|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
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
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction of | (I.R.S. Employer | |
| Incorporation or Organization) | Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of exchange on which registered | ||
| The |
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 ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
☐
Yes ☒
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.
☒
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).
☒
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.
☒ 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 | ☐ | |
| ☒ | Smaller reporting company | |||
| 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 ☒
As
of December 31, 2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $
The number of shares outstanding of registrant’s Common Stock, as of September 28, 2022 was .
DOCUMENTS
INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
| 2 |
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 the novel strain of coronavirus and the disease it causes (“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.
COVID-19 has had and continues to have a significant negative effect on the hospitality industry and our business. The effects of COVID-19, including government restrictions such as mandated closings of non-essential businesses and travel restrictions, have severely reduced overall lodging demand. Since March 2020, we have experienced a significant decline in occupancy and Revenue per Available Room (“RevPAR”) associated with COVID-19, which resulted in a decline in our operating cash flow, our financial condition, results of operations and performance, and a decline on the global economy and financial markets. The continued extent to which COVID-19 has impacted 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 and possible resurgences, 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. However, the distribution of COVID-19 vaccines that began in December 2020 and the reports of their effectiveness have resulted in an improvement in traveler and general consumer sentiment. Investors are cautioned to interpret many of the risks identified in the risk factors discussed herein.
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; | |
| ● | hyperinflation; | |
| ● | 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, 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.
| 3 |
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.
Effective February 19, 2021, the Company’s 83.7% owned subsidiary, Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF), was liquidated and all of its assets including its 68.8% interest in Portsmouth Square, Inc. (“Portsmouth”), a public company (OTCBB: PRSI) was distributed to its shareholders in exchange for their Santa Fe common stock. InterGroup received cash of $5,013,000 and 422,998 shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. As a former 3.7% shareholder of Santa Fe, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield, received cash of $221,000 and 18,641 shares of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of Dissolution from the State of Nevada, and Santa Fe is effectively fully dissolved and no longer in legal existence. The liquidation and distribution of Santa Fe did not have an impact on the consolidated statement of operations but rather on the consolidated balance sheets as a reclass between non-controlling interests and accumulated deficit.
As of June 30, 2022, InterGroup owns approximately 75.0% of the outstanding common shares of Portsmouth. As of June 30, 2022, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield, owns approximately 2.5% of the outstanding common shares of Portsmouth. Mr. Winfield also serves as the Chairman of the Board and Chief Executive Officer of Portsmouth. The Company’s Vice President Real Estate, David Gonzalez was elected President of Portsmouth in May 2021.
Portsmouth’s primary business was conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”). Portsmouth received management fees as a general partner of Justice for its services in overseeing and managing the Partnership’s assets. Those fees were eliminated in consolidation. Effective July 15, 2021, Portsmouth completed the purchase of 100% of the limited partnership interest of Justice through the acquisition of the remaining 0.7% non-controlling interest.
| 4 |
Effective December 23, 2021, the partnership was dissolved. The financial statements of Justice were consolidated with those of the Company.
Prior to its dissolution effective December 23, 2021, Justice owned and operated 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 through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”). Mezzanine was a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Effective December 23, 2021, Portsmouth replaced Justice as the single member 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 a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (“Hilton”) through January 31, 2030.
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 the County of Los Angeles, California. The Company also has an investment in unimproved real property. As of June 30, 2022, 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.
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
Operating entered into a hotel management agreement (“HMA”) with Aimbridge Hospitality (“Aimbridge”) to manage the Hotel, along with its five-level parking garage, with an effective date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the February 3, 2017 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 Aimbridge shall be one and seven-tenths percent (1.70%) of total Hotel revenue.
For the fiscal years ended June 30, 2022 and 2021, hotel management fees were $1,055,000 and $242,000, respectively, offset by key money amortization of $250,000 for both years and are included in Hotel operating expenses in the consolidated statements of operations. As part of the Hotel management agreement, Aimbridge, through Portsmouth’s wholly owned subsidiary, Kearny Street Parking LLC, manages the parking garage in-house.
| 5 |
CHINESE CULTURE FOUNDATION LEASE
On March 15, 2005, the Hotel 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 Hotel 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, 2022, monthly event space fee is $6,800. 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. If the Hotel needs the event space during one of the dates previously reserved by the Foundation, the Hotel shall pay the Foundation $4,000 per day for using the event space. During the fiscal years ended June 30, 2022 and 2021, the Hotel paid the Foundation $12,000 and $0 for such fees, respectively.
SALES AND REFINANCING OF REAL ESTATE PROPERTIES
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 $12,043,000. Santa Fe was able to utilize its entire available federal net operating losses (“NOL”) and capital loss carryforwards. However, California A.B. 85, signed by Governor Newsom on June 29, 2020, suspended the use of NOLs for tax years beginning in 2020, 2021, and 2022; therefore, Santa Fe was unable to utilize its NOLs for State income tax purposes. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of the RLOC of $2,985,000 as the Company had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property.
In October 2020, the Company refinanced its $4,800,000 mortgage note payable on its 31-unit apartment complex in Santa Monica, California and obtained a new mortgage note payable for $8,400,000. The Company received net proceeds of $3,529,000 as a result of the refinance. Interest rate on the mortgage is fixed at 2.52% for ten years and the mortgage matures in November 2030.
In November 2020, the Company refinanced its $1,088,000 mortgage note payable on its 9-unit apartment complex in West Los Angeles, California and obtained a new mortgage note payable for $1,995,000. The Company received net proceeds of $798,000 as a result of the refinance. Interest rate on the mortgage is fixed at 3.05% for ten years and the mortgage matures in December 2030.
In January 2021, the Company refinanced its $1,597,000 mortgage note payable on its 14-unit apartment complex in West Los Angeles, California and obtained a new mortgage note payable for $2,780,000. The Company received net proceeds of $1,057,000 as a result of the refinance. Interest rate on the mortgage is fixed at 3.05% for ten years and the mortgage matures in February 2031.
In June 2021, the Company refinanced its $563,000 mortgage note payable on its 4-unit apartment complex in West Los Angeles, California and obtained a new mortgage note payable for $1,155,000. The Company received net proceeds of $619,000 as a result of the refinance. Interest rate on the mortgage has a five-year fixed interest rate of 3.5% per annum and adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity date of the new mortgage is August 1, 2051.
In June 2021, the Company refinanced two of its single-family houses in West Los Angeles, California with two existing mortgages totaling $751,000 and obtained two new mortgage notes payable for a combined $1,475,000. The Company received combined net proceeds of $759,000 as a result of the refinancing of these two mortgages. Interest rate on the mortgages is at five-year fixed interest rate of 3.5% per annum and adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity date of the new mortgage is August 1, 2051.
| 6 |
In July 2021, the Company refinanced three of its California properties’ existing mortgages totaling $1,065,000 with three new mortgages totaling $3,450,000. The Company generated net proceeds totaling $2,325,000 as a result of the refinancing. Interest rate on the three new mortgages is fixed at 3.50% for five years and the mortgages mature in July 2051. In July 2021, the Company obtained a mortgage note payable on one of its California properties for $830,000. The Company received net proceeds of $836,000 which exceeded the new loan amount by $6,000 due to advanced deposits made by the Company prior to closing. Interest rate on the mortgage is fixed at 3.50% for five years and the mortgage note payable matures in August 2051.
On October 14, 2021, the Company refinanced its $15,900,000 mortgage note payable on its 358-unit apartment complex in Irving, Texas and obtained a new mortgage note payable for $28,800,000. The Company received net proceeds of $12,938,000 as a result of the refinance. The annual interest rate on the mortgage is fixed at 2.95% for ten years with interest-only payments for the first five years and 30-year amortization thereafter. The mortgage loan matures in November 2031.
On June 30, 2022, the Company refinanced its $5,283,000 mortgage note payable on its 30-unit apartment complex in West Los Angeles, California and obtained a new mortgage note payable for $5,850,000. The Company received net proceeds of $584,000 as a result of the refinance. The annual interest rate on the mortgage is fixed at 4.4% for the first five years and 5.44% thereafter. The mortgage loan matures in July 2052.
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 consolidated balance sheets as part of Other Assets, net and reviewed for impairment on a periodic basis. As of June 30, 2022 and 2021, the Company had other investments of zero and $41,000, 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, 2022 and 2021, the Company had obligations for securities sold (equities short) of $449,000 and $6,419,000, respectively.
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 as of June 30, 2022 and 2021 were $490,000 and $7,917,000, respectively.
| 7 |
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 oversees the investment activity of Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice and served in that position until the dissolution of Justice in December 2021. Depending on certain market conditions and various risk factors, the Chief Executive Officer, and Portsmouth, 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 Portsmouth, 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 has 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. The COVID-19 pandemic altered the typical seasonality by significantly reducing operations and revenues through the first calendar quarter of 2022. The hotel has since returned to normal seasonality of being mostly impacted from Thanksgiving through the first week of January. 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.
COMPETITION
The hotel industry has been devastated by the COVID-19 pandemic that hurt business worse than 9/11 and the Great Recession combined. By the start of the fiscal year 2021 most of the hotels in the San Francisco market were closed due to lack of business, only one hotel in our primary competitive set remained open at that time. Most of those hotels stayed closed through end of Q1 fiscal year 2021. By the end of Q2 fiscal year 2021, all but one had reopened. The market has seen slight improvements over the last two quarters of fiscal year 2021 but RevPAR in San Francisco was hit the hardest of any major market in the US. Our Hotel has navigated this very competitive market nimbly and has consistently been ranked the number one hotel in its Competitive Set (“CompSet”) based on our ability to drive occupancy. At the end of fiscal year 2021 the Hotel had roughly a 233% RevPAR index. We took advantage of the slow periods to make certain capital improvements including complete refinishing of all guest room furniture, resurfacing half of the hotel bath tubs that needed repair, refreshed meeting space and lobby paint and vinyl, replaced all bed frames and socks, and started the carpet corridor install that was completed in July 2021. Hotel improvements are ongoing to remain competitive.
As of the date of this report, the competition for business is stronger than ever as there still hasn’t been a rebound close to 2019 for the overall market. For the six months ending June 30, 2022, the Hotel’s CompSet was still only running 51% occupancy and average daily rate of $244 for a RevPAR of $125. The Hotel has fared drastically better than its CompSet by aggressively pursuing all segments and opening all channels on off peak days and limiting access over peak demand dates. Conversely, for the six months ending June 30, 2022, the Hotel is running occupancy of 82% at $195 average daily rate for a RevPAR of $160, giving the Hotel a RevPAR index of 128%. As group demands rebound some of the larger hotels in our CompSet, we could see significant gains in their occupancy as they sell large blocks to fill their empty meeting spaces which will gradually chip away at the Hotel’s phenomenal RevPAR index for the last six months.
The Hotel’s location in the San Francisco Financial District historically had provided 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. With business travel to San Francisco almost non-existent for the time, we are competing with hotels in more tourist attracting locations and amenities for the leisure traveler. 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 March of 2020 as COVID-19 ravaged the hotel industry. The shift to attracting leisure travel has pushed the hotel to price aggressively to lure competition from the more tourist locations in San Francisco.
| 8 |
The Hotel is also subject to certain operating risks common to all of the hotel industry, which could adversely impact performance. These risks include, but are not limited to:
| ● | 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.
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.
| 9 |
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, 2022, the Company had a total of 28 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.
On February 3, 2017, Aimbridge assumed all labor union agreements and retained employees of their choice to continue providing services to the Hotel. As of June 30, 2022, approximately 86% 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 Aimbridge was a party. CBA for Local 2 (Hotel and Restaurant Employees) expired on August 13, 2022 and is currently under review. 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 Aimbridge. 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.
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.
| 10 |
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, 2022 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 during 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.
| 11 |
Adverse changes in the U.S. and global economies could negatively impact our financial performance.
Due to several 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, results of operations, and fair market value of the Hotel.
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.
| 12 |
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.
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.
| 13 |
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.
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 Aimbridge. 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.
| 14 |
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 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.
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, therefore, 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 can 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.
| 15 |
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 is a 67.8% beneficial shareholder of the Company. Because of this concentrated stock ownership, Mr. Winfield will be able 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 enough shares to significantly decrease our price per share.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
SAN FRANCISCO HOTEL PROPERTY
The Hotel is owned by Portsmouth 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.
As required by its senior lender, Operating will continue to make minimum payments into its furniture, fixtures, and equipment (“FFE”) escrow account held by its senior lender of the greatest of 4% of annual revenues or a minimum of $1,952,000 per annum. In the opinion of management, the Hotel is adequately covered by insurance.
| 16 |
HOTEL FINANCING
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 Company 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 Portsmouth’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 FFE 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 Company 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 was 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 the $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, 2022 and 2021, InterGroup is in compliance with both requirements. 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 lockbox 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 had been below 1.00 from third quarter of fiscal year 2020 to third quarter of fiscal year 2022 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 for at least the next twelve months and beyond. Additionally, Operating’s DSCR for the fourth quarter of fiscal year 2022 has reached 1.69 for the Mortgage Loan and 1.34 for the Mezzanine Loan.
