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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2019
or
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to_________
Commission File Number 1-10324
THE INTERGROUP CORPORATION
(Exact name of registrant as specified in its charter)
| DELAWARE | 13-3293645 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| Incorporation or organization) | Identification No.) |
12121 Wilshire Boulevard, Suite 610, Los Angeles, California 90025
(Address of principal executive offices) (Zip Code)
(310) 889-2500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer [ ] | Accelerated filer [ ] | |
| Non-accelerated filer [ ] | Smaller reporting company [X] | |
| Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
[ ] Yes [X] No
Securities registered pursuant to section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common stock | INTG | NASDAQ CAPITAL MARKET |
The number of shares outstanding of registrant’s Common Stock, as of January 24, 2020 was 2,299,422.
TABLE OF CONTENTS
| - 2 - |
FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| As of | December 31, 2019 | June 30, 2019 | ||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 39,540,000 | $ | 39,836,000 | ||||
| Investment in real estate, net | 51,064,000 | 51,773,000 | ||||||
| Investment in marketable securities | 8,148,000 | 9,696,000 | ||||||
| Other investments, net | 564,000 | 612,000 | ||||||
| Cash and cash equivalents | 8,456,000 | 11,837,000 | ||||||
| Restricted cash | 14,884,000 | 13,295,000 | ||||||
| Other assets, net | 2,464,000 | 2,362,000 | ||||||
| Deferred tax asset | 1,097,000 | 1,468,000 | ||||||
| Total assets | $ | 126,217,000 | $ | 130,879,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities - Justice | $ | 8,647,000 | $ | 11,298,000 | ||||
| Accounts payable and other liabilities | 4,054,000 | 3,766,000 | ||||||
| Due to securities broker | 2,355,000 | 1,629,000 | ||||||
| Obligations for securities sold | 16,000 | 1,225,000 | ||||||
| Related party and other notes payable | 4,950,000 | 5,261,000 | ||||||
| Finance leases | 1,282,000 | 1,486,000 | ||||||
| Line of credit payable | 2,985,000 | 2,985,000 | ||||||
| Mortgage notes payable - Hotel, net | 111,947,000 | 113,087,000 | ||||||
| Mortgage notes payable - real estate, net | 57,812,000 | 58,571,000 | ||||||
| Total liabilities | 194,048,000 | 199,308,000 | ||||||
| Shareholders’ deficit: | ||||||||
| Preferred stock, $.01 par value, 100,000 shares authorized; none issued | - | - | ||||||
| Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 and 3,404,982 issued; 2,299,422 and 2,309,962 outstanding, respectively | 33,000 | 33,000 | ||||||
| Additional paid-in capital | 10,166,000 | 10,342,000 | ||||||
| Accumulated deficit | (39,176,000 | ) | (39,760,000 | ) | ||||
| Treasury stock, at cost, 1,105,560 and 1,095,020 shares, respectively | (14,693,000 | ) | (14,347,000 | ) | ||||
| Total InterGroup shareholders’ deficit | (43,670,000 | ) | (43,732,000 | ) | ||||
| Noncontrolling interest | (24,161,000 | ) | (24,697,000 | ) | ||||
| Total shareholders’ deficit | (67,831,000 | ) | (68,429,000 | ) | ||||
| Total liabilities and shareholders’ deficit | $ | 126,217,000 | $ | 130,879,000 | ||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| - 3 - |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the three months ended December 31, | 2019 | 2018 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 14,901,000 | $ | 13,997,000 | ||||
| Real estate | 3,839,000 | 3,752,000 | ||||||
| Total revenues | 18,740,000 | 17,749,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (11,730,000 | ) | (11,236,000 | ) | ||||
| Real estate operating expenses | (2,089,000 | ) | (1,866,000 | ) | ||||
| Depreciation and amortization expenses | (1,232,000 | ) | (1,249,000 | ) | ||||
| General and administrative expenses | (581,000 | ) | (479,000 | ) | ||||
| Total costs and operating expenses | (15,632,000 | ) | (14,830,000 | ) | ||||
| Income from operations | 3,108,000 | 2,919,000 | ||||||
| Other income (expense): | ||||||||
| Interest expense - mortgages | (2,330,000 | ) | (2,405,000 | ) | ||||
| Net loss on marketable securities | (53,000 | ) | (1,945,000 | ) | ||||
| Net loss on marketable securities - Comstock | (66,000 | ) | (26,000 | ) | ||||
| Dividend and interest income | 111,000 | 88,000 | ||||||
| Trading and margin interest expense | (241,000 | ) | (193,000 | ) | ||||
| Total other expense, net | (2,579,000 | ) | (4,481,000 | ) | ||||
| Income (loss) before income taxes | 529,000 | (1,562,000 | ) | |||||
| Income tax (expense) benefit | (149,000 | ) | 440,000 | |||||
| Net income (loss) | 380,000 | (1,122,000 | ) | |||||
| Less: Net (income) loss attributable to the noncontrolling interest | (132,000 | ) | 95,000 | |||||
| Net income (loss) attributable to InterGroup Corporation | $ | 248,000 | $ | (1,027,000 | ) | |||
| Net income (loss) per share | ||||||||
| Basic | $ | 0.17 | $ | (0.48 | ) | |||
| Diluted | $ | 0.14 | N/A | |||||
| Net income (loss) per share attributable to InterGroup Corporation | ||||||||
| Basic | $ | 0.11 | $ | (0.44 | ) | |||
| Diluted | $ | 0.09 | N/A | |||||
| Weighted average number of basic common shares outstanding | 2,302,748 | 2,327,007 | ||||||
| Weighted average number of diluted common shares outstanding | 2,633,143 | N/A | ||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| - 4 - |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the six months ended December 31, | 2019 | 2018 | ||||||
| Revenues: | ||||||||
| Hotel | $ | 30,330,000 | $ | 29,807,000 | ||||
| Real estate | 7,556,000 | 7,431,000 | ||||||
| Total revenues | 37,886,000 | 37,238,000 | ||||||
| Costs and operating expenses: | ||||||||
| Hotel operating expenses | (23,078,000 | ) | (22,046,000 | ) | ||||
| Real estate operating expenses | (4,039,000 | ) | (3,878,000 | ) | ||||
| Depreciation and amortization expenses | (2,445,000 | ) | (2,492,000 | ) | ||||
| General and administrative expenses | (1,341,000 | ) | (1,122,000 | ) | ||||
| Total costs and operating expenses | (30,903,000 | ) | (29,538,000 | ) | ||||
| Income from operations | 6,983,000 | 7,700,000 | ||||||
| Other income (expense): | ||||||||
| Interest expense - mortgages | (4,727,000 | ) | (4,970,000 | ) | ||||
| Net loss on marketable securities | (198,000 | ) | (1,680,000 | ) | ||||
| Net loss on marketable securities - Comstock | (370,000 | ) | (462,000 | ) | ||||
| Dividend and interest income | 241,000 | 185,000 | ||||||
| Trading and margin interest expense | (534,000 | ) | (497,000 | ) | ||||
| Total other expense, net | (5,588,000 | ) | (7,424,000 | ) | ||||
| Income before income taxes | 1,395,000 | 276,000 | ||||||
| Income tax expense | (371,000 | ) | (270,000 | ) | ||||
