NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The
condensed consolidated financial statements included herein have been prepared by The InterGroup Corporation (“InterGroup”
or the “Company”), without audit, according to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in
accordance with generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading.
Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which included
only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations
as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial
statements of InterGroup and the notes therein included in the Company’s Annual Report on Form 10-K for the year ended June
30, 2019. The September 30, 2019 Condensed Consolidated Balance Sheet was derived from the Consolidated Balance Sheet as included
in the Company’s Form 10-K for the year ended June 30, 2019.
The
results of operations for the three months ended September 30, 2019 are not necessarily indicative of results to be expected for
the full fiscal year ending June 30, 2020.
Basic
and diluted income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted
average number of common shares outstanding. The computation of diluted income per share is similar to the computation of basic
earnings 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. The Company’s only potentially
dilutive common shares are stock options.
As
of September 30, 2019, the Company had the power to vote 86.3% 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 4% interest in the common
stock in Santa Fe owned by the Company’s Chairman and President pursuant to a voting trust agreement entered into on June
30, 1998.
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’s primary business is conducted through its general and limited partnership interest
in Justice Investors Limited Partnership; a California limited partnership (“Justice” or the “Partnership”).
InterGroup also directly owns approximately 13.4% 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 on the HMA, base
management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. On August 29, 2019,
Interstate announced that it entered into a definitive agreement to merge with Aimbridge Hospitality. The transaction is subject
to regulatory and customary closing conditions and is expected to be completed by the end of calendar year 2019.
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 Dallas, Texas and Southern California.
The Company also has an investment in unimproved real property. As of September 30, 2019, all of the Company’s residential
and commercial rental properties are managed in-house.
Due
to Securities Broker
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.
Obligations
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 condensed consolidated statements
of operations.
Income
Tax
The
Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest
in the Hotel. The income tax expense during the three months ended September 30, 2019 and 2018 represent the income tax effect
on the Company’s pretax income which includes its share in the net income of the Hotel. For the three months ended September
30, 2018, the income tax expense includes adjustments relating to the changes in the deferred tax assets as a result of tax law
changes.
Financial
Condition and Liquidity
The
Company’s cash flows are primarily generated from the ownership and management of real estate.
To
fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000
mortgage loan and a $20,000,000 mezzanine loan in December 2013. 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 with interest only payments due through January
2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024.
Outstanding principal balance on the loan was $93,397,000 and $93,746,000 as of September 30, 2019 and June 30, 2019, respectively.
As additional security for the mortgage loan, there is a limited 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 interest only loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. As additional
security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender.
Effective
as of May 11, 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 September
30, 2019, InterGroup is in compliance with both requirements.
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 which had a 9.75% per annum
interest rate 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.
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 55.4% and 44.6% owned
by Santa Fe and the Company, respectively. 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. 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.
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.
The
Hotel has continued to generate positive operating income. While the debt service requirements related to the loans may create
some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows
from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current
and future obligations and financial requirements.
The
Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The
Company’s marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated
statements of operations.
Management
believes that its cash, marketable securities, and the cash flows generated from its real estate assets, will be adequate to meet
the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in
the Hotel property to support additional borrowings, if necessary.
The
following table provides a summary as of September 30, 2019, the Company’s material financial obligations which also including
interest payments.
|
|
|
|
|
|
9 Months
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
|
Total
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
Thereafter
|
|
|
Mortgage and subordinated notes payable
|
|
$
|
171,849,000
|
|
|
$
|
2,315,000
|
|
|
$
|
12,483,000
|
|
|
$
|
3,095,000
|
|
|
$
|
37,812,000
|
|
|
$
|
107,655,000
|
|
|
$
|
8,489,000
|
|
|
Other notes payable
|
|
|
9,476,000
|
|
|
|
764,000
|
|
|
|
3,991,000
|
|
|
|
1,022,000
|
|
|
|
744,000
|
|
|
|
567,000
|
|
|
|
2,388,000
|
|
|
Interest
|
|
|
35,825,000
|
|
|
|
6,748,000
|
|
|
|
8,601,000
|
|
|
|
8,148,000
|
|
|
|
7,013,000
|
|
|
|
3,401,000
|
|
|
|
1,914,000
|
|
|
Total
|
|
$
|
217,150,000
|
|
|
$
|
9,827,000
|
|
|
$
|
25,075,000
|
|
|
$
|
12,265,000
|
|
|
$
|
45,569,000
|
|
|
$
|
111,623,000
|
|
|
$
|
12,791,000
|
|
Recently
Issued and Adopted 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, 2019.
