10-K 1 form10-k.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2020

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to_________

 

Commission File Number 1-10324

 

THE INTERGROUP CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   13-3293645
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

12121 Wilshire Boulevard, Suite 610, Los Angeles, California 90025

(Address of principal executive offices) (Zip Code)

 

(310) 889-2500

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock $.01 par value   The NASDAQ Stock Market, LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

[  ] Yes [X] No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

[  ] Yes [X] No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X] Yes [  ] No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.

[X] Yes [  ] No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer [  ]   Accelerated Filer [  ]
         
Non-Accelerated Filer [  ]  (Do not check if a smaller reporting company) Smaller reporting company [X]
         
Emerging growth company [  ]      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):

[  ] Yes [X] No

 

The aggregate market value of the Common Stock, no par value, held by non-affiliates computed by reference to the average bid and asked price on December 31, 2019 was $29,720,000.

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock   INTG   NASDAQ CAPITAL MARKET

 

The number of shares outstanding of registrant’s Common Stock, as of September 9, 2020 was 2,287,147.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
  PART I  
     
Item 1. Business. 4
     
Item 1A. Risk Factors. 9
     
Item 1B. Unresolved Staff Comments. 13
     
Item 2. Properties. 14
     
Item 3. Legal Proceedings. 19
     
Item 4. Mine Safety Disclosures. 19
     
  PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 19
     
Item 6. Selected Financial Data. 20
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 20
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 26
     
Item 8. Financial Statements and Supplementary Data. 27
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 55
     
Item 9A. Controls and Procedures. 56
     
Item 9B. Other Information. 56
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance. 57
     
Item 11. Executive Compensation. 59
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 63
     
Item 13. Certain Relationships and Related Transactions, and Director Independence. 65
     
Item 14. Principal Accounting Fees and Services. 66
     
  PART IV  
     
Item 15. Exhibits, Financial Statement Schedules. 66
     
Signatures   69

 

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FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the impact to our business and financial condition, and measures being taken in response to COVID-19, the effects of competition and the effects of future legislation or regulations and other non-historical statements. Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events.

 

Currently, one of the most significant factors is the potential adverse effect of COVID-19, including possible resurgences, on our financial condition, results of operations, cash flows and performance, and on the global economy and financial markets. The extent to which COVID-19 impacts us and guests at our hotel will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its effect, additional closures that may be mandated or advisable whether due to an increased number of COVID-19 cases or otherwise, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified in the risk factors discussed in this 10-K and incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the year ended June 30, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

 

Other factors that may cause actual results to differ materially from current expectations include, but are not limited to:

 

  risks associated with the lodging industry, including competition, increases in wages, labor relations, energy and fuel costs, actual and threatened pandemics, actual and threatened terrorist attacks, and downturns in domestic and international economic and market conditions, particularly in the San Francisco Bay area;
     
  risks associated with the real estate industry, including changes in real estate and zoning laws or regulations, increases in real property taxes, rising insurance premiums, costs of compliance with environmental laws and other governmental regulations;
     
  the availability and terms of financing and capital and the general volatility of securities markets;
     
  changes in the competitive environment in the hotel industry;
     
  economic volatility and potential recessive trends;
     
  risks related to natural disasters;
     
  litigation; and
     
  other risk factors discussed below in this Report.

 

All such forward-looking statements are based on current expectations of management and therefore involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results expressed in the statements. You should not put undue reliance on any forward-looking statements and we urge investors to carefully review the disclosures we make concerning risks and uncertainties in Item 1A: “Risk Factors” in this Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the year ended June 30, 2019, as such factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov, as well as risks, uncertainties and other factors discussed in this Annual Report on Form 10-K. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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PART I

 

Item 1. Business.

 

GENERAL

 

The InterGroup Corporation (“InterGroup” or the “Company” and may also be referred to as “we” “us” or “our” in this report) is a Delaware corporation formed in 1985, as the successor to Mutual Real Estate Investment Trust (“M-REIT”), a New York real estate investment trust created in 1965. The Company has been a publicly held company since M-REIT’s first public offering of shares in 1966.

 

The Company was organized to buy, develop, operate, rehabilitate and dispose of real property of various types and descriptions, and to engage in such other business and investment activities as would benefit the Company and its shareholders. The Company was founded upon, and remains committed to, social responsibility. Such social responsibility was originally defined as providing decent and affordable housing to people without regard to race. In 1985, after examining the impact of federal, state and local equal housing laws, the Company determined to broaden its definition of social responsibility. The Company changed its form from a REIT to a corporation so that it could pursue a variety of investments beyond real estate and broaden its social impact to engage in any opportunity which would offer the potential to increase shareholder value within the Company’s underlying commitment to social responsibility.

 

As of June 30, 2020, the Company owned approximately 83.7% of the common shares of Santa Fe Financial Corporation (“Santa Fe”), a public company (OTC Market Inc.’s Pink: SFEF). As of June 30, 2020, InterGroup also has the power to vote an approximately 3.7% interest in the common stock in Santa Fe owned by InterGroup Chairman and CEO, John V. Winfield, pursuant to a voting trust agreement entered into on June 30, 1998. Mr. Winfield, Chairman of the Board of both Santa Fe and InterGroup, is a control person of both entities. Santa Fe’s revenue is primarily generated through its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a public company (OTC Market Inc.’s Pink: PRSI). InterGroup also directly owns approximately 13.7% of Portsmouth. Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors, a California limited partnership (“Justice” or the “Partnership”). Portsmouth has a 93.3% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated with those of the Company.

 

Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”) owns and operates a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Mezzanine is a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (“Hilton”) through January 31, 2030.

 

Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms of the HMA, base management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.

 

In addition to the operations of the Hotel, the Company also generates income from the ownership, management and, when appropriate, sale of real estate. Properties include sixteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the United States but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property. As of June 30, 2020, all of the Company’s operating real estate properties are managed in-house.

 

The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors and its Executive Strategic Real Estate and Securities Investment Committee. The Company may also look for new real estate investment opportunities in hotels, apartments, office buildings and development properties. The acquisition of any new real estate investments will depend on the Company’s ability to find suitable investment opportunities and the availability of sufficient financing to acquire such investments. To help fund any such acquisition, the Company may borrow funds to leverage its investment capital. The amount of any such debt will depend on a number of factors including, but not limited to, the availability of financing and the sufficiency of the acquisition property’s projected cash flows to support the operations and debt service.

 

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The Company also may derive income from the investment of its cash and investment securities assets. The Company has invested in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the Company’s marketable securities and other investments.

 

HILTON HOTELS FRANCHISE LICENSE AGREEMENT

 

The Partnership entered into a Franchise License Agreement (the “License Agreement”) with the HLT Existing Franchise Holding LLC (“Hilton”) on December 10, 2004. The term of the License Agreement was for an initial period of fifteen years commencing on the date the Hotel began operating as a Hilton hotel, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, Operating and Hilton entered into an amended franchise agreement that, among other things, extended the License Agreement through 2030, and also provided the Partnership with certain key money cash incentives to be earned through 2030.

 

HOTEL MANAGEMENT COMPANY AGREEMENT

 

On February 1, 2017, Justice entered into a Hotel management agreement with Interstate Management Company, LLC to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, not to exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base management fee payable to Interstate shall be one and seven-tenths (1.70%) of total Hotel revenue. For the fiscal years ended June 30, 2020 and 2019, Interstate management fees were $341,000 and $1,206,000, respectively, and are included in Hotel operating expenses in the consolidated statements of operations. As part of the Hotel management agreement, Interstate, through the Partnership’s wholly owned subsidiary, Kearny Street Parking LLC, manages the parking garage in-house.

 

CHINESE CULTURE FOUNDATION LEASE

 

On March 15, 2005, the Partnership entered into an amended lease with the Chinese Culture Foundation of San Francisco (the “Foundation”) for the third-floor space of the Hotel commonly known as the Chinese Culture Center, which the Foundation had right to occupy pursuant to a 50-year nominal rent lease that began in 1967.

 

The amended lease, among other things, requires the Partnership to pay to the Foundation a monthly event space fee in the amount of $5,000, adjusted annually based on the local Consumer Price Index. As of June 30, 2020, monthly event space fee is $6,200. The term of the amended lease expires on October 17, 2023, with an automatic extension for another 10-year term if the property continues to be operated as a hotel. Subject to certain conditions as set forth in the amended lease, the Foundation is entitled to reserve for a maximum of 75 days per calendar year for use of the event space. In the event that the Partnership needs the event space during one of the dates previously reserved by the Foundation, the Partnership shall pay the Foundation $4,000 per day for using the event space. During the fiscal year ended June 30, 2020, the Partnership did not pay the Foundation any such fees. During the fiscal year ended June 30, 2019, the Partnership paid the Foundation $13,000 for using the event space on previously reserved dates by the Foundation.

 

SALES AND REFINANCINGS OF REAL ESTATE PROPERTIES

 

In July 2015, the Company purchased a residential house in Los Angeles, California as a strategic asset for $1,975,000 in cash. In August 2016, the Company obtained a $1,000,000 mortgage note payable on this property and received net proceeds of $983,000. The interest on the note was 5.75% with interest only payments for twenty-three months. In September 2018, the Company refinanced the mortgage note payable with a new mortgage in the amount of $1,000,000. The interest rate on the mortgage is 4.75% and matures in October 2048.

 

In July 2018, the Company obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interests were due in July 2019. On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at our 27-unit apartment complex in Santa Monica, California. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. In July 2020, the RLOC was extended to July 2021. As of June 30, 2020 and 2019, outstanding balance of the RLOC was $2,985,000.

 

In April 2020, the Company refinanced its $8,453,000 and $2,469,000 mortgage notes payable on its 151-unit apartment complex in Parsippany, New Jersey and obtained a new mortgage note payable for $18,370,000. The Company received net proceeds of $6,814,000 as a result of the refinance. Interest rate on the mortgage is fixed at 3.17% for ten years and the mortgage matures in May 2030.

 

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In June 2020, the Company refinanced its $1,274,000 mortgage note payable on its 9-unit apartment complex in Marina del Rey, California and obtained a new mortgage note payable for $2,600,000. The Company received net proceeds of $1,144,000 as a result of the refinance. Interest rate on the mortgage is fixed at 3.09% for ten years and the mortgage matures in July 2030.

 

MARKETABLE SECURITIES INVESTMENT POLICIES

 

In addition to its Hotel and real estate operations, the Company also invests from time to time in income producing instruments, corporate debt and equity securities, publicly traded investment funds, mortgage backed securities, securities issued by REITs and other companies which invest primarily in real estate.

 

The Company’s securities investments are made under the supervision of an Executive Strategic Real Estate and Securities Investment Committee of the Board of Directors (the “Committee”). The Committee currently has three members and is chaired by the Company’s Chairman of the Board and President, John V. Winfield. The Committee has delegated authority to manage the portfolio to the Company’s Chairman and President together with such assistants and management committees he may engage. The Committee generally follows certain established investment guidelines for the Company’s investments. These guidelines presently include: (i) corporate equity securities should be listed on the New York Stock Exchange (NYSE), NYSE MKT, NYSE Arca or the Nasdaq Stock Market (NASDAQ); (ii) the issuer of the listed securities should be in compliance with the listing standards of the applicable national securities exchange; and (iii) investment in a particular issuer should not exceed 10% of the market value of the total portfolio. The investment guidelines do not require the Company to divest itself of investments, which initially meet these guidelines but subsequently fail to meet one or more of the investment criteria. The Committee has in the past approved non-conforming investments and may in the future approve non-conforming investments. The Committee may modify these guidelines from time to time.

 

The Company may also invest, with the approval of the Committee, in unlisted securities, such as convertible notes, through private placements including private equity investment funds. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments and reviewed for impairment on a periodic basis. As of June 30, 2020 and 2019, the Company had other investments of $278,000 and $612,000, respectively.

 

As part of its investment strategies, the Company may assume short positions in marketable securities. Short sales are used by the Company to potentially offset normal market risks undertaken in the course of its investing activities or to provide additional return opportunities. As of June 30, 2020 and 2019, the Company had obligations for securities sold (equities short) of $294,000 and $1,225,000, respectively.

 

In addition, the Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms. The margin used by the Company may fluctuate depending on market conditions. The use of leverage could be viewed as risky and the market values of the portfolio may be subject to large fluctuations. Margin balances due at June 30, 2020 and 2019 were $1,576,000 and $1,629,000, respectively.

 

As Chairman of the Executive Strategic Real Estate and Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Board of Portsmouth and Santa Fe and oversees the investment activity of those companies. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.

 

Further information with respect to investment in marketable securities and other investments of the Company is set forth in Management Discussion and Analysis of Financial Condition and Results of Operations section and Notes 5 and 6 of the Notes to Consolidated Financial Statements.

 

SEASONALITY

 

Historically, the Hotel’s operation have been seasonal under normal circumstances. Like most hotels in the San Francisco area, the Hotel generally maintained high occupancy and room rates during the entire year except for the weeks starting from Thanksgiving to the end of the calendar year due to the holiday season. These seasonal patterns can be expected to cause fluctuations in the quarterly revenues of the Hotel. However, the COVID-19 pandemic has altered this seasonal trend in 2020. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information regarding the effects of the COVID-19 pandemic on our results of operations.

 

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COMPETITION

 

The hotel industry is highly competitive. Competition is based on a number of factors, most notably convenience of location, brand affiliation, price, range of services and guest amenities or accommodations offered and quality of customer service. Competition is often specific to the individual market in which properties are located. The San Francisco market is a very competitive market with a high supply of guest rooms and meeting space in the area. During fiscal year 2019, we implemented advanced state of the art Internet system which included a rewiring of the entire hotel with the best possible Ethernet cabling and fiber. Specifically, the complete overhaul of the infrastructure of the Internet in the guest rooms and meeting space will enable the Hotel to compete in this market. This investment is allowing the Hotel to go to market with measurable statistics that will help win the much-coveted technology company meetings when those are able to be held again. We installed 55” and 65” 4K smart televisions in all guest rooms and common areas during fiscal year 2019. During fiscal year 2020, we completed the installation of window washing equipment, giving us the ability to wash windows periodically. We also replaced mattresses in all guestrooms and upgraded all computers in our business center and Hotel administrative offices during fiscal year 2020.

 

Our highest priority is guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition and is critical to the Hotel’s objective of building sustainable guest loyalty. In order to make a large impact on guest experience, the Hotel will continue training team members on Hilton brand standards and guest satisfaction, hiring and retaining talents in key operations, and enhancing the arrival experience.

 

The Hotel’s location in the San Francisco Financial District lends itself to greater opportunities over its competitors when it comes to developing relationships with the Financial District entities and the customers who regularly do business in the downtown area. The ability to capitalize on the strong midweek demand of the individual business traveler to the Financial District has been the focus during the timeframe of strong growth in the market; however, that customer along with our group customers has significantly reduced occupancy beginning in February 2020 as COVID-19 ravaged the hotel industry. The Hotel has remained open during the pandemic as many of our competitors have closed their doors and remained closed. The key to growing share during this time will be focusing on service and cleanliness standards to gain customer confidence to return.

 

The Hotel is also subject to certain operating risks common to all of the hotel industry, which could adversely impact performance. These risks include:

 

  Competition for guests and meetings from other hotels including competition and pricing pressure from internet wholesalers and distributors;
     
  increases in operating costs, including wages, benefits, insurance, property taxes and energy, due to inflation and other factors, which may not be offset in the future by increased room rates;
     
  labor strikes, disruptions or lock outs;
     
  dependence on demand from business and leisure travelers, which may fluctuate and is seasonal;
     
  increases in energy costs, cost of fuel, airline fares and other expenses related to travel, which may negatively affect traveling;
     
  terrorism, terrorism alerts and warnings, wars and other military actions, pandemics or other medical events or warnings which may result in decreases in business and leisure travel;
     
  natural disasters; and
     
  adverse effects of downturns and recessionary conditions in international, national and/or local economies and market conditions.

 

ENVIRONMENTAL MATTERS

 

In connection with the ownership of the Hotel, the Company is subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances.

 

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Environmental consultants retained by the Partnership or its lenders conducted updated Phase I environmental site assessments in fiscal year ended June 30, 2014 on the Hotel property. These Phase I assessments relied, in part, on Phase I environmental assessments prepared in connection with the Partnership’s first mortgage loan obtained in December 2013. Phase I assessments are designed to evaluate the potential for environmental contamination on properties based generally upon site inspections, facility personnel interviews, historical information and certain publicly available databases; however, Phase I assessments will not necessarily reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at the properties.

 

Although the Phase I assessments and other environmental reports we have reviewed disclose certain conditions on our property and the use of hazardous substances in operation and maintenance activities that could pose a risk of environmental contamination or liability, we are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial position, results of operations or cash flows.