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.
| 17 |
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 31, 2023. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000. Upon the dissolution of Justice in December 2021, Portsmouth assumed Justice’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. As of June 30, 2022 and 2021, the balance of the loan was $14,200,000 and $6,650,000, net of loan amortization costs of zero, respectively, and are eliminated in the consolidated balance sheets of InterGroup.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). Justice received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice used the proceeds from the SBA Loan for payroll costs and other qualified expenses. The SBA Loan was scheduled to mature on April 9, 2022 with a 1.00% interest rate and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On June 10, 2021, the SBA Loan was forgiven in full and $4,719,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year ending June 30, 2021.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan was scheduled to mature on February 3, 2026, had a 1.00% interest rate, and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On November 19, 2021, the Second SBA Loan was forgiven in full and $2,000,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year ending June 30, 2022.
RENTAL PROPERTIES
As June 30, 2022, the Company’s investment in real estate consisted of twenty properties located throughout the United States, with a concentration in Texas and Los Angeles County, 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, 2022, all 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, 2022 were approximately $977,000. In October 2021, the Company refinanced its 3.73% existing $15,900,000 mortgage note payable on the property and generated net proceeds of $12,938,000. The outstanding new mortgage balance was $28,800,000 as of June 30, 2022. The annual interest rate on the mortgage is fixed at 2.95% for ten years with interest-only payments for the first five years and 30-year amortization thereafter. The mortgage loan matures in November 2031.
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, 2022 were approximately $276,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In April 2020, the Company refinanced its 3.51% and 4.51% existing $8,737,000 and $2,512,000 mortgages and generated net proceeds of $6,814,000. The outstanding new mortgage balance was approximately $17,598,000 at June 30, 2022 with a fixed interest rate of 3.17% per annum and the maturity date of the new mortgage is May 1, 2030.
| 18 |
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, 2022, real estate property taxes were approximately $124,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $4,958,000 at June 30, 2022 with a fixed interest rate of 4.05% per annum 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, 2022, real estate property taxes were approximately $67,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $2,998,000 as of June 30, 2022 with a fixed interest rate of 3.875% per annum and the maturity date of the mortgage is April 1, 2025.
Los Angeles, California. The Company owns one commercial property, twelve apartment complexes, and three single-family houses in the general area of County of Los Angeles, California (“Los Angeles”).
The Company’s 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, 2022 were approximately $32,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. As of June 30, 2022, this property was not encumbered by a mortgage.
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, 2022, 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. The outstanding mortgage balance was approximately $2,026,000 as of June 30, 2022 with a fixed interest rate of 3.59% per annum and the maturity date of the mortgage is June 23, 2026.
The second Los Angeles apartment complex was 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 was made pursuant to a Contribution Agreement (the “Contribution Agreement”) between Santa Fe and InterGroup, dated February 5, 2020. The Contribution Agreement also contained 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. 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 managed its federal and state income tax liability, and utilized 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.
| 19 |
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, 2022, real estate property taxes were approximately $38,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In January 2021, the Company refinanced its 5.89% existing $1,597,000 mortgage and generated net proceeds of $1,057,000. The outstanding new mortgage balance was approximately $2,704,000 at June 30, 2022 with a fixed interest rate of 3.05% per annum and the maturity date of the new mortgage is February 1, 2031.
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, 2022, real estate property taxes were approximately $30,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In November 2020, the Company refinanced its 5.89% existing $1,088,000 mortgage and generated net proceeds of $798,000. The outstanding new mortgage balance was approximately $1,934,000 as of June 30, 2022 with a fixed interest rate of 3.05% per annum and the maturity date of the new mortgage is December 1, 2030.
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, 2022, real estate property taxes were approximately $124,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In October 2020, the Company refinanced its 4.85% existing $4,800,000 mortgage and generated net proceeds of $3,529,000. The outstanding new mortgage balance was approximately $8,400,000 at June 30, 2022 with a fixed interest rate of 2.52% per annum and the maturity date of the new mortgage is November 1, 2030. The new mortgage requires interest-only payments for the first two years and will amortized over 30 years thereafter.
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, 2022, real estate property taxes were approximately $77,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. On June 30, 2022, the Company refinanced its 5.97%, $5,283,000 mortgage note payable on this property and obtained a new mortgage note payable for $5,850,000. The Company received net proceeds of $584,000 because of the refinance. The annual interest rate on the new mortgage is fixed at 4.40% for the first five years and 5.44% thereafter. The mortgage loan matures in July 2052.
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, 2022, 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. In July 2021, the Company refinanced its 3.75% existing $323,000 mortgage and generated net proceeds of $846,000. The outstanding new mortgage balance was approximately $1,135,000 as of June 30, 2022 with a fixed interest rate of 3.50% per annum and the maturity date of the new mortgage is July 1, 2051.
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, 2022, 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. In June 2021, the Company refinanced its 3.75% existing $563,000 mortgage and generated net proceeds of $619,000. The outstanding new mortgage balance was approximately $1,135,000 at June 30, 2022 with a five-year fixed interest rate of 3.5% per annum and adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity date of the new mortgage is August 1, 2051.
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, 2022, real estate property taxes were approximately $23,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $774,000 as of June 30, 2022 with an interest rate of 4.125% and the maturity date of the mortgage is September 1, 2042.
| 20 |
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, 2022, real estate property taxes were approximately $21,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In July 2021, the Company refinanced the property’s existing 3.75%, $416,000 mortgage with a new mortgage for $1,595,000. The Company generated net proceeds of $1,098,000 because of the refinancing. Interest rate on the new mortgage is fixed at 3.50% for five years and the mortgages mature in July 2051. Outstanding mortgage balance was approximately $1,567,000 as of June 30, 2022.
The eleventh Los Angeles apartment complex, which was 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, 2022, real estate property taxes were approximately $13,000. Depreciation is recorded on the straight-line method based upon an estimated useful life of 40 years. On November 23, 2020, Santa Fe sold this property to InterGroup for $1,530,000 in exchange for a reduction of $1,196,000 of its obligation to InterGroup. The outstanding mortgage on the property for $334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately $901,000, which was eliminated in consolidation at InterGroup. The sales price of the property represents the current value as of the sale date as appraised by a licensed independent third-party appraiser. The fairness of the sale terms of the transaction were reviewed and approved by the independent directors of Santa Fe and InterGroup, and unanimously approved by the entire Board of Directors of both companies. In July 2021, the Company refinanced the property’s existing 3.75%, $327,000 mortgage with a new mortgage for $700,000. The Company generated net proceeds of $381,000 because of the refinancing. Interest rate on the new mortgage is fixed at 3.50% for five years and the mortgage matures in July 2051. Outstanding mortgage balance was approximately $688,000 as of June 30, 2022.
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, 2022, real estate property taxes were approximately $57,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 27.5 years. In June 2020, the Company refinanced its 5.6% existing $1,303,000 mortgage and generated net proceeds of $1,144,000. The outstanding new mortgage balance was approximately $2,498,000 as of June 30, 2022 with a fixed interest rate of 3.09% per annum and the maturity date of the new mortgage is July 1, 2030.
The thirteenth Los Angeles apartment complex is a 4,093 square foot apartment with 4 units. In an all-cash transaction, the Company acquired the property on May 14, 2021 at an initial cost of approximately $2,600,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. For the year ended June 30, 2022, real estate property taxes were approximately $34,000. In July 2021, the Company obtained a mortgage on the property for $830,000, generating net proceeds of $836,000. Interest rate on the mortgage is fixed at 3.50% for five years and the mortgage matures in August 2051. Outstanding mortgage balance was approximately $817,000 as of June 30, 2022.
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, 2022, 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. In June 2021, the Company refinanced its 3.75% existing $363,000 mortgage and generated net proceeds of $576,000. The outstanding new mortgage balance was approximately $904,000 as of June 30, 2022 with a five-year fixed interest rate of 3.5% per annum adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity date of the new mortgage is August 1, 2051.
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, 2022, real estate property taxes were approximately $13,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In June 2021, the Company refinanced its 3.75% existing $388,000 mortgage and generated net proceeds of $183,000. The outstanding new mortgage balance was approximately $545,000 as of June 30, 2022 with a five-year fixed interest rate of 3.5% per annum adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity date of the new mortgage is August 1, 2051.
| 21 |
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. For the year ended June 30, 2022, real estate property taxes were approximately $26,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In September 2021, the Company refinanced the property’s existing 4.75% per annum mortgage and reduced the rate to five-year fixed at 3.5% per annum, adjustable thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The outstanding mortgage balance was approximately $956,000 as of June 30, 2022 and the maturity date of the mortgage is October 1, 2048.
Maui, Hawaii. In August 2004, the Company purchased an approximately two-acre parcel of unimproved land in Kihei, Maui, Hawaii for $1,467,000. In March 2021, in an effort to make both companies more efficient, InterGroup purchased back the 50% interest of InterGroup Uluniu Inc. from Portsmouth for $980,000, which represents Portsmouth’s carrying cost of the investment. No gains or losses were realized as a result of the transaction since it was a related-party transaction. As a related-party transaction, the fairness of the financial terms of the transactions were reviewed and approved by the independent director of each company.
MORTGAGES
Further information with respect to mortgage notes payable of the Company is set forth in Note 10 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, 2022 are provided below.
| Property | Economic Occupancy | Physical Occupancy | ||||||
| 1. Las Colinas, TX | 100 | % | 99 | % | ||||
| 2. Morris County, NJ | 92 | % | 97 | % | ||||
| 3. St. Louis, MO | 68 | % | 66 | % | ||||
| 4. Florence, KY | 80 | % | 92 | % | ||||
| 5. Los Angeles, CA (1) | 92 | % | 95 | % | ||||
| 6. Los Angeles, CA (2) | 96 | % | 89 | % | ||||
| 7. Los Angeles, CA (3) | 96 | % | 79 | % | ||||
| 8. Los Angeles, CA (4) | 81 | % | 93 | % | ||||
| 9. Los Angeles, CA (5) | 100 | % | 97 | % | ||||
| 10. Los Angeles, CA (6) | 98 | % | 100 | % | ||||
| 11. Los Angeles, CA (7) | 100 | % | 100 | % | ||||
| 12. Los Angeles, CA (8) | 100 | % | 94 | % | ||||
| 13. Los Angeles, CA (9) | 100 | % | 100 | % | ||||
| 14. Los Angeles, CA (10) | 75 | % | 75 | % | ||||
| 15. Los Angeles, CA (11) | 97 | % | 100 | % | ||||
| 16. Los Angeles, CA (12) | 62 | % | 62 | % | ||||
| 17. Los Angeles, CA (13) | 100 | % | 100 | % | ||||
| 18. Los Angeles, CA (14) | 100 | % | 100 | % | ||||
| 19. Los Angeles, CA (15) | 69 | % | 94 | % | ||||
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. In February 2022, the Los Angeles County Board of Supervisors extended the majority of the eviction moratorium to 2022 and parts of it until 2023. The County’s non-payment eviction protection is scheduled to last from July 1, 2022 until the end of 2022.
| 22 |
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”. As of June 30, 2022, the approximate number of holders of record of the Company’s Common Stock was 182. 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.
| 23 |
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, 2022.
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Fiscal 2022 Period | (a) Total Number of Shares Purchased | (b) Average Price Paid Per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of shares that May Yet be Purchased Under the Plans or Programs | ||||||||||||
| Month #1 (April 1- April 30) | 868 | $ | 48.64 | 868 | 127,119 | |||||||||||
| Month #2 (May 1- May 31) | 4,773 | $ | 46.68 | 4,773 | 122,346 | |||||||||||
| Month #3 (June 1- June 30) | 1,362 | $ | 47.20 | 1,362 | 120,984 | |||||||||||
| TOTAL: | 7,003 | $ | 47.02 | 7,003 | 120,984 | |||||||||||
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.
| 24 |
In December 2020, due to the surge in COVID-19 cases and hospitalizations, the Health Officer of the City and County of San Francisco suspended or restricted certain activities. Health Order C19-07q (the “Order”) incorporates suspensions, reductions in capacity limits, and other restrictions contained in the Regional Stay At Home Order issued by the California Department of Public Health on December 3, 2020. Effective December 17, 2020, the Bay Area Region, including San Francisco, was required to comply with the State’s December 3, 2020 Regional Stay-at-Home Order. The Order strongly discouraged anyone in the County from travelling for leisure, recreation, business, or other purposes that could be postponed until after the surge. With limited exceptions, this Order imposed a mandatory quarantine on anyone traveling, moving, or returning to the County from anywhere outside the Bay Area. Effective January 20, 2021, Health Order C19- 07r revised and replaced the previous Order; it continued to temporarily prohibit certain businesses and activities from resuming but allowed certain other businesses, activities, travel, and governmental functions to occur subject to specified health and safety restrictions, limitations, and conditions to limit the transmission of COVID-19.