The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 3 and Note 10
for balances of finance lease ROU assets and liabilities, respectively.
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 – 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 three months ended September 30,
|
|
2019
|
|
|
2018
|
|
|
Hotel revenues:
|
|
|
|
|
|
|
|
|
|
Hotel rooms
|
|
$
|
13,314,000
|
|
|
$
|
13,522,000
|
|
|
Food and beverage
|
|
|
1,222,000
|
|
|
|
1,449,000
|
|
|
Garage
|
|
|
736,000
|
|
|
|
774,000
|
|
|
Other operating departments
|
|
|
157,000
|
|
|
|
65,000
|
|
|
Total hotel revenue
|
|
$
|
15,429,000
|
|
|
$
|
15,810,000
|
|
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.
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 September 30, 2019 and June 30, 2019 other than trade and other receivables, net
on our condensed 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 condensed consolidated balance sheets. Contract liabilities increased to
$1,161,000 as of September 30, 2019 from $1,215,000 as of June 30, 2019. The increase for the three months ended September 30,
2019 was primarily driven by deposits received from upcoming groups, offset by $620,000 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 and lease agreements do not extend beyond one year.
NOTE
3 – INVESTMENT IN HOTEL, NET
Investment
in hotel consisted of the following as of:
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
September 30, 2019
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,738,000
|
|
|
$
|
-
|
|
|
$
|
2,738,000
|
|
|
Finance lease ROU assets
|
|
|
521,000
|
|
|
|
(61,000
|
)
|
|
|
460,000
|
|
|
Furniture and equipment
|
|
|
31,209,000
|
|
|
|
(27,041,000
|
)
|
|
|
4,168,000
|
|
|
Building and improvements
|
|
|
63,879,000
|
|
|
|
(31,379,000
|
)
|
|
|
32,500,000
|
|
|
Investment in Hotel, net
|
|
$
|
98,347,000
|
|
|
$
|
(58,481,000
|
)
|
|
$
|
39,866,000
|
|
|
|
|
|
|
|
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
4 – INVESTMENT IN REAL ESTATE, NET
The
Company’s investment in real estate includes 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 Dallas, Texas and Southern
California. The Company also has an investment in unimproved real property. Investment in real estate consisted of the following:
|
As of
|
|
September 30, 2019
|
|
|
June 30, 2019
|
|
|
Land
|
|
$
|
23,566,000
|
|
|
$
|
23,566,000
|
|
|
Buildings, improvements and equipment
|
|
|
68,636,000
|
|
|
|
68,369,000
|
|
|
Accumulated depreciation
|
|
|
(42,248,000
|
)
|
|
|
(41,629,000
|
)
|
|
|
|
|
49,954,000
|
|
|
|
50,306,000
|
|
|
Land held for development
|
|
|
1,467,000
|
|
|
|
1,467,000
|
|
|
Investment in real estate, net
|
|
$
|
51,421,000
|
|
|
$
|
51,773,000
|
|
NOTE
5 – 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 transfer to its shareholders through income and/or capital gain.
At
September 30, 2019 and June 30, 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
|
|
|
Fair
|
|
|
Investment
|
|
Cost
|
|
|
Unrealized Gain
|
|
|
Unrealized Loss
|
|
|
Unrealized Loss
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
10,846,000
|
|
|
$
|
1,786,000
|
|
|
$
|
(4,095,000
|
)
|
|
$
|
(2,309,000
|
)
|
|
$
|
8,537,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
19,204,000
|
|
|
$
|
1,753,000
|
|
|
$
|
(11,261,000
|
)
|
|
$
|
(9,508,000
|
)
|
|
$
|
9,696,000
|
|
As
of September 30, 2019 and June 30, 2019, approximately 5% and 7%, respectively, of the investment in marketable securities balance
above is comprised of the common stock of Comstock Mining Inc (“Comstock”). As of September 30, 2019 and June 30,
2019, the Company had $3,829,000 and $11,088,000, respectively, of unrealized losses related to securities held for over one year;
of which $3,616,000 and $10,900,000 are related to its investment in Comstock, respectively. The decrease in unrealized losses
is a result of reclassing $7,586,000 of unrealized gain related to Comstock that was included in the cost basis as of June 30,
2019.
Net
gains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses).