 

The Company believes that the Hotel is in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on the Company. The Company has not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present properties.

 

Competition – Rental Properties

 

The ownership, operation and leasing of multifamily rental properties are highly competitive. The Company competes with domestic and foreign financial institutions, REITs, life insurance companies, pension trusts, trust funds, partnerships and individual investors. In addition, The Company competes for tenants in markets primarily on the basis of property location, rent charged, services provided and the design and condition of improvements. The Company also competes with other quality apartment owned by public and private companies. The number of competitive multifamily properties in a particular market could adversely affect the Company’s ability to lease its multifamily properties, as well as the rents it is able to charge. In addition, other forms of residential properties, including single family housing and town homes, provide housing alternatives to potential residents of quality apartment communities or potential purchasers of for-sale condominium units. The Company competes for residents in its apartment communities based on resident service and amenity offerings and the desirability of the Company’s locations. Resident leases at the Company’s apartment communities are priced competitively based on market conditions, supply and demand characteristics, and the quality and resident service offerings of its communities.

 

EMPLOYEES

 

As of June 30, 2020, the Company had a total of 30 full-time employees. Effective August 2014, the Company entered into a client service agreement with Automatic Data Processing (“ADP”), a professional employer organization serving as an off-site, full service human resource department for its employees. ADP personnel management services are delivered by entering into a co-employment relationship with the Company’s employees. The employees and the Company are not party to any collective bargaining agreement, and the Company believes that its employee relations are satisfactory.

 

Effective February 3, 2017, the Partnership had no employees. On February 3, 2017, Interstate assumed all labor union agreements and retained employees of their choice to continue providing services to the Hotel. As of June 30, 2020, approximately 87% of those employees were represented by one of three labor unions, and their terms of employment were determined under various collective bargaining agreements (“CBAs”) to which the Partnership was a party. During the fiscal year ended June 30, 2020, the Partnership renewed the CBA for Local 2 (Hotel and Restaurant Employees). CBA for Local 856 (International Brotherhood of Teamsters) will expire on December 31, 2022. CBA for Local 39 (Stationary Engineers) will expire on July 31, 2024.

 

Negotiation of collective bargaining agreements, which includes not just terms and conditions of employment, but scope and coverage of employees, is a regular and expected course of business operations for the Partnership and Interstate. The Partnership expects and anticipates that the terms of conditions of CBAs will have an impact on wage and benefit costs, operating expenses, and certain hotel operations during the life of each CBA, and incorporates these principles into its operating and budgetary practices.

 

ADDITIONAL INFORMATION

 

The Company files required annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The public may read and copy any materials that we file with the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.

 

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Other information about the Company can be found on its website www.intgla.com. Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.

 

Item 1A. Risk Factors.

 

The responses by federal, state, and local civil authorities to the COVID-19 pandemic has had a material detrimental impact on our business, financial results and liquidity, and such impact could worsen and last for an unknown period of time.

 

The global spread of the COVID-19 pandemic is complex and rapidly-evolving, with governments, public institutions and other organizations imposing or recommending, and businesses and individuals implementing, restrictions on various activities or other actions to combat its spread, such as restrictions and bans on travel or transportation, limitations on the size of gatherings, closures of work facilities, schools, public buildings and businesses, cancellation of events, including sporting events, conferences and meetings, and quarantines and lock-downs. The shelter-in-place, physical distancing, quarantine measures, city closures and their consequences have dramatically reduced travel, conventions and demand for hotel rooms, which has and will continue to impact our business, operations, and financial results. The pandemic is having a significant impact on the U.S. economy and on the local markets in which our properties are located. While we did not incur significant disruptions in our real estate operations during the fiscal year ended June 30, 2020 from the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our financial condition, results of operations and cash flows due to many uncertainties. The extent to which the closures impacts our business, operations, and financial results, including the duration and magnitude of such effects, will depend on numerous evolving factors that we may not be able to accurately predict or assess, including the duration and scope of the closures; the negative impact it has on global and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence; our ability to successfully navigate the impacts of the closures; governments actions, businesses and individuals take in response to the closures, including limiting or banning travel; and how quickly economies, travel activity, and demand for lodging recovers after the closures subsides.

 

The COVID-19 closures have subjected our business, operations and financial condition to a number of risks, including, but not limited to, those discussed below:

 

Risks Related to Revenue: The COVID-19 closures and other imposed restrictions have negatively impacted and will in the future negatively impact to an extent we are unable to predict, our revenue from the Hotel. Currently, the Hotel is not generating revenue sufficient to meet its operating expenses, which is adversely affecting our net income.
   
Risks Related to Operations: Because of the significant decline in the demand for hotel rooms, the Hotel has taken steps to reduce operating costs and improve efficiency, including furloughing a substantial number of its personnel and implementing reduced work weeks for other personnel. Such steps, and further changes we may make in the future to reduce costs, may negatively impact guest loyalty, or our ability to attract and retain associates, and our reputation and market share may suffer as a result. For example, if our furloughed personnel do not return to work with us when the COVID-19 closures and imposed restrictions are lifted, including because they find new jobs during the furlough, we may experience operational challenges that impact guest loyalty and our market share, which could limit our ability to grow revenue and could reduce our profits. Further, reputational damage from, and the financial impact of, reduced work weeks could lead associates to depart the company and could make it harder for us to recruit new associates in the future. We may also face demands or requests from labor unions that represent our associates, whether in the course of our periodic renegotiation of our collective bargaining agreements or otherwise, for additional compensation, healthcare benefits or other terms as a result of COVID-19 that could increase costs, and we could experience labor disputes or disruptions as we continue to implement our COVID-19 mitigation plans.

 

COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could also precipitate or aggravate the other risk factors that we identify in this annual report, which in turn could materially adversely affect our business, financial condition, liquidity, and results of operations (including revenues and profitability). Further, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider presenting significant risks to our operations.

 

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Adverse changes in the U.S. and global economies could negatively impact our financial performance.

 

Due to a number of factors affecting consumers, the outlook for the lodging industry remains uncertain. These factors have resulted at times in the past and could continue to result in the future in fewer customers visiting, or customers spending less, in San Francisco, as compared to prior periods. Leisure travel and other leisure activities represent discretionary expenditures, and participation in such activities tends to decline during economic downturns, during which consumers generally have less disposable income. As a result, in those times customer demand for the luxury amenities and leisure activities that we offer may decline. Furthermore, during periods of economic contraction, revenues may decrease while some of our costs remain fixed or even increase, resulting in decreased earnings.

 

Weakened global economic conditions may adversely affect our industry, business and results of operations.

 

Our overall performance depends in part on worldwide economic conditions which could adversely affect the tourism industry. According to current economic news reports, the United States and other key international economies may be subject to a recession, characterized by falling demand for a variety of goods and services, restricted credit, going concern threats to financial institutions, major multinational companies and medium and small businesses, poor liquidity, declining asset values, reduced corporate profitability, and volatility in credit, equity and foreign exchange markets. These conditions affect discretionary and leisure spending and could adversely affect our customers’ ability or willingness to travel to destinations for leisure and cutback on discretionary business travel, which could adversely affect our operating results. In addition, in a weakened economy, companies that have competing properties may reduce room rates and other prices which could also reduce our average revenues and harm our operating results.

 

We operate a single property located in San Francisco and rely on the San Francisco market. Changes adversely impacting this market could have a material effect on our business, financial condition and results of operations.

 

Our business has a limited base of operations and substantially all of our revenues are currently generated by the Hotel. Accordingly, we are subject to greater risks than a more diversified hotel or resort operator and the profitability of our operations is linked to local economic conditions in San Francisco. The combination of a decline in the local economy of San Francisco, reliance on a single location and the significant investment associated with it may cause our operating results to fluctuate significantly and may adversely affect us and materially affect our total profitability.

 

We face intense local and increasingly national competition which could impact our operations and adversely affect our business and results of operations.

 

We operate in the highly competitive San Francisco hotel industry. The Hotel competes with other high-quality Northern California hotels and resorts. Many of these competitors seek to attract customers to their properties by providing, food and beverage outlets, retail stores and other related amenities, in addition to recently renovated hotel accommodations. To the extent that we seek to enhance our revenue base by offering our own various amenities, we compete with the service offerings provided by these competitors.

 

Many of the competing properties have themes and attractions which draw a significant number of visitors and directly compete with our operations. Some of these properties are operated by subsidiaries or divisions of large public companies that may have greater name recognition and financial and marketing resources than we do and market to the same target demographic group as we do. Various competitors are expanding and renovating their existing facilities. We believe that competition in the San Francisco hotel and resort industry is based on certain property-specific factors, including overall atmosphere, range of amenities, price, location, technology infrastructure, entertainment attractions, theme and size. Any market perception that we do not excel with respect to such property-specific factors could adversely affect our ability to compete effectively. If we are unable to compete effectively, we could lose market share, which could adversely affect our business and results of operations.

 

The San Francisco hotel and resort industry is capital intensive; financing our renovations and future capital improvements could reduce our cash flow and adversely affect our financial performance.

 

The Hotel has an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. We will also need to make capital expenditures to comply with applicable laws and regulations.

 

Renovations and other capital improvements of hotels require significant capital expenditures. In addition, renovations and capital improvements of hotels usually generate little or no cash flow until the project’s completion. We may not be able to fund such projects solely from cash provided from our operating activities. Consequently, we will rely upon the availability of debt or equity capital and reserve funds to fund renovations and capital improvements and our ability to carry them out will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on, among other things, market conditions. No assurances can be made that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.

 

Renovations and other capital improvements may give rise to the following additional risks, among others: construction cost overruns and delays; increased prices of materials due to tariffs; temporary closures of all or a portion of the Hotel to customers; disruption in service and room availability causing reduced demand, occupancy and rates; and possible environmental issues.

 

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As a result, renovations and any other future capital improvement projects may increase our expenses, reduce our cash flows and our revenues. If capital expenditures exceed our expectations, this excess would have an adverse effect on our available cash.

 

We have substantial debt, and we may incur additional indebtedness, which may negatively affect our business and financial results.

 

We have substantial debt service obligations. Our substantial debt may negatively affect our business and operations in several ways, including: requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce funds available for operations and capital expenditures, future business opportunities and other purposes; making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions; limiting our flexibility in planning for, or reacting to, changes in the business and the industry in which we operate; placing us at a competitive disadvantage compared to our competitors that have less debt; limiting our ability to borrow more money for operations, capital or to finance acquisitions in the future; and requiring us to dispose of assets, if needed, in order to make required payments of interest and principal.

 

Our business model involves high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a timely manner in response to a reduction in our revenues.

 

The costs associated with owning and operating the Hotel are significant. Some of these costs (such as property taxes and insurance costs) are fixed, meaning that such costs may not be altered in a timely manner in response to changes in demand for services. Failure to adjust our expenses may adversely affect our business and results of operations. Our real property taxes may increase as property tax rates change and as the values of properties are assessed and reassessed by tax authorities. Our real estate taxes do not depend on our revenues, and generally we could not reduce them other than by disposing of our real estate assets.

 

Insurance premiums have increased significantly in recent years, and continued escalation may result in our inability to obtain adequate insurance at acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of the Hotel. If we do not obtain adequate insurance, to the extent that any of the events not covered by an insurance policy materialize, our financial condition may be materially adversely affected.

 

In the future, our property may be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, which could reduce our cash flow and adversely affect our financial performance. If our revenues decline and we are unable to reduce our expenses in a timely manner, our business and results of operations could be adversely affected.

 

Risk of declining market values in marketable securities.

 

The Company invests from time to time in marketable securities. As a result, the Company is exposed to market volatility in connection with these investments. The Company’s financial position and financial performance could be adversely affected by worsening market conditions or sluggish performance of such investments.

 

Illiquidity risk in nonmarketable securities

 

Nonmarketable securities are, by definition, instruments that are not readily salable in the capital markets, and when sold are usually at a substantial discount. Thus, the holder is limited to return on investment from any income producing feature of the instrument, as any sale of such an instrument would be subject to a substantial discount. Thus, a holder may need to hold such instruments for long period of time and not be able to realize a return of their cash investment should there be a need to liquidate to obtain cash at any given time.

 

Litigation and legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.

 

We are a party, from time to time, to various litigation claims and legal proceedings, government and regulatory inquiries and/or proceedings, including, but not limited to, intellectual property, premises liability and breach of contract claims. Material legal proceedings are described more fully in Note 18, Commitments and Contingencies, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.

 

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Litigation is inherently unpredictable, and defending these proceedings can result in significant ongoing expenditures and the diversion of our management’s time and attention from the operation of our business, which could have a negative effect on our business operations. Our failure to successfully defend or settle any litigation or legal proceedings could result in liabilities that, to the extent not covered by our insurance, could have a material adverse effect on our financial condition, revenue and profitability.

 

The threat of terrorism could adversely affect the number of customer visits to the Hotel.

 

The threat of terrorism has caused, and may in the future cause, a significant decrease in customer visits to San Francisco due to disruptions in commercial and leisure travel patterns and concerns about travel safety. We cannot predict the extent to which disruptions in air or other forms of travel as a result of any further terrorist act, outbreak of hostilities or escalation of war would adversely affect our financial condition, results of operations or cash flows. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.

 

We depend in part, on third party management companies for the future success of our business and the loss of one or more of their key personnel could have an adverse effect on our ability to manage our business and operate successfully and competitively, or could be negatively perceived in the capital markets.

 

The Hotel is managed by Interstate. Their ability to manage the Hotel and to operate successfully and competitively is dependent, in part, upon the efforts and continued service of their managers. The departure of key personnel of current or future management companies could have an adverse effect on our business and our ability to operate successfully and competitively, and it could be difficult to find replacements for these key personnel, as competition for such personnel is intense.

 

Seasonality and other related factors such as weather can be expected to cause quarterly fluctuations in revenue at the Hotel.

 

The hotel and resort industry is seasonal in nature. This seasonality can tend to cause quarterly fluctuations in revenues at the Hotel. Our quarterly earnings may also be adversely affected by other related factors outside our control, including weather conditions and poor economic conditions. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these quarterly fluctuations in our revenues.

 

The hotel industry is heavily regulated and failure to comply with extensive regulatory requirements may result in an adverse effect on our business.

 

The hotel industry is subject to extensive regulation and the Hotel must maintain its licenses and pay taxes and fees to continue operations. Our property is subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol. We are also subject to laws governing our relationship with our employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to remodel, refurbish or add to our property may be dependent upon our obtaining necessary building permits from local authorities. The failure to obtain any of these permits could adversely affect our ability to increase revenues and net income through capital improvements of our property. In addition, we are subject to the numerous rules and regulations relating to state and federal taxation. Compliance with these rules and regulations requires significant management attention. Furthermore, compliance costs associated with such laws, regulations and licenses are significant. Any change in the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or gaming license could require us to make substantial expenditures or could otherwise negatively affect our gaming operations. Any failure to comply with all such rules and regulations could subject us to fines or audits by the applicable taxation authority.

 

Violations of laws could result in, among other things, disciplinary action. If we fail to comply with regulatory requirements, this may result in an adverse effect on our business.

 

Uninsured and underinsured losses could adversely affect our financial condition and results of operations.

 

There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. We will use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. Uninsured and underinsured losses could harm our financial condition and results of operations. We could incur liabilities resulting from loss or injury to the Hotel or to persons at the Hotel. Claims, whether or not they have merit, could harm the reputation of the Hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.

 

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In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in the Hotel, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the Hotel. In the event of a significant loss, our deductible may be high, and we may be required to pay for all such repairs and, as a consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate the Hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.

 

It has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our property at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (for example, earthquake, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we were unable to obtain adequate insurance on the Hotel for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments that require us to maintain adequate insurance on the Hotel to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and the Hotel experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our financial condition and the operations of the Hotel.

 

In addition, insurance coverage for the Hotel and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

 

You may lose all or part of your investment.

 

There is no assurance that the Company’s initiatives to improve its profitability or liquidity and financial position will be successful. Accordingly, there is substantial risk that an investment in the Company will decline in value.

 

The price of the Company’s common stock may fluctuate significantly, which could negatively affect the Company and holders of its common stock.

 

The market price of the Company’s common stock may fluctuate significantly from time to time as a result of many factors, including: investors’ perceptions of the Company and its prospects; investors’ perceptions of the Company’s and/or the industry’s risk and return characteristics relative to other investment alternatives; difficulties between actual financial and operating results and those expected by investors and analysts; changes in our capital structure; trading volume fluctuations; actual or anticipated fluctuations in quarterly financial and operational results; volatility in the equity securities market; and sales, or anticipated sales, of large blocks of the Company’s common stock.

 

The concentrated beneficial ownership of our common stock and the ability it affords to control our business may limit or eliminate other shareholders’ ability to influence corporate affairs.