On March 24, 2021, the City and County of San Francisco announced it moved into the orange tier which removed the suggested Shelter in Place for guests travelling to San Francisco. This was a very positive step for the hotel community. This tier opened activities in the city including expanded restaurant capacities, museums, and attractions. For the hotel it allowed for guests to gather in public spaces and for outlets and amenities to open at limited capacities including fitness centers. It did not change the very stringent cleaning and sanitation requirements set forth by the Health Officer of the City and County of San Francisco which proved to be a costly measure to maintain. Effective May 6, 2021, the City and County of San Francisco moved into the yellow tier guidelines. We continue to closely monitor the very fluid changes that the Center for Disease Control, San Francisco Department of Health and other authorities implement with regards to the COVID-19 pandemic.
On August 20, 2021, San Francisco announced vaccination requirements for indoor activities. This order requires restaurants, theaters, and entertainment venues where food or drink is served inside, as well as gyms, recreation facilities, yoga studios, dance studios and other fitness establishments, clubs involving elevated breathing to show proof of vaccination.
On January 11, 2022, a new Health Order has been issued. The primary change to the Order is to comply with changes the State made lowering the threshold for mega events to 500 attendees indoor and 5,000 attendees outdoor beginning January 15, 2022. On March 17, 2022, the State of California announced that beginning on April 1, 2022, it will no longer require that people attending Indoor Mega-Event (i.e., events with 1,000 or more attendees) provide proof of vaccination or negative testing to gain entry. Instead, the State strongly recommend that venues hosting Indoor Mega-Events continue to impose that requirement.
The San Francisco hospitality market has seen the two largest citywide events go virtual with DreamForce in September 2021 and JP Morgan Healthcare Conference in January 2022. RSA Conference originally scheduled for February 2022 was moved to June 2022 and Google Cloud Next was cancelled for 2022. As of the date of this report, the market is seeing slow and steady improvement month over month. Rates in the market grew roughly 20% from February 2022 to March 2022 as demand is steadily increasing, particularly midweek where it has been the softest. Demand generators are returning to the market with the largest being Game Developers Conference in March 2022. Although it was approximately half of the pre-COVID attendance, it lifted the market to the best RevPAR we have seen since March 2020. . April 2022 continued the trend with midweek rates rising and another strong performance from the RIMS citywide. May was another strong month with increasing leisure demand and another successful citywide in American Thoracic Society, RevPAR grew 10% month over month. June was the strongest month since the pandemic with rates growing $35 almost 15% just from the previous month driven by strong summer travel and the most successful citywide since the pandemic began in RSA. The hotel achieved a significant benchmark breaking the $4MM mark in total revenues for the first time since January of 2020. July and August 2022 performed strong as well as we closed out the expected demand from summer travel along with an increase in much needed Business Travel and small groups to the hotel.
| 25 |
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 CARES Act. Justice received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used all proceeds from the SBA Loan for payroll costs and other qualified expenses. The SBA Loan - Justice was scheduled to mature on April 9, 2022 and had a 1.00% interest rate and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. 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. InterGroup used all the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on April 27, 2022 and had a 1.00% interest rate. Both the SBA Loan – Justice and SBA Loan – InterGroup (collectively the “SBA Loans”) were forgiven in full by the SBA during the fiscal year ending June 30, 2021 and $5,172,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year ended June 30, 2021.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan was scheduled to mature on February 3, 2026, had a 1.00% interest rate, and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On November 19, 2021, the Second SBA Loan was forgiven in full and $2,000,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year ended June 30, 2022.
RESULTS OF OPERATIONS
As of June 30, 2022, the Company owned approximately 75.0% of the common shares of Portsmouth Square, Inc. The Company’s principal sources of revenue are revenues from the hotel owned by Portsmouth, rental income from its investments in multi-family and commercial real estate properties, and income received from investment of its cash and securities assets.
Portsmouth’s primary asset is 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 Portsmouth have been consolidated with those of the Company.
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, 2022 Compared to Fiscal Year Ended June 30, 2021
The Company had a net loss of $10,616,000 or the year ended June 30, 2022 compared to a net income of $10,545,000 for the year ended June 30, 2021. Income from operations was $3,671,000 for the year ended June 30, 2022 and loss from operations was $4,870,000 for fiscal year ended June 30, 2021. The Company recorded losses of $8,101,000 from marketable securities transactions during fiscal year ended June 30, 2022 as compared to gains of $10,705,000 during fiscal year ended June 30, 2021. Gain on debt forgiveness was $2,000,000 and $5,172,000 during fiscal years ended June 30, 2022 and 2021, respectively. The Company did not sell any of its properties during fiscal year ended June 30, 2022. During fiscal year ended June 30, 2021, Santa Fe sold its California property and recorded a gain of $12,043,000 from the sale of real estate in fiscal year ended June 30, 2021.
Hotel Operations
The Company had net loss of $2,776,000 from Hotel operations for the year ended June 30, 2022 compared to net loss of $7,450,000 for the year ended June 30, 2021. The change was primarily attributable to the $16,866,000 increase in Hotel revenue, offset by the $9,540,000 increase in operating expenses.
| 26 |
The following table sets forth a more detailed presentation of Hotel operations for the years ended June 30, 2022 and 2021.
| For the year ended June 30, | 2022 | 2021 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 26,599,000 | $ | 12,138,000 | ||||
| Food and beverage | 1,471,000 | 293,000 | ||||||
| Garage | 3,112,000 | 2,117,000 | ||||||
| Other operating departments | 352,000 | 120,000 | ||||||
| Total hotel revenues | 31,534,000 | 14,668,000 | ||||||
| Operating expenses excluding depreciation and amortization | (27,451,000 | ) | (17,911,000 | ) | ||||
| Operating income (loss) before interest, depreciation and amortization | 4,083,000 | (3,243,000 | ) | |||||
| Gain on disposal of assets | - | 12,000 | ||||||
| Gain on forgiveness of debt | 2,000,000 | 4,719,000 | ||||||
| Interest expense - mortgage | (6,549,000 | ) | (6,710,000 | ) | ||||
| Depreciation and amortization expense | (2,310,000 | ) | (2,228,000 | ) | ||||
| Net loss from Hotel operations | $ | (2,776,000 | ) | $ | (7,450,000 | ) | ||
For the year ended June 30, 2022, the Hotel had operating income of $4,083,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of $31,534,000 compared to operating loss of $3,243,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of $14,668,000 for the year ended June 30, 2021. Room revenues increased by $14,461,000 for the year ended June 30, 2022 compared to the year ended June 30, 2021, food and beverage revenue increased by $1,178,000, revenue from garage increased by $995,000, and revenue from other operating departments increased by $232,000. The year over year increase in all areas are result of recovery from the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak since March 2020.
The following table sets forth the monthly average occupancy percentage of the Hotel for the fiscal years ended June 30, 2022 and 2021.
| Month | Jul | Aug | Sep | Oct | Nov | Dec | Jan | Feb | Mar | Apr | May | Jun | Fiscal Year | |||||||||||||||||||||||||||||||||||||||
| Year | 2021 | 2021 | 2021 | 2021 | 2021 | 2021 | 2022 | 2022 | 2022 | 2022 | 2022 | 2022 | 2021 - 2022 | |||||||||||||||||||||||||||||||||||||||
| Average Occupancy % | 82 | % | 77 | % | 76 | % | 79 | % | 72 | % | 74 | % | 68 | % | 74 | % | 81 | % | 87 | % | 90 | % | 95 | % | 80 | % | ||||||||||||||||||||||||||
| Year | 2020 | 2020 | 2020 | 2020 | 2020 | 2020 | 2021 | 2021 | 2021 | 2021 | 2021 | 2021 | 2020 - 2021 | |||||||||||||||||||||||||||||||||||||||
| Average Occupancy % | 44 | % | 55 | % | 62 | % | 64 | % | 52 | % | 30 | % | 29 | % | 45 | % | 67 | % | 66 | % | 71 | % | 78 | % | 55 | % | ||||||||||||||||||||||||||
Total operating expenses increased by $9,540,000 due to increase in salaries and wages, union health insurance, repairs and maintenance, 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, 2022 and 2021.
For the Year Ended June 30, | Average Daily Rate | Average Occupancy % | RevPAR | |||||||||
| 2022 | $ | 168 | 80 | % | $ | 134 | ||||||
| 2021 | $ | 111 | 55 | % | $ | 61 | ||||||
| 27 |
The Hotel’s revenues increased by 115% year over year. Average daily rate increased by $57, average occupancy increased 25%, and RevPAR increased by $73 for the twelve months ended June 30, 2022 compared to the twelve months ended June 30, 2021.
The Hotel has taken advantage of the softer demand to take on many improvement projects. We have replaced the wall vinyl in several areas in the lobby and replaced all the art to represent more of the iconic locations in San Francisco. All lobby and restaurant rugs have been replaced and all public restrooms on the first four floors have new vinyl. The Hotel has replaced most of the vinyl in the common areas of the meeting floors and will complete the meeting rooms by September 2022. All guest room carpet has been replaced and a new revised model room that has been valued engineered has been presented to the Hilton design team and is expected to be completed by mid-year 2023. Project to repurpose the old Justice offices, accounting offices, Spa, and Executive Lounge has begun which would add 15 additional income producing guest rooms to our inventory. Part of the renovation will be funded by the Hotel’s furniture, fixture, and equipment reserve account with our senior lender.
Real Estate Operations
Revenue from real estate operations increased to $15,685,000 for the year ended June 30, 2022 from $13,990,000 for the year ended June 30, 2021 primarily due to $935,000 reduction in delinquent rents and $581,000 increase in gross potential rent as a result of higher rental rates and higher occupancy. Real estate operating expenses increased to $8,694,000 from $7,869,000 primarily due to increased administrative expenses, salary expense, insurance expense, and painting – contract labor. 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 $7,614,000 for the year ended June 30, 2022 compared to a net gain on marketable securities of $11,638,000 for the year ended June 30, 2021. For the year ended June 30, 2022, the Company had a net realized loss of $2,581,000 related to the Company’s investment in the common stock of Comstock Mining Inc. (“Comstock” - NYSE MKT: LODE). For the year ended June 30, 2021, the Company had a net gain (realized and unrealized) of $3,390,000 related to the Company’s investment in Comstock.
As of June 30, 2022 and 2021, investments in Comstock represent approximately 0% and 4% of the Company’s investment portfolio, respectively. For the year ended June 30, 2022, the Company had a net realized loss of $2,206,000 and a net unrealized loss of $5,408,000. For the year ended June 30, 2021, the Company had a net realized gain of $876,000 and a net unrealized gain of $10,762,000.
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, 2022 and 2021, 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 $41,000 and $119,000, respectively.
The Company and its subsidiary Portsmouth, 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, 2022 and 2021 represents primarily the combined income tax effect of Portsmouth’s pretax loss which includes its share in net loss from the Hotel and the pre-tax loss from InterGroup (standalone).
| 28 |
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As of June 30, 2022 and 2021, the Company had investments in marketable equity securities of $11,049,000 and $35,792,000, respectively. The following table shows the composition of the Company’s marketable securities portfolio by selected industry groups:
| As of June 30, 2022 Industry Group | Fair Value | % of Total Investment Securities | ||||||
| REITs and real estate companies | $ | 3,289,000 | 29.8 | % | ||||
| Communications Services | 2,787,000 | 25.2 | % | |||||
| Financial services | 1,755,000 | 15.9 | % | |||||
| Technology | 815,000 | 7.4 | % | |||||
| Basic materials | 769,000 | 7.0 | % | |||||
| Consumer cyclical | 693,000 | 6.3 | % | |||||
| Industrial | 385,000 | 3.5 | % | |||||
| Energy | 279,000 | 2.5 | % | |||||
| Other | 277,000 | 2.4 | % | |||||
| $ | 11,049,000 | 100.0 | % | |||||
As of June 30, 2021 Industry Group | Fair Value | % of Total Investment Securities | ||||||
| REITs and real estate companies | $ | 11,624,000 | 32.5 | % | ||||
| Energy | 6,374,000 | 17.8 | % | |||||
| Communications Services | 4,872,000 | 13.6 | % | |||||
| Financial services | 3,873,000 | 10.8 | % | |||||
| Industrials | 3,746,000 | 10.5 | % | |||||
| Basic materials | 1,797,000 | 5.0 | % | |||||
| Consumer goods | 1,702,000 | 4.8 | % | |||||
| Healthcare | 981,000 | 2.7 | % | |||||
| Technology | 442,000 | 1.2 | % | |||||
| Other | 381,000 | 1.1 | % | |||||
| $ | 35,792,000 | 100.0 | % | |||||
As of June 30, 2022, the Company’s investment portfolio is diversified with 38 different equity positions. The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The three largest security positions represent 23%, 20%, and 13% of the portfolio and consists of the common stock of Paramount Global - Preferred Stock (NASDAQ: PARAP), American Realty Investors, Inc. (NASDAQ: ARL), and BlackRock Muni holdings California Quality Fund Inc. (NASDAQ: MUC), which are included the Communications, REITs and real estate companies, and Financial Services industry groups, respectively.