| Net income | 1,024,000 | 6,000 | ||||||
| Less: Net income attributable to the noncontrolling interest | (440,000 | ) | (403,000 | ) | ||||
| Net income (loss) attributable to InterGroup Corporation | $ | 584,000 | $ | (397,000 | ) | |||
| Net income per share | ||||||||
| Basic | $ | 0.44 | $ | 0.003 | ||||
| Diluted | $ | 0.39 | $ | 0.002 | ||||
| Net income (loss) per share attributable to InterGroup Corporation | ||||||||
| Basic | $ | 0.25 | $ | (0.17 | ) | |||
| Diluted | $ | 0.22 | N/A | |||||
| Weighted average number of basic common shares outstanding | 2,306,070 | 2,330,213 | ||||||
| Weighted average number of diluted common shares outstanding | 2,636,465 | 2,657,008 | ||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| - 5 - |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
(Unaudited)
| Additional | InterGroup | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | Shareholder’ | Noncontrolling | Shareholder’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2019 | 3,404,982 | $ | 33,000 | $ | 10,342,000 | $ | (39,760,000 | ) | $ | (14,347,000 | ) | $ | (43,732,000 | ) | $ | (24,697,000 | ) | $ | (68,429,000 | ) | ||||||||||||
| Net Income | - | - | - | 336,000 | - | 336,000 | 308,000 | 644,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 8,000 | - | - | 8,000 | - | 8,000 | ||||||||||||||||||||||||
| Investment in Santa Fe | - | - | (147,000 | ) | - | - | (147,000 | ) | 74,000 | (73,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (156,000 | ) | (156,000 | ) | - | (156,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2019 | 3,404,982 | 33,000 | 10,203,000 | (39,424,000 | ) | (14,503,000 | ) | (43,691,000 | ) | (24,315,000 | ) | (68,006,000 | ) | |||||||||||||||||||
| Net income | - | - | - | 248 ,000 | - | 248,000 | 132,000 | 380,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 9,000 | - | - | 9,000 | - | 9,000 | ||||||||||||||||||||||||
| Investment in Santa Fe | - | - | (46,000 | ) | - | - | (46,000 | ) | 22,000 | (24,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (190,000 | ) | (190,000 | ) | - | (190,000 | ) | |||||||||||||||||||||
| Balance at December 31, 2019 | 3,404,982 | $ | 33,000 | $ | 10,166,000 | $ | (39,176,000 | ) | $ | (14,693,000 | ) | $ | (43,670,000 | ) | $ | (24,161,000 | ) | $ | (67,831,000 | ) | ||||||||||||
| Additional | InterGroup | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Treasury | Shareholder’ | Noncontrolling | Shareholder’ | ||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Stock | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance at July 1, 2018 | 3,395,616 | $ | 33,000 | $ | 10,522,000 | $ | (41,217,000 | ) | $ | (13,268,000 | ) | $ | (43,930,000 | ) | $ | (26,037,000 | ) | $ | (69,967,000 | ) | ||||||||||||
| Net Income | - | - | - | 630,000 | - | 630,000 | 498,000 | 1,128,000 | ||||||||||||||||||||||||
| Stock options expense | - | - | 30,000 | - | - | 30,000 | - | 30,000 | ||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (198,000 | ) | (198,000 | ) | - | (198,000 | ) | |||||||||||||||||||||
| Balance at September 30, 2018 | 3,395,616 | 33,000 | 10,552,000 | (40,587,000 | ) | (13,466,000 | ) | (43,468,000 | ) | (25,539,000 | ) | (69,007,000 | ) | |||||||||||||||||||
| Net loss | - | - | - | (1,027,000 | ) | - | (1,027,000 | ) | (95,000 | ) | (1,122,000 | ) | ||||||||||||||||||||
| Issuance of stock | 9,366 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
| Stock options expense | - | - | 29,000 | - | - | 29,000 | - | 29,000 | ||||||||||||||||||||||||
| Investment in Santa Fe | - | - | (31,000 | ) | - | - | (31,000 | ) | 16,000 | (15,000 | ) | |||||||||||||||||||||
| Purchase of treasury stock | - | - | - | - | (266,000 | ) | (266,000 | ) | - | (266,000 | ) | |||||||||||||||||||||
| Balance at December 31, 2018 | 3,404,982 | $ | 33,000 | $ | 10,550,000 | $ | (41,614,000 | ) | $ | (13,732,000 | ) | $ | (44,763,000 | ) | $ | (25,618,000 | ) | $ | (70,381,000 | ) | ||||||||||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| - 6 - |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the six months ended December 31, | 2019 | 2018 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 1,024,000 | $ | 6,000 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 2,417,000 | 2,461,000 | ||||||
| Deferred taxes | 371,000 | 270,000 | ||||||
| Net unrealized loss on marketable securities | 491,000 | 2,664,000 | ||||||
| Stock compensation expense | 17,000 | 59,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Investment in marketable securities | 1,057,000 | 3,591,000 | ||||||
| Other assets | (102,000 | ) | 449,000 | |||||
| Accounts payable and other liabilities - Justice | (2,651,000 | ) | (1,181,000 | ) | ||||
| Accounts payable and other liabilities | 288,000 | (84,000 | ) | |||||
| Due to securities broker | 726,000 | (1,475,000 | ) | |||||
| Obligations for securities sold | (1,209,000 | ) | (1,935,000 | ) | ||||
| Net cash provided by operating activities | 2,429,000 | 4,825,000 | ||||||
| Cash flows from investing activities: | ||||||||
| Payments for hotel investments | (909,000 | ) | (583,000 | ) | ||||
| Payments for real estate investments | (531,000 | ) | (399,000 | ) | ||||
| Payments for investment in Santa Fe | (97,000 | ) | (15,000 | ) | ||||
| Proceeds from other investments | 48,000 | 80,000 | ||||||
| Net cash used in investing activities | (1,489,000 | ) | (917,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net payments of mortgage and other notes payable | (2,386,000 | ) | (4,411,000 | ) | ||||
| Proceeds from line of credit | - | 2,985,000 | ||||||
| Purchase of treasury stock | (346,000 | ) | (464,000 | ) | ||||
| Net cash used in financing activities | (2,732,000 | ) | (1,890,000 | ) | ||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (1,792,000 | ) | 2,018,000 | |||||
| Cash, cash equivalents and restricted cash at the beginning of the period | 25,132,000 | 17,511,000 | ||||||
| Cash, cash equivalents and restricted cash at the end of the period | $ | 23,340,000 | $ | 19,529,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 4,799,000 | $ | 5,081,000 | ||||
| Taxes paid | $ | 39,000 | $ | 265,000 | ||||
The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
| - 7 - |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have been prepared by The InterGroup Corporation (“InterGroup” or the “Company”), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial statements of InterGroup and the notes therein included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. The December 31, 2019 Condensed Consolidated Balance Sheet was derived from the Consolidated Balance Sheet as included in the Company’s Form 10-K for the year ended June 30, 2019.