 

The Company’s President, Chief Executive Officer, and Chairman of the Board of Directors, John V. Winfield, owns more than 60% of the Company’s outstanding common stock. Because of this concentrated stock ownership, Mr. Winfield will be in a position to significantly influence the election of the Company’s board of directors and all other decisions on all matters requiring shareholder approval. As a result, the ability of other shareholders to determine the management and policies of the Company is significantly limited. The interests of the Company’s largest shareholder may differ from the interests of other shareholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of officers and directors and other business decisions. This level of control may also have an adverse impact on the market value of our shares because our largest shareholder may institute or undertake transactions, policies or programs that may result in losses, may not take any steps to increase our visibility in the financial community and/or may sell sufficient numbers of shares to significantly decrease our price per share.

 

Item 1B. Unresolved Staff Comments.

 

None.

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Item 2. Properties.

 

SAN FRANCISCO HOTEL PROPERTY

 

The Hotel is owned by the Partnership through its wholly owned subsidiary, Operating. The Hotel is centrally located in the Financial District in San Francisco, one block from the Transamerica Pyramid. The Embarcadero Center is within walking distance and North Beach is two blocks away. Chinatown is directly across the bridge that runs from the Hotel to Portsmouth Square Park. The Hotel is a 31-story (including parking garage), steel and concrete, A-frame building, built in 1970. The Hotel has 544 well-appointed guest rooms and luxury suites situated on 22 floors. The third floor houses the Chinese Culture Center (the “CCC”), its administrative office, and a grand ballroom. The Hotel has approximately 22,000 square feet of meeting room space, including the grand ballroom. Other features of the Hotel include a 5-level underground parking garage and pedestrian bridge across Kearny Street connecting the Hotel and the CCC with Portsmouth Square Park in Chinatown. The bridge, built and owned by the Partnership, is included in the lease to the CCC.

 

The Partnership expects to set aside at least 4% of gross annual Hotel revenues each year or a minimum of $2,000,000 as required by its senior lender for capital improvements. In the opinion of management, the Hotel is adequately covered by insurance.

 

HOTEL FINANCINGS

 

On December 18, 2013: (i) Justice Operating Company, LLC, a Delaware limited liability company (“Operating”), entered into a loan agreement (“Mortgage Loan Agreement”) with Bank of America (“Mortgage Lender”); and (ii) Justice Mezzanine Company, a Delaware limited liability company (“Mezzanine”), entered into a mezzanine loan agreement (“Mezzanine Loan Agreement” and, together with the Mortgage Loan Agreement, the “Loan Agreements”) with ISBI San Francisco Mezz Lender LLC (“Mezzanine Lender” and, together with Mortgage Lender, the “Lenders”). The Partnership is the sole member of Mezzanine, and Mezzanine is the sole member of Operating.

 

The Loan Agreements provide for a $97,000,000 Mortgage Loan and a $20,000,000 Mezzanine Loan. The proceeds of the Loan Agreements were used to fund the redemption of limited partnership interests and the pay-off of the prior mortgage.

 

The Mortgage Loan is secured by the Partnership’s principal asset, the Hotel. The Mortgage Loan bears an interest rate of 5.275% per annum and matures in January 2024. The term of the loan is ten years with interest only due in the first three years and principal and interest payments to be made during the remaining seven years of the loan based on a thirty-year amortization schedule. The Mortgage Loan also requires payments for impounds related to property tax, insurance and capital improvement reserves. As additional security for the Mortgage Loan, there is a limited guaranty (“Mortgage Guaranty”) executed by Portsmouth in favor of the Mortgage Lender.

 

The Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The Mezzanine Loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. Interest only payments were due monthly. On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. As a result of the refinance, Justice has generated $500,000 in annual interest expense savings. As additional security for the new mezzanine loan, there is a limited guaranty executed by the Partnership and Portsmouth in favor of Cred Reit Holdco LLC (the “Mezzanine Guaranty” and, together with the Mortgage Guaranty, the “Guaranties”).

 

The Guaranties are limited to what are commonly referred to as “bad boy” acts, including: (i) fraud or intentional misrepresentations; (ii) gross negligence or willful misconduct; (iii) misapplication or misappropriation of rents, security deposits, insurance or condemnation proceeds; and (iv) failure to pay taxes or insurance. The Guaranties are full recourse guaranties under identified circumstances, including failure to maintain “single purpose” status which is a factor in a consolidation of Operating or Mezzanine in a bankruptcy of another person, transfer or encumbrance of the Property in violation of the applicable loan documents, Operating or Mezzanine incurring debts that are not permitted, and the Property becoming subject to a bankruptcy proceeding. Pursuant to the Guaranties, the Partnership is required to maintain a certain minimum net worth and liquidity. Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain a certain net worth and liquidity. As of June 30, 2020 and 2019, InterGroup is in compliance with both requirements. Due to the Hotel’s current low occupancy and low rates and their negative impact on the Hotel’s cash flow, Justice Operating Company, LLC is not meeting certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lock-box and cash sweep by the Lender for all cash collected by the Hotel, and under certain terms, would allow the Lender to request Operating to replace its hotel management company. The DSCR for Operating has been below 1.00 for the last two quarters during fiscal year 2020 while it is required to maintain a DSCR of at least 1.10 to 1.00 for two consecutive quarters. However, such lockbox has been created and utilized from the loan inception and will be in place up to loan maturity regardless of the DSCR. Justice has not missed any of its debt service payments and does not anticipate missing any debt obligations even during these uncertain times for at least the next twelve months and beyond.

 

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Each of the Loan Agreements contains customary representations and warranties, events of default, reporting requirements, affirmative covenants and negative covenants, which impose restrictions on, among other things, organizational changes of the respective borrower, operations of the Property, agreements with affiliates and third parties. Each of the Loan Agreements also provides for mandatory prepayments under certain circumstances (including casualty or condemnation events) and voluntary prepayments, subject to satisfaction of prescribed conditions set forth in the Loan Agreements.

 

On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of two years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The proceeds of the loan were applied to the July 2014 payments to Justice Holdings Company, LLC (“Holdings”) in connection with the redemption of limited partnership interests. The loan was extended to July 1, 2021. The balance of this loan is $3,000,000 as of June 30, 2020 and 2019, and is eliminated in the consolidated balance sheets.

 

On April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. Justice received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice has used proceeds from the SBA Loan primarily for payroll costs. As of June 30, 2020, Justice had used $3,568,000 in qualified expenses and had a balance of $1,151,000 available for future qualified expenses. The SBA Loan is scheduled to mature on April 9, 2022 with a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until October 2020, and the repayment obligations under the loan may be forgiven if the funds are used for payroll and other qualified expenses. We anticipate applying for loan forgiveness shortly. All unforgiven portion of the principal and accrued interest will be due at maturity.

 

RENTAL PROPERTIES

 

As June 30, 2020, the Company’s investment in real estate consisted of twenty properties located throughout the United States, with a concentration in Texas and Southern California. These properties include sixteen apartment complexes, three single-family houses as strategic investments and one commercial real estate property. All properties are operating properties. In addition to the properties, the Company owns approximately 2 acres of unimproved land in Maui, Hawaii. As of June 30, 2020, all of the Company’s operating real estate properties are managed in-house.

 

Description of Properties

 

Las Colinas, Texas. The Las Colinas property is a waterfront apartment community along Beaver Creek that was developed in 1993 with 358 units on approximately 15.6 acres of land. The Company acquired the complex on April 30, 2004 for approximately $27,145,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 27.5 years. Real estate property taxes for the year ended June 30, 2020 were approximately $905,000. The outstanding mortgage balance was approximately $16,529,000 at June 30, 2020 with an interest rate of 3.73% and the maturity date of the mortgage is December 1, 2022.

 

Morris County, New Jersey. The Morris County property is a two-story garden apartment complex that was completed in June 1964 with 151 units on approximately 8 acres of land. The Company acquired the complex on September 15, 1967 at an initial cost of approximately $1,600,000. Real estate property taxes for the year ended June 30, 2020 were approximately $251,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $8,737,000 at June 30, 2019 and the maturity date of the mortgage was July 31, 2022 with interest rate fixed at 3.51%. In June 2014, the Company obtained a second mortgage on this property in the amount of $2,701,000. The term of the loan was approximately 8 years with the interest rate fixed at 4.51%. The outstanding mortgage balance was approximately $2,512,000 at June 30, 2019. In April 2020, the Company refinanced the two aforementioned mortgage notes payable on this property and obtained a new mortgage note payable for $18,370,000. The Company received net proceeds of $6,814,000 as a result of the refinance. Interest rate on the mortgage is fixed at 3.17% for ten years and the mortgage matures in May 2030.

 

St. Louis, Missouri. The St. Louis property is a two-story project with 264 units on approximately 17.5 acres. The Company acquired the complex on November 1, 1968 at an initial cost of $2,328,000. For the year ended June 30, 2020, real estate property taxes were approximately $109,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $5,236,000 at June 30, 2020 with an interest rate of 4.05% and the maturity date of the mortgage is May 31, 2023.

 

Florence, Kentucky. The Florence property is a three-story apartment complex with 157 units on approximately 6.0 acres. The Company acquired the property on December 20, 1972 at an initial cost of approximately $1,995,000. For the year ended June 30, 2020, real estate property taxes were approximately $59,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In March 2015, the Company refinanced the $3,636,000 mortgage note payable for a new mortgage in the amount of $3,492,000. The Company paid down approximately $210,000 of the old mortgage as part of the refinancing. The new mortgage has a fixed interest rate of 3.87% for ten years and matures in April 2025. The outstanding mortgage balance was approximately $3,150,000 at June 30, 2020.

 

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Los Angeles, California. The Company owns one commercial property, eleven apartment complexes, and three single-family houses in the general area of West Los Angeles.

 

The first Los Angeles commercial property is a 5,503 square foot, two story building that served as the Company’s corporate offices until it was leased out, effective October 1, 2009 and the Company leased a new space for its corporate office. The Company acquired the building on March 4, 1999 for $1,876,000. Property taxes for the year ended June 30, 2020 were approximately $31,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In April 2016, the Company refinanced the $1,007,000 mortgage note payable for a new mortgage in the amount of $921,000. The new mortgage has a fixed interest rate swap with the floating rate loan. By combing both rates rate through maturity of the credit facility (1.49% swap + 2.50% credit spread), the all-in fixed rate is 3.99%. The outstanding mortgage balance was approximately $770,000 at June 30, 2020 and the note matures in January 2021.

 

The first Los Angeles apartment complex is a 10,600 square foot two-story apartment with 12 units. The Company acquired the property on July 30, 1999 at an initial cost of approximately $1,305,000. For the year ended June 30, 2020, real estate property taxes were approximately $24,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In June 2016, the Company refinanced the $2,095,000 mortgage note payable for a new mortgage in the amount of $2,300,000 with an interest rate of 3.59%. The outstanding mortgage balance was approximately $2,125,000 at June 30, 2020 and the maturity date of the mortgage is June 23, 2026.

 

The second Los Angeles apartment complex is a 29,000 square foot three-story apartment with 27 units. This complex was held by Intergroup Woodland Village, Inc., which was 55.4% and 44.6% owned by Santa Fe and the Company, respectively. On February 5, 2020, Santa Fe acquired the additional 44.6% interest in Woodland Village from InterGroup by issuing 97,500 shares of its common stock to InterGroup. Subsequent to the transaction, Intergroup Woodland Village, Inc. was converted into Woodland Village LLC (“Woodland Village”) and Woodland Village become a wholly owned subsidiary of Santa Fe. The transaction is being made pursuant to a Contribution Agreement (the “Contribution Agreement”) between the Santa Fe and InterGroup, dated February 5, 2020. The Contribution Agreement also contains a provision for a potential subsequent earn out to InterGroup pursuant to terms set forth therein.

 

The property was acquired on September 29, 1999 at an initial cost of approximately $4,075,000. For the year ended June 30, 2020, real estate property taxes were approximately $70,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $2,843,000 at June 30, 2018 with an interest rate of 4.85% and the maturity date of the mortgage was December 1, 2020. In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage. A new mortgage note payable was established at Woodland Village due to InterGroup for $2,969,000 and the note was eliminated in consolidation. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC. In July 2019, InterGroup obtained a modification from CIBC which increased its $5,000,000 revolving line of credit by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup was also extended from July 24, 2019 to July 23, 2020. In July 2020, InterGroup entered into a second modification agreement with CIBC which extended the maturity date of its $8,000,000 RLOC to July 21, 2021. The $2,969,000 mortgage due to InterGroup was also extended to July 21, 2021. On August 28, 2020, Santa Fe sold the 27-unit apartment complex for $15,650,000 and realized a gain on the sale of approximately $12,026,000. Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000 as InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale. Santa Fe will not seek a replacement property.

 

The third Los Angeles apartment complex is a 12,700 square foot apartment with 14 units. The Company acquired the property on October 20, 1999 at an initial cost of approximately $2,150,000. For the year ended June 30, 2020, real estate property taxes were approximately $37,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $1,597,000 at June 30, 2020 with an interest rate of 5.89% and the maturity date of the mortgage is March 1, 2021.

 

The fourth Los Angeles apartment complex is a 10,500 square foot apartment with 9 units. The Company acquired the property on November 10, 1999 at an initial cost of approximately $1,675,000. For the year ended June 30, 2020, real estate property taxes were approximately $29,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $1,088,000 at June 30, 2020 with an interest rate of 5.89% and the maturity date of the mortgage is March 1, 2021.

 

16
 

 

The fifth Los Angeles apartment complex is a 26,100 square foot two-story apartment with 31 units. The Company acquired the property on May 26, 2000 at an initial cost of approximately $7,500,000. For the year ended June 30, 2020, real estate property taxes were approximately $122,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $4,800,000 at June 30, 2020 with an interest rate of 4.85% and the maturity date of the mortgage is December 1, 2020.

 

The sixth Los Angeles apartment complex is a 27,600 square foot two-story apartment with 30 units. The Company acquired the property on July 7, 2000 at an initial cost of approximately $4,411,000. For the year ended June 30, 2020, real estate property taxes were approximately $75,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $5,614,000 at June 30, 2020 with an interest rate of 5.97% and the maturity date of the mortgage is September 1, 2022.

 

The seventh Los Angeles apartment complex is a 3,000 square foot apartment with 4 units. The Company acquired the property on July 19, 2000 at an initial cost of approximately $1,070,000. For the year ended June 30, 2020, real estate property taxes were approximately $18,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $333,000 at June 30, 2020 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The eighth Los Angeles apartment complex is a 4,500 square foot two-story apartment with 4 units. The Company acquired the property on July 28, 2000 at an initial cost of approximately $1,005,000. For the year ended June 30, 2020, real estate property taxes were approximately $17,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $563,000 at June 30, 2020 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The ninth Los Angeles apartment complex is a 7,500 square foot apartment with 7 units. The Company acquired the property on August 9, 2000 at an initial cost of approximately $1,308,000. For the year ended June 30, 2020, real estate property taxes were approximately $22,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $823,000 at June 30, 2020 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The tenth Los Angeles apartment complex is a 13,000 square foot two-story apartment with 8 units. The Company acquired the property on May 1, 2001 at an initial cost of approximately $1,206,000. For the year ended June 30, 2020, real estate property taxes were approximately $20,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In July 2013, the Company refinanced its $466,000 adjustable rate mortgage note payable on this property for a new 30-year mortgage in the amount of $500,000. The interest rate on the new loan is fixed at 3.50% per annum for the first five years and variable for the remaining of the term. For the fiscal year ended June 30, 2020, interest rate on the note was 3.75%. The note matures in July 2043. The outstanding mortgage balance was approximately $428,000 at June 30, 2020.

 

The eleventh Los Angeles apartment complex, which is owned 100% by the Company’s subsidiary Santa Fe, is a 4,200 square foot two-story apartment with 2 units. Santa Fe acquired the property on February 1, 2002 at an initial cost of approximately $785,000. For the year ended June 30, 2020, real estate property taxes were approximately $12,000. Depreciation is recorded on the straight-line method based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $337,000 at June 30, 2020 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The twelfth apartment which is located in Marina del Rey, California, is a 6,316 square foot two-story apartment with 9 units. The Company acquired the property on April 29, 2011 at an initial cost of approximately $4,000,000. For the year ended June 30, 2020, real estate property taxes were approximately $55,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 27.5 years. The outstanding mortgage balance was approximately $1,303,000 at June 30, 2019 with an interest rate of 5.60% and the maturity date of the mortgage was May 1, 2021. In June 2020, the Company refinanced the mortgage note payable and obtained a new mortgage note payable for $2,600,000. The Company received net proceeds of $1,144,000 as a result of the refinance. Interest rate on the new mortgage is fixed at 3.09% for ten years and the mortgage matures in July 2030.