The following table shows the net (loss) gain on the Company’s marketable securities and the associated margin interest and trading expenses for the respective years.
| For the years ended June 30, | 2022 | 2021 | ||||||
| Net (loss) gain on marketable securities | $ | (7,614,000 | ) | $ | 11,638,000 | |||
| Impairment loss on other investments | (41,000 | ) | (119,000 | ) | ||||
| Dividend and interest income | 980,000 | 519,000 | ||||||
| Margin interest expense | (851,000 | ) | (810,000 | ) | ||||
| Trading expenses | (575,000 | ) | (523,000 | ) | ||||
| Total | $ | (8,101,000 | ) | $ | 10,705,000 | |||
| 29 |
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL SOURCES
Historically, our cash flows have been primarily generated from our Hotel and real estate operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic continues to have a material detrimental impact on our liquidity. For the fiscal year ended June 30, 2022, our net cash flow provided by operations was $921,000 . 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.
The Company had cash and cash equivalents of $14,367,000 and $6,808,000 as of June 30, 2022 and 2021, respectively. The Company had restricted cash of $8,982,000 and $8,584,000 as of June 30, 2022 and 2021, respectively. The Company had marketable securities, net of margin due to securities brokers, of $10,110,000 and $21,456,000 as of June 30, 2022 and 2021, respectively. These marketable securities are short-term investments and liquid in nature.
On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000 and extended the maturity date of the loan to July 31, 2021. On July 7, 2021, the maturity date was extended to July 31, 2022. Upon the dissolution of Justice in December 2021, Portsmouth assumed Justice’s note payable to InterGroup in the amount of $11,350,000. On December 31, 2021, Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth’s borrowing from InterGroup as needed up to $16,000,000. On July 20, 2022, the maturity date was extended to July 31, 2023. During the fiscal year ending June 30, 2022, InterGroup advanced $7,550,000 to the Hotel, bringing the total amount due to InterGroup to $14,200,000 on June 30, 2022.
During the fiscal year ending June 30, 2021, we completed refinancing on six of our California properties and generated net proceeds of $6,762,000. During the fiscal year ending June 30, 2022, we refinanced six of our properties’ existing mortgages and obtained a mortgage note payable on one of our California properties, generating net proceeds totaling $16,683,000. We are currently evaluating other refinancing opportunities and we could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. The Company had an uncollateralized $5,000,000 revolving line of credit (“LOC”) from CIBC Bank USA (“CIBC”) and the entire $5,000,000 was available to be drawn down as of June 30, 2022 should additional liquidity be necessary. In July 2022, the Company renewed the LOC for a reduced amount of $2,000,000 and is available in its entirety.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). Justice received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice used the proceeds from the SBA Loan for payroll costs and other qualified expenses. The SBA Loan was scheduled to mature on April 9, 2022 with a 1.00% interest rate and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On June 10, 2021, the SBA Loan was forgiven in full and $4,719,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year ending June 30, 2021.
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. InterGroup used all the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on April 27, 2022 and had a 1.00% interest rate. On March 17, 2021, SBA Loan – InterGroup was forgiven in full and $453,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year ending June 30, 2021.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan was scheduled to mature on February 3, 2026, had a 1.00% interest rate, and was subject to the terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On November 19, 2021, the Second SBA Loan was forgiven in full and $2,000,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year ending June 30, 2022.
| 30 |
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 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 as of June 30, 2022, the Company’s material financial obligations which also includes interest payments.
| Year | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 195,400,000 | $ | 7,755,000 | $ | 108,574,000 | $ | 3,970,000 | $ | 1,174,000 | $ | 3,304,000 | $ | 70,623,000 | ||||||||||||||
| Related party notes payable | 3,521,000 | 567,000 | 567,000 | 567,000 | 567,000 | 462,000 | 791,000 | |||||||||||||||||||||
| Interest | 35,822,000 | 9,075,000 | 5,630,000 | 2,491,000 | 2,371,000 | 2,264,000 | 13,991,000 | |||||||||||||||||||||
| Total | $ | 234,743,000 | $ | 17,397,000 | $ | 114,771,000 | $ | 7,028,000 | $ | 4,112,000 | $ | 6,030,000 | $ | 85,405,000 | ||||||||||||||
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 Aimbridge 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 AND ESTIMATES
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.
| 31 |
Item 8. Financial Statements and Supplementary Data.
| 32 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
The InterGroup Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of The InterGroup Corporation and its subsidiaries (the “Company”) as of June 30, 2022, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2022, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audit of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit 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 audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters do not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Description of the Matters: Liquidity and Deferred Tax Asset Valuation Allowance
As discussed in Note 2 to the consolidated financial statements, the Company’s cash flows have been primarily generated from their Hotel and real estate operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic continued to have a material detrimental impact on their liquidity. As a result, the Company has taken several steps to preserve capital and increase liquidity. After considering their approach to liquidity and accessing their available sources or cash, the Company believes that their cash position will be adequate to meet anticipated requirements for operating and other expenditures for at least twelve months from the date of issuance of these consolidated financial statements, even if the economic recovery takes longer than anticipated.
As discussed in Note 13 to the consolidated financial statements, a significant portion of the deferred tax assets at June 30, 2022 are not realizable and thus a valuation allowance of $22,775,000 has been recorded.
We identified liquidity and the deferred tax asset valuation allowance as critical audit matters due to the uncertainty, subjectivity, estimates and judgments required by management when forecasting future liquidity and profitability.
How We Addressed the Matters in Our Audit
To test the Company’s conclusions about their ability to continue as a going concern and about their deferred tax valuation allowance, we obtained an analysis about their plans and reviewed all the positive and negative conditions. In addition to considering the impact of any subsequent events, we received the Company’s five-year income projection. We examined the forecast for reasonableness in addition to reviewing management’s plans and considered whether it is likely that the Company will have sufficient available cash to fund their continuing operations and meet their current obligations as they become due for a reasonable period of time, and the extent to which their future profitability will allow them to realize their current deferred tax assets, and that such plans can be effectively implemented.
/s/
We have served as the Company’s auditor since 2022.
September 28, 2022
PCAOB ID Number
| 33 |
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 sheet of The InterGroup Corporation (the “Company”) as of June 30, 2021, the related consolidated statements of operations, shareholders’ deficit and cash flows for the year 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, 2021, 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 audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/
September 28, 2022
We served as the Company’s auditor from 2017 through 2021.
| 34 |
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
| As of June 30, | 2022 | 2021 | ||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | $ | ||||||
| Investment in real estate, net | ||||||||
| Investment in marketable securities | ||||||||
| Other investments | ||||||||
| Cash and cash equivalents | ||||||||
| Restricted cash | ||||||||
| Other assets | ||||||||
| Deferred tax asset | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities | $ | $ | ||||||
| Accounts payable and other liabilities – Hotel | ||||||||
| Due to securities broker | ||||||||
| Obligations for securities sold | ||||||||
| Related party notes payable | ||||||||
| Other notes payable – SBA Loans | ||||||||
| Finance leases | ||||||||
| Mortgage notes payable - Hotel | ||||||||
| Mortgage notes payable - real estate | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies - Note 17 | ||||||||
| Shareholders’ deficit: | ||||||||
| Preferred stock, $ par value, shares authorized; issued | ||||||||
| Common stock, $ par value, shares authorized; and issued; and outstanding as of June 30, 2022 and 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost, and shares as of June 30, 2022 and 2021, respectively | ( | ) | ( | ) | ||||
| Total InterGroup shareholders’ deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total shareholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and shareholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 35 |
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the years ended June 30, | 2022 | 2021 | ||||||
| Revenues: | ||||||||
| Hotel | $ | $ | ||||||
| Real estate | ||||||||
| Total revenues | ||||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | ( | ) | ( | ) | ||||
| Real estate operating expenses | ( | ) | ( | ) | ||||
| Depreciation and amortization expense | ( | ) | ( | ) | ||||
| General and administrative expense | ( | ) | ( | ) | ||||
| Total costs and operating expenses | ( | ) | ( | ) | ||||
| Income (loss) from operations | ( | ) | ||||||
| Other (expense) income: | ||||||||
| Interest expense - mortgages | ( | ) | ( | ) | ||||
| Gain from sale of real estate | ||||||||
| Gain on disposal of assets | ||||||||
| Net (loss) gain on marketable securities | ( | ) | ||||||
| Net (loss) gain on marketable securities - Comstock | ( | ) | ||||||
| Gain on debt forgiveness | ||||||||
| Loss on debt extinguishment | ( | ) | ||||||
| Impairment loss on other investments | ( | ) | ( | ) | ||||
| Dividend and interest income | ||||||||
| Trading and margin interest expense | ( | ) | ( | ) | ||||
| Net other (expense) income | ( | ) | ||||||
| (Loss) income before income taxes | ( | ) | ||||||
| Income tax (expense) benefit | ( | ) | ||||||
| Net (loss) income | ( | ) | ||||||
| Less: Net loss (income) attributable to the noncontrolling interest | ( | ) | ||||||
| Net (loss) income attributable to InterGroup | $ | ( | ) | $ | ||||
| Net (loss) income per share | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | |||||||
| Net (loss) income per share attributable to InterGroup | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | |||||||
| Weighted average number of common shares outstanding | ||||||||
| Weighted average number of diluted shares outstanding | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 36 |
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
| Common Stock | Additional Paid-in | Accumulated | Treasury | InterGroup Shareholders’ | Non-controlling | Total Shareholders’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2020 | $ | $ | $ | ( | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Net Income | - | |||||||||||||||||||||||||||||||
| Stock options expense | - | |||||||||||||||||||||||||||||||
| Reclassify non-controlling interest to InterGroup | - | ( | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Investment in Portsmouth | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Investment in Justice | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Distribution to NCI | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Purchase of treasury stock | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||
| Issuance of stock from exercise of stock options | ||||||||||||||||||||||||||||||||
| Stock options expense | - | |||||||||||||||||||||||||||||||
| Distribution from Santa Fe | - | |||||||||||||||||||||||||||||||
| Investment in Portsmouth | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Purchase of Partnership interest | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Reclassify noncontrolling interest due to purchase of Justice | - | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Purchase of treasury stock | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 37 |
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the years ended June 30, | 2022 | 2021 | ||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: | ||||||||
| Net unrealized loss (gain) on marketable securities | ( | ) | ||||||
| Deferred taxes | ( | ) | ||||||
| Gain on disposal of assets | ( | ) | ||||||
| Gain from sale of real estate | ( | ) | ||||||
| Gain from debt forgiveness | ( | ) | ( | ) | ||||
| Impairment loss on other investments | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of loan cost | ||||||||
| Amortization of related party notes | ( | ) | ( | ) | ||||
| Stock compensation expense | ||||||||
| Reclassifying non-controlling interest | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Investment in marketable securities | ( | ) | ||||||
| Other assets | ( | ) | ||||||
| Accounts payable and other liabilities | ( | ) | ( | ) | ||||
| Accounts payable and other liabilities – Hotel | ( | |||||||
| Due to securities broker | ( | ) | ||||||
| Obligations for securities sold | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures for property and equipment - Hotel | ( | ) | ( | ) | ||||
| Capital expenditures for property and equipment - real estate | ( | ) | ( | ) | ||||
| Distribution from Santa Fe | ||||||||
| Investment in Portsmouth | ( | ) | ( | ) | ||||
| Investment in Justice | ( | ) | ( | ) | ||||
| Proceeds from other investments | ||||||||
| Proceeds from sale of real estate | ||||||||
| Distribution to non-controlling interest | ( | ) | ||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Payments of mortgage, finance leases and other notes payable | ( | ) | ( | ) | ||||
| Proceeds from mortgage and other notes payable | ||||||||
| Issuance cost from refinance of long-term debt | ( | ) | ( | ) | ||||
| Purchase of treasury stock | ( | ) | ( | ) | ||||
| Proceeds from other notes payable – SBA Loans | ||||||||
| Issuance cost from renewing line of credit | ( | ) | ||||||
| Payments of line of credit | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash: | ( | ) | ||||||
| Cash, cash equivalents and restricted cash at the beginning of the year | ||||||||
| Cash, cash equivalents and restricted cash at the end of the year | $ | $ | ||||||
| Supplemental information: | ||||||||
| Income taxes paid | $ | $ | ||||||
| Interests paid | $ | $ | ||||||
| Supplemental non-cash investing and financing transactions: | ||||||||
| Additions to Hotel equipment through finance leases | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| 38 |
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.