The results of operations for the six months ended December 31, 2019 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2020.
Basic and diluted income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted income per share is similar to the computation of basic earnings per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. The Company’s only potentially dilutive common shares are stock options.
As of December 31, 2019, the Company had the power to vote 86.3% of the voting shares of Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF). This percentage includes the power to vote an approximately 4% interest in the common stock in Santa Fe owned by the Company’s Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998.
Santa Fe’s primary business is conducted through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a public company (OTCBB: PRSI). Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership; a California limited partnership (“Justice” or the “Partnership”). InterGroup also directly owns approximately 13.4% of the common stock of Portsmouth.
Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”) owns and operates a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Mezzanine is a wholly-owned subsidiary of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton) through January 31, 2030.
Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.
| - 8 - |
In addition to the operations of the Hotel, the Company also generates income from the ownership, management and, when appropriate, sale of real estate. Properties include sixteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the United States, but are concentrated in Dallas, Texas and Southern California. The Company also has an investment in unimproved real property. As of December 31, 2019, all of the Company’s residential and commercial rental properties are managed in-house.
Due to Securities Broker
Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.
Obligations for Securities Sold
Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the condensed consolidated statements of operations.
Income Tax
The Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the six months ended December 31, 2019 and 2018 represent the income tax effect on the Company’s pretax income which includes its share in the net income of the Hotel.
Financial Condition and Liquidity
The Company’s cash flows are primarily generated from the ownership and management of real estate.
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024. Outstanding principal balance on the loan was $92,914,000 and $93,746,000 as of December 31, 2019 and June 30, 2019, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. On July 31, 2019, Mezzanine refinanced the mezzanine loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan which had a 9.75% per annum interest rate was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.
Effective as of May 11, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain a certain net worth and liquidity. As of December 31, 2019, InterGroup is in compliance with both requirements.
In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.
| - 9 - |
On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off a mortgage note payable on a single-family house located in Los Angeles, California. On September 28, 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. Net proceeds of $995,000 received as a result of the refinance was used to pay down the RLOC.
The Hotel has continued to generate positive operating income. While the debt service requirements related to the loans may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.
The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company’s marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.
Management believes that its cash, marketable securities, and the cash flows generated from its real estate assets, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.
The following table provides a summary as of December 31, 2019, the Company’s material financial obligations which also including interest payments.
| 6 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 170,968,000 | $ | 1,433,000 | $ | 12,483,000 | $ | 3,095,000 | $ | 37,812,000 | $ | 107,655,000 | $ | 8,490,000 | ||||||||||||||
| Other notes payable | 9,217,000 | 585,000 | 3,991,000 | 1,022,000 | 744,000 | 567,000 | 2,308,000 | |||||||||||||||||||||
| Interest | 33,535,000 | 4,460,000 | 8,598,000 | 8,148,000 | 7,014,000 | 3,401,000 | 1,914,000 | |||||||||||||||||||||
| Total | $ | 213,720,000 | $ | 6,478,000 | $ | 25,072,000 | $ | 12,265,000 | $ | 45,570,000 | $ | 111,623,000 | $ | 12,712,000 | ||||||||||||||
Recently Issued and Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842) . ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements . ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. Effective July 1, 2019, we adopted ASU 2016-02 using the modified retrospective approach provided by ASU 2018-11. We elected certain practical expedients permitted under the transition guidance, including the election to carryforward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets. In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value of the fixed payments without performing an allocation of lease and non-lease components. We did not record any operating lease right-of-use (“ROU”) assets and operating lease liabilities upon adoption of the new standard as the aggregate value of the ROU assets and operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2019. The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 3 and Note 10 for balances of finance lease ROU assets and liabilities, respectively.
On June 16, 2016, the FASB issued ASU 2016-13, “ Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments .” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2023. The Company is currently reviewing the effect of ASU No. 2016-13.
| - 10 - |
NOTE 2 – REVENUE
Our revenue from real estate is primarily rental income from residential and commercial property leases which is recorded when due from residents and is recognized monthly as earned. The following table present our Hotel revenue disaggregated by revenue streams.
| For the three months ended December 31, | 2019 | 2018 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 12,497,000 | $ | 11,565,000 | ||||
| Food and beverage | 1,425,000 | 1,565,000 | ||||||
| Garage | 776,000 | 734,000 | ||||||
| Other operating departments | 203,000 | 133,000 | ||||||
| Total hotel revenue | $ | 14,901,000 | $ | 13,997,000 | ||||
| For the six months ended December 31, | 2019 | 2018 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 25,811,000 | $ | 25,087,000 | ||||
| Food and beverage | 2,647,000 | 3,014,000 | ||||||
| Garage | 1,512,000 | 1,508,000 | ||||||
| Other operating departments | 360,000 | 198,000 | ||||||
| Total hotel revenue | $ | 30,330,000 | $ | 29,807,000 | ||||
Performance obligations
We identified the following performance obligations, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:
| ● | Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs. | |
| ● | Noncancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation. | |
| ● | Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest. | |
| ● | Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above. |
Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.
We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.
| - 11 - |
Contract assets and liabilities
We do not have any material contract assets as of December 31, 2019 and June 30, 2019 other than trade and other receivables, net on our condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.
We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our condensed consolidated balance sheets. Contract liabilities decreased to $1,027,000 as of December 31, 2019, from $1,215,000 as of June 30, 2019. The decrease for the six months ended December 31, 2019 was primarily driven by $188,000 revenue recognized that was included in the advanced deposits balance as of June 30, 2019.
Contract costs
We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers and lease agreements do not extend beyond one year.