 

The first Los Angeles single-family house is a 2,771 square foot home. The Company acquired the property on November 9, 2000 at an initial cost of approximately $660,000. For the year ended June 30, 2020, real estate property taxes were approximately $11,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $363,000 at June 30, 2020 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

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The second Los Angeles single-family house is a 2,201 square foot home. The Company acquired the property on August 22, 2003 at an initial cost of approximately $700,000. For the year ended June 30, 2020, real estate property taxes were approximately $12,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $388,000 at June 30, 2020 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The third Los Angeles single-family house is a 2,387 square foot home. The company acquired the property in July of 2015 as a strategic asset for $1,975,000 in cash. In August 2016, the Company obtained a $1,000,000 mortgage note payable and received net proceeds of $983,000. The interest on note is 4.50% with interest only payments for twenty-three months. On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off the mortgage note payable. On September 28, 2018, the Company obtained a new mortgage note payable in the amount of $1,000,000 for this property with interest rates fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The mortgage note payable matures in October 2048. $995,000 received as a result of the refinance was used to pay down the RLOC. The outstanding mortgage balance was approximately $974,000 at June 30, 2020. For the year ended June 30, 2020, real estate property taxes were approximately $25,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years.

 

Maui, Hawaii. In August 2004, the Company purchased an approximately two-acre parcel of unimproved land in Kihei, Maui, Hawaii for $1,467,000.

 

MORTGAGES

 

Further information with respect to mortgage notes payable of the Company is set forth in Note 11 of the Notes to Consolidated Financial Statements.

 

ECONOMIC AND PHYSICAL OCCUPANCY RATES

 

The Company leases units in its residential rental properties on a short-term basis, with no lease extending beyond one year. The economic occupancy (gross potential less rent below market, vacancy loss, bad debt, discounts and concessions divided by gross

 

potential rent) and the physical occupancy (gross potential rent less vacancy loss divided by gross potential rent) for each of the Company’s operating properties for fiscal year ended June 30, 2020 are provided below.

 

   Economic   Physical 
Property  Occupancy   Occupancy 
1. Las Colinas, TX   96%   90%
2. Morris County, NJ   92%   96%
3. St. Louis, MO   89%   88%
4. Florence, KY   95%   96%
5. Los Angeles, CA (1)   81%   89%
6. Los Angeles, CA (2)   32%   47%
7. Los Angeles, CA (3)   100%   96%
8. Los Angeles, CA (4)   95%   89%
9. Los Angeles, CA (5)   67%   83%
10. Los Angeles, CA (6)   99%   98%
11. Los Angeles, CA (7)   99%   98%
12. Los Angeles, CA (8)   100%   98%
13. Los Angeles, CA (9)   100%   98%
14. Los Angeles, CA (10)   100%   96%
15. Los Angeles, CA (11)   100%   100%
16. Los Angeles, CA (12)   91%   95%
17. Los Angeles, CA (13)   100%   100%
18. Los Angeles, CA (14)   100%   100%
19. Los Angeles, CA (15)   100%   100%

 

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The Company’s Los Angeles, California properties are subject to various rent control laws, ordinances and regulations which impact the Company’s ability to adjust and achieve higher rental rates.

 

Item 3. Legal Proceedings.

 

The Company may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company will defend itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or result of operations when resolved.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

PART II

 

Item 5. Market for Common Equity and Related Stockholder Matters.

 

MARKET INFORMATION

 

The Company’s Common Stock is listed and trades on the NASDAQ Capital Market tier of the NASDAQ Stock Market, LLC under the symbol: “INTG”. The following table sets forth the high and low sales prices for the Company’s common stock for each quarter of the last two fiscal years ended June 30, 2020 and 2019 as reported by NASDAQ.

 

Fiscal 2020  High   Low 
         
First Quarter (7/ 1 to 9/30)   $31.44   $29.08 
Second Quarter (10/1 to 12/31)   $38.60   $29.34 
Third Quarter (1/1 to 3/31)   $37.45   $26.36 
Fourth Quarter (4/1 to 6/30)   $32.00   $25.96 

 

Fiscal 2019  High   Low 
         
First Quarter (7/ 1 to 9/30)   $39.35   $27.25 
Second Quarter (10/1 to 12/31)   $35.00   $29.26 
Third Quarter (1/1 to 3/31)   $33.60   $29.20 
Fourth Quarter (4/1 to 6/30)   $32.09   $29.97 

 

As of June 30, 2020, the approximate number of holders of record of the Company’s Common Stock was 214. Such number of owners was determined from the Company’s shareholders records and does not include beneficial owners of the Company’s Common Stock whose shares are held in names of various brokers, clearing agencies or other nominees.

 

DIVIDENDS

 

The Company has not declared any cash dividends on its common stock and does not foresee issuing cash dividends in the near future.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

 

This information appears in Part III, Item 12 of this report.

 

19
 

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

The following table reflects purchases of InterGroup’s common stock made by The InterGroup Corporation, for its own account, during the fourth quarter of its fiscal year ending June 30, 2020.

 

SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

 

           (c) Total Number   (d) Maximum Number 
   (a) Total   (b)   of Shares Purchased   of shares that May 
Fiscal  Number of   Average   as Part of Publicly   Yet be Purchased 
2019  Shares   Price Paid   Announced Plans   Under the Plans 
Period  Purchased   Per Share   or Programs   or Programs 
                 
Month #1 (April 1- April 30)    1,400   $29.86    1,400    104,864 
                     
Month #2 (May 1- May 31)    573   $28.24    573    104,291 
                     
Month #3 (June 1- June 30)    772   $28.34    772    103,519 
                     
TOTAL:    2,745   $29.09    2,745    103,519 

 

The Company has only one stock repurchase program. The program was initially announced on January 13, 1998 and was amended on February 10, 2003 and October 12, 2004. The total number of shares authorized to be repurchased pursuant to those prior authorizations was 870,000, adjusted for stock splits. On June 3, 2009, the Board of Directors authorized the Company to purchase up to an additional 125,000 shares of Company’s common stock. On November 15, 2012, the Board of Directors authorized the Company to purchase up to an additional 100,000 shares of Company’s common stock. On September 23, 2019, the Board of Directors authorized the Company to purchase up to an additional 120,000 shares of Company’s common stock. The purchases will be made, in the discretion of management, from time to time, in the open market or through privately negotiated third party transactions depending on market conditions and other factors. The Company’s repurchase program has no expiration date and can be amended and increased, from time to time, in the discretion of the Board of Directors. No plan or program expired during the period covered by the table.

 

Item 6. Selected Financial Data.

 

Not required for smaller reporting companies.

 

Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations.

 

NEGATIVE EFFECTS OF CIVIL AUTHORITY ACTIONS ON OUR BUSINESS

 

On February 25, 2020, the City of San Francisco issued the proclamation by the Mayor declaring the existence of a local emergency. The negative effects of the civil authority actions related to the novel strain of coronavirus (“COVID-19”) on our business have been significant. In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. To mitigate the harm from the pandemic, on March 16, 2020, the City and County of San Francisco, along with a group of five other Bay Area counties and the City of Berkeley, issued parallel health officer orders imposing shelter in place limitations across the Bay Area, requiring everyone to stay safe at home except for certain essential needs. Since February 2020, several unfavorable events and civil authority actions have unfolded causing demand for our hotel rooms to suffer including cancellations of all citywide conventions, reduction of flights in and out of the Bay Area and decline in both leisure and business travel.

 

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In response to the decrease in demand, we have since furloughed all managers at the Hotel except for members of the executive team and continue to limit hourly staff to a minimum. By the end of March 2020, we had temporarily closed all of our food and beverage outlets, valet parking, concierge and bell services, fitness center, as well as the executive lounge facility. We continue to implement social distancing standards and cleaning processes designed by Interstate and Hilton to keep employees and guests safe. The full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this Annual Report. The pandemic effectively eliminated our ability to generate any profits, due to the drastic decline in both leisure and business travel. As a result, management believes the ongoing length and severity of the economic downturn caused by the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results. We are also assessing the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets. As of the date of this annual report, the effects of the pandemic continue to affect our economy, business and leisure travel, and our needs to continue to curtail certain revenue generating activities at the Hotel, and until there are vaccines or other methodologies to effectively combat this pandemic, we expect that the effects will have a material adverse effect on our business.

 

As a result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by the Small Business Administration (“SBA”). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of June 30, 2020, Justice had used $3,568,000 in qualified expenses such as payroll expenses, mortgage interests, utilities, etc., and had a balance of $1,151,000 available for future qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of June 30, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 27, 2022 and has a 1.00% interest rate. Both the SBA Loan – Justice and SBA Loan – InterGroup (collectively the “SBA Loans”) may be forgiven if the funds are used for payroll and other qualified expenses. All payments of principal and interests are deferred until October 2020. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. We anticipate applying for loan forgiveness shortly. All unforgiven portion of the principal and accrued interest will be due at maturity.

 

RESULTS OF OPERATIONS

 

As of June 30, 2020, the Company owned approximately 83.7% of the common shares of its subsidiary, Santa Fe, and Santa Fe owned approximately 68.8% of the common shares of Portsmouth Square, Inc. Intergroup also directly owns approximately 13.7% of the common shares of Portsmouth. The Company’s principal sources of revenue continue to be derived from the general and limited partnership interests of its subsidiary, Portsmouth, in the Justice Investors limited partnership (“Justice” or the “Partnership”), rental income from its investments in multi-family and commercial real estate properties, and income received from investment of its cash and securities assets. Justice owns a 544-room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the “Hilton San Francisco Financial District” (the “Hotel” or the “Property”) and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company.

 

The Hotel is operated by the Partnership as a full-service Hilton brand hotel pursuant to a License Agreement with Hilton. The Partnership entered into the License Agreement on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the reopening date, upon completion of a major renovation, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030 in the form of a self-exhausting, interest free note. The key money cash incentive of $4,750,000 was received on July 1, 2015. As of June 30, 2020 and 2019, the balance of the note was $3,008,000 and $3,325,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets.

 

On February 1, 2017, Justice entered into a hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of HMA is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. As of June 30, 2020 and 2019, balance of the key money including accrued interests are $1,009,000 and $2,049,000, respectively, and are included in restricted cash in the consolidated balance sheets. As of June 30, 2020 and 2019, balance of the unamortized portion of the key money are $1,646,000 and $1,896,000, respectively, and are included in the related party notes payable in the consolidated balance sheets. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.

 

21
 

 

In addition to the operations of the Hotel, the Company also generates income from the ownership and management of its real estate. Properties include sixteen apartment complexes, one commercial real estate property, and three single-family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property in Hawaii.

 

The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential.

 

Fiscal Year Ended June 30, 2020 Compared to Fiscal Year Ended June 30, 2019

 

The Company had a net loss of $5,089,000 for the year ended June 30, 2020 compared to a net income of $2,814,000 for the year ended June 30, 2019. The change is primarily attributable to the decrease in Hotel revenue.

 

Hotel Operations

 

The Company had net loss from Hotel operations of $3,768,000 for the year ended June 30, 2020 compared to net income of $5,277,000 for the year ended June 30, 2019. The change was primarily attributable to the $17,042,000 decrease in Hotel revenue, offset by the $7,133,000 decrease in operating expenses.

 

The following table sets forth a more detailed presentation of Hotel operations for the years ended June 30, 2020 and 2019.

 

For the year ended June 30,  2020   2019 
Hotel revenues:          
Hotel rooms  $36,465,000   $51,243,000 
Food and beverage   3,529,000    5,353,000 
Garage   2,368,000    2,875,000 
Other operating departments   477,000    410,000 
Total hotel revenues   42,839,000    59,881,000 
Operating expenses excluding depreciation and amortization   (37,333,000)   (44,466,000)
Operating income before interest, depreciation and amortization   5,506,000    15,415,000 
Loss on disposal of assets   -    (398,000)
Interest expense - mortgage   (6,885,000)   (7,234,000)
Depreciation and amortization expense   (2,389,000)   (2,506,000)
Net (loss) income from Hotel operations  $(3,768,000)  $5,277,000 

 

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For the year ended June 30, 2020, the Hotel generated operating income of $5,506,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of $42,839,000 compared to operating income of $15,415,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of $59,881,000 for the year ended June 30, 2019. Room revenues decreased by $14,778,000 for the year ended June 30, 2020 compared to the year ended June 30, 2019, food and beverage revenue decreased by $1,824,000, and revenue from garage decreased by $507,000. The year over year decline in all areas are result of the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak in March 2020 which continues to affect us. Revenue from other operating departments increased year over year mainly due to increase in cancellation revenue. The following table sets forth the monthly average occupancy percentage of the Hotel for the fiscal years ended June 30, 2020 and 2019.

 

Month  July   August   September   October   November   December   January   February   March   April   May   June   Fiscal Year 
Year  2019   2019   2019   2019   2019   2019   2020   2020   2020   2020   2020   2020   2019 - 2020 
Average Occupancy %   98%   99%   98%   97%   99%   98%   96%   96%   35%   10%   27%   34%   74%
                                                                  
Year  2018   2018   2018   2018   2018   2018   2019   2019   2019   2019   2019   2019  

Fiscal Year
2018 - 2019

 
Average Occupancy %    98%   98%          97%   97%   95%   98%          94%        97%       94%   96%   96%   98%   96%

 

Operating expenses decreased by $7,133,000 for the year ended June 30, 2020 to $37,333,000 compared to the year ended June 30, 2019 of $44,466,000 primarily due to decrease in salaries and wages, rooms commission, credit card fees, management fees, and franchise fees.

 

The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”) of the Hotel for the year ended June 30, 2020 and 2019.

 

For the Year
Ended June 30,
  Average
Daily Rate
   Average
Occupancy %
   RevPAR 
             
2020  $248    74%  $183 
2019  $268    96%  $257 

 

The Hotel’s revenues decreased by 28% year over year. Average daily rate decreased by $20, average occupancy dropped 22%, and RevPAR decreased by $74 for the twelve months ended June 30, 2020 compared to the twelve months ended June 30, 2019.

 

In order to provide our guests with best in class technology experience, we completed the upgrade of our new internet system from Cisco, and installed new 55” smart 4K televisions and Hilton’s stay connected internet streaming products. We also replaced mattresses in all guestrooms during the fiscal year ended June 30, 2020. The COVID-19 pandemic and design delays have pushed back the plans for the conversion of the Justice offices, Fitness Center and Executive Lounge; projects that would add 19 guest rooms into our inventory. The long-term value of these rooms is in utilizing them as guest rooms, and we will work to implement a new timeline as business returns. Part of this renovation will be funded by the Hotel’s furniture, fixture and equipment reserve account with our lender as well as the key money incentive provided by Interstate. Lastly, the Hotel completed the installation of a complete exterior building maintenance system which will enable periodic window washing, replaced and upgraded all computers in the business center and administrative offices.

 

Real Estate Operations

 

Revenue from real estate operations increased to $15,178,000 for the year ended June 30, 2020 from $14,872,000 for the year ended June 30, 2019 primarily as a result of increase in market rent. Real estate operating expenses increased to $8,051,000 from $7,810,000 primarily as a result of increase in repairs and maintenance costs. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.

 

Investment Transactions

 

The Company had a net loss on marketable securities of $1,913,000 for the year ended June 30, 2020 compared to a net loss on marketable securities of $1,733,000 for the year ended June 30, 2019. For the year ended June 30, 2020 and 2019, the Company had a net unrealized loss of zero and $254,000, respectively, related to the Company’s investment in the common stock of Comstock Mining Inc. (“Comstock” - NYSE MKT: LODE).

 

As of June 30, 2020 and 2019, investments in Comstock represent approximately 11% and 7% of the Company’s investment portfolio, respectively. For the year ended June 30, 2020, the Company had a net realized loss of $641,000 and a net unrealized loss of $1,272,000. For the year ended June 30, 2019, the Company had a net realized loss of $806,000 and a net unrealized loss of $927,000.

 

23
 

 

Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.

 

During the years ended June 30, 2020 and 2019, the Company performed an impairment analysis of its other investments and determined that its investments had other than temporary impairment and recorded impairment losses of $219,000 and $98,000, respectively.

 

The Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax benefit during the years ended June 30, 2020 and 2019 represents primarily the combined income tax effect of Portsmouth’s pretax (loss) income which includes its share in net (loss) income from the Hotel and the pre-tax loss from InterGroup (standalone).