Effective
February 19, 2021, the Company’s
In
June 2022, InterGroup received distribution of $
As
of June 30, 2022, InterGroup owns approximately
Portsmouth’s
primary business was conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California
limited partnership (“Justice” or the “Partnership”). Effective July 15, 2021, Portsmouth completed the purchase
of
Prior to its dissolution effective December 23, 2021, Justice owned and operated 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 through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”). Mezzanine was a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Effective December 23, 2021, Portsmouth replaced Justice as the single member 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 a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (“Hilton”) through January 31, 2030.
Aimbridge Hospitality (“Aimbridge”) manages the Hotel, along with its five-level parking garage, under certain Hotel management agreement (“HMA”) with Operating. The term of the management agreement is for an initial period of ten years commencing on the February 3, 2017 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 Aimbridge shall be one and seven-tenths percent (1.70%) of total Hotel revenue.
| 39 |
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 Portsmouth. 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
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 Company 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, 2022 and 2021.
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
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, 2022 and 2021.
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.
| 40 |
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, 2022 and 2021, the
Company recorded impairment losses related to other investments of $
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, 2022 and 2021, the Company does
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.
Other Assets
Other assets include prepaid insurance, accounts receivable, prepaid expenses, and other miscellaneous assets.
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. The Company had accounts receivable of $
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.
| 41 |
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, 2022 and 2021, the Company purchased and 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, the Company 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 $
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.
| 42 |
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, and the American Rescue Plan Act enacted on March 11, 2021. 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, 2022 and 2021, we evaluated the income tax provisions of the CARES Act and the American Rescue Plan Act and have determined there to be no material effect on the fiscal years’ tax provision. We will continue to evaluate the income tax provisions of both acts 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.
Basic net 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 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. The basic and diluted earnings per share are the same for the fiscal year ended June 30, 2022 because the Company had a net loss. As of June 30, 2021, the Company’s potentially dilutive common shares are shares that Mr. Winfield has a right to acquire pursuant to vested stock options and shares that Mr. Gonzalez has a right to acquire pursuant to vested stock options.
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 which are based on management’s assessment of the collectability of accounts receivable as of the end of the fiscal year. Actual results may differ from those estimates. Management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets and when appropriate, records tax valuation allowances based on that evidence and 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
As of June 30, 2022, there was no material impact from the recent adoption of new accounting pronouncements, nor expected material impact from recently issued accounting pronouncements yet to be adopted, on the Company’s consolidated financial statements.
NOTE 2 – LIQUIDITY
Historically,
our cash flows have been primarily generated from our Hotel and real estate operations. However, the responses by federal, state, and
local civil authorities to the COVID-19 pandemic continues to have a material detrimental impact on our liquidity. For the fiscal year
ended June 30, 2022, our net cash flow provided by operations was $
The
Company had cash and cash equivalents of $
| 43 |
On
December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup
as needed up to $
During
the fiscal year ending June 30, 2021, we completed refinancing on six of our California properties and generated net proceeds of $
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the Coronavirus Aid, Relief, and
Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). Justice
received proceeds of $
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 $
On
February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the
SBA. Justice received proceeds of $
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 at all of our properties.
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 the economic recovery takes longer than anticipated. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. However, there can be no guarantee that management will be successful with its plan.
| 44 |
The following table provides a summary as of June 30, 2022, the Company’s material financial obligations which also includes interest payments.
| Year | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | ||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Related party notes payable | ||||||||||||||||||||||||||||
| Interest | ||||||||||||||||||||||||||||
| Total | $ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
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 revenue recognition rules under ASC 606 specifically eliminates rental revenue from the accounting standard.
The following table present our Hotel revenue disaggregated by revenue streams.
| For the year ended June 30, | 2022 | 2021 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | $ | ||||||
| Food and beverage | ||||||||
| Garage | ||||||||
| Other operating departments | ||||||||
| Total Hotel revenue | $ | $ | ||||||
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. | |
| ● | Non-cancelable 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.
| 45 |
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, 2022 and 2021, 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 and had a balance of $
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, 2022 | Cost | Depreciation | Value | |||||||||
| Land | $ | $ | $ | |||||||||
| Finance lease ROU assets | ( | ) | ||||||||||
| Furniture and equipment | ( | ) | ||||||||||
| Building and improvements | ( | ) | ||||||||||
| Investment in Hotel, net | $ | $ | ( | ) | $ | |||||||
| Accumulated | Net Book | |||||||||||
| June 30, 2021 | Cost | Depreciation | Value | |||||||||
| Land | $ | $ | $ | |||||||||
| Finance lease ROU assets | ( |
) | ||||||||||
| Furniture and equipment | ( |
) | ||||||||||
| Building and improvements | ( |
) | ||||||||||
| Investment in Hotel, net | $ | $ | ( |
) | $ | |||||||
NOTE 5 - INVESTMENT IN REAL ESTATE, NET
At June 30, 2022, 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.
| 46 |
Investment in real estate included the following:
| As of June 30, | 2022 | 2021 | ||||||
| Land | $ | $ | ||||||
| Buildings, improvements and equipment | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Land held for development | ||||||||
| Investment in real estate, net | $ | $ | ||||||
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 inure to its shareholders through income and/or capital gain.
At June 30, 2022 and 2021, 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, 2022 | ||||||||||||||||||||
| Corporate Equities | $ | $ | $ | ( |
) | $ | ( |
) | $ | |||||||||||
| As of June 30, 2021 | ||||||||||||||||||||
| Corporate Equities | $ | $ | $ | ( |
) | $ | $ | |||||||||||||
Net gain (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, 2022 and 2021, respectively.
| For the year ended June 30, | 2022 | 2021 | ||||||
| Realized gain on marketable securities | $ | $ | ||||||
| Realized loss on marketable securities related to Comstock | ( | ) | ( | ) | ||||
| Unrealized (loss) gain on marketable securities | ( | ) | ||||||
| Unrealized gain on marketable securities related to Comstock | ||||||||
| Net (loss) gain on marketable securities | $ | ( | ) | $ | ||||
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, 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).
| 47 |
The assets measured at fair value on a recurring basis are as follows:
| As of June 30, 2022 | Level 1 | |||
| Assets: | ||||
| Investment in marketable securities: | ||||
| REITs and real estate companies | $ | |||
| Communication services | ||||
| Financial services | ||||
| Technology | ||||
| Basic material | ||||
| Consumer cyclical | ||||
| Industrial | ||||
| Energy | ||||
| Other | ||||
| $ |
| As of June 30, 2021 | Level 1 | |||
| Assets: | ||||
| Investment in marketable securities: | ||||
| REITs and real estate companies | $ | |||
| Energy | ||||
| Communication services | ||||
| Financial services | ||||
| Industrial | ||||
| Basic material | ||||
| Consumer cyclical | ||||
| Healthcare | ||||
| Technology | ||||
| Other | ||||
| $ |
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 are “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:
| Net loss for the | ||||||||||||
| Assets | Level 3 | June 30, 2022 | year ended June 30, 2022 | |||||||||
| Other non-marketable investments | $ | $ | $ | ( | ) | |||||||
| Net loss for the | ||||||||||||
| Assets | Level 3 | June 30, 2021 | year ended June 30, 2021 | |||||||||
| Other non-marketable investments | $ | $ | $ | ( | ) | |||||||
| 48 |
For
fiscal years ended June 30, 2022 and 2021, we received distribution from other non-marketable investments of and $
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 8 – OTHER ASSETS
Other assets consist of the following as of June 30:
| 2022 | 2021 | |||||||
| Accounts receivable, net | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Miscellaneous assets | ||||||||
| Prepaid taxes | ||||||||
| Total other assets | $ | $ |
NOTE 9 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The following summarizes the balances of related party and other notes payable as of June 30, 2022 and 2021, respectively.
| As of June 30, | 2022 | 2021 | ||||||
| Note payable – Hilton | $ | $ | ||||||
| Note payable – Aimbridge | ||||||||
| Other notes payable - SBA Loans | ||||||||
| Total related party and other notes payable | $ | $ | ||||||
Note
payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $
On
February 1, 2017, Operating entered an HMA with Ambridge 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
In
July 2018, InterGroup obtained a revolving $
| 49 |
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan – Justice”) with CIBC Bank USA under the CARES Act administered
by the U.S. Small Business Administration. The Partnership received proceeds of $
On
February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the
SBA. Justice received proceeds of $
Future minimum principal payments for all related party and other financing transactions are as follows:
| For the year ending June 30, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ |
To
fund the redemption of limited partnership interests and to repay the prior mortgage of $
Effective
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 $
| 50 |
On
July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $
On
August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $
On
November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to InterGroup for $
As
disclosed in its Definitive Information Statement on Schedule 14C, filed with the SEC on January 25, 2021, Santa Fe received shareholder
approval to distribute its assets, as described and subsequently dissolve, all as set forth in the Information Statement. As InterGroup
formerly owned
Four of the Portsmouth directors serve as directors of InterGroup. The Company’s Vice President Real Estate was elected President of Portsmouth in May 2021. The Company’s director and Chairman of the Audit Committee, William J. Nance, serves as Comstock’s director and Chairman of the Audit and Finance, Compensation and Nominating and Governance Committees of Comstock.
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 oversees the investment activity of Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice and served in that position until the dissolution of Justice in December 2021. Depending on certain market conditions and various risk factors, the Chief Executive Officer and Portsmouth 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 Portsmouth, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.
| 51 |
NOTE 10 – 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 was the sole member of Mezzanine until its dissolution in December 2021 when Portsmouth replaced the Partnership as the sole member of Mezzanine. Mezzanine is the sole member of Operating.
The
Loan Agreements provide for a $
The
Mortgage Loan is secured by Operating’s principal asset, the Hilton San Francisco-Financial District (the “Property”).
The Mortgage Loan bears an interest rate of
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
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
was 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 the $
| 52 |
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
October 2020, the Company refinanced its $
In
November 2020, the Company refinanced its $
In
January 2021, the Company refinanced its $
In
June 2021, the Company refinanced its $
In
June 2021, the Company refinanced two of its single-family houses in West Los Angeles, California with two existing mortgages totaling
$
In
July 2021, the Company refinanced three of its California properties’ existing mortgages totaling $
On
October 14, 2021, the Company refinanced its $
On
June 30, 2022, the Company refinanced its $
| 53 |
Each mortgage notes payable is secured by real estate or the Hotel. As of June 30, 2022 and 2021, the mortgage notes payables are summarized as follows:
| As of June 30, 2022 | ||||||||||||||
| Number | Note | Note | Mortgage | Interest | ||||||||||
| Property | of Units | Origination Date | Maturity Date | Balance | Rate | |||||||||
| SF Hotel | $ | % | ||||||||||||
| SF Hotel | % | |||||||||||||
| Mortgage notes payable – Hotel | ||||||||||||||
| Debt issuance costs | ( | ) | ||||||||||||
| Total mortgage notes payable – Hotel | $ | |||||||||||||
| Florence | $ | % | ||||||||||||
| Las Colinas | % | |||||||||||||
| Morris County | % | |||||||||||||
| St. Louis | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Mortgage notes payable – real estate | ||||||||||||||
| Debt issuance costs | ( | ) | ||||||||||||
| Total mortgage notes payable – real estate | $ | |||||||||||||
| 54 |
| As of June 30, 2021 | ||||||||||||||
| Number | Note | Note | Mortgage | Interest | ||||||||||
| Property | of Units | Origination Date | Maturity Date | Balance | Rate | |||||||||
| SF Hotel | $ | % | ||||||||||||
| SF Hotel | % | |||||||||||||
| Mortgage notes payable – Hotel | ||||||||||||||
| Debt issuance costs | ( | ) | ||||||||||||
| Total mortgage notes payable – Hotel | $ | |||||||||||||
| Florence | $ | % | ||||||||||||
| Las Colinas | % | |||||||||||||
| Morris County | % | |||||||||||||
| St. Louis | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Los Angeles | % | |||||||||||||
| Mortgage notes payable – real estate | ||||||||||||||
| Debt issuance costs | ( | ) | ||||||||||||
| Total mortgage notes payable – real estate | $ | |||||||||||||
Future minimum payments for all mortgage notes payable are as follows:
| For the year ending June 30, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
| 55 |
NOTE 11 – MANAGEMENT AGREEMENTS
On
February 1, 2017, Operating entered into a Hotel management agreement (“HMA”) with Aimbridge Hospitality (“Aimbridge”)
to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of
NOTE 12 – CONCENTRATION OF CREDIT RISK
As
of June 30, 2022 and 2021, receivables related to Hotel customers were $
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; however, the Company has never suffered any losses as a result of such high balances.