NOTE 3 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
| Accumulated | Net Book | |||||||||||
| December 31, 2019 | Cost | Depreciation | Value | |||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||
| Finance lease ROU assets | 1,746,000 | (137,000 | ) | 1,609,000 | ||||||||
| Furniture and equipment | 30,268,000 | (27,206,000 | ) | 3,062,000 | ||||||||
| Building and improvements | 63,879,000 | (31,748,000 | ) | 32,131,000 | ||||||||
| Investment in Hotel, net | $ | 98,631,000 | $ | (59,091,000 | ) | $ | 39,540,000 | |||||
| Accumulated | Net Book | |||||||||||
| June 30, 2019 | Cost | Depreciation | Value | |||||||||
| Land | $ | 2,738,000 | $ | - | $ | 2,738,000 | ||||||
| Finance lease ROU assets | 521,000 | (35,000 | ) | 486,000 | ||||||||
| Furniture and equipment | 30,585,000 | (26,842,000 | ) | 3,743,000 | ||||||||
| Building and improvements | 63,879,000 | (31,010,000 | ) | 32,869,000 | ||||||||
| Investment in Hotel, net | $ | 97,723,000 | $ | (57,887,000 | ) | $ | 39,836,000 | |||||
NOTE 4 – INVESTMENT IN REAL ESTATE, NET
The Company’s investment in real estate includes sixteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the United States, but are concentrated in Dallas, Texas and Southern California. The Company also has an investment in unimproved real property. Investment in real estate consisted of the following:
| As of | December 31, 2019 | June 30, 2019 | ||||||
| Land | $ | 23,566,000 | $ | 23,566,000 | ||||
| Buildings, improvements and equipment | 68,899,000 | 68,369,000 | ||||||
| Accumulated depreciation | (42,869,000 | ) | (41,629,000 | ) | ||||
| 49,596,000 | 50,306,000 | |||||||
| Land held for development | 1,468,000 | 1,467,000 | ||||||
| Investment in real estate, net | $ | 51,064,000 | $ | 51,773,000 | ||||
| - 12 - |
NOTE 5 – INVESTMENT IN MARKETABLE SECURITIES
The Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically invested in corporate bonds and income producing securities, which may include interests in real estate-based companies and REITs, where financial benefit could transfer to its shareholders through income and/or capital gain.
At December 31, 2019 and June 30, 2019, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:
| Gross | Gross | Net | Fair | |||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | |||||||||||||||
| As of December 31, 2019 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 10,576,000 | $ | 1,672,000 | $ | (4,100,000 | ) | $ | (2,428,000 | ) | $ | 8,148,000 | ||||||||
| As of June 30, 2019 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 19,204,000 | $ | 1,753,000 | $ | (11,261,000 | ) | $ | (9,508,000 | ) | $ | 9,696,000 | ||||||||
As of December 31, 2019, and June 30, 2019, approximately 4% and 7%, respectively, of the investment in marketable securities balance above is comprised of the common stock of Comstock Mining Inc (“Comstock”). As of December 31, 2019, and June 30, 2019, the Company had $3,845,000 and $11,088,000, respectively, of unrealized losses related to securities held for over one year; of which $3,684,000 and $10,900,000 are related to its investment in Comstock, respectively. For the six months ended December 31, 2019, the decrease in unrealized losses is a result of reclassing $7,586,000 of unrealized gain related to Comstock that was included in the cost basis as of June 30, 2019.
Net gains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of net loss on marketable securities for the three and six months ended December 31, 2019 and 2018, respectively:
| For the three months ended December 31, | 2019 | 2018 | ||||||
| Realized (loss) gain on marketable securities, net | $ | (3,000 | ) | $ | 530,000 | |||
| Unrealized loss on marketable securities, net | (50,000 | ) | (2,475,000 | ) | ||||
| Unrealized loss on marketable securities related to Comstock | (66,000 | ) | (26,000 | ) | ||||
| Net loss on marketable securities | $ | (119,000 | ) | $ | (1,971,000 | ) | ||
| For the six months ended December 31, | 2019 | 2018 | ||||||
| Realized (loss) gain on marketable securities, net | $ | (77,000 | ) | $ | 522,000 | |||
| Unrealized loss on marketable securities, net | (121,000 | ) | (2,202,000 | ) | ||||
| Unrealized loss on marketable securities related to Comstock | (370,000 | ) | (462,000 | ) | ||||
| Net loss on marketable securities | $ | (568,000 | ) | $ | (2,142,000 | ) | ||
| - 13 - |
NOTE 6 – OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the securities investment committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses. Other investments also include non-marketable warrants carried at fair value.
Other investments, net consist of the following:
| Type | December 31, 2019 | June 30, 2019 | ||||||
| Private equity hedge fund, at cost | $ | 376,000 | $ | 376,000 | ||||
| Other preferred stock, at cost | 188,000 | 236,000 | ||||||
| $ | 564,000 | $ | 612,000 | |||||
NOTE 7 - FAIR VALUE MEASUREMENTS
The carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
The assets measured at fair value on a recurring basis are as follows:
| 12/31/2019 | 06/30/2019 | |||||||
| As of | Total - Level 1 | Total - Level 1 | ||||||
| Assets: | ||||||||
| Investment in marketable securities: | ||||||||
| REITs and real estate companies | $ | 3,263,000 | $ | 3,069,000 | ||||
| Energy | 1,278,000 | 950,000 | ||||||
| Insurance | 1,109,000 | - | ||||||
| Corporate bonds | 883,000 | 1,420,000 | ||||||
| Consumer cyclical | 572,000 | 1,448,000 | ||||||
| Basic material | 546,000 | 829,000 | ||||||
| Financial services | 278,000 | 951,000 | ||||||
| Technology | 149,000 | 651,000 | ||||||
| Industrials | 70,000 | 193,000 | ||||||
| Healthcare | - | 185,000 | ||||||
| $ | 8,148,000 | $ | 9,696,000 | |||||
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.
| - 14 - |
Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments in non-marketable securities,” that were initially measured at cost and have been written down to fair value as a result of impairment. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:
| Assets | Level 3 | December 31, 2019 |
Net
loss for the
six months ended December 31, 2019 |
|||||||||
| Other non-marketable investments | $ | 564,000 | $ | 564,000 | $ | - | ||||||
| Assets | Level 3 | June 30, 2019 |
Net
loss for the
six months ended December 31, 2018 |
|||||||||
| Other non-marketable investments | $ | 612,000 | $ | 612,000 | $ | - | ||||||
For the six months ended December 31, 2019 and 2018, we received distribution from other non-marketable investments of $48,000 and $80,000, respectively.
Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments and holds less than 20% ownership in each of the investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
NOTE 8 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows.
| As of | 12/31/2019 | 06/30/2019 | ||||||
| Cash and cash equivalents | $ | 8,456,000 | $ | 11,837,000 | ||||
| Restricted cash | 14,884,000 | 13,295,000 | ||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 23,340,000 | $ | 25,132,000 | ||||
Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves. It also includes key money received from Interstate that is restricted for capital improvements for the Hotel.
NOTE 9 – STOCK BASED COMPENSATION PLANS
The Company follows Accounting Standard Codification (ASC) Topic 718 “Compensation – Stock Compensation”, which addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units.