Below is the composition of net loss on marketable securities for the three months ended September 30, 2019 and 2018, respectively:
|
For the three months ended September 30,
|
|
2019
|
|
|
2018
|
|
|
Realized loss on marketable securities
|
|
$
|
(74,000
|
)
|
|
$
|
(8,000
|
)
|
|
Unrealized (loss) gain on marketable securities
|
|
|
(71,000
|
)
|
|
|
217,000
|
|
|
Unrealized loss on marketable securities related to Comstock
|
|
|
(304,000
|
)
|
|
|
(380,000
|
)
|
|
Net loss on marketable securities
|
|
$
|
(449,000
|
)
|
|
$
|
(171,000
|
)
|
NOTE
6 – OTHER INVESTMENTS, NET
The
Company may also invest, with the approval of the securities investment committee and other Company guidelines, in private investment
equity funds and other unlisted securities, such as convertible notes through private placements. 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. Other investments also include non-marketable warrants carried at fair value.
Other
investments, net consist of the following:
|
Type
|
|
September 30, 2019
|
|
|
June 30, 2019
|
|
|
Private equity hedge fund, at cost
|
|
$
|
376,000
|
|
|
$
|
376,000
|
|
|
Other preferred stock, at cost
|
|
|
188,000
|
|
|
|
236,000
|
|
|
|
|
$
|
564,000
|
|
|
$
|
612,000
|
|
NOTE
7 - 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 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:
|
|
|
9/30/2019
|
|
|
6/30/2019
|
|
|
As of
|
|
Total - Level 1
|
|
|
Total - Level 1
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Investment in marketable securities:
|
|
|
|
|
|
|
|
|
|
REITs and real estate companies
|
|
$
|
3,061,000
|
|
|
$
|
3,069,000
|
|
|
Energy
|
|
|
1,364,000
|
|
|
|
950,000
|
|
|
Consumer cyclical
|
|
|
1,320,000
|
|
|
|
1,448,000
|
|
|
Corporate bonds
|
|
|
1,214,000
|
|
|
|
1,420,000
|
|
|
Financial services
|
|
|
602,000
|
|
|
|
951,000
|
|
|
Basic material
|
|
|
543,000
|
|
|
|
829,000
|
|
|
Technology
|
|
|
224,000
|
|
|
|
651,000
|
|
|
Healthcare
|
|
|
114,000
|
|
|
|
185,000
|
|
|
Industrials
|
|
|
95,000
|
|
|
|
193,000
|
|
|
|
|
$
|
8,537,000
|
|
|
$
|
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.
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. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring
basis as follows:
|
|
|
|
|
|
|
|
|
Net loss for the three months
|
|
|
Assets
|
|
Level 3
|
|
|
September 30, 2019
|
|
|
ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
564,000
|
|
|
$
|
564,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months
|
|
|
Assets
|
|
Level 3
|
|
|
June 30, 2019
|
|
|
ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
612,000
|
|
|
$
|
612,000
|
|
|
$
|
-
|
|
For
the three months ended September 30, 2019 and 2018, we received distribution from other non-marketable investments of $48,000
and $80,000, 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 and holds less than 20% ownership in each of the 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.
NOTE
8 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated
balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows.
|
As of
|
|
9/30/2019
|
|
|
6/30/2019
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
12,194,000
|
|
|
$
|
11,837,000
|
|
|
Restricted cash
|
|
|
13,230,000
|
|
|
|
13,295,000
|
|
|
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
|
|
$
|
25,424,000
|
|
|
$
|
25,132,000
|
|
Restricted
cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves.
It also includes key money received from Interstate that is restricted for capital improvements for the Hotel.
NOTE
9 – STOCK BASED COMPENSATION PLANS
The
Company follows Accounting Standard Codification (ASC) Topic 718 “Compensation – Stock Compensation”, which
addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units.
Please
refer to Note 16 – Stock Based Compensation Plans in the Company’s Form 10-K for the year ended June 30, 2019 for
more detailed information on the Company’s stock-based compensation plans.
During
the three months ended September 30, 2019 and 2018, the Company recorded stock option compensation cost of $8,000 and $30,000,
respectively, related to stock options that were previously issued. As of September 30, 2019, there was a total of $36,000 of
unamortized compensation related to stock options which is expected to be recognized over the weighted-average period of 2.42
years.
In
December 2018, the Company’s President and Chief Executive Officer, John V. Winfield exercised 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.