NOTE 13 – INCOME TAXES
The provision for the Company’s income tax (expense) benefit is comprised of the following:
| For the years ended June 30, | 2022 | 2021 | ||||||
| Federal | ||||||||
| Current tax expense | $ | ( | ) | $ | ( | ) | ||
| Deferred tax (expense) benefit | ( | ) | ||||||
| ( | ) | |||||||
| State | ||||||||
| Current tax expense | ( | ) | ( | ) | ||||
| Deferred tax benefit | ( | ) | ||||||
| ( | ) | |||||||
| Income Tax Benefit | $ | $ | ( | ) | ||||
| 56 |
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, | 2022 | 2021 | ||||||
| Statutory federal tax rate | $ | $ | ( | ) | ||||
| State income taxes, net of federal tax benefit | ( | ) | ||||||
| Dividend received deduction | ||||||||
| PPP Loan forgiveness | ||||||||
| Provision to return adjustment | ||||||||
| Deferral true up – Justice difference in basis of fixed assets | ||||||||
| Disallowed interest | ||||||||
| Net operating loss | ||||||||
| Valuation allowance | ( | ) | ( | |||||
| Basis difference in investments | ||||||||
| Carryback claim refundable | ||||||||
| Payable true up | ( | ) | ||||||
| Other | ||||||||
| $ | $ | ( | ) | |||||
The components of the deferred tax asset and liabilities are as follows:
| June 30, 2022 | June 30, 2021 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Deferred gains on real estate sale and depreciation | ||||||||
| Capital loss carryforwards | ||||||||
| Investment impairment reserve | ||||||||
| Accruals and reserves | ||||||||
| Interest expense | ||||||||
| Tax credits | ||||||||
| Other | ||||||||
| Deferred Tax Asset before Valuation Allowance | ||||||||
| Valuation Allowance | ( | ) | ( | ) | ||||
| Deferred Tax Asset after Valuation Allowance | ||||||||
| Deferred tax liabilities: | ||||||||
| Equity earnings | ( | ) | ||||||
| Deferred gains on real estate sale and depreciation | ( | ) | ||||||
| Unrealized gain on marketable securities | ( | ) | ( | ) | ||||
| State taxes | ( | ) | ( | ) | ||||
| Deferred Tax Liability | ( | ) | ( | ) | ||||
| Net deferred tax asset | $ | $ | ||||||
Management
considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets to determine
if it is more likely than not that the deferred tax asset will be realized. As of June 30, 2022, it has been determined that it more
likely than not that the deferred tax asset will not be recognized with the exception of forecasted five-year projected income. Thus,
there was a valuation allowance of $
As
of June 30, 2022, the Company had net operating loss (“NOL”) carryforwards of approximately $
| Federal | State | |||||||
| InterGroup | $ | $ | ||||||
| Portsmouth | ||||||||
| $ | $ | |||||||
| 57 |
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, 2022, 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, 2022, tax years beginning in fiscal years 2018 and 2017 remain open to examination by the federal and state tax jurisdictions, respectively, and are subject to the statute of limitations.
The
Company’s income tax expense for the fiscal year ended June 30, 2021 includes $
NOTE 14 – SEGMENT INFORMATION
The
Company operates in
Information below represents reported segments for the years ended June 30, 2022 and 2021. 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 gain (loss), dividend and interest income and investment related expenses.
| As of and for the year ended | Hotel | Real Estate | Investment | |||||||||||||||||
| June 30, 2022 | Operations | Operations | Transactions | Other | Total | |||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Segment operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Segment income (loss) from operations | ( | ) | ||||||||||||||||||
| Interest expense - mortgages | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Gain (loss) on debt extinguishment | ( | ) | ||||||||||||||||||
| Depreciation and amortization expense | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Loss from investments | ( | ) | ( | ) | ||||||||||||||||
| Income tax benefit | ||||||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||
| Total assets | $ | $ | $ | $ | $ | |||||||||||||||
| 58 |
| As of and for the year ended | Hotel | Real Estate | Investment | |||||||||||||||||
| June 30, 2021 | Operations | Operations | Transactions | Other | Total | |||||||||||||||
| Revenues | $ | $ | $ | $ | $ | |||||||||||||||
| Segment operating expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Segment income (loss) from operations | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Interest expense - mortgage | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Gain on disposal of assets | ||||||||||||||||||||
| Gain on debt forgiveness | ||||||||||||||||||||
| Gain on sale of real estate | ||||||||||||||||||||
| Depreciation and amortization expense | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Gain from investments | ||||||||||||||||||||
| Income tax expense | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||
| Total assets | $ | $ | $ | $ | $ | |||||||||||||||
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 shares of the common stock are available for issuance to participants under the 2008 RSU Plan. The 2008 RSU Plan will terminate ten () 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.
| 59 |
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, 2022 and 2021, there were no RSUs outstanding.
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 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 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 stock options to the Company’s Chairman, President and Chief Executive, John V. Winfield to purchase up to shares of the Company’s common stock pursuant to the 2010 Incentive Plan. The exercise price of the options is $, 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 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. 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, 2022, 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 to , and Section 6.4 to change “tenth (10th) anniversary
date” to “twentieth (20th) anniversary date”. This would increase the term of the 2010
| 60 |
In February 2012, the Compensation Committee awarded stock options to the Company’s Chairman, President and Chief Executive, John V. Winfield to purchase up to shares of common stock. The per share exercise price of the options is $ which is the fair value of the Company’s Common Stock as reported on NASDAQ on February 28, 2012. The options expire 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. On January 21, 2022,
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 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 shares and have a term of , expiring on , with an exercise price of $ per share. The incentive stock options are for shares and have a term of , expiring on December 26, 2018, with an exercise price of $ 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. In December 2018, Mr. Winfield exercised the vested incentive stock options by surrendering shares of the Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of shares. No additional compensation expense was recorded related to the issuance.
In March 2017, the Compensation Committee awarded stock options to the Company’s Vice President of Real Estate, David C. Gonzalez, to purchase up to shares of common stock. The per share exercise price of the options is $ 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 options vesting upon each one-year anniversary of the date of grant. All shares are vested as of June 30, 2022.
During the years ended June 30, 2022 and 2021, the Company recorded stock option compensation expense of $ and $, respectively, related to stock options previously issued. As of June 30, 2022, all compensation related to stock options has been fully amortized.
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.
| 61 |
| Number of | Weighted Average | Weighted Average | Aggregate | |||||||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | |||||||||||||||||
| Outstanding at | July 1, 2020 | $ | years | $ | ||||||||||||||||
| Granted | - | - | ||||||||||||||||||
| Exercised | - | - | ||||||||||||||||||
| Forfeited | - | - | ||||||||||||||||||
| Exchanged | - | - | ||||||||||||||||||
| Outstanding at | June 30, 2021 | $ | years | $ | ||||||||||||||||
| Exercisable at | June 30, 2021 | $ | years | $ | ||||||||||||||||
| Vested and expected to vest at | June 30, 2021 | $ | years | $ | ||||||||||||||||
| Outstanding at | July 1, 2021 | $ | years | $ | ||||||||||||||||
| Granted | - | - | ||||||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||||||
| Forfeited | - | - | ||||||||||||||||||
| Exchanged | - | - | ||||||||||||||||||
| Outstanding at | June 30, 2022 | $ | years | $ | ||||||||||||||||
| Exercisable at | June 30, 2022 | $ | years | $ | ||||||||||||||||
| Vested at | June 30, 2022 | $ | years | $ | ||||||||||||||||
NOTE 16 – RELATED PARTY TRANSACTIONS
As
discussed in Note 9 – Related Party and Other Financing Transactions, upon the dissolution of Justice in December 2021, Portsmouth
assumed Justice’s note payable to InterGroup in the amount of $
On
February 5, 2020, the Company entered into a Contribution Agreement (the “Contribution Agreement”) with Santa Fe pursuant
to which the Company received shares of common stock, par value $ per share, of Santa Fe, in exchange for its contribution
to Santa Fe of shares of common stock (the “Common Stock”) of Intergroup Woodland Village, Inc., an Ohio corporation
(“Transaction”).
| 62 |
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.
On
November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to InterGroup for $
Effective
February 19, 2021, the Company’s
In
August 2004, the Company purchased an approximately two-acre parcel of unimproved land in Kihei, Maui, Hawaii for $
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 oversees the investment activity of Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice and served in that position until the dissolution of Justice in December 2021. Depending on certain market conditions and various risk factors, the Chief Executive Officer and Portsmouth 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 Portsmouth, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.
NOTE 17 – 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, FFE 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.
| 63 |
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
Since
the opening of the Hotel as a full brand Hilton in January 2006, Justice has incurred monthly royalties, program fees and information
technology recapture charges equal to a percentage of the Hotel’s gross room revenue. Fees for such services during fiscal year
2022 and 2021 totaled approximately $
Hotel Employees
On February 3, 2017, Aimbridge assumed all labor union agreements and retained employees of their choice to continue providing services to the Hotel. As of June 30, 2022, approximately 86% 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 Aimbridge was a party. CBA for Local 2 (Hotel and Restaurant Employees) expired on August 13, 2022 and is currently under review. 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 Company and Aimbridge. The Company 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.
Legal Matters
Portsmouth
Square Inc., through its operating company Justice Investors Operating Co., a Delaware limited liability company (the “Company”),
is the owner of the real property located at 750 Kearny Street in San Francisco, currently improved with a 27 – story building
which houses a Hilton Hotel (the “Property”). The Property was improved pursuant to approvals granted by the City and County
of San Francisco (the “City”) in 1970. Those approvals included a Major Encroachment Permit (“Permit”) by which
the Company was authorized to construct an ornamental overhead pedestrian bridge across Kearny Street, connecting the Property to the
City park and underground parking garage known as Portsmouth Square (the “Bridge”). The construction of the Bridge was a
condition of the City’s approval of the construction of the hotel structure on the Property. Effective on May 24, 2022, the City
has revoked the Permit and directed the Company to remove the Bridge at the Company’s expense, including construction management
costs and traffic control. Pursuant to a letter dated June 13, 2022, the City’s Department of Public works has specifically directed
the “removal of the unpermitted pedestrian bridge and all related physical encroachments in the public right-of-way and on City
property” and the submission of a general bridge removal and restoration plan (the “Plan”). The Company disputes the
legality of the purported revocation of the Permit. The Company further disputes any obligation to remove the Bridge at its expense.
In particular, representatives of the Company have participated in meetings with the City since August 1, 2019, discussing a collaborative
process for the possible removal of the Bridge. Until the recent revocation of the Permit, the City representatives have repeatedly and
consistently agreed that the City will pay for the associated costs of any Bridge removal. Nevertheless, without waiving any rights,
in an effort to understand all of the available options, and to provide a response to the City’s new directives, the Company has
engaged a Project Manager, a structural engineering firm and an architect to advise on the process and for the development of a Plan
for the Bridge removal, as well as the reconstruction of the front of the Hilton Hotel. The Plan is currently not expected to be completed
until early in 2023. At this time, early estimates of the cost of the Plan exceed $
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.
NOTE 18 – SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date that the accompanying financial statements were issued, and has determined that no material subsequent events exist through the date of this filing.
| 64 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On January 31, 2022, the Audit Committee retained WithumSmith+Brown, PC (“Withum”) as the Company’s new independent registered public accounting firm upon the resignation of Moss Adams LLP (“Moss Adams”) in December 2021. For the fiscal years ended June 30, 2020 and 2021, and the interim periods up to the resignation date, Moss Adams’ reports on the financial statements did not contain an adverse opinion or a disclaimer of opinion, nor was qualified or modified as to uncertainty, audit scope, or accounting principles. Furthermore, there were no disagreements on any matter of accounting principles or practices, financial statement disclosure, nor auditing scope or procedure.
Item 9A. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Annual Report on Form 10-K. Based upon such evaluation, management has concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The internal control over financial reporting is a process, under the supervision of our Chief Executive Officer and Principal Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The internal control over financial reporting includes those policies and procedures that:
● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
● provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
| 65 |
Management, including our Chief Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its evaluation under that framework, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2022.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm, pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit us to provide only management’s report in this Annual Report on Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company’s internal control over financial reporting during the fiscal year covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth certain information with respect to the Directors and Executive Officers of the Company as of June 30, 2022:
| Name | Position with the Company | Age | Term to Expire | |||
| Class A Directors: | ||||||
| John V. Winfield (4) | Chairman of the Board; President and Chief Executive Officer | 75 | Fiscal 2024 Annual Meeting | |||
| Jerold R. Babin (3) | Director | 89 | Fiscal 2024 Annual Meeting | |||
| Class B Directors: | ||||||
| Yvonne L. Murphy (1) (2) (4) | Director | 65 | Fiscal 2022 Annual Meeting | |||
| William J. Nance (2) (3) (4) | Director | 78 | Fiscal 2022 Annual Meeting | |||
| Class C Director: | ||||||
| John C. Love (1) (2) (3) | Director | 82 | Fiscal 2023 Annual Meeting | |||
| Executive Officers: | ||||||
| David C. Gonzalez | Vice President Real Estate, Advisor of Executive Strategic Real Estate and Securities Investment Committee, and President of Portsmouth Interim Principal Financial Officer |
55 | N/A | |||
| Danfeng Xu | Treasurer, Controller (Principal Financial Officer), and Secretary Resigned effective August 31, 2022 |
35 | N/A |
| (1) | Member of the Nominating Committee |
| (2) | Member of the Compensation Committee |
| (3) | Member of the Audit Committee |
| (4) | Member of the Executive Strategic Real Estate and Securities Investment Committee |
| 66 |
Business Experience:
The principal occupation and business experience during the last five years for each of the Directors and Executive Officers of the Company are as follows:
John V. Winfield — Mr. Winfield was first appointed to the Board in 1982. He currently serves as the Company’s Chairman of the Board, President and Chief Executive Officer, having first been appointed as such in 1987. Mr. Winfield also serves as Chairman and Chief Executive Officer of the Company’s subsidiary Portsmouth, a public company. Effective June 2016, Mr. Winfield became the Managing Director of Justice and served in that position until the dissolution of Justice in December 2021. On May 24, 2021, Mr. Winfield resigned effective immediately as President of Portsmouth. Mr. Winfield’s extensive experience as an entrepreneur and investor, as well as his managerial and leadership experience from serving as a chief executive officer and director of public companies, led to the Board’s conclusion that he should serve as a director of the Company.