 

MARKETABLE SECURITIES AND OTHER INVESTMENTS

 

As of June 30, 2020 and 2019, the Company had investments in marketable equity securities of $6,178,000 and $9,696,000, respectively. The following table shows the composition of the Company’s marketable securities portfolio by selected industry groups:

 

       % of Total 
As of June 30, 2020      Investment 
Industry Group  Fair Value   Securities 
         
REITs and real estate companies   $2,365,000    38.3%
Basic material    1,209,000    19.6%
Energy    767,000    12.4%
Industrials    484,000    7.8%
Corporate bonds    417,000    6.7%
Other    936,000    15.2%
   $6,178,000    100.0%

 

       % of Total 
As of June 30, 2019      Investment 
Industry Group  Fair Value   Securities 
         
REITs and real estate companies   $3,069,000    31.7%
Consumer cyclical    1,448,000    14.9%
Corporate bonds    1,420,000    14.6%
Financial services    951,000    9.8%
Energy    950,000    9.8%
Other    1,858,000    19.2%
   $9,696,000    100.0%

 

As of June 30, 2020, the Company’s investment portfolio is diversified with 59 different equity positions. The Company holds two equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 19.4% of the portfolio and consists of the common stock of American Realty Investors, Inc. which is included in the REITs and real estate companies’ industry group.

 

The following table shows the net loss on the Company’s marketable securities and the associated margin interest and trading expenses for the respective years.

 

For the years ended June 30,  2020   2019 
Net loss on marketable securities  $(1,913,000)  $(1,733,000)
Impairment loss on other investments   (219,000)   (98,000)
Dividend and interest income   363,000    484,000 
Margin interest expense   (452,000)   (576,000)
Trading expenses   (545,000)   (574,000)
   $(2,766,000)  $(2,497,000)

 

24
 

 

FINANCIAL CONDITION AND LIQUIDITY

 

Historically, our cash flows have been primarily generated from our Hotel operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic has had a material detrimental impact on our liquidity. For the fiscal year ended June 30, 2020, our net cash flow used in operations was $3,454,000. For the fiscal year ended June 30, 2019, our net cash flow provided by operations was $14,269,000. We have taken several steps to preserve capital and increase liquidity at our Hotel, including implementing strict cost management measures to eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets.

 

As of June 30, 2020, we had cash, cash equivalents, and restricted cash of $28,286,000 which included $10,666,000 of restricted cash held by our Hotel senior lender Wells Fargo Bank, N.A. (“Lender”). Of the $10,666,000 restricted cash, $7,486,000 was held for furniture, fixtures and equipment (“FF&E”) reserves and $2,432,000 was held for a possible future property improvement plan (“PIP”) requested by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i) January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. On August 19, 2020, Operating received PIP deposits in the amount of $2,379,000 held by Lender. The funds were utilized to fund operating expenses, including franchise and management fees and other expenses.

 

On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of June 30, 2020, Justice had used $3,568,000 in qualified expenses such as payroll expenses, mortgage interests, utilities, etc., and had a balance of $1,151,000 available for future qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of June 30, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 27, 2022 and has a 1.00% interest rate. Both the SBA Loan – Justice and SBA Loan – InterGroup (collectively the “SBA Loans”) may be forgiven if the funds are used for payroll and other qualified expenses. All payments of principal and interests are deferred until October 2020. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. We anticipate applying for loan forgiveness shortly. All unforgiven portion of the principal and accrued interest will be due at maturity.

 

In order to increase our liquidity position, the Company refinanced its 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, the Company refinanced one of its California properties and generated net proceeds of $1,144,000. We are currently evaluating other refinancing opportunities. We could refinance additional multifamily properties should the need arise; however, we do not deem it necessary at this time. The Company has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) of which $5,000,000 was available to be drawn down as of June 30, 2020; however, the outstanding balance on the revolving line of credit was paid down fully on August 28, 2020, making the entire $8,000,000 available to be drawn down should additional liquidity be necessary. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,026,000. Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000 as InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale. Santa Fe will not seek a replacement property.

 

As the sole general partner of Justice that controls approximately 93.3% of the voting interest in the Partnership, Portsmouth has the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup and/or Santa Fe to meet any capital calls and its other obligations during the next twelve months and beyond. On August 28, 2020, the Board of InterGroup and Santa Fe have passed resolutions, respectively, to provide funding to Portsmouth if necessary. The Partnership is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital.

 

25
 

 

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel.

 

Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.

 

MATERIAL CONTRACTUAL OBLIGATIONS

 

The following table provides a summary of the Company’s material financial obligations which also includes interest.

 

       Year   Year   Year   Year   Year     
   Total   2021   2022   2023   2024   2025   Thereafter 
Mortgage notes payable  $178,352,000   $11,211,000   $3,101,000   $28,244,000   $108,113,000   $3,494,000   $24,189,000 
Related party and other notes payable   13,909,000    1,016,000    9,190,000    750,000    567,000    567,000    1,819,000 
Interest   34,492,000    8,801,000    8,418,000    7,625,000    4,412,000    904,000    4,332,000 
   Total  $226,753,000   $21,028,000   $20,709,000   $36,619,000   $113,092,000   $4,965,000   $30,340,000 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company has no material off balance sheet arrangements.

 

IMPACT OF INFLATION

 

Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Interstate has the power and ability under the terms of its management agreement to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company’s income is not viewed by management as material.

 

The Company’s residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are expected to offset anticipated increased property operating expenses.

 

CRITICAL ACCOUNTING POLICIES

 

Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Not required for smaller reporting companies.

 

26
 

 

Item 8. Financial Statements and Supplementary Data.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
   
Report of Independent Registered Public Accounting Firm 28
   
Consolidated Balance Sheets - June 30, 2020 and 2019 29
   
Consolidated Statements of Operations - For years ended June 30, 2020 and 2019 30
   
Consolidated Statements of Shareholders’ Deficit - For years ended June 30, 2020 and 2019 31
   
Consolidated Statements of Cash Flows - For years ended June 30, 2020 and 2019 32
   
Notes to the Consolidated Financial Statements 33

 

27
 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors

The Intergroup Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of The Intergroup Corporation and its subsidiaries (the “Company”) as of June 30, 2020 and 2019, and the related consolidated statements of operations, shareholders’ deficit and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2020 and 2019, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Moss Adams LLP

 

Irvine, California

September 9, 2020

 

We have served as the Company’s auditor since 2017.

 

28
 

 

THE INTERGROUP CORPORATION

CONSOLIDATED BALANCE SHEETS

 

         
As of June 30,  2020   2019 
         
ASSETS          
Investment in Hotel, net  $38,769,000   $39,836,000 
Investment in real estate, net   50,338,000    51,773,000 
Investment in marketable securities   6,178,000    9,696,000 
Other investments, net   278,000    612,000 
Cash and cash equivalents   14,163,000    11,837,000 
Restricted cash   14,123,000    13,295,000 
Other assets, net   1,985,000    2,362,000 
Deferred tax asset   4,383,000    1,468,000 
           
Total assets  $130,217,000   $130,879,000 
           
LIABILITIES AND SHAREHOLDERS’ DEFICIT          
Liabilities:          
Accounts payable and other liabilities  $4,213,000   $3,819,000 
Accounts payable and other liabilities - Hotel   7,414,000    11,245,000 
Due to securities broker   1,576,000    1,629,000 
Obligations for securities sold   294,000    1,225,000 
Related party and other notes payable   4,654,000    5,261,000 
Other notes payable – SBA Loans   5,172,000    - 
Finance leases   1,098,000    1,486,000 
Line of credit payable   2,985,000    2,985,000 
Mortgage notes payable - Hotel   111,446,000    113,087,000 
Mortgage notes payable - real estate   65,612,000    58,571,000 
Total liabilities   204,464,000    199,308,000 
           
Commitments and contingencies - Note 18          
           
Shareholders’ deficit:          
Preferred stock, $.01 par value, 100,000 shares authorized; none issued   -    - 
Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 issued; 2,288,809 and 2,309,962 outstanding as of June 30, 2020 and 2019   33,000    33,000 
Additional paid-in capital   6,626,000    10,342,000 
Accumulated deficit   (43,541,000)   (39,760,000)
Treasury stock, at cost, 1,116,173 and 1,095,020 shares as of June 30, 2020 and 2019   (14,995,000)   (14,347,000)
Total Intergroup shareholders’ deficit   (51,877,000)   (43,732,000)
Noncontrolling interest   (22,370,000)   (24,697,000)
Total shareholders’ deficit   (74,247,000)   (68,429,000)
Total liabilities and shareholders’ deficit  $130,217,000   $130,879,000 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

29
 

 

THE INTERGROUP CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

For the years ended June 30,  2020   2019 
Revenues:          
Hotel  $42,839,000   $59,881,000 
Real estate   15,178,000    14,872,000 
Total revenues   58,017,000    74,753,000 
Costs and operating expenses:          
Hotel operating expenses   (37,333,000)   (44,466,000)
Real estate operating expenses   (8,051,000)   (7,810,000)
Depreciation and amortization expense   (4,872,000)   (4,935,000)
General and administrative expense   (2,870,000)   (2,346,000)
           
Total costs and operating expenses   (53,126,000)   (59,557,000)
           
Income from operations   4,891,000    15,196,000 
Other income (expense):          
Interest expense - mortgage   (9,321,000)   (9,788,000)
Loss on disposal of assets   -    (398,000)
Net loss on marketable securities   (1,913,000)   (1,733,000)
Loss on debt extinguishment   (687,000)   - 
Impairment loss on other investments   (219,000)   (98,000)
Dividend and interest income   363,000    484,000 
Trading and margin interest expense   (997,000)   (1,150,000)
Net other expense   (12,774,000)   (12,683,000)
(Loss) Income before income taxes   (7,883,000)   2,513,000 
Income tax benefit   2,794,000    301,000 
Net (loss) income   (5,089,000)   2,814,000 
Less: Net loss (income) attributable to the noncontrolling interest   1,308,000    (1,357,000)
Net (loss) income attributable to InterGroup  $(3,781,000)  $1,457,000 
           
Net (loss) income per share          
Basic  $(2.21)  $1.21 
Diluted  $(2.21)  $1.06 
Net (loss) income per share attributable to InterGroup          
Basic  $(1.64)  $0.63 
Diluted  $(1.64)  $0.55 
           
Weighted average number of common shares outstanding   2,300,059    2,328,156 
Weighted average number of diluted shares outstanding   2,623,254    2,658,551 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

30
 

 

THE INTERGROUP CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

 

           Additional           InterGroup       Total 
   Common Stock   Paid-in   Accumulated   Treasury   Shareholders’   Noncontrolling   Shareholders’ 
   Shares   Amount   Capital   Deficit   Stock   Deficit   Interest   Deficit 
                                 
Balance at July 1, 2018   3,395,616   $33,000   $10,522,000   $(41,217,000)  $(13,268,000)  $     (43,930,000)  $(26,037,000)  $     (69,967,000)
                                         
Net Income   -    -    -    1,457,000    -    1,457,000    1,357,000    2,814,000 
                                         
Issuance of stock   9,366    -    -    -    -    -    -    - 
                                         
Stock options expense   -    -    76,000    -    -    76,000    -    76,000 
                                         
Investment in Santa Fe   -    -    (256,000)   -    -    (256,000)   133,000    (123,000)
                                         
Investment in Justice   -    -    -    -    -    -    (150,000)   (150,000)
                                         
Purchase of treasury stock   -    -    -    -    (1,079,000)   (1,079,000)   -    (1,079,000)
                                         
Balance at June 30, 2019   3,404,982   $33,000   $10,342,000   $(39,760,000)  $(14,347,000)  $(43,732,000)  $(24,697,000)  $(68,429,000)
                                         
Net Loss   -    -    -    (3,781,000)   -    (3,781,000)   (1,308,000)   (5,089,000)
                                         
Stock options expense   -    -    142,000    -    -    142,000    -    142,000 
                                         
Investment in Santa Fe   -    -    (4,505,000)   -    -    (4,505,000)   3,468,000    (1,037,000)
                                         
Investment in Portsmouth   -    -    (266,000)   -    -    (266,000)   167,000    (99,000)
                                         
Investment in Woodland   -    -    913,000    -    -    913,000    -    913,000 
                                         
Purchase of treasury stock   -    -    -    -    (648,000)   (648,000)   -    (648,000)
                                         
Balance at June 30, 2020   3,404,982   $33,000   $6,626,000   $(43,541,000)  $(14,995,000)  $(51,877,000)  $(22,370,000)  $(74,247,000)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

31
 

 

THE INTERGROUP CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the years ended June 30,  2020   2019 
Cash flows from operating activities:          
Net (loss) income  $(5,089,000)  $2,814,000 
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:          
Net unrealized loss on marketable securities   1,272,000    927,000 
Deferred taxes   (2,915,000)   (1,713,000)
Loss on disposal of assets   -    398,000 
Impairment loss on other investments   219,000    98,000 
Depreciation and amortization   4,715,000    4,777,000 
Stock compensation expense   142,000    76,000 
Changes in assets and liabilities:          
Investment in marketable securities   2,246,000    3,218,000 
Other assets, net   377,000    2,823,000 
Accounts payable and other liabilities – Justice   (3,831,000)   1,352,000 
Accounts payable and other liabilities   394,000    467,000 
Due to securities broker   (53,000)   (258,000)
Obligations for securities sold   (931,000)   (710,000)
Net cash (used in) provided by operating activities   (3,454,000)   14,269,000 
           
Cash flows from investing activities:          
Investment in Hotel, net   (1,292,000)   (1,397,000)
Investment in real estate, net   (1,048,000)   (833,000)
Proceeds from other investments   115,000    103,000 
Investment in Santa Fe   (1,037,000)   (123,000)
Investment in Portsmouth   (99,000)   - 
Investment in Woodland   913,000    - 
Investment in Justice   -    (150,000)
Net cash used in investing activities   (2,448,000)   (2,400,000)
           
Cash flows from financing activities:          
Proceeds from other notes payable – SBA Loans   5,172,000    - 
Net proceeds from (payments of) mortgage and other notes payable   5,303,000    (5,992,000)
Issuance cost from refinance of long-term debt   (771,000)   (162,000)
Proceeds from line of credit   -    2,985,000 
Purchase of treasury stock   (648,000)   (1,079,000)
Net cash provided by (used in) financing activities   9,056,000    (4,248,000)
           
Net increase in cash, cash equivalents and restricted cash:   3,154,000    7,621,000 
Cash, cash equivalents and restricted cash at the beginning of the year   25,132,000    17,511,000 
Cash, cash equivalents and restricted cash at the end of the year  $28,286,000   $25,132,000 
           
Supplemental information:          
Income taxes paid (refunds received)  $41,000   $(1,239,000)
Interests paid  $9,440,000   $10,011,000 
           
Non-cash transactions:          
Additions to Hotel equipment through finance leases  $30,000   $382,000 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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THE INTERGROUP CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

 

Description of the Business

 

The InterGroup Corporation, a Delaware corporation, (“InterGroup” or the “Company”) was formed to buy, develop, operate and dispose of real property and to engage in various investment activities to benefit the Company and its shareholders.

 

As of June 30, 2020, the Company had the power to vote 87.4% of the voting shares of Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF). This percentage includes the power to vote an approximately 3.7% interest in the common stock in Santa Fe owned by the Company’s Chairman and CEO, John V. Winfield, pursuant to a voting trust agreement entered into on June 30, 1998. Mr. Winfield, Chairman of the Board of both Santa Fe and InterGroup, is a control person of both entities.

 

Santa Fe’s primary business is conducted through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a public company (OTCBB: PRSI). Portsmouth has a 93.3% limited partnership interest in Justice Investors, a California limited partnership (“Justice” or the “Partnership”) and is the sole general partner. Justice was formed in 1967 to acquire real property in San Francisco, California. As of June 30, 2020, the Partnership has approximately 23 voting limited partners. InterGroup also directly owns approximately 13.7% of the common stock of Portsmouth.

 

Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”) owns and operates a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Mezzanine is a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (“Hilton”) through January 31, 2030.

 

Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms of the HMA, base management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the form of a self-exhausting, interest free note payable in the amount of $2,000,000 in a separate key money agreement. As of June 30, 2020 and 2019, balance of the key money including accrued interests are $1,009,000 and $2,049,000, respectively, and are included in restricted cash in the consolidated balance sheets. As of June 30, 2020 and 2019, balance of the unamortized portion of the key money are $1,646,000 and $1,896,000, respectively, and are included in the related party notes payable in the consolidated balance sheets. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.

 

In addition to the operations of the Hotel, the Company also generates income from the ownership of real estate. Properties include apartment complexes, commercial real estate, and three single-family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has investments in unimproved real property. All of the Company’s residential rental properties are managed in-house.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and Santa Fe. All significant inter-company transactions and balances have been eliminated.

 

Investment in Hotel, Net

 

Property and equipment are stated at cost. Building improvements are depreciated on a straight-line basis over their useful lives ranging from 3 to 39 years. Furniture, fixtures, and equipment are depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years.