Option-pricing
models require the input of various subjective assumptions, including the option’s expected life 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 September 30, 2019:
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Remaining Life
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oustanding at July 1, 2018
|
|
|
368,000
|
|
|
$
|
17.21
|
|
|
|
4.17
|
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oustanding at July 1, 2019
|
|
|
341,195
|
|
|
$
|
16.95
|
|
|
|
3.07 years
|
|
|
$
|
4,680,000
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exchanged
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
341,195
|
|
|
$
|
16.95
|
|
|
|
2.82 years
|
|
|
$
|
4,369,000
|
|
|
Exercisable at September 30, 2019
|
|
|
330,395
|
|
|
$
|
16.62
|
|
|
|
2.67 years
|
|
|
$
|
4,342,000
|
|
|
Vested and Expected to vest at September 30, 2019
|
|
|
341,195
|
|
|
$
|
16.95
|
|
|
|
2.82 years
|
|
|
$
|
4,369,000
|
|
NOTE
10 – 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 three months ended September 30, 2019 and 2018. Operating income from hotel operations
consist of the operation of the hotel and operation of the garage. Operating income for rental properties consists of rental income.
Operating loss for investment transactions consist of net investment gains (losses), impairment loss on other investments, net
unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment
consists of corporate general and administrative expenses and the income tax expense for the entire Company.
|
As of and for the three months
|
|
Hotel
|
|
|
Real Estate
|
|
|
Investment
|
|
|
|
|
|
|
|
|
ended September 30, 2019
|
|
Operations
|
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenues
|
|
$
|
15,429,000
|
|
|
$
|
3,717,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,146,000
|
|
|
Segment operating expenses
|
|
|
(11,348,000
|
)
|
|
|
(1,950,000
|
)
|
|
|
-
|
|
|
|
(760,000
|
)
|
|
|
(14,058,000
|
)
|
|
Segment income (loss) from operations
|
|
|
4,081,000
|
|
|
|
1,767,000
|
|
|
|
-
|
|
|
|
(760,000
|
)
|
|
|
5,088,000
|
|
|
Interest expense
|
|
|
(1,792,000
|
)
|
|
|
(605,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,397,000
|
)
|
|
Depreciation and amortization expense
|
|
|
(593,000
|
)
|
|
|
(620,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,213,000
|
)
|
|
Loss from investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(612,000
|
)
|
|
|
-
|
|
|
|
(612,000
|
)
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(222,000
|
)
|
|
|
(222,000
|
)
|
|
Net income (loss)
|
|
$
|
1,696,000
|
|
|
$
|
542,000
|
|
|
$
|
(612,000
|
)
|
|
$
|
(982,000
|
)
|
|
$
|
644,000
|
|
|
Total assets
|
|
$
|
62,071,000
|
|
|
$
|
51,421,000
|
|
|
$
|
9,101,000
|
|
|
$
|
7,268,000
|
|
|
$
|
129,861,000
|
|
|
For the three months
|
|
Hotel
|
|
|
Real Estate
|
|
|
Investment
|
|
|
|
|
|
|
|
|
ended September 30, 2018
|
|
Operations
|
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
|
Revenues
|
|
$
|
15,810,000
|
|
|
$
|
3,679,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
19,489,000
|
|
|
Segment operating expenses
|
|
|
(10,810,000
|
)
|
|
|
(2,012,000
|
)
|
|
|
-
|
|
|
|
(643,000
|
)
|
|
|
(13,465,000
|
)
|
|
Segment income (loss) from operations
|
|
|
5,000,000
|
|
|
|
1,667,000
|
|
|
|
-
|
|
|
|
(643,000
|
)
|
|
|
6,024,000
|
|
|
Interest expense
|
|
|
(1,814,000
|
)
|
|
|
(751,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,565,000
|
)
|
|
Depreciation and amortization expense
|
|
|
(642,000
|
)
|
|
|
(601,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,243,000
|
)
|
|
Loss from investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(378,000
|
)
|
|
|
-
|
|
|
|
(378,000
|
)
|
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(710,000
|
)
|
|
|
(710,000
|
)
|
|
Net income (loss)
|
|
$
|
2,544,000
|
|
|
$
|
315,000
|
|
|
$
|
(378,000
|
)
|
|
$
|
(1,353,000
|
)
|
|
$
|
1,128,000
|
|
NOTE
11 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The
following summarizes the balances of related party and other notes payable as of September 30, 2019 and June 30, 2019, respectively.
|
As of
|
|
9/30/2019
|
|
|
6/30/2019
|
|
|
|
|
|
|
|
|
|
|
Note payable - Hilton
|
|
$
|
3,246,000
|
|
|
$
|
3,325,000
|
|
|
Note payable - Interstate
|
|
|
1,833,000
|
|
|
|
1,896,000
|
|
|
Other notes payable
|
|
|
27,000
|
|
|
|
40,000
|
|
|
Total related party and other notes payable
|
|
$
|
5,106,000
|
|
|
$
|
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 September 30,
2019 and June 30, 2019, balance of the key money plus accrued interest is $999,000 and $2,049,000, respectively, and is included
in restricted cash in the condensed consolidated balance sheets. Unamortized portion of the key money is included in the related
party notes payable in the condensed consolidated balance sheets.