Jerold R. Babin — Mr. Babin was first appointed as a Director of the Portsmouth, a subsidiary of the Company, in February 1996. Mr. Babin was elected to the Board of InterGroup in February 2014. Mr. Babin is a retail securities broker. From 1974 to 1989, he worked at Drexel Burnham and from 1989 to June 30, 2010, he worked for Prudential Securities (later Wachovia Securities and now Wells Fargo Advisors) where he held the title of First Vice-President. Mr. Babin retired from his position at Wells Fargo advisors in June 2010. For the past 20 years, until present, Mr. Babin has also served as an arbitrator for FINRA (formerly NASD). Mr. Babin’s extensive experience in the securities and financial markets as well has his experience in the securities and public company regulatory industry led to the Board’s conclusion that he should serve as a director of the Company.
Yvonne L. Murphy — Mrs. Murphy was elected to the Board of InterGroup in February 2014 and to the Board of Portsmouth, a subsidiary of the Company, in February 2019. She resigned from the Board of Portsmouth in December 2019. She was a member of Governor Kenny C. Guinn’s executive staff in Nevada, and was employed for years by the prestigious Jones Vargas law firm in Reno, Nevada. She served in nine legislative sessions during the most challenging years in Nevada’s history. Prior to starting her own lobbying firm, Ms. Murphy worked for RR Partners in its corporate office in Las Vegas, Nevada and in the Government Affairs Division in Reno. She has a Doctorate and a Master’s in Business Administration from the California Pacific University. Mrs. Murphy’s impressive experience in corporate management, legal research and legislative lobbying led to the Board’s conclusion that she should serve as a director of the Company.
William J. Nance — Mr. Nance is a Certified Public Accountant and private consultant to the real estate and banking industries. He is also President of Century Plaza Printers Inc. Mr. Nance was first elected to the Board in 1984. He served as the Company’s Chief Financial Officer from 1987 to 1990 and as Treasurer from 1987 to June 2002. Mr. Nance is also a Director of Santa Fe and Portsmouth. Mr. Nance also serves as a director of Comstock Mining, Inc. Mr. Nance’s extensive experience as a CPA and in numerous phases of the real estate industry, his business and management experience gained in running his own businesses, his service as a director and audit committee member for other public companies and his knowledge and understanding of finance and financial reporting, led to the Board’s conclusion that he should serve as a director of the Company.
John C. Love — Mr. Love was appointed to the Board in 1998. Mr. Love is an international hospitality and tourism consultant. He is a retired partner in the national CPA and consulting firm of Pannell Kerr Forster and, for the last 30 years, a lecturer in hospitality industry management control systems and competition strategy at Golden Gate University and San Francisco State University. He is Chairman Emeritus of the Board of Trustees of Golden Gate University and the Executive Secretary of the Hotel and Restaurant Foundation. Mr. Love is also a Director of Portsmouth and served on the Board of Santa Fe from March 1998 to December 2019. Mr. Love’s extensive experience as a CPA and in the hospitality industry, including teaching at the university level for the last 30 years in management control systems, and his knowledge and understanding of finance and financial reporting, led to the Board’s conclusion that he should serve as a director of the Company.
| 67 |
David C. Gonzalez — Mr. Gonzalez was appointed Vice President Real Estate of the Company on January 31, 2001. Since 1989, Mr. Gonzalez has served in numerous capacities with the Company, including Controller and Director of Real Estate. Mr. Gonzalez was appointed advisor of the Executive Strategic Real Estate and Securities Investment Committee of the Company and Portsmouth in February 2020. The Board of Directors of Portsmouth Square, Inc. elected Mr. Gonzalez as President of Portsmouth Square Inc. effective May 24, 2021.
Danfeng Xu – Ms. Xu was appointed as Treasurer and Controller of the Company on October 16, 2017. Ms. Xu also serves as Treasurer and Controller of Portsmouth and Santa Fe, having been appointed to those positions on October 16, 2017. On June 1, 2018, she was appointed Secretary of the Company, Portsmouth and Santa Fe. Prior to joining the Company, she had served as Controller and worked in other positions at the Hotel from July 2010 to February 2017. She obtained her Bachelor of Science degree in Business Administration, Accounting and Finance from The Ohio State University and her Master of Professional Accounting, with a concentration in Audit and Assurance from University of Washington. Ms. Xu resigned effective August 31, 2022.
Family Relationships: There are no family relationships among directors, executive officers, or persons nominated or chosen by the Company to become directors or executive officers.
Involvement in Certain Legal Proceedings: No director or executive officer, or person nominated or chosen to become a director or executive officer, was involved in any legal proceeding requiring disclosure.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and each beneficial owner of more than ten percent of the Common Stock of the Company, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of Forms 3 and 4 and amendments thereto furnished to the Company during its most recent fiscal year and Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that during fiscal year 2022 all filing requirements applicable to its officers, directors, and greater than ten-percent beneficial owners were complied with.
Code of Ethics.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, including its Board of Directors. A copy of the Code of Ethics is posted on the Company’s website at www.intgla.com. The Company will provide to any person without charge, upon request, a copy of its Code of Ethics by sending such request to: The InterGroup Corporation, Attn: Treasurer, 1516 S. Bundy Drive, Suite 200, Los Angeles, California 90025. The Company will promptly disclose any amendments or waivers to its Code of Ethics on Form 8-K and will post such information on its website.
BOARD AND COMMITTEE INFORMATION
InterGroup’s common stock is listed on the NASDAQ Capital Market tier of the NASDAQ Stock Market, LLC (“NASDAQ”). InterGroup is a Smaller Reporting Company under the rules and regulations of the Securities and Exchange Commission (“SEC”). With the exception of the Company’s President and CEO, John V. Winfield, all of InterGroup’s Board of Directors consists of “independent” directors as independence is defined by the applicable rules of the SEC and NASDAQ.
| 68 |
Nominating Committee
The Company’s Nominating Committee is comprised of two “independent” directors as independence is defined by the applicable rules of the SEC and NASDAQ. Directors Love and Murphy serve as the current members of the Nominating Committee. The Company has not established a charter for the Nominating Committee, and the Committee has no policy with regard to consideration of any director candidates recommended by security holders. As a smaller reporting company whose directors own in excess of sixty percent of the voting shares of the Company, InterGroup has not deemed it appropriate to institute such a policy. There have not been any material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors.
Audit Committee and Audit Committee Financial Expert
The Company is a Smaller Reporting Company under SEC rules and regulations. The Company’s Audit Committee is currently comprised of three members: Directors Nance (Chairperson), Babin and Love, each of whom meets the independence requirements of the SEC and NASDAQ as modified or supplemented from time to time. The Company’s Board of Directors has determined that Directors Nance and Love also meet the Audit Committee Financial Expert requirement as defined by the SEC and NASDAQ based on their qualifications and business experience discussed above in this Item 10.
Compensation Committee
The Company’s Compensation Committee (the “Compensation Committee”) is comprised of three “independent” members of the Board of Directors as independence is defined by the applicable rules of the SEC and NASDAQ. Mr. Nance serves as Chairman of the Compensation Committee. The Company has not established a charter for the Compensation Committee. The Compensation Committee reviews and recommends to the Board of Directors the compensation for the Company’s Chief Executive Officer and other executive officers, including equity or performance-based compensation and plans. The Compensation Committee seeks to design and set compensation to attract and retain highly qualified executive officers and to align their interests with those of long-term owners of the Company. The Compensation Committee may also make recommendations to the Board of Directors as to the amount and form of director compensation. The Compensation Committee has not engaged any compensation consultants in determining the amount or form of executive of director compensation but does review and monitor published compensation surveys and studies. The Compensation Committee may delegate to the Company’s Chief Executive Officer the authority to determine the compensation of certain executive officers. The Compensation Committee also oversees the Company’s 2010 Incentive Plan.
Item 11. Executive Compensation
The following table provides certain summary information concerning compensation awarded to, earned by, or paid to the Company’s principal executive officer and other named executive officers of the Company whose total compensation exceeded $100,000 for all services rendered to the Company and its subsidiaries for each of the Company’s last two completed fiscal years ended June 30, 2022 and 2021. There was no non-equity incentive plan compensation or nonqualified deferred compensation earnings. There are currently no employment contracts with the executive officers.
| 69 |
SUMMARY COMPENSATION TABLE
| Name and Position | Fiscal Year | Salary | Bonus | Other Compensation | Total | |||||||||||||||
| John V. Winfield | 2022 | $ | 838,000 | (1) | $ | - | $ | 59,000 | (2) | $ | 897,000 | (3) | ||||||||
| Chairman, President and | 2021 | $ | 843,000 | (1) | $ | 270,000 | $ | 56,000 | (2) | $ | 1,169,000 | (3) | ||||||||
| Chief Executive Officer | ||||||||||||||||||||
| David C. Gonzalez | 2022 | $ | 457,000 | $ | - | $ | - | $ | 457,000 | |||||||||||
| Vice President Real Estate | 2021 | $ | 324,000 | $ | 360,000 | $ | - | $ | 684,000 | |||||||||||
| Danfeng Xu | 2022 | $ | 171,000 | $ | 10,000 | $ | - | $ | 181,000 | (3) | ||||||||||
| Treasurer and Controller | 2021 | $ | 170,000 | $ | 9,000 | $ | - | $ | 179,000 | (3) | ||||||||||
| (Principal Financial Officer) | ||||||||||||||||||||
| (1) | Mr. Winfield served as President and Chairman of the Board of the Company’s subsidiary, Santa Fe, up to its liquidation in March 2021. Mr. Winfield also serves as Chairman of the Board of Portsmouth. Mr. Winfield received a salary in the aggregate amount of $438,000 from Santa Fe and Portsmouth during fiscal year 2021. During fiscal year 2022, Mr. Winfield received salary of $433,000 from Portsmouth. The amounts include director’s fees totaling $6,000 and $11,000 for the fiscal years 2022 and 2021, respectively. |
| (2) | Compensation for a portion of the salary of an assistant to Mr. Winfield. |
| (3) | Compensation is allocated approximately 50% to the Company and 50% to Santa Fe and Portsmouth. However, upon the liquidation of Santa Fe in March 2021, salary is allocated approximately 50% to the Company and 50% to Portsmouth. |
Outstanding Equity Awards at Fiscal Year Ended June 30, 2022
The following table sets forth information concerning option awards and stock awards for each named executive officer that were outstanding as of the end of the Company’s last completed fiscal year ended June 30, 2022. There were no other equity incentive plan awards that were outstanding.
| Option Awards | ||||||||||||||||
| Number of | Number of | |||||||||||||||
| securities | securities | |||||||||||||||
| underlying | underlying | |||||||||||||||
| unexercised | unexercised | Option | Option | |||||||||||||
| options (#) | options (#) | exercise | expiration | |||||||||||||
| Name | exercisable | Un-exercisable | price $ | date | ||||||||||||
| John V. Winfield | 100,000 | (1) | - | $ | 10.30 | 3/16/26 | ||||||||||
| John V. Winfield | 133,195 | (2) | - | $ | 18.65 | 12/26/23 | ||||||||||
| David C. Gonzalez | 18,000 | (3) | - | $ | 27.30 | 3/2/27 | ||||||||||
| (1) | Stock options issued to Mr. Winfield pursuant to the Company’s 2010 Incentive Plan are subject to both time and performance-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 20,000 options vesting upon each one-year anniversary of the date of grant, March 16, 2010. Pursuant to the performance 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, 2022, the performance vesting requirements of the options were satisfied. |
| 70 |
| (2) | 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. |
| (3) | Mr. Gonzalez’s stock options vest over a period of five years, with 3,600 options vesting upon each one-year anniversary of the date of grant, March 2, 2017. |
Internal Revenue Code Limitations
Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), provides that, in the case of a publicly held corporation, the corporation is not generally allowed to deduct remuneration paid to its chief executive officer and certain other highly compensated officers to the extent that such remuneration exceeds $1,000,000 for the taxable year. Certain remuneration, however, is not subject to disallowance, including compensation paid on a commission basis and, if certain requirements prescribed by the Code are satisfied, other performance-based compensation. Since InterGroup and Portsmouth are both public companies, the $1,000,000 limitation applies separately to the compensation paid by each entity. Stock option expenses are also amortized over a several years. For fiscal years 2022 and 2021, no compensation paid by the Company to its CEO or other executive officers was subject the deduction disallowance prescribed by Section 162(m) of the Code.