Please refer to Note 16 – Stock Based Compensation Plans in the Company’s Form 10-K for the year ended June 30, 2019 for more detailed information on the Company’s stock-based compensation plans.
During the three months ended December 31, 2019 and 2018, the Company recorded stock option compensation cost of $9,000 and $29,000, respectively, related to stock options that were previously issued. During the six months ended December 31, 2019 and 2018, the Company recorded stock option compensation cost of $17,000 and $59,000, respectively, related to stock options that were previously issued. As of December 31, 2019, there was a total of $28,000 of unamortized compensation related to stock options which is expected to be recognized over the weighted-average period of 2.17 years.
In December 2018, the Company’s President and Chief Executive Officer, John V. Winfield exercised 26,805 vested Incentive Stock Options by surrendering 17,439 shares of the Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation expense was recorded related to the issuance.
| - 15 - |
Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history. The Company has selected to use the simplified method for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.
The following table summarizes the stock options activity from July 1, 2018 through December 31, 2019:
| Number of | Weighted Average | Weighted Average | Aggregate | |||||||||||||
| Shares | Exercise Price | Remaining Life | Intrinsic Value | |||||||||||||
| Oustanding at July 1, 2018 | 368,000 | $ | 17.21 | 4.17 | $ | 3,505,000 | ||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | (26,805 | ) | 20.52 | |||||||||||||
| Forfeited | - | - | ||||||||||||||
| Exchanged | - | - | ||||||||||||||
| Outstanding at June 30, 2019 | 341,195 | $ | 16.95 | 3.07 years | $ | 4,680,000 | ||||||||||
| Exercisable at June 30, 2019 | 330,395 | $ | 16.62 | 2.92 years | $ | 4,643,000 | ||||||||||
| Vested and Expected to vest at June 30, 2019 | 341,195 | $ | 16.95 | 3.07 years | $ | 4,680,000 | ||||||||||
| Oustanding at July 1, 2019 | 341,195 | $ | 16.95 | 3.07 years | $ | 4,680,000 | ||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | - | - | ||||||||||||||
| Exchanged | - | - | ||||||||||||||
| Outstanding at December 31, 2019 | 341,195 | $ | 16.95 | 2.57 years | $ | 6,993,000 | ||||||||||
| Exercisable at December 31, 2019 | 330,395 | $ | 16.62 | 2.42 years | $ | 6,883,000 | ||||||||||
| Vested and Expected to vest at December 31, 2019 | 341,195 | $ | 16.95 | 2.57 years | $ | 6,993,000 | ||||||||||
NOTE 10 – SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the hotel (“Hotel Operations”), the operation of its multi-family residential properties (“Real Estate Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this information.
Information below represents reported segments for the three and six months ended December 31, 2019 and 2018. Operating income from hotel operations consist of the operation of the hotel and operation of the garage. Operating income for rental properties consists of rental income. Operating loss for investment transactions consist of net investment gains (losses), impairment loss on other investments, net unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax expense for the entire Company.
| - 16 - |
| As of and for the three months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2019 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 14,901,000 | $ | 3,839,000 | $ | - | $ | - | $ | 18,740,000 | ||||||||||
| Segment operating expenses | (11,730,000 | ) | (2,089,000 | ) | - | (581,000 | ) | (14,400,000 | ) | |||||||||||
| Segment income (loss) from operations | 3,171,000 | 1,750,000 | - | (581,000 | ) | 4,340,000 | ||||||||||||||
| Interest expense - mortgage | (1,735,000 | ) | (595,000 | ) | - | - | (2,330,000 | ) | ||||||||||||
| Depreciation and amortization expense | (611,000 | ) | (621,000 | ) | - | - | (1,232,000 | ) | ||||||||||||
| Loss from investments | - | - | (249,000 | ) | - | (249,000 | ) | |||||||||||||
| Income tax expense | - | - | - | (149,000 | ) | (149,000 | ) | |||||||||||||
| Net income (loss) | $ | 825,000 | $ | 534,000 | $ | (249,000 | ) | $ | (730,000 | ) | $ | 380,000 | ||||||||
| Total assets | $ | 59,981,000 | $ | 51,064,000 | $ | 8,712,000 | $ | 6,460,000 | $ | 126,217,000 | ||||||||||
| For the three months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2018 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 13,997,000 | $ | 3,752,000 | $ | - | $ | - | $ | 17,749,000 | ||||||||||
| Segment operating expenses | (11,236,000 | ) | (1,866,000 | ) | - | (479,000 | ) | (13,581,000 | ) | |||||||||||
| Segment income (loss) from operations | 2,761,000 | 1,886,000 | - | (479,000 | ) | 4,168,000 | ||||||||||||||
| Interest expense - mortgage | (1,797,000 | ) | (608,000 | ) | - | - | (2,405,000 | ) | ||||||||||||
| Depreciation and amortization expense | (643,000 | ) | (606,000 | ) | - | - | (1,249,000 | ) | ||||||||||||
| Loss from investments | - | - | (2,076,000 | ) | - | (2,076,000 | ) | |||||||||||||
| Income tax benefit | - | - | - | 440,000 | 440,000 | |||||||||||||||
| Net income (loss) | $ | 321,000 | $ | 672,000 | $ | (2,076,000 | ) | $ | (39,000 | ) | $ | (1,122,000 | ) | |||||||
| As of and for the six months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2019 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 30,330,000 | $ | 7,556,000 | $ | - | $ | - | $ | 37,886,000 | ||||||||||
| Segment operating expenses | (23,078,000 | ) | (4,039,000 | ) | - | (1,341,000 | ) | (28,458,000 | ) | |||||||||||
| Segment income (loss) from operations | 7,252,000 | 3,517,000 | - | (1,341,000 | ) | 9,428,000 | ||||||||||||||
| Interest expense - mortgage | (3,527,000 | ) | (1,200,000 | ) | - | - | (4,727,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,204,000 | ) | (1,241,000 | ) | - | - | (2,445,000 | ) | ||||||||||||
| Loss from investments | - | - | (861,000 | ) | - | (861,000 | ) | |||||||||||||
| Income tax expense | - | - | - | (371,000 | ) | (371,000 | ) | |||||||||||||
| Net income (loss) | $ | 2,521,000 | $ | 1,076,000 | $ | (861,000 | ) | $ | (1,712,000 | ) | $ | 1,024,000 | ||||||||
| Total assets | $ | 59,981,000 | $ | 51,064,000 | $ | 8,712,000 | $ | 6,460,000 | $ | 126,217,000 | ||||||||||
| For the six months | Hotel | Real Estate | Investment | |||||||||||||||||
| ended December 31, 2018 | Operations | Operations | Transactions | Corporate | Total | |||||||||||||||
| Revenues | $ | 29,807,000 | $ | 7,431,000 | $ | - | $ | - | $ | 37,238,000 | ||||||||||
| Segment operating expenses | (22,046,000 | ) | (3,878,000 | ) | - | (1,122,000 | ) | (27,046,000 | ) | |||||||||||
| Segment income (loss) from operations | 7,761,000 | 3,553,000 | - | (1,122,000 | ) | 10,192,000 | ||||||||||||||
| Interest expense - mortgage | (3,611,000 | ) | (1,359,000 | ) | - | - | (4,970,000 | ) | ||||||||||||
| Depreciation and amortization expense | (1,285,000 | ) | (1,207,000 | ) | - | - | (2,492,000 | ) | ||||||||||||
| Loss from investments | - | - | (2,454,000 | ) | - | (2,454,000 | ) | |||||||||||||
| Income tax expense | - | - | - | (270,000 | ) | (270,000 | ) | |||||||||||||
| Net income (loss) | $ | 2,865,000 | $ | 987,000 | $ | (2,454,000 | ) | $ | (1,392,000 | ) | $ | 6,000 | ||||||||
| - 17 - |
NOTE 11 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The following summarizes the balances of related party and other notes payable as of December 31, 2019 and June 30, 2019, respectively.
| As of | 12/31/2019 | 06/30/2019 | ||||||
| Note payable - Hilton | $ | 3,167,000 | $ | 3,325,000 | ||||
| Note payable - Interstate | 1,771,000 | 1,896,000 | ||||||
| Other notes payable | 12,000 | 40,000 | ||||||
| Total related party and other notes payable | $ | 4,950,000 | $ | 5,261,000 | ||||
Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.
On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2 nd ) anniversary of the takeover date. As of December 31, 2019, and June 30, 2019, balance of the key money plus accrued interest is $1,004,000 and $2,049,000, respectively, and is included in restricted cash in the condensed consolidated balance sheets. Unamortized portion of the key money is included in the related party notes payable in the condensed consolidated balance sheets.
As of December 31, 2019, the Company had finance lease obligations outstanding of $1,282,000. These finance leases expire in various years through 2023 at rates ranging from 5.77% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of December 31, 2019 are as follows:
| For the year ending June 30, | ||||
| 2020 | $ | 246,000 | ||
| 2021 | 492,000 | |||
| 2022 | 482,000 | |||
| 2023 | 182,000 | |||
| Total minimum lease payments | 1,402,000 | |||
| Less interest on finance lease | (120,000 | ) | ||
| Present value of future minimum lease payments | $ | 1,282,000 | ||
Future minimum principal payments for all related party and other financing transactions are as follows:
| For the year ending June 30, | ||||
| 2020 | $ | 585,000 | ||
| 2021 | 3,991,000 | |||
| 2022 | 1,022,000 | |||
| 2023 | 744,000 | |||
| 2024 | 567,000 | |||
| Thereafter | 2,308,000 | |||
| $ | 9,217,000 |
| - 18 - |
In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.
Effective May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan, in order to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unable to satisfy independently as of March 31, 2017.
Four of the Portsmouth directors serve as directors of InterGroup. Two of those directors also serve as directors of Santa Fe. The two Santa Fe directors also serve as directors of InterGroup.
As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Portsmouth and Santa Fe and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.
NOTE 12 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE
The following summarizes the balances of accounts payable and other liabilities – Justice as of December 31, 2019 and June 30, 2019.
| As of | 12/31/2019 | 06/30/2019 | ||||||
| Trade payable | $ | 1,953,000 | $ | 1,792,000 | ||||
| Advance deposits | 1,027,000 | 1,215,000 | ||||||
| Property tax payable | 1,046,000 | 1,046,000 | ||||||
| Payroll and related accruals | 1,826,000 | 2,584,000 | ||||||
| Interest payable | - | 412,000 | ||||||
| Withholding and other taxes payable | 882,000 | 1,831,000 | ||||||
| Security deposit | 52,000 | 52,000 | ||||||
| Other payables | 1,861,000 | 2,366,000 | ||||||
| Total accounts payable and other liabilities - Justice | $ | 8,647,000 | $ | 11,298,000 | ||||
NOTE 13 – ACCOUNTS PAYABLE AND OTHER LIABILITIES
The following summarizes the balances of accounts payable and other liabilities as of December 31, 2019 and June 30, 2019.
| As of | 12/31/2019 | 06/30/2019 | ||||||
| Trade payable | $ | 560,000 | $ | 521,000 | ||||
| Advance deposits | 324,000 | 378,000 | ||||||
| Property tax payable | 935,000 | 595,000 | ||||||
| Payroll and related accruals | 49,000 | 47,000 | ||||||
| Interest payable | 223,000 | 221,000 | ||||||
| Withholding and other taxes payable | 1,069,000 | 1,108,000 | ||||||
| Security deposit | 743,000 | 736,000 | ||||||
| Other payables | 151,000 | 160,000 | ||||||
| Total accounts payable and other liabilities | $ | 4,054,000 | $ | 3,766,000 | ||||
NOTE 14 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date these financial statements were available to be issued. Based on our evaluation no material events have occurred that require disclosure.
| - 19 - |
Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “could,” “will”, “would” and similar expressions, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, such as national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry, the impact of terrorism and war on the national and international economies, including tourism and securities markets, energy and fuel costs, natural disasters, general economic conditions and competition in the hotel industry in the San Francisco area, seasonality, labor relations and labor disruptions, actual and threatened pandemics such as swine flu, partnership distributions, the ability to obtain financing at favorable interest rates and terms, securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
As of December 31, 2019, the Company owned approximately 82.3% of the common shares of its subsidiary, Santa Fe and Santa Fe owned approximately 68.8% of the common shares of Portsmouth Square, Inc. InterGroup also directly owns approximately 13.4% of the common shares of Portsmouth. The Company’s principal source of revenue continues to be derived from the general and limited partnership interests of its subsidiary, Portsmouth, in the Justice Investors limited partnership (“Justice” or the “Partnership”) inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. The Company also generates income from its investments in real estate properties and from investment of its cash and securities assets. Justice owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company.
The Hotel is operated by the Partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with Hilton. The Partnership entered into the License Agreement on December 10, 2004. The term of the License Agreement was for an initial period of 15 years commencing on the opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received on July 1, 2015.
| - 20 - |
On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel and related facilities with an effective takeover date of February 3, 2017. The term of HMA is for an initial period of ten years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement.
In addition to the operations of the Hotel, the Company also generates income from the ownership and management of 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. All of the Company’s residential and commercial rental operating 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. 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.
