THE INTERGROUP CORPORATION 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," "might" and similar expressions, are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: 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, securities markets, energy and fuel costs; natural disasters; general economic conditions and competition in the hotel industry in theSan Francisco area; seasonality, labor relations and labor disruptions; actual and threatened pandemics such as swine flu or the outbreak of COVID-19 or similar outbreaks; 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 endedJune 30, 2020 . These risks and uncertainties 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.
NEGATIVE EFFECTS OF CIVIL AUTHORITY ACTIONS ON OUR BUSINESS
OnFebruary 25, 2020 , theCity 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. InMarch 2020 , theWorld 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, onMarch 16, 2020 , the City and County ofSan Francisco , along with a group of five otherBay Area counties and theCity of Berkeley , issued parallel health officer orders imposing shelter in place limitations across theBay Area , requiring everyone to stay safe at home except for certain essential needs. SinceFebruary 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 theBay Area and decline in both leisure and business travel. InDecember 2020 , due to the surge in COVID-19 cases and hospitalizations, the Health Officer of the City and County ofSan Francisco has 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 theCalifornia Department of Public Health onDecember 3, 2020 . EffectiveDecember 17, 2020 , theBay Area Region , includingSan Francisco , is required to comply with the State'sDecember 3, 2020 Regional Stay-at-Home Order. The Order strongly discourages anyone in the County from travelling for leisure, recreation, business or other purposes that can be postponed until after the current surge. With limited exceptions, this Order imposed a mandatory quarantine on anyone traveling, moving, or returning to the County from anywhere outside theBay Area . EffectiveJanuary 20, 2021 , Health Order C19-07r revised and replaced the previous Order; it continues to temporarily prohibit certain businesses and activities from resuming but allows 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. Quarantine and isolation requirements and recommendations upon moving to, traveling to, or returning to the County have not changed from the previous Order. OnMarch 24, 2021 , the City and County ofSan Francisco announced it moved into the orange tier which removed the suggested Shelter in Place for guests travelling toSan Francisco . This was a very positive step for the hotel community. This tier opens up activities in the city including expanded restaurant capacities, museums and attractions. For the hotel it allows for guests to gather in public spaces and for outlets and amenities to open up at limited capacities including fitness centers. It does not change the very stringent cleaning and sanitation requirements set forth by the Health Officer of the City and County ofSan Francisco which proves to be a costly measure to maintain. EffectiveMay 6, 2021 , the City and County ofSan Francisco moved
into the yellow tier guidelines. - 23 - In response to the decrease in demand, we have since furloughed all managers at the Hotel except for members of the executive team and continue to limit hourly staff to a minimum. By the end ofMarch 2020 , we had temporarily closed all of our food and beverage outlets, valet parking, concierge and bell services, fitness center, as well as the executive lounge facility. We continue to implement social distancing standards and cleaning processes designed by Interstate and Hilton to keep employees and guests safe. The full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this report. The pandemic effectively eliminated our ability to generate any profits, due to the drastic decline in both leisure and business travel. As a result, management believes the ongoing length and severity of the economic downturn caused by the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results. We are also assessing the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets. As of the date of this report, the effects of the pandemic continue to affect our economy, business and leisure travel, and our needs to continue to curtail certain revenue generating activities at the Hotel. We expect that the effects will have a material adverse effect on our business until the pandemic ends. As a result of the CARES Act signed into law onMarch 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 theSmall 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. OnApril 9, 2020 , Justice entered into a loan agreement ("SBA Loan - Justice") withCIBC Bank USA under the CARES Act. The Partnership received proceeds of$4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As ofMarch 31, 2021 , Justice had used all proceeds of the SBA Loan - Justice in qualified expenses. The SBA Loan - Justice is scheduled to mature onApril 9, 2022 and has a 1.00% interest rate. OnApril 27, 2020 , InterGroup entered into a loan agreement ("SBA Loan - InterGroup") withCIBC Bank USA under the CARES Act and received loan proceeds in the amount of$453,000 . As ofMarch 31, 2021 , InterGroup had used all of the$453,000 loan proceeds in qualified payroll expenses. The SBA Loan - InterGroup was scheduled to mature onApril 27, 2022 and had a 1.00% interest rate. The SBA Loans are subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. If the SBA approves the forgiveness amount, all payments of principal and interest are deferred until the date the forgiveness amount is remitted by the SBA to CIBC. If the SBA does not forgive any amount of the loan, payments would start within 30 days. All unforgiven portion of the principal and accrued interest will be due at maturity. During the quarter endedDecember 31, 2020 , Justice and InterGroup