 

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Repairs and maintenance are charged to expense as incurred. Costs of significant renewals and improvements are capitalized and depreciated over the shorter of its remaining estimated useful life or life of the asset. The cost of assets sold or retired, and the related accumulated depreciation are removed from the accounts; any resulting gain or loss is included in other income (expenses).

 

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with generally accepted accounting principles (“GAAP”). If the carrying amount of the asset, including any intangible assets associated with that asset, exceeds its estimated undiscounted net cash flow, before interest, the Partnership will recognize an impairment loss equal to the difference between the asset’s carrying amount and its estimated fair value. If impairment is recognized, the reduced carrying amount of the asset will be accounted for as its new cost. For a depreciable asset, the new cost will be depreciated over the asset’s remaining useful life. Generally, fair values are estimated using discounted cash flow, replacement cost or market comparison analyses. The process of evaluating for impairment requires estimates as to future events and conditions, which are subject to varying market and economic factors. Therefore, it is reasonably possible that a change in estimate resulting from judgments as to future events could occur which would affect the recorded amounts of the property. No impairment losses were recorded for the years ended June 30, 2020 and 2019.

 

Investment in Real Estate, Net

 

Rental properties are stated at cost less accumulated depreciation. Depreciation of rental property is provided on the straight-line method based upon estimated useful lives of 5 to 40 years for buildings and improvements and 5 to 10 years for equipment. Expenditures for repairs and maintenance are charged to expense as incurred and major improvements are capitalized.

 

The Company also reviews its rental property assets for impairment. No impairment losses on the investment in real estate have been recorded for the years ended June 30, 2020 and 2019.

 

The fair value of the tangible assets of an acquired property, which includes land, building and improvements, is determined by valuing the property as if they were vacant, and incorporates costs during the lease-up periods considering current market conditions and costs to execute similar leases such lost rental revenue and tenant improvements. The value of tangible assets is depreciated using straight-line method based upon the assets estimated useful lives.

 

Investment in Marketable Securities

 

Marketable securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading securities with all unrealized gains and losses on the Company’s investment portfolio recorded through the consolidated statements of operations.

 

Other Investments, Net

 

Other investments include non-marketable securities (carried at cost, net of any impairments loss) and non-marketable debt instruments. The Company has no significant influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the years ended June 30, 2020 and 2019, the Company recorded impairment losses related to other investments of $219,000 and $98,000, respectively. As of June 30, 2020 and 2019, the allowance for impairment losses was $6,270,000 and $6,367,000, respectively.

 

Cash and Cash Equivalents

 

Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased and are carried at cost, which approximates fair value. As of June 30, 2020 and 2019, the Company does not have any cash equivalents.

 

Restricted Cash

 

Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel. It also includes key money received from Interstate that is restricted for capital improvements.

 

Other Assets, Net

 

Other assets include prepaid insurance, accounts receivable, franchise fees, tax refund receivable, and other miscellaneous assets. Franchise fees are stated at cost and amortized over the life of the agreement (15 years).

 

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Accounts receivable from the Hotel and rental property customers are carried at cost less an allowance for doubtful accounts that is based on management’s assessment of the collectability of accounts receivable. As of June 30, 2020, and 2019, the allowance for doubtful accounts was $79,000 and $71,000, respectively. The Company extends unsecured credit to its customers but mitigates the associated credit risk by performing ongoing credit evaluations of its customers.

 

Due to Securities Broker

 

The Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms. Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.

 

Obligation for Securities Sold

 

Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the statement of operations.

 

Accounts Payable and Other Liabilities

 

Accounts payable and other liabilities include trade payables, advance customer deposits, accrued wages, accrued real estate taxes, and other liabilities.

 

Treasury Stock

 

The Company records the acquisition of treasury stock under the cost method. During the years ended June 30, 2020 and 2019, the Company purchased 21,153 and 33,601 shares of treasury stock, respectively.

 

Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Accounting standards for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:

 

Level 1–inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2–inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

Level 3–inputs to the valuation methodology are unobservable and significant to the fair value.

 

Revenue Recognition

 

On July 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach to all contracts resulting in no cumulative adjustment to accumulated deficit. The adoption of this standard did not impact the timing of our revenue recognition based on the short-term, day-to-day nature of our operations. See Note 3 – Revenue.

 

Advertising Costs

 

Advertising costs are expensed as incurred and are included in Hotel operating expenses in the consolidated statements of operations. Advertising costs were $176,000 and $282,000 for the years ended June 30, 2020 and 2019, respectively.

 

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Income Taxes

 

Deferred income taxes are calculated under the liability method. Deferred income tax assets and liabilities are based on differences between the financial statement and tax basis of assets and liabilities at the current enacted tax rates. Changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation allowances are established for certain deferred tax assets where realization is not likely.

 

We have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27, 2020. The effect of tax law changes is required to be recognized either in the interim period in which the legislation is enacted or reflected in the computation of the annual effective tax rate, depending on the nature of the change. As of June 30, 2020, we evaluated the income tax provisions of the CARES Act and have determined there to be no material effect on the fiscal year tax provision. We will continue to evaluate the income tax provisions of the CARES Act and monitor the tax law changes that could have income tax accounting and disclosure implications.

 

Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions.

 

Earnings Per Share

 

Basic net (loss) income per share is computed by dividing net (loss) income available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted net income per share is similar to the computation of basic net income per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. As of June 30, 2020, the Company’s only potentially dilutive common shares are 323,195 shares that Mr. Winfield has a right to acquire pursuant to vested stock options. The basic and diluted earnings per share are the same for the fiscal year ended June 30, 2020 because the Company had a net loss.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to the recording of allowance for doubtful accounts and allowance for impairment losses which are based on management’s assessment of the collectability of accounts receivable and the fair market value of nonmarketable securities, respectively, as of the end of the fiscal year. Actual results may differ from those estimates.

 

Debt Issuance Costs

 

Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the debt liability and are amortized over the life of the debt. Loan amortization costs are included in interest expense in the consolidated statement of operations.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. Effective July 1, 2019, we adopted ASU 2016-02 using the modified retrospective approach provided by ASU 2018-11. We elected certain practical expedients permitted under the transition guidance, including the election to carryforward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets. In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value of the fixed payments without performing an allocation of lease and non-lease components. We did not record any operating lease right-of-use (“ROU”) assets and operating lease liabilities upon adoption of the new standard as the aggregate value of the ROU assets and operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2020 and 2019. The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 4 and Note 10 for balances of finance lease ROU assets and liabilities, respectively.

 

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On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2023. The Company is currently reviewing the effect of ASU No. 2016-13.

 

NOTE 2 - LIQUIDITY

 

Historically, our cash flows have been primarily generated from our Hotel operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic has had a material detrimental impact on our liquidity. For the fiscal year ended June 30, 2020, our net cash flow used in operations was $3,454,000. For the fiscal year ended June 30, 2019, our net cash flow provided by operations was $14,269,000. We have taken several steps to preserve capital and increase liquidity at our Hotel, including implementing strict cost management measures to eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets.

 

As of June 30, 2020, we had cash, cash equivalents, and restricted cash of $28,286,000 which included $10,666,000 of restricted cash held by our Hotel senior lender Wells Fargo Bank, N.A. (“Lender”). Of the $10,666,000 restricted cash, $7,486,000 was held for furniture, fixtures and equipment (“FF&E”) reserves and $2,432,000 was held for a possible future property improvement plan (“PIP”) requested by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i) January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. On August 19, 2020, Operating received PIP deposits in the amount of $2,379,000 held by Lender. The funds were utilized to fund operating expenses, including franchise and management fees and other expenses.

 

On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of June 30, 2020, Justice had used $3,568,000 in qualified expenses such as payroll expenses, mortgage interests, utilities, etc., and had a balance of $1,151,000 available for future qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of June 30, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 27, 2022 and has a 1.00% interest rate. Both the SBA Loan – Justice and SBA Loan – InterGroup (collectively the “SBA Loans”) may be forgiven if the funds are used for payroll and other qualified expenses. All payments of principal and interests are deferred until October 2020. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. We anticipate applying for loan forgiveness shortly. All unforgiven portion of the principal and accrued interest will be due at maturity.

 

In order to increase our liquidity position, the Company refinanced its 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, the Company refinanced one of its California properties and generated net proceeds of $1,144,000. We are currently evaluating other refinancing opportunities. We could refinance additional multifamily properties should the need arise; however, we do not deem it necessary at this time. The Company has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) of which $5,000,000 was available to be drawn down as of June 30, 2020; however, the outstanding balance on the revolving line of credit was paid down fully on August 28, 2020, making the entire $8,000,000 available to be drawn down should additional liquidity be necessary. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,026,000. Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000 as InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale. Santa Fe will not seek a replacement property.

 

As the sole general partner of Justice that controls approximately 93.3% of the voting interest in the Partnership, Portsmouth has the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup and/or Santa Fe to meet any capital calls and its other obligations during the next twelve months and beyond. On August 28, 2020, the Board of InterGroup and Santa Fe have passed resolutions, respectively, to provide funding to Portsmouth if necessary. The Partnership is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital.

 

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Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel.

 

Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.

 

NOTE 3 - REVENUE

 

Our revenue from real estate is primarily rental income from residential and commercial property leases which is recorded when due from residents and is recognized monthly as earned. The following table present our Hotel revenue disaggregated by revenue streams.

 

For the year ended June 30,  2020   2019 
Hotel revenues:          
Hotel rooms  $36,465,000   $51,243,000 
Food and beverage   3,529,000    5,353,000 
Garage   2,368,000    2,875,000 
Other operating departments   477,000    410,000 
Total Hotel revenue  $42,839,000   $59,881,000 

 

Performance obligations

 

We identified the following performance obligations for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:

 

  Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
     
  Noncancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
     
  Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
     
  Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.

 

Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.

 

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We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.

 

Contract assets and liabilities

 

We do not have any material contract assets as of June 30, 2020 and 2019, other than trade and other receivables, net on our consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.

 

We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our consolidated balance sheets. Contract liabilities decreased to $375,000 as of June 30, 2020 from $1,215,000 as of June 30, 2019. The decrease for the twelve months ended June 30, 2020 was primarily driven by $840,000 revenue recognized that was included in the advanced deposits balance as of June 30, 2019.

 

Contract costs

 

We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers are less than one year.

 

NOTE 4 – INVESTMENT IN HOTEL, NET

 

Investment in Hotel consisted of the following as of:

 

       Accumulated   Net Book 
June 30, 2020  Cost   Depreciation   Value 
             
Land  $2,738,000   $-   $2,738,000 
Finance lease ROU assets   1,775,000    (291,000)   1,484,000 
Furniture and equipment   30,528,000    (27,498,000)   3,030,000 
Building and improvements   64,005,000    (32,488,000)   31,517,000 
Investment in Hotel, net  $99,046,000   $(60,277,000)  $38,769,000 

 

       Accumulated   Net Book 
June 30, 2019  Cost   Depreciation   Value 
             
Land  $2,738,000   $-   $2,738,000 
Finance lease ROU assets   521,000    (35,000)   486,000 
Furniture and equipment   30,585,000    (26,842,000)   3,743,000 
Building and improvements   63,879,000    (31,010,000)   32,869,000 
Investment in Hotel, net  $97,723,000   $(57,887,000)  $39,836,000 

 

NOTE 5 - INVESTMENT IN REAL ESTATE, NET

 

At June 30, 2020, the Company’s investment in real estate consisted of twenty properties located throughout the United States. These properties include sixteen apartment complexes, three single-family houses as strategic investments, and one commercial real estate property. The Company also owns unimproved land located in Maui, Hawaii.

 

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Investment in real estate included the following:

 

As of  June 30, 2020   June 30, 2019 
Land  $23,565,000   $23,566,000 
Buildings, improvements and equipment   69,417,000    68,369,000 
Accumulated depreciation   (44,112,000)   (41,629,000)
    48,870,000    50,306,000 
Land held for development   1,468,000    1,467,000 
Investment in real estate, net  $50,338,000   $51,773,000 

 

NOTE 6 - INVESTMENT IN MARKETABLE SECURITIES

 

The Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically invested in corporate bonds and income producing securities, which may include interests in real estate-based companies and REITs, where financial benefit could insure to its shareholders through income and/or capital gain.

 

At June 30, 2020 and 2019, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:

 

       Gross   Gross   Net    
Investment  Cost   Unrealized Gain   Unrealized Loss   Unrealized Loss   Fair
Value
 
                     
As of June 30, 2020                         
Corporate Equities  $11,459,000   $902,000   $(6,183,000)  $(5,281,000)  $6,178,000 
                         
As of June 30, 2019                         
Corporate Equities  $19,204,000   $1,753,000   $(11,261,000)  $(9,508,000)  $9,696,000 

 

As of June 30, 2020 and 2019, approximately 11% and 7% of the investment marketable securities balance above is comprised of the common stock of Comstock Mining Inc. (“Comstock” – NYSE AMERICAN: LODE), respectively.

 

As of June 30, 2020 and 2019, the Company had $5,734,000 and $11,088,000, respectively, of unrealized losses related to securities held for over one year; of which $5,427,000 and $10,900,000 are related to its investment in Comstock, respectively.

 

Net loss on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the two components for the years ended June 30, 2020 and 2019, respectively.

 

For the year ended June 30,  2020   2019 
Realized loss on marketable securities   (641,000)   (806,000)
Unrealized loss on marketable securities related to Comstock   -    (254,000)
Unrealized loss on marketable securities   (1,272,000)   (673,000)
Net loss on marketable securities  $(1,913,000)  $(1,733,000)

 

NOTE 7 – OTHER INVESTMENTS, NET

 

The Company may also invest, with the approval of the Executive Strategic Real Estate and Securities Investment Committee and other Company guidelines, in private investment equity funds and other unlisted securities. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses.

40
 

 

Other investments, net consist of the following:

 

Type   June 30, 2020     June 30, 2019  
Private equity hedge fund, at cost   $ 157,000     $ 376,000  
Other investments     121,000       236,000  
    $ 278,000     $ 612,000  

 

NOTE 8 - FAIR VALUE MEASUREMENTS

 

The carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities, due to securities broker and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).

 

The assets measured at fair value on a recurring basis are as follows:

 

As of June 30, 2020    
   Level 1 
Assets:     
Investment in marketable securities:     
REITs and real estate companies  $2,365,000 
Basic material   1,209,000 
Energy   767,000 
Industrials   484,000 
Corporate bonds   417,000 
Other   936,000 
   $6,178,000 

 

As of June 30, 2019    
   Level 1 
Assets:     
Investment in marketable securities:     
REITs and real estate companies  $3,069,000 
Consumer cyclical   1,448,000 
Corporate bonds   1,420,000 
Financial services   951,000 
Energy   950,000 
Other   1,858,000 
   $9,696,000 

 

The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.

 

41
 

 

Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments in non-marketable securities,” that were initially measured at cost and have been written down to fair value as a result of impairment or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments). The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:

 

Assets  Level 3   June 30, 2020   Net loss for the year
ended June 30, 2020
 
                
Other non-marketable investments  $278,000   $278,000   $(219,000)

 

          

 

Net loss for the year

 
Assets  Level 3   June 30, 2019   ended June 30, 2019 
                
Other non-marketable investments  $612,000   $612,000   $(98,000)

 

For fiscal years ended June 30, 2020 and 2019, we received distribution from other non-marketable investments of $115,000 and $103,000, respectively.

 

Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. When determining the fair value of these investments on a non-recurring basis, the Company uses valuation techniques such as the market approach and the unobservable inputs include factors such as conversion ratios and the stock price of the underlying convertible instruments. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

 

NOTE 9 – OTHER ASSETS, NET

 

Other assets consist of the following as of June 30:

 

    2020    2019 
Accounts receivable, net  $504,000   $852,000 
Prepaid expenses   673,000    747,000 
Miscellaneous assets, net   808,000    763,000 
Total other assets  $1,985,000   $2,362,000 

 

NOTE 10 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS

 

The following summarizes the balances of related party and other notes payable as of June 30, 2020 and 2019, respectively.

 

As of June 30,  2020   2019 
Note payable - Hilton  $3,008,000   $3,325,000 
Note payable - Interstate   1,646,000    1,896,000 
Other notes payable - SBA Loans   5,172,000    - 
Other notes payable   -    40,000 
Total related party and other notes payable  $9,826,000   $5,261,000 

 

Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.

 

On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. As of June 30, 2020 and 2019, balance of the key money including accrued interests are $1,009,000 and $2,049,000, respectively, and are included in restricted cash in the consolidated balance sheets. Unamortized portion of the key money is included in the related party notes payable in the consolidated balance sheets.

 

42
 

 

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is a subsidiary of Santa Fe and the Company. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interests were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC. In July 2020, the $2,969,000 mortgage due to InterGroup and the RLOC was extended to July 2021.