Three Months Ended December 31, 2019 Compared to Three Months Ended December 31, 2018
The Company had net income of $380,000 for the three months ended December 31, 2019 compared to net loss of $1,122,000 for the three months ended December 31, 2018. The change is primarily attributable to the decrease in loss on marketable securities.
Hotel Operations
The Company had net income from Hotel operations of $825,000 for the three months ended December 31, 2019 compared to net income of $321,000 for the three months ended December 31, 2018. The change is primarily attributable to the increase in Hotel revenue, offset by the rise of Hotel operating expenses.
The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 2019 and 2018.
| For the three months ended December 31, | 2019 | 2018 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 12,497,000 | $ | 11,565,000 | ||||
| Food and beverage | 1,425,000 | 1,565,000 | ||||||
| Garage | 776,000 | 734,000 | ||||||
| Other operating departments | 203,000 | 133,000 | ||||||
| Total hotel revenues | 14,901,000 | 13,997,000 | ||||||
| Operating expenses excluding depreciation and amortization | (11,730,000 | ) | (11,236,000 | ) | ||||
| Operating income before interest, depreciation and amortization | 3,171,000 | 2,761,000 | ||||||
| Interest expense - mortgage | (1,735,000 | ) | (1,797,000 | ) | ||||
| Depreciation and amortization expense | (611,000 | ) | (643,000 | ) | ||||
| Net income from Hotel operations | $ | 825,000 | $ | 321,000 | ||||
For the three months ended December 31, 2019, the Hotel had operating income of $3,171,000 before interest expense, depreciation and amortization on total operating revenues of $14,901,000 compared to operating income of $2,761,000 before interest expense, depreciation and amortization on total operating revenues of $13,997,000 for the three months ended December 31, 2018. Hotel room revenue rose by $932,000 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The increase is primarily due to the timing of Dreamforce, one of the largest annual citywide conventions in San Francisco, from September in 2018 to November in 2019. Food and beverage revenue decreased by $140,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Revenue from garage increased by $42,000 as a result of the increase in occupancy and monthly parkers. Other operating departments revenue increased by $70,000 primarily due to increase in group cancellation revenue.
Total operating expenses increased by $494,000 primarily due to annual wage increase per union bargaining agreements.
| - 21 - |
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended December 31, 2019 and 2018.
|
Three Months Ended December 31, |
Average Daily Rate |
Average Occupancy % |
RevPAR |
|||||||||||
| 2019 | $ | 255 | 98 | % | $ | 250 | ||||||||
| 2018 | $ | 239 | 97 | % | $ | 232 | ||||||||
The Hotel’s revenues increased by 6.5% this quarter as compared to the previous comparable quarter. Average daily rate increased by $16, average occupancy increased by 1%, and RevPAR increased by $18 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018.
Real Estate Operations
Net income from real estate operations for the three months ended December 31, 2019, decreased by $138,000 compared to the three months ended December 31, 2018, due to an increase in payroll and repairs and maintenance. All of Company’s properties are managed in-house. 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 $119,000 for the three months ended December 31, 2019 compared to a net loss on marketable securities of $1,971,000 for the three months ended December 31, 2018. For the three months ended December 31, 2019, the Company had a net realized loss of $3,000 and a net unrealized loss of $116,000. For the three months ended December 31, 2018, the Company had a net realized gain of $530,000 and a net unrealized loss of $2,501,000.
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.
The Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expense (benefit) during the three months ended December 31, 2019, and 2018 represents primarily the income tax effect of the pretax income (loss) at InterGroup and the pretax income of Portsmouth, which includes its share in net income of the Hotel.
Six Months Ended December 31, 2019 Compared to Six Months Ended December 31, 2018
The Company had net income of $1,024,000 for the six months ended December 31, 2019 compared to net income of $6,000 for the six months ended December 31, 2018. The increase in net income is primarily attributable to a decrease in loss on marketable securities, the rise in Hotel revenue, offset by the increase in Hotel operating expenses.
Hotel Operations
The Company had net income from Hotel operations of $2,521,000 for the six months ended December 31, 2019 compared to net income of $2,865,000 for the six months ended December 31, 2018. The change is primarily attributable to the rise in Hotel operating expenses, offset by the increase in Hotel revenue.
| - 22 - |
The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 2019 and 2018.
| For the six months ended December 31, | 2019 | 2018 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 25,811,000 | $ | 25,087,000 | ||||
| Food and beverage | 2,647,000 | 3,014,000 | ||||||
| Garage | 1,512,000 | 1,508,000 | ||||||
| Other operating departments | 360,000 | 198,000 | ||||||
| Total hotel revenues | 30,330,000 | 29,807,000 | ||||||
| Operating expenses excluding depreciation and amortization | (23,078,000 | ) | (22,046,000 | ) | ||||
| Operating income before interest, depreciation and amortization | 7,252,000 | 7,761,000 | ||||||
| Interest expense - mortgage | (3,527,000 | ) | (3,611,000 | ) | ||||
| Depreciation and amortization expense | (1,204,000 | ) | (1,285,000 | ) | ||||
| Net income from Hotel operations | $ | 2,521,000 | $ | 2,865,000 | ||||
For the six months ended December 31, 2019, the Hotel had operating income of $7,252,000 before interest expense, depreciation and amortization on total operating revenues of $30,330,000 compared to operating income of $7,761,000 before interest expense, depreciation and amortization on total operating revenues of $29,807,000 for the six months ended December 31, 2018. Hotel room revenue rose by $724,000 for the six months ended December 31, 2019 compared to the six months ended December 31, 2018. The increase is primarily due to replacing guaranteed room revenue at low rates with room revenue at higher market rates driven by citywide conventions. Food and beverage revenue decreased by $367,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Garage revenue remained consistent year over year. Revenue from other operating departments increased by $162,000 primarily due to increase in group cancellation revenue.
Total operating expenses increased by $1,032,000 primarily due to annual wage increase per union bargaining agreements.
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the six months ended December 31, 2019 and 2018.
|
Six months Ended December 31, |
Average Daily Rate |
Average Occupancy % |
RevPAR |
|||||||||||
| 2019 | $ | 263 | 98 | % | $ | 258 | ||||||||
| 2018 | $ | 258 | 97 | % | $ | 250 | ||||||||
The Hotel’s revenues increased by 1.8% for the six months ended December 31, 2019, as compared to the six months ended December 31, 2018. Average daily rate increased by $5, average occupancy increased by 1%, and RevPAR increased by $8 for the six months ended December 31, 2019, compared to the six months ended December 31, 2018.