As
of September 30, 2019, the Company had finance lease obligations outstanding of $1,385,000. These finance leases expire in various
years through 2023 at rates ranging from 5.77% to 6.25% per annum. Minimum future lease payments for assets under finance leases
as of September 30, 2019 are as follows:
|
For the year ending June 30,
|
|
|
|
|
2020
|
|
$
|
369,000
|
|
|
2021
|
|
|
492,000
|
|
|
2022
|
|
|
482,000
|
|
|
2023
|
|
|
183,000
|
|
|
Total minimum lease payments
|
|
|
1,526,000
|
|
|
Less interest on finance lease
|
|
|
(141,000
|
)
|
|
Present value of future minimum lease payments
|
|
$
|
1,385,000
|
|
Future
minimum principal payments for all related party and other financing transactions are as follows:
|
For the year ending June 30,
|
|
|
|
|
2020
|
|
$
|
764,000
|
|
|
2021
|
|
|
3,991,000
|
|
|
2022
|
|
|
1,022,000
|
|
|
2023
|
|
|
744,000
|
|
|
2024
|
|
|
567,000
|
|
|
Thereafter
|
|
|
2,388,000
|
|
|
|
|
$
|
9,476,000
|
|
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 55.4% and 44.6% owned
by Santa Fe and the Company, respectively. 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. 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.
Effective
May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under
environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine
loan, in order to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unable
to satisfy independently as of March 31, 2017.
All
of the Portsmouth directors serve as directors of InterGroup. Three of those directors also serve as directors of Santa Fe. The
three Santa Fe directors also serve as directors of InterGroup.
As
Chairman of the 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 Portsmouth and Santa Fe and oversees the investment activity
of those companies. 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
12 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE
The
following summarizes the balances of accounts payable and other liabilities – Justice as of September 30, 2019 and June
30, 2019.
|
As of
|
|
9/30/2019
|
|
|
6/30/2019
|
|
|
|
|
|
|
|
|
|
|
Trade payable
|
|
$
|
1,581,000
|
|
|
$
|
1,792,000
|
|
|
Advance deposits
|
|
|
1,161,000
|
|
|
|
1,215,000
|
|
|
Property tax payable
|
|
|
1,538,000
|
|
|
|
1,046,000
|
|
|
Payroll and related accruals
|
|
|
2,639,000
|
|
|
|
2,584,000
|
|
|
Interest payable
|
|
|
411,000
|
|
|
|
412,000
|
|
|
Withholding and other taxes payable
|
|
|
1,193,000
|
|
|
|
1,831,000
|
|
|
Security deposit
|
|
|
52,000
|
|
|
|
52,000
|
|
|
Other payables
|
|
|
2,183,000
|
|
|
|
2,366,000
|
|
|
Total accounts payable and other liabilities - Justice
|
|
$
|
10,758,000
|
|
|
$
|
11,298,000
|
|
NOTE
13 – ACCOUNTS PAYABLE AND OTHER LIABILITIES
The
following summarizes the balances of accounts payable and other liabilities as of September 30, 2019 and June 30, 2019.
|
As of
|
|
9/30/2019
|
|
|
6/30/2019
|
|
|
|
|
|
|
|
|
|
|
Trade payable
|
|
$
|
760,000
|
|
|
$
|
521,000
|
|
|
Advance deposits
|
|
|
354,000
|
|
|
|
378,000
|
|
|
Property tax payable
|
|
|
1,038,000
|
|
|
|
595,000
|
|
|
Payroll and related accruals
|
|
|
50,000
|
|
|
|
47,000
|
|
|
Interest payable
|
|
|
219,000
|
|
|
|
221,000
|
|
|
Withholding and other taxes payable
|
|
|
1,329,000
|
|
|
|
1,108,000
|
|
|
Security deposit
|
|
|
751,000
|
|
|
|
736,000
|
|
|
Other payables
|
|
|
194,000
|
|
|
|
160,000
|
|
|
Total accounts payable and other liabilities
|
|
$
|
4,695,000
|
|
|
$
|
3,766,000
|
|