 

On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off a mortgage note payable on a single-family house located in Los Angeles, California. On September 28, 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. Net proceeds of $995,000 received as a result of the refinance was used to pay down the RLOC.

 

On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of June 30, 2020, Justice had used $3,568,000 in qualified expenses and had a balance of $1,151,000 available for future qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of June 30, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 27, 2022 and has a 1.00% interest rate. Both the SBA Loan – Justice and SBA Loan – InterGroup (collectively the “SBA Loans”) may be forgiven if the funds are used for payroll and other qualified expenses. All payments of principal and interests are deferred until October 2020. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. We anticipate applying for loan forgiveness shortly. All unforgiven portion of the principal and accrued interest will be due at maturity. As of June 30, 2020, balance of the SBA Loans total $5,172,000 and are included in other notes payable in the consolidated balance sheets.

 

As of June 30, 2020, the Company had finance lease obligations outstanding of $1,098,000. These finance leases expire in various years through 2023 at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of June 30, 2020 are as follows:

 

For the year ending June 30,     
2021  $503,000 
2022   492,000 
2023   188,000 
Total minimum lease payments   1,183,000 
Less interest on finance lease   (85,000)
Present value of future minimum lease payments  $1,098,000 

 

43
 

 

Future minimum principal payments for all related party and other financing transactions are as follows:

 

For the year ending June 30,     
2021  $1,016,000 
2022   9,190,000 
2023   750,000 
2024   567,000 
2025   567,000 
Thereafter   1,819,000 
   $13,909,000 

 

On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended to July 1, 2021. The balance of this loan is $3,000,000 as of June 30, 2020 and 2019, and is eliminated in the consolidated balance sheets.

 

On February 5, 2020, Santa Fe acquired additional 44.6% interest in Woodland Village from InterGroup by issuing 97,500 shares of its common stock to InterGroup. As a result of the transaction, Woodland Village became a wholly owned subsidiary of Santa Fe. The transaction is being made pursuant to a Contribution Agreement (the “Contribution Agreement”) between Santa Fe and InterGroup, dated February 5, 2020. The Contribution Agreement also contains a provision for a potential subsequent earn out to InterGroup pursuant to terms set forth therein.

 

Four of the Portsmouth directors serve as directors of InterGroup. Two of those directors also serve as directors of Santa Fe. The two Santa Fe directors also serve as directors of InterGroup.

 

As Chairman of the Executive Strategic Real Estate and Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Board of Portsmouth and Santa Fe and oversees the investment activity of those companies. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.

 

NOTE 11 - MORTGAGE NOTES PAYABLE

 

On December 18, 2013: (i) Justice Operating Company, LLC, a Delaware limited liability company (“Operating”), entered into a loan agreement (“Mortgage Loan Agreement”) with Bank of America (“Mortgage Lender”); and (ii) Justice Mezzanine Company, a Delaware limited liability company (“Mezzanine”), entered into a mezzanine loan agreement (“Mezzanine Loan Agreement” and, together with the Mortgage Loan Agreement, the “Loan Agreements”) with ISBI San Francisco Mezz Lender LLC (“Mezzanine Lender” and, together with Mortgage Lender, the “Lenders”). The Partnership is the sole member of Mezzanine, and Mezzanine is the sole member of Operating.

 

The Loan Agreements provide for a $97,000,000 Mortgage Loan and a $20,000,000 Mezzanine Loan. The proceeds of the Loan Agreements were used to fund the redemption of limited partnership interests and the pay-off of the prior mortgage.

 

The Mortgage Loan is secured by the Partnership’s principal asset, the Hilton San Francisco-Financial District (the “Property”). The Mortgage Loan bears an interest rate of 5.275% per annum and matures in January 2024. The term of the loan is 10 years with interest only due in the first three years and principle and interest on the remaining seven years of the loan based on a thirty-year amortization schedule. The Mortgage Loan also requires payments for impounds related to property tax, insurance and capital improvement reserves. As additional security for the Mortgage Loan, there is a limited guaranty (“Mortgage Guaranty”) executed by Portsmouth in favor of the Mortgage Lender.

 

The Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The Mezzanine Loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. Interest only payments were due monthly. On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. As additional security for the new mezzanine loan, there is a limited guaranty executed by the Partnership and Portsmouth in favor of Cred Reit Holdco LLC (the “Mezzanine Guaranty” and, together with the Mortgage Guaranty, the “Guaranties”).

 

44
 

 

The Guaranties are limited to what are commonly referred to as “bad boy” acts, including: (i) fraud or intentional misrepresentations; (ii) gross negligence or willful misconduct; (iii) misapplication or misappropriation of rents, security deposits, insurance or condemnation proceeds; and (iv) failure to pay taxes or insurance. The Guaranties are full recourse guaranties under identified circumstances, including failure to maintain “single purpose” status which is a factor in a consolidation of Operating or Mezzanine in a bankruptcy of another person, transfer or encumbrance of the Property in violation of the applicable loan documents, Operating or Mezzanine incurring debts that are not permitted, and the Property becoming subject to a bankruptcy proceeding. Pursuant to the Guaranties, the Partnership is required to maintain a certain minimum net worth and liquidity. Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain a certain net worth and liquidity. As of June 30, 2020 and 2019, InterGroup is in compliance with both requirements. However, due to the Hotel’s current low occupancy and its negative impact on the Hotel’s cash flow, Justice Operating Company, LLC is not meeting certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of a lock-box and cash sweep by the Lender for all cash collected by the Hotel, and under certain terms, would allow the Lender to request Operating to replace its hotel management company. The DSCR for Operating has been below 1.00 for the last two quarters during fiscal year 2020 while it is required to maintain a DSCR of at least 1.10 to 1.00 for two consecutive quarters. However, such lockbox has been created and utilized from the loan inception and will be in place up to loan maturity regardless of the DSCR.

 

Each of the Loan Agreements contains customary representations and warranties, events of default, reporting requirements, affirmative covenants and negative covenants, which impose restrictions on, among other things, organizational changes of the respective borrower, operations of the Property, agreements with affiliates and third parties. Each of the Loan Agreements also provides for mandatory prepayments under certain circumstances (including casualty or condemnation events) and voluntary prepayments, subject to satisfaction of prescribed conditions set forth in the Loan Agreements.

 

In August 2018, $1,005,000 was drawn from the Company’s RLOC with CIBC to pay off a mortgage note payable on its single-family house located in Los Angeles, California. In September 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. $995,000 received as a result of the refinance was used to pay down the RLOC.

 

In April 2020, the Company refinanced its $8,453,000 and $2,469,000 mortgage notes payable on its 151-unit apartment complex in Parsippany, New Jersey and obtained a new mortgage note payable for $18,370,000. The Company received net proceeds of $6,814,000 as a result of the refinance. Interest rate on the mortgage is fixed at 3.17% for ten years and the mortgage matures in May 2030. The Company recorded loss on debt extinguishment of approximately $687,000 as a result of the refinance which represent prepayment premium on prior mortgage notes payables.

 

In June 2020, the Company refinanced its $1,274,000 mortgage note payable on its 9-unit apartment complex in Marina del Rey, California and obtained a new mortgage note payable for $2,600,000. The Company received net proceeds of $1,144,000 as a result of the refinance. Interest rate on the mortgage is fixed at 3.09% for ten years and the mortgage matures in July 2030.

 

45
 

 

Each mortgage notes payable is secured by real estate or the Hotel. As of June 30, 2020 and 2019, the mortgage notes payables are summarized as follows:

 

    As of June 30, 2020                        
                             
    Number   Note   Note            
Property   of Units   Origination Date   Maturity Date   Mortgage Balance     Interest Rate  
                                 
SF Hotel   544 rooms   December   2013   January   2024   $ 92,292,000       5.28 %
SF Hotel   544 rooms   July   2019   January   2024     20,000,000       7.25 %
        Mortgage notes payable - Hotel         112,292,000          
        Debt issuance costs         (896,000 )        
        Total mortgage notes payable - Hotel       $ 111,396,000          
                                     
Florence   157   March   2015   April   2025   $ 3,150,000       3.87 %
Las Colinas   358   November   2012   December   2022     16,529,000       3.73 %
Morris County   151   April   2020   May   2030     18,341,000       3.17 %
St. Louis   264   May   2013   May   2023     5,236,000       4.05 %
Los Angeles   4   September   2012   September   2042     333,000       3.75 %
Los Angeles   2   September   2012   September   2042     337,000       3.75 %
Los Angeles   1   August   2012   September   2042     363,000       3.75 %
Los Angeles   31   November   2010   December   2020     4,800,000       4.85 %
Los Angeles   30   August   2007   September   2022     5,614,000       5.97 %
Los Angeles   14   April   2011   March   2021     1,597,000       5.89 %
Los Angeles   12   June   2016   June   2026     2,125,000       3.59 %
Los Angeles   9   June   2020   July   2030     2,600,000       3.09 %
Los Angeles   9   April   2011   March   2021     1,088,000       5.89 %
Los Angeles   8   July   2013   July   2043     428,000       3.75 %
Los Angeles   7   August   2012   September   2042     823,000       3.75 %
Los Angeles   4   August   2012   September   2042     563,000       3.75 %
Los Angeles   1   September   2012   September   2042     388,000       3.75 %
Los Angeles   1   September   2018   October   2048     974,000       4.75 %
Los Angeles   Office   April   2016   January   2021     770,000       2.67 %
        Mortgage notes payable - real estate         66,059,000          
        Debt issuance costs         (447,000 )        
        Total mortgage notes payable - real estate       $ 65,612,000          

 

46
 

 

    As of June 30, 2019                        
                             
    Number   Note   Note            
Property   of Units   Origination Date   Maturity Date   Mortgage Balance     Interest Rate  
                                 
SF Hotel   544 rooms   December   2013   January   2024   $ 93,746,000       5.28 %
SF Hotel   544 rooms   December   2013   January   2024     20,000,000       9.75 %
        Mortgage notes payable - Hotel         113,746,000          
        Debt issuance costs         (659,000 )        
        Total mortgage notes payable - Hotel       $ 113,087,000          
                                     
Florence   157   March   2015   April   2025   $ 3,222,000       3.87 %
Las Colinas   358   November   2012   December   2022     16,974,000       3.73 %
Morris County   151   July   2012   August   2022     8,737,000       3.51 %
Morris County   151   June   2014   August   2022     2,512,000       4.51 %
St. Louis   264   May   2013   May   2023     5,365,000       4.05 %
Los Angeles   4   September   2012   September   2042     343,000       3.75 %
Los Angeles   2   September   2012   September   2042     347,000       3.75 %
Los Angeles   1   August   2012   September   2042     373,000       3.75 %
Los Angeles   31   November   2010   December   2020     4,927,000       4.85 %
Los Angeles   30   August   2007   September   2022     5,765,000       5.97 %
Los Angeles   14   April   2011   March   2021     1,632,000       5.89 %
Los Angeles   12   June   2016   June   2026     2,172,000       3.59 %
Los Angeles   9   April   2011   May   2021     1,303,000       5.60 %
Los Angeles   9   April   2011   March   2021     1,112,000       5.89 %
Los Angeles   8   July   2013   July   2043     440,000       3.75 %
Los Angeles   7   August   2012   September   2042     846,000       3.75 %
Los Angeles   4   August   2012   September   2042     579,000       3.75 %
Los Angeles   1   September   2012   September   2042     399,000       3.75 %
Los Angeles   1   September   2018   October   2048     990,000       4.75 %
Los Angeles   Office   April   2016   January   2021     806,000       4.91 %
        Mortgage notes payable - real estate         58,844,000          
        Debt issuance costs         (273,000 )        
        Total mortgage notes payable - real estate       $ 58,571,000          

 

Future minimum payments for all mortgage notes payable are as follows:

 

For the year ending June 30,     
2021  $11,211,000 
2022   3,101,000 
2023   28,244,000 
2024   108,113,000 
2025   3,494,000 
Thereafter   24,188,000 
   $178,351,000 

 

47
 

 

NOTE 12 – MANAGEMENT AGREEMENTS

 

On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. The key money is included in restricted cash balances in the consolidated balance sheets. As of June 30, 2020 and 2019, balance of the key money including accrued interests are $1,009,000 and $2,049,000, respectively. As of June 30, 2020 and 2019, unamortized portion of the key money was $1,646,000 and $1,896,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets. During the years ended June 30, 2020 and 2019, Interstate management fees were $341,000 and $1,206,000, respectively, and are included in Hotel operating expenses in the consolidated statements of operations.

 

NOTE 13 – CONCENTRATION OF CREDIT RISK

 

As of June 30, 2020 and 2019, all accounts receivables are related to Hotel customers. The Hotel had two customers that accounted for 95%, or $239,000 of accounts receivable at June 30, 2020, and one customer that accounted for 32%, or $272,000 of accounts receivable at June 30, 2019.

 

The Company maintains its cash and cash equivalents and restricted cash with various financial institutions that are monitored regularly for credit quality. At times, such cash and cash equivalents holdings may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) or other federally insured limits.

 

NOTE 14 – INCOME TAXES

 

The provision for the Company’s income tax (expense) benefit is comprised of the following:

 

For the years ended June 30,  2020   2019 
         
Federal          
Current tax expense  $(57,000)  $(1,387,000)
Deferred tax benefit   1,828,000    2,563,000 
    1,771,000    1,176,000 
           
State          
Current tax expense   (64,000)   (25,000)
Deferred tax benefit (expense)   1,087,000    (850,000)
    1,023,000    (875,000)
           
Income Tax Benefit  $2,794,000   $301,000 

 

48
 

 

The provision for income taxes differs from the amount of income tax computed by applying the federal statutory income tax rate to income before taxes as a result of the following differences:

 

For the years ended June 30,  2020   2019 
         
Statutory federal tax rate  $1,593,000   $(457,000)
State income taxes, net of federal tax benefit   812,000    (972,000)
Dividend received deduction   18,000    16,000 
Disallowed interest   504,000    - 
Valuation allowance   49,000    2,158,000 
Basis difference in investments   39,000    815,000 
Carryback tax payable   -    (1,140,000)
Other   (221,000)   (119,000)
   $2,794,000   $301,000 

 

The components of the deferred tax asset and liabilities are as follows:

 

   June 30, 2020   June 30, 2019 
Deferred tax assets:          
Net operating loss carryforwards  $8,713,000   $6,810,000 
Capital loss carryforwards   1,074,000    1,283,000 
Investment impairment reserve   1,156,000    1,295,000 
Accruals and reserves   871,000    1,095,000 
Interest expense   1,498,000    162,000 
Tax credits   563,000    619,000 
Unrealized loss on marketable securities   1,591,000    547,000 
Other   221,000    231,000 
Valuation allowance   (497,000)   (524,000)
    15,190,000    11,518,000 
Deferred tax liabilities:          
Equity earnings   (4,306,000)   (3,188,000)
Deferred gains on real estate sale and depreciation   (6,249,000)   (6,844,000)
State taxes   (252,000)   (18,000)
    (10,807,000)   (10,050,000)
Net deferred tax asset  $4,383,000   $1,468,000 

 

Management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of June 30, 2019, because of tax planning to generate taxable income in the future, management has determined that there is sufficient positive evidence to conclude that a significant portion of its deferred tax assets are realizable. As a result, the valuation allowance decreased by $2,086,000 during the fiscal year ended June 30, 2019.

 

As of June 30, 2020, the Company had estimated net operating losses (NOLs) of $30,486,000 and $26,140,000 for federal and state purposes, respectively. Below is the break-down of the NOLs for InterGroup, Santa Fe and Portsmouth. The carryforward expires in varying amounts through the year 2038.

 

49
 

 

   Federal   State 
InterGroup  $-   $- 
Santa Fe   9,781,000    4,761,000 
Portsmouth   20,705,000    21,379,000 
   $30,486,000   $26,140,000 

 

Utilization of the net operating loss carryover may be subject a substantial annual limitation if it should be determined that there has been a change in the ownership of more than 50 percent of the value of the Company’s stock, pursuant to Section 382 of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating loss carryovers before utilization.

 

Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions. As of June 30, 2020, it has been determined there are no uncertain tax positions likely to impact the Company.

 

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates and is subject to examination by federal, state and local jurisdictions, where applicable.

 

As of June 30, 2020, tax years beginning in fiscal years 2015 and 2016 remain open to examination by the major tax jurisdictions, and are subject to the statute of limitations.

 

NOTE 15 – SEGMENT INFORMATION

 

The Company operates in three reportable segments, the operation of the Hotel (“Hotel Operations”), the operation of its multi-family residential properties (“Real Estate Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this information.