EQUITY COMPENSATION PLANS
The Company currently has one equity compensation plan, which has been approved by the Company’s stockholders. However, any outstanding stock options issued under the Company’s prior equity compensation plans remain effective in accordance with their terms.
The purpose of the Company’s equity compensation plans is to provide a means whereby officers, directors and key employees of the Company develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. A further purpose of these plans is to provide a means through which the Company may attract able individuals to become employees or serve as directors of the Company and to provide a means for such individuals to acquire and maintain stock ownership in the Company, thereby strengthening their concern for the welfare of the Company.
The 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 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 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 Plan will expire under the terms of the grant agreement.
| 71 |
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, 2022, 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 because 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. On January 21, 2022, Mr. Winfield exercised 90,000 of his vested stock options by surrendering 35,094 shares of the Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 54,906 shares. No additional compensation expense was recorded related to the issuance.
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.
| 72 |
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.
Compensation of Directors
Effective as of fiscal year ended June 30, 2011, annual cash compensation payable to non-employee directors has been $12,000. With the exception of members of the Audit Committee, non-employee directors do not receive any additional fees for attending Board or Committee meetings but are entitled to reimbursement of their reasonable expenses to attend such meetings. Members of the Audit Committee are paid a fee of $1,000 per quarter, with the Chair of that Committee to receive $1,500 per quarter. As an executive officer, the Company’s Chairman has elected to forego his annual board fees.
The following table sets forth the compensation paid to directors during the fiscal year ended June 30, 2022:
DIRECTOR COMPENSATION
| Fees Earned or | All Other | |||||||||||||||
| Name | Paid in Cash* | Stock Awards | Compensation | Total | ||||||||||||
| John C. Love | $ | 46,000 | (1) | - | - | $ | 46,000 | |||||||||
| William J. Nance | $ | 48,000 | (2) | - | - | $ | 48,000 | |||||||||
| Jerold R. Babin | $ | 44,000 | (3) | - | - | $ | 44,000 | |||||||||
| Yvonne L. Murphy | $ | 34,000 | - | - | $ | 34,000 | ||||||||||
| John V. Winfield (4) | - | - | - | |||||||||||||
| * | Amounts shown include board retainer fees, committee fees and meeting fees. |
| (1) | Mr. Love also serves as director of the Company’s subsidiary, Portsmouth. Amounts shown include $8,000 in regular board and audit committee fees paid by Portsmouth. |
| (2) | Mr. Nance also serves as a director of Portsmouth. Amounts shown include $8,000 in regular board and audit committee fees paid by Portsmouth. |
| (3) | Mr. Babin also serves as a director of Portsmouth. Amounts shown include $6,000 in regular board fees paid by Portsmouth. |
| (4) | As Chief Executive Officer, the Company’s Chairman, John V. Winfield, was not paid any board, committee or meetings fees. Mr. Winfield received $6,000 in regular board fees from Portsmouth, which is reported on the Summary Compensation Table. |
| 73 |
Change in Control or Other Arrangements
Except for the foregoing, there are no other arrangements for compensation of Directors and there are no employment contracts between the Company and its Directors or any change in control arrangements.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners.
The following table sets forth, as of September 28, 2022, certain information with respect to the beneficial ownership of Common Stock of the Company owned by those persons or groups known by the Company to own more than five percent of the outstanding shares of Common Stock.
| Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percent of Class (2) | ||||||
| John V. Winfield | 1,686,374 | (3) | 68.0 | % | ||||
| 1516 S. Bundy Drive, Suite 200 Los Angeles, California 90025 | ||||||||
| (1) | Unless otherwise indicated and subject to applicable community property laws, each person has sole voting and investment power with respect to the shares beneficially owned. |
| (2) | Percentages are calculated on the basis of 2,227,541 shares of Common Stock outstanding as of September 28, 2022, plus any securities that person has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. |
| (3) | Includes 233,195 shares that Mr. Winfield has a right to acquire pursuant to vested stock options. |
Security Ownership of Management.
The following table sets forth, as of September 28, 2022, certain information with respect to the beneficial ownership of Common Stock of the Company owned by (i) each Director and each of the named Executive Officers, and (ii) all Directors and Executive Officers as a group.
| Name of Beneficial Owner | Amount and Nature of Beneficial Ownership (1) | Percent of Class (2) | ||||||
| John V. Winfield | 1,686,374 | (3) | 68 .0 | % | ||||
| William J. Nance | 47,946 | 1.9 | % | |||||
| John C. Love | 17,561 | * | ||||||
| David C. Gonzalez | 44,769 | (4) | 1.8 | % | ||||
| Yvonne L. Murphy | 2,282 | * | ||||||
| All Directors and Executive Officers as a Group (5 persons) | 1,798,932 | 72.6 | % | |||||
| * | Ownership does not exceed 1%. |
| 74 |
| (1) | Unless otherwise indicated and subject to applicable community property laws, each person has sole voting and investment power with respect to the shares beneficially owned. |
| (2) | Percentages are calculated on the basis of 2,227,541 shares of Common Stock outstanding at September 28, 2022, plus any securities that person has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. |
| (3) | Includes 233,195 shares that Mr. Winfield has a right to acquire pursuant to vested stock options. |
| (4) | Includes 18,000 shares that Mr. Gonzalez has a right to acquire pursuant to vested stock options. |
Changes in Control.
There are no arrangements that may result in a change in control of the Company.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following table sets forth information as of June 30, 2022 with respect to compensation plans (including individual compensation arrangements) under which equity securities of the Company are authorized for issuance, aggregated as follows:
| Plan category | Number
of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted average exercise price of outstanding options warrants and rights |
Remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||
| (a) | (b) | (c) | ||||||||
| Equity compensation plans approved by security holders | 251,195 | $ | 15.95 | None | ||||||
| Equity compensation plans not approved by security holders | None | N/A | None | |||||||
| Total | 251,195 | $ | 15.95 | None | ||||||
(a) There were 251,195 stock options outstanding as of June 30, 2022.
(b) Reflects the weighted average exercise price of all outstanding options.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
On June 30, 1998, the Company’s Chairman and President entered into a voting trust agreement with the Company giving the Company the power to vote his 4.0% interest in the outstanding shares of the Santa Fe common stock. The voting trust agreement was terminated in March 2021 upon the liquidation of Santa Fe liquidation. Mr. Winfield received 2.5% of Portsmouth stock in exchange for his 4.0% interest in Santa Fe. Director William Nance is a director and Chairman of the Audit Committee of Comstock Mining, Inc., since 2005.
| 75 |
Two general partners provided services to the Partnership through December 17, 2013. On December 18, 2013, the Partnership redeemed Evon’s partnership interest and Portsmouth Square became the sole general partner. The Partnership’s obligation to pay Evon, Justice’s former general partner, terminated as of December 18, 2013. Under the terms of the Justice Partnership Agreement, its general partner, Portsmouth, received annual compensation of one percent of Hotel Revenue up to the dissolution of the Partnership in December 2021. During each of the years ended June 30, 2022 and 2021, total compensation earned by Portsmouth under the new and previous agreements were $130,000 and $146,000, respectively. Amounts earned by Portsmouth are eliminated in consolidation. Effective with the dissolution of the Partnership, the compensation to Portsmouth from the hotel was terminated.
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 Portsmouth, and oversees the investment activity of Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice and served in that position until the dissolution of Justice in December 2021. Depending on certain market conditions and various risk factors, the Chief Executive Officer and Portsmouth 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 Portsmouth, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.
Director Independence
InterGroup’s common stock is listed on the NASDAQ Capital Market tier of the NASDAQ Stock Market LLC. InterGroup is a Smaller Reporting Company under the rules and regulations of the SEC. The Board of Directors of InterGroup currently consists of five members. With the exception of the Company’s President and CEO, John V. Winfield, all of InterGroup’s Board of Directors consists of “independent” directors as independence is defined by the applicable rules of the SEC and NASDAQ. There are no members of the Company’s compensation, nominating or audit committees that do not meet those independence standards.
Item 14. Principal Accounting Fees and Services
On
January 31, 2022, the Audit Committee retained WithumSmith+Brown, PC, PCAOB ID: 100 (“Withum”) as the Company’s
new independent registered public accounting firm upon the resignation of Moss Adams LLP, Irvine CA, PCAOB ID:
| Fiscal Year | ||||||||
| 2022 | 2021 | |||||||
| Audit fees – Withum | $ | 52,000 | $ | - | ||||
| Tax fees – Withum | 31,000 | - | ||||||
| Audit fees – Moss Adams | 207,000 | 247,000 | ||||||
| Tax fees – Moss Adams | 95,000 | 60,000 | ||||||
| TOTAL: | $ | 385,000 | $ | 307,000 | ||||
Audit Committee Pre-Approval Policies
The Audit Committee shall pre-approve all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by its independent registered public accounting firm, subject to any de minimis exceptions that may be set for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act which are approved by the Committee prior to the completion of the audit. The Committee may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Committee at its next scheduled meeting. All of the services described herein were approved by the Audit Committee pursuant to its pre-approval policies.
| 76 |
None of the hours expended on the independent registered public accounting firms’ engagement to audit the Company’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the independent registered public accounting firm’s full-time permanent employees.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The following financial statements of the Company are included in Part II, Item 8 of this Report at pages 32 through 64:
(a)(2) Financial Statement Schedules
All other schedules for which provision is made in Regulation S-X have been omitted because they are not required or are not applicable or the required information is shown in the consolidated financial statements or notes to the consolidated financial statements.
(a)(3) Exhibits
Set forth below is an index of applicable exhibits filed with this report according to exhibit table number.
| Exhibit Number | Description | |
| 3.(i) | Articles of Incorporation: | |
| 3.1 | Certificate of Incorporation, dated September 11, 1985, incorporated by reference to Exhibit 3.1 of the Company’s Registration Statement on Form S-4, filed on September 6, 1985 (Registration No. 33-00126) and Amendment 1 to that Registration Statement filed on October 23, 1985. | |
| 3.2 | Restated Certificate of Incorporation, dated March 9, 1998, incorporated by reference to Exhibit 3 of the Company’s Amended Quarterly Report on Form 10-QSB/A for the period ended March 31, 1998, as filed on May 19, 1998. | |
| 3.3 | Certificate of Amendment to Certificate of Incorporation, dated October 2, 1998, incorporated by reference to Exhibit 3 of the Company’s Quarterly report on Form 10-QSB for the period ended September 30, 1998, as filed on November 13, 1998. |
| 77 |
| 78 |
| * | All Exhibits marked by one asterisk are incorporated herein by reference to the Trust’s Registration Statement on Form S-4 as filed with the Securities and Exchange Commission on September 6, 1985, Amendment No. 1 to Form S-4 as filed with the Securities and Exchange Commission on October 23, 1985, Exhibit 14 to Form 8 Amendment No. 1 to Form 8 filed with the Securities Exchange Commission November 1987 and Form 8 Amendment No. 1 Item 4 filed with the Securities Exchange Commission October 1988. |
| 79 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| THE INTERGROUP CORPORATION | ||||
| (Registrant) | ||||
| Date: | September 28, 2022 | by | /s/ John V. Winfield | |
| John V. Winfield, President, | ||||
| Chairman of the Board and | ||||
| Chief Executive Officer | ||||
| Date: | September 28, 2022 | by | /s/ David C. Gonzalez | |
| David C. Gonzalez, Vice President Real Estate and Interim Principal Financial Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signatures | Title and Position | Date | ||
| /s/ John V Winfield | President, Chief Executive Officer and | September 28, 2022 | ||
| John V. Winfield | Chairman of the Board (Principal Executive Officer) | |||
| /s/ David C. Gonzalez | Vice President Real Estate (Interim Principal Financial Officer) | September 28, 2022 | ||
| David C. Gonzalez | ||||
| /s/ Jerold R. Babin | Director | September 28, 2022 | ||
| Jerold R. Babin | ||||
| /s/ John C. Love | Director | September 28, 2022 | ||
| John C. Love | ||||
| /s/ Yvonne L. Murphy | Director | September 28, 2022 | ||
| Yvonne L. Murphy | ||||
| /s/ William J. Nance | Director | September 28, 2022 | ||
| William J. Nance |
| 80 |