Real Estate Operations
Net income from real estate operations for the six months ended December 31, 2019 increased by $89,000 compare to the six months ended December 31, 2018 due to reduction in mortgage interest. All of Company’s properties are managed in-house. 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 $568,000 for the six months ended December 31, 2019 compared to a net loss on marketable securities of $2,142,000 for the six months ended December 31, 2018. For the six months ended December 31, 2019, the Company had a net realized loss of $77,000 and a net unrealized loss of $491,000. For the six months ended December 31, 2018, the Company had a net realized gain of $522,000 and a net unrealized loss of $2,664,000.
| - 23 - |
Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company’s results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company’s marketable securities see the Marketable Securities section below.
The Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expense during the six months ended December 31, 2019 and 2018 represents primarily the income tax effect of the pretax income at InterGroup and the pretax income of Portsmouth, which includes its share in net income of the Hotel.
MARKETABLE SECURITIES
The following table shows the composition of the Company’s marketable securities portfolio as of December 31, 2019 and June 30, 2019 by selected industry groups.
| % of Total | ||||||||
| As of December 31, 2019 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REIT’s and real estate ompanies | $ | 3,263,000 | 40.1 | % | ||||
| Energy | 1,278,000 | 15.7 | % | |||||
| Insurance | 1,109,000 | 13.6 | % | |||||
| Corporate bonds | 883,000 | 10.8 | % | |||||
| Consumer cyclical | 572,000 | 7.0 | % | |||||
| Basic material | 546,000 | 6.7 | % | |||||
| Financial services | 278,000 | 3.4 | % | |||||
| Technology | 149,000 | 1.8 | % | |||||
| Industrials | 70,000 | 0.9 | % | |||||
| $ | 8,148,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of June 30, 2019 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| REITs and real estate companies | $ | 3,069,000 | 31.8 | % | ||||
| Consumer cyclical | 1,448,000 | 14.9 | % | |||||
| Corporate bonds | 1,420,000 | 14.6 | % | |||||
| Financial | 951,000 | 9.8 | % | |||||
| Energy | 950,000 | 9.8 | % | |||||
| Basic material | 829,000 | 8.5 | % | |||||
| Technology | 651,000 | 6.7 | % | |||||
| Industrials | 193,000 | 2.0 | % | |||||
| Healthcare | 185,000 | 1.9 | % | |||||
| $ | 9,696,000 | 100.0 | % | |||||
As of December 31, 2019, the Company’s investment portfolio includes approximately 34 equity positions. The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 27% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL), which is included in the REITs and real estate companies’ industry group.
As of June 30, 2019, the Company’s investment portfolio includes approximately 29 equity positions. The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 18% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL), which is included in the REITs and real estate companies’ industry group.
| - 24 - |
The following table shows the net gain or loss on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods:
| For the three months ended December 31, | 2019 | 2018 | ||||||
| Net loss on marketable securities | $ | (119,000 | ) | $ | (1,971,000 | ) | ||
| Dividend and interest income | 111,000 | 88,000 | ||||||
| Margin interest expense | (116,000 | ) | (132,000 | ) | ||||
| Trading and management expenses | (125,000 | ) | (61,000 | ) | ||||
| Net loss from investment transactions | $ | (249,000 | ) | $ | (2,076,000 | ) | ||
| For the six months ended December 31, | 2019 | 2018 | ||||||
| Net loss on marketable securities | $ | (568,000 | ) | $ | (2,142,000 | ) | ||
| Dividend and interest income | 241,000 | 185,000 | ||||||
| Margin interest expense | (252,000 | ) | (288,000 | ) | ||||
| Trading and management expenses | (282,000 | ) | (209,000 | ) | ||||
| Net loss from investment transactions | $ | (861,000 | ) | $ | (2,454,000 | ) | ||
FINANCIAL CONDITION AND LIQUIDITY
The Company’s cash flows are primarily generated from its Hotel and real estate operations. The Company may also receive cash from its investment in marketable securities and other investments.
To fund the redemption of limited partnership interests and to repay the prior mortgage, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December of 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum and matures in January 2024. Outstanding principal balance on the loan was $92,914,000 and $93,746,000 as of December 31, 2019 and June 30, 2019, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by the Portsmouth in favor of the mortgage lender. The mezzanine loan is a secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. 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.
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 June 30, 2020. The balance of this loan was $3,000,000 as of December 31, 2019 and June 30, 2019, and is eliminated in the condensed consolidated balance sheets.
In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC.
| - 25 - |
On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off a mortgage note payable on a single-family house located in Los Angeles, California. On September 28, 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. Net proceeds of $995,000 received as a result of the refinance was used to pay down the RLOC.
Despite an uncertain economy, the Hotel has continued to generate positive operating income. While the debt service requirements related to the loans may create some additional risk for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.
The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company’s marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations.
Management believes that its cash, marketable securities, and the cash flows generated from those assets and from the partnership management fees, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of December 31, 2019, the Company’s material financial obligations which also including interest payments.
| 6 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | ||||||||||||||||||||||
| Mortgage and subordinated notes payable | $ | 170,968,000 | $ | 1,433,000 | $ | 12,483,000 | $ | 3,095,000 | $ | 37,812,000 | $ | 107,655,000 | $ | 8,490,000 | ||||||||||||||
| Other notes payable | 9,217,000 | 585,000 | 3,991,000 | 1,022,000 | 744,000 | 567,000 | 2,308,000 | |||||||||||||||||||||
| Interest | 33,535,000 | 4,460,000 | 8,598,000 | 8,148,000 | 7,014,000 | 3,401,000 | 1,914,000 | |||||||||||||||||||||
| Total | $ | 213,720,000 | $ | 6,478,000 | $ | 25,072,000 | $ | 12,265,000 | $ | 45,570,000 | $ | 111,623,000 | $ | 12,712,000 | ||||||||||||||
IMPACT OF INFLATION
Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Interstate has the power and ability 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 USE OF ESTIMATES
Critical accounting policies are those that are most significant to the presentation 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 condensed 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. There have been no material changes to the Company’s critical accounting policies during the six months ended December 31, 2019 except for the adoption of ASU 2016-02. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for a summary of the critical accounting policies.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.
Item 4. 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) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company’s 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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company’s internal control over financial reporting during the last quarterly period
covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
OTHER INFORMATION
During the period ending December 31, 2019, there were no pending or threatened legal actions.
As a smaller reporting company, we are not required to provide the information required by this Item.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no events that are required to be reported under this Item.
Item 3. DEFAULTS UPON SENIOR SECURITIES
There have been no events that are required to be reported under this Item.
Item 4. MINE SAFETY DISCLOSURES
There have been no events that are required to be reported under this Item.
There have been no events that are required to be reported under this Item.
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| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
| - 28 - |
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: January 24, 2020 | by | /s/ John V. Winfield |
| John V. Winfield | ||
| President, Chairman of the Board and | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: January 24, 2020 | by | /s/ Danfeng Xu |
| Danfeng Xu | ||
| Treasurer and Controller | ||
| (Principal Financial Officer) | ||
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