 

Information below represents reported segments for the years ended June 30, 2020 and 2019. Segment income from Hotel operations consists of the operation of the Hotel and operation of the garage. Segment income from real estate operations consists of the operation of the rental properties. Loss from investments consists of net investment loss, dividend and interest income and investment related expenses.

 

 

As of and for the year  Hotel   Real Estate   Investment         
ended June 30, 2020  Operations   Operations   Transactions   Other   Total 
Revenues  $42,839,000   $15,178,000   $-   $-   $58,017,000 
Segment operating expenses   (37,333,000)   (8,051,000)   -    (2,870,000)   (48,254,000)
Segment income (loss) from operations   5,506,000    7,127,000    -    (2,870,000)   9,763,000 
Interest expense - mortgage   (6,885,000)   (2,436,000)   -    -    (9,321,000)
Loss on debt extinguishment   -    (687,000)   -    -    (687,000)
Depreciation and amortization expense   (2,389,000)   (2,483,000)   -    -    (4,872,000)
Loss from investments   -    -    (2,766,000)   -    (2,766,000)
Income tax benefit   -    -    -    2,794,000    2,794,000 
 Net income (loss)  $(3,768,000)  $1,521,000   $(2,766,000)  $(76,000)  $(5,089,000)
Total assets  $56,004,000   $50,338,000   $6,456,000   $17,419,000   $130,217,000 

 

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As of and for the year  Hotel   Real Estate   Investment         
ended June 30, 2019  Operations   Operations   Transactions   Other   Total 
Revenues  $59,881,000   $14,872,000   $-   $-   $74,753,000 
Segment operating expenses   (44,466,000)   (7,810,000)   -    (2,346,000)   (54,622,000)
Segment income (loss) from operations   15,415,000    7,062,000    -    (2,346,000)   20,131,000 
Interest expense - mortgage   (7,234,000)   (2,554,000)   -    -    (9,788,000)
Loss on disposal of assets   (398,000)   -    -    -    (398,000)
Depreciation and amortization expense   (2,506,000)   (2,429,000)   -    -    (4,935,000)
Loss from investments   -    -    (2,497,000)   -    (2,497,000)
Income tax benefit   -    -    -    301,000    301,000 
 Net income (loss)  $5,277,000   $2,079,000   $(2,497,000)  $(2,045,000)  $2,814,000 
Total assets  $62,148,000   $51,773,000   $10,308,000   $6,650,000   $130,879,000 

 

NOTE 16 – STOCK-BASED COMPENSATION PLANS

 

The Company follows the Statement of Financial Accounting Standards 123 (Revised), “Share-Based Payments” (“SFAS No. 123R”), which was primarily codified into ASC Topic 718 “Compensation – Stock Compensation”, which addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units.

 

The Company currently has one equity compensation plan, which is the Intergroup 2010 Omnibus Employee Incentive Plan. The InterGroup Corporation 2008 Restricted Stock Unit Plan (the “2008 RSU Plan”) terminated on its expiration date of December 8th, 2018 as prescribed in the plan document. Both plans have been approved by the Company’s stockholders and are described below. Any outstanding options issued under the Key Employee Plan or the Non-Employee Director Plan remain effective in accordance with their terms.

 

The InterGroup Corporation 2008 Restricted Stock Unit Plan

 

On December 3, 2008, the Board of Directors adopted, subject to shareholder approval, an equity compensation plan for its officers, directors and key employees entitled, The InterGroup Corporation 2008 Restricted Stock Unit Plan (the “2008 RSU Plan”). The 2008 RSU Plan was approved and ratified by the shareholders on February 18, 2009.

 

The 2008 RSU Plan authorizes the Company to issue restricted stock units (“RSUs”) as equity compensation to officers, directors and key employees of the Company on such terms and conditions established by the Compensation Committee of the Company. RSUs are not actual shares of the Company’s common stock, but rather promises to deliver common stock in the future, subject to certain vesting requirements and other restrictions as may be determined by the Committee. Holders of RSUs have no voting rights with respect to the underlying shares of common stock and holders are not entitled to receive any dividends until the RSUs vest and the shares are delivered. No awards of RSUs shall vest until at least six months after shareholder approval of the Plan. Subject to certain adjustments upon changes in capitalization, a maximum of 200,000 shares of the common stock are available for issuance to participants under the 2008 RSU Plan. The 2008 RSU Plan will terminate ten (10) years from December 3, 2008, unless terminated sooner by the Board of Directors. After the 2008 RSU Plan is terminated, no awards may be granted but awards previously granted shall remain outstanding in accordance with the Plan and their applicable terms and conditions.

 

The shares of common stock to be delivered upon the vesting of an award of RSUs have been registered under the Securities Act, pursuant to a registration statement filed on Form S-8 by the Company on June 16, 2010. The grant of RSUs is personal to the recipient and is not transferable. Once received, shares of common stock issuable upon the vesting of the RSUs are freely transferable subject to any requirements of Section 16(b) of the Exchange Act. Under the 2008 RSU Plan, the Compensation Committee also has the power and authority to establish and implement an exchange program that would permit the Company to offer holders of awards issued under prior shareholder approved compensation plans to exchange certain options for new RSUs on terms and conditions to be set by the Committee. The exchange program is designed to increase the retention and motivational value of awards granted under prior plans. In addition, by exchanging options for RSUs, the Company will reduce the number of shares of common stock subject to equity awards, thereby reducing potential dilution to stockholders in the event of significant increases in the value of its common stock.

 

As of June 30, 2020, there were no RSUs outstanding.

 

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Intergroup Corporation 2010 Omnibus Employee Incentive Plan

 

On February 24, 2010, the shareholders of the Company approved The Intergroup Corporation 2010 Omnibus Employee Incentive Plan (the “2010 Incentive Plan”), which was formally adopted by the Board of Directors following the annual meeting of shareholders. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on 5 years of continuous service. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Incentive Plan. The 2010 Incentive plan as modified in December 2013, authorizes a total of up to 400,000 shares of common stock to be issued as equity compensation to officers and employees of the Company in an amount and in a manner to be determined by the Compensation Committee in accordance with the terms of the 2010 Incentive Plan. The 2010 Incentive Plan authorizes the awards of several types of equity compensation including stock options, stock appreciation rights, performance awards and other stock-based compensation. The 2010 Incentive Plan had an original expiration date of February 23, 2020, if not terminated sooner by the Board of Directors upon recommendation of the Compensation Committee. Any awards issued under the 2010 Incentive Plan will expire under the terms of the grant agreement.

 

The shares of common stock to be issued under the 2010 Incentive Plan have been registered under the Securities Act, pursuant to a registration statement filed on Form S-8 by the Company on June 16, 2010. Once received, shares of common stock issued under the Plan will be freely transferable subject to any requirements of Section 16 (b) of the Exchange Act.

 

On March 16, 2010, the Compensation Committee authorized the grant of 100,000 stock options to the Company’s Chairman, President and Chief Executive, John V. Winfield to purchase up to 100,000 shares of the Company’s common stock pursuant to the 2010 Incentive Plan. The exercise price of the options is $10.30, which is 100% of the fair market value of the Company’s Common Stock as determined by reference to the closing price of the Company’s Common Stock as reported on the NASDAQ Capital Market on March 16, 2010, the date of grant. The options had an original expiration date ten years from the date of grant, unless terminated earlier in accordance with the terms of the 2010 Incentive Plan. The options shall be subject to both time and market based vesting requirements, each of which must be satisfied before options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest over a period of five years, with 20,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the market vesting requirements, the options vest in increments of 20,000 shares upon each increase of $2.00 or more in the market price of the Company’s common stock above the exercise price ($10.30) of the options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading days during any one quarter. As of June 30, 2020, all the market vesting requirements have been met.

 

On December 28, 2019, the Compensation Committee of the Board of Directors recommended to the Board amendments to the 2010 Incentive Plan which would amend Section 1.3 to extend the term from ten years to sixteen years, and Section 6.4 to change “tenth (10th) anniversary date” to “twentieth (20th) anniversary date”. This would increase the term of the 2010 Incentive Plan to twenty years (expiring in February 2030 instead of February 2020) and also permit the existence of options with a term longer than ten years. The purpose of the amendment to the term is to extend its existence as our only incentive plan. The purpose of amendment of the allowable term of options is so that the Board may extend the term of the 100,000 options granted to John Winfield on March 16, 2010 from ten years to sixteen years so that these options will terminate on March 16, 2026 instead of on March 16, 2020, in recognition of Mr. Winfield’s contributions to and leadership of our Company. The recommended amendments were approved by shareholders on February 25, 2020. During the fiscal year ended June 30, 2020, the Company recorded additional stock option compensation expense in the amount of $116,000 as a result of the aforementioned amendments.

 

In February 2012, the Compensation Committee awarded 90,000 stock options to the Company’s Chairman, President and Chief Executive, John V. Winfield to purchase up to 90,000 shares of common stock. The per share exercise price of the options is $19.77 which is the fair value of the Company’s Common Stock as reported on NASDAQ on February 28, 2012. The options expire ten years from the date of grant. The options are subject to both time and market based vesting requirements, each of which must be satisfied before the options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest over a period of five years, with 18,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the market vesting requirements, the options vest in increments of 18,000 shares upon each increase of $2.00 or more in the market price of the Company’s common stock above the exercise price ($19.77) of the options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading days during any one quarter. As of June 30, 2020, all of these options have met the market vesting requirements.

 

On December 26, 2013, the Compensation Committee authorized, subject to shareholder approval, a grant of non-qualified and incentive stock options for an aggregate of 160,000 shares (the “Option Grant”) to the Company’s President and Chief Executive Officer, John V. Winfield. The stock option grant was approved by shareholders on February 19, 2014. The grant of stock options was made pursuant to, and consistent with, the 2010 Incentive Plan, as proposed to be amended. The non-qualified stock options are for 133,195 shares and have a term of ten years, expiring on December 26, 2023, with an exercise price of $18.65 per share. The incentive stock options are for 26,805 shares and have a term of five years, expiring on December 26, 2018, with an exercise price of $20.52 per share. In accordance with the terms of the 2010 Incentive Plan, the exercise prices were based on 100% and 110%, respectively, of the fair market value of the Company’s common stock as determined by reference to the closing price of the Company’s common stock as reported on the NASDAQ Capital Market on the date of grant. The stock options are subject to time vesting requirements, with 20% of the options vesting annually commencing on the first anniversary of the grant date. In December 2018, Mr. Winfield exercised the 26,805 vested incentive stock options by surrendering 17,439 shares of the Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation expense was recorded related to the issuance.

 

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In March 2017, the Compensation Committee awarded 18,000 stock options to the Company’s Vice President of Real Estate, David C. Gonzalez, to purchase up to 18,000 shares of common stock. The per share exercise price of the options is $27.30 which is the fair value of the Company’s Common Stock as reported on NASDAQ Capital Market on March 2, 2017. The options expire ten years from the date of grant. Pursuant to the time vesting requirements, the options vest over a period of five years, with 3,600 options vesting upon each one-year anniversary of the date of grant.

 

During the years ended June 30, 2020 and 2019, the Company recorded stock option compensation expense of $142,000 and $76,000, respectively, related to stock options previously issued and amending the 2010 Incentive Plan. As of June 30, 2020, there was an estimated total of $18,000 unamortized compensation related to stock options which is expected to be recognized over the weighted average of 1.67 years.

 

Option-pricing models require the input of various subjective assumptions, including the option’s expected life, estimated forfeiture rates and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history. The Company has selected to use the simplified method for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

 

The following table summarizes the stock options activity from July 1, 2018 through June 30, 2020:

 

      Number of   Weighted Average   Weighted Average   Aggregate 
      Shares   Exercise Price   Remaining Life   Intrinsic Value 
                    
Outstanding at  July 1, 2018   368,000   $17.21    4.17 years   $3,505,000 
Granted      -    -    -    - 
Exercised      (26,805)   20.52    -    - 
Forfeited      -    -    -    - 
Exchanged      -    -    -    - 
Outstanding at  June 30, 2019   341,195   $16.95    3.07 years   $4,680,000 
Exercisable at  June 30, 2019   330,395   $16.62    2.92 years   $4,643,000 
Vested and Expected to vest at  June 30, 2019   341,195   $16.95    3.07 years   $4,680,000 
                        
Outstanding at  July 1, 2019   341,195   $16.95    3.07 years   $4,680,000 
Granted      -    -    -    - 
Exercised      -    -    -    - 
Forfeited      -    -    -    - 
Exchanged      -    -    -    - 
Outstanding at  June 30, 2020   341,195   $16.95    3.83 years   $3,271,000 
Exercisable at  June 30, 2020   323,195   $16.38    3.67 years   $3,271,000 
Vested and Expected to vest at  June 30, 2020   341,195   $16.95    3.83 years   $3,271,000 

 

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NOTE 17 – RELATED PARTY TRANSACTIONS

 

As discussed in Note 10 – Related Party and Other Financing Transactions, on July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of two years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The proceeds of the loan were applied to the July 2014 payments to Justice Holdings Company, LLC (“Holdings”) in connection with the redemption of limited partnership interests. The loan was extended to July 1, 2021. The balance of this loan is $3,000,000 as of June 30, 2020 and 2019, and is eliminated in the consolidated balance sheets.

 

In connection with the redemption of limited partnership interests of Justice, Justice Operating Company, LLC agreed to pay a total of $1,550,000 in fees to certain officers and directors of the Company for services rendered in connection with the redemption of partnership interests, refinancing of Justice’s properties and reorganization of Justice. This agreement was superseded by a letter dated December 11, 2013 from Justice, in which Justice assumed the payment obligations of Justice Operating Company, LLC. As of June 30, 2018, $200,000 of these fees remained payable and were paid off as of June 30, 2019.

 

On February 5, 2020, the Company entered into a Contribution Agreement (the “Contribution Agreement”) with Santa Fe pursuant to which the Company received 97,500 shares of common stock, par value $0.10 per share, of Santa Fe, in exchange for its contribution to Santa Fe of 4,460 shares of common stock (the “Common Stock”) of Intergroup Woodland Village, Inc., an Ohio corporation (“Transaction”). As a result of the contribution, Woodland Village became a wholly owned subsidiary of Santa Fe. Before the issuance of the stock referenced in the preceding sentence, the Company had the power to vote 86.3% of the voting shares of Santa Fe, which includes the power to vote an approximately 4% interest in the common stock in Santa Fe owned by the Company’s Chairman and CEO, John V. Winfield, pursuant to a voting trust agreement entered into on June 30, 1998. Subsequent to this issuance, the Company has the power to vote 87.4% of the issued and outstanding common stock of Santa Fe, which includes the power to vote an approximately 3.7% interest in the common stock in Santa Fe under the aforementioned voting trust agreement. Mr. Winfield, Chairman of the Board of both the Company and Santa Fe, is a control person of both entities.

 

On February 5, 2020, after review by independent directors of the Company, and by the unanimous vote of all directors of the Company (with Mr. Winfield abstaining), the Board approved the entry into the Contribution Agreement and the consummation of the Transaction. The Company’s Board approved the Transaction after the receipt of a fairness opinion from a third-party independent firm. The Board was first made aware of the Transaction in early January 2020, received information to review on or about January 17, 2020 and was given multiple opportunities to discuss the materials with management before the February 5, 2020 Board meeting. The Contribution Agreement also contains a provision for a potential subsequent earn out to InterGroup pursuant to terms set forth therein.

 

As Chairman of the Executive Strategic Real Estate and Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Board of Portsmouth and Santa Fe and oversees the investment activity of those companies. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.

 

NOTE 18 – COMMITMENTS AND CONTINGENCIES

 

Cash Management Agreement

 

As part of the Hotel refinancing effective December 18, 2013, Operating entered into a Cash Management Agreement with Bank of America, N.A. (“Lender”) and Wells Fargo Bank, N.A. (“Cash Management Bank”) whereby all cash received by Operating is to be deposited into a business checking account controlled by the Cash Management Bank up to the loan maturity date. Additionally, other terms of the Cash Management Agreement provide that effective February 2019 or upon a Property Improvement Plan (“PIP”) requirement by Hilton (“Franchisor”) deemed the “Cash Sweep Period” during which all excess cash generated by Operating beyond the monthly budgeted expenses and debt services including principal and interest, insurance reserves, real estate taxes reserve, furniture fixtures and equipment (“FF&E”) reserves, for the senior and mezzanine loans, will be held by the Cash Management Bank for future hotel improvements as required by the date or a PIP. Currently, any and all funds are being controlled by the Cash Management Bank according to the Cash Management Agreement.

 

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Franchise Agreements

 

The Partnership entered into a Franchise License Agreement (the “License Agreement”) with the HLT Existing Franchise Holding LLC (“Hilton”) on November 24, 2004. The term of the License agreement was for an initial period of 15 years commencing on the date the Hotel began operating as a Hilton hotel, with an option to extend the License Agreement for another five