submitted applications for full loan forgiveness. As ofMarch 31, 2021 , the SBA has not forgiven the SBA Loan - Justice. As ofMarch 31, 2021 , the SBA has forgiven the full$453,000 of the SBA Loan - InterGroup. OnFebruary 3, 2021 , Justice entered into a second loan agreement ("Second SBA Loan") withCIBC Bank USA administered by the SBA. Justice received proceeds of$2,000,000 from the Second SBA Loan. Justice will use proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan is scheduled to mature onFebruary 3, 2026 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. As ofMarch 31, 2021 , unused portion of the Second SBA Loan was$350,000 . RESULTS OF OPERATIONS As ofMarch 31, 2021 , the Company owns approximately 71.3% of the common shares ofPortsmouth Square, Inc. Historically, the Company's principal source of revenue is derived from the investment of its subsidiary, Portsmouth, in theJustice Investors Limited Partnership ("Justice" or the "Partnership") inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. 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. However, the impact of the COVID-19 pandemic is highly uncertain and management expects that the ongoing length and severity of the economic downturn will have a material adverse impact on our business, financial condition, liquidity and financial results. 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 onDecember 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. OnJune 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 onJuly 1, 2015 . OnFebruary 1, 2017 , Justice entered into an HMA with Interstate to manage the Hotel and related facilities with an effective takeover date ofFebruary 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. - 24 - 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 fifteen apartment complexes, one commercial real estate property, and three single-family houses as strategic investments. The properties are located throughoutthe United States , but are concentrated inTexas andSouthern 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
The Company had net income of$1,399,000 for the three months endedMarch 31, 2021 compared to net loss of$3,059,000 for the three months endedMarch 31, 2020 . The change is primarily due to gains from marketable securities in the three months endedMarch 31, 2021 , offset by the decrease in operating income from the Hotel.Hotel Operations
The Company had net loss from Hotel operations of
The following table sets forth a more detailed presentation of Hotel operations
for the three months ended
For the three months endedMarch 31, 2021
2020 Hotel revenues: Hotel rooms$ 2,368,000 $ 9,642,000 Food and beverage 17,000 874,000 Garage 479,000 650,000 Other operating departments 38,000 93,000 Total hotel revenues 2,902,000 11,259,000 Operating expenses excluding depreciation and amortization (3,990,000 ) (10,060,000 ) Operating (loss) income before interest, depreciation and amortization (1,088,000 )
1,199,000
Interest expense - mortgage (1,642,000 ) (1,663,000 ) Depreciation and amortization expense (529,000 ) (597,000 ) Net loss from Hotel operations$ (3,259,000 ) $
(1,061,000 )
For the three months endedMarch 31, 2021 , the Hotel had operating loss of$1,088,000 before interest expense, depreciation and amortization on total operating revenues of$2,902,000 compared to operating income of$1,199,000 before interest expense, depreciation and amortization on total operating revenues of$11,259,000 for the three months endedMarch 31, 2020 . For the three months endedMarch 31, 2021 , room revenues decreased by$7,274,000 , food and beverage revenue decreased by$857,000 , and garage revenue decreased by$171,000 , compared to the three months endedMarch 31, 2020 . The year over year decline in all areas are result of the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak sinceMarch 2020 . Total operating expenses decreased by$6,070,000 due to decrease in salaries and wages, rooms commission, credit card fees, management fees, and franchise fees. - 25 - The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months endedMarch 31, 2021 and 2020. Three Months Average Ended March 31, Average Daily Rate Occupancy % RevPAR 2021 $ 103 47 %$ 48 2020 $ 242 76 %$ 184 The Hotel's revenues decreased by 74% this quarter as compared to the previous comparable quarter. Average daily rate decreased by$139 , average occupancy dropped 29%, and RevPAR decreased by$136 for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . Real Estate Operations
Net income from real estate operations for the three months endedMarch 31, 2021 decreased by$94,000 compared to the three months endedMarch 31, 2020 as a result of decrease in revenue. The decrease in revenue year over year is due to increased vacancy loss and bad debt expense as the pandemic has affected some tenants' ability to pay rent on time. All of the 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 gain on marketable securities of$5,638,000 for the three months endedMarch 31, 2021 compared to a net loss on marketable securities of$2,393,000 for the three months endedMarch 31, 2020 . For the three months endedMarch 31, 2021 , the Company had a net realized gain of$267,000 and a net unrealized gain of$5,371,000 . For the three months endedMarch 31, 2020 , the Company had a net realized loss of$1,113,000 and a net unrealized loss of$1,280,000 . 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 theMarketable Securities section below. The Company and its subsidiaries, Portsmouth andSanta Fe , compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expense during the three months endedMarch 31, 2021 and 2020 represent primarily the income tax effect of the pretax income (loss) at InterGroup,Santa Fe , and Portsmouth, which includes its share in net income (loss) of Justice.
Nine months Ended
The Company had net income of$5,155,000 for the nine months endedMarch 31, 2021 compared to net loss of$2,035,000 for the nine months endedMarch 31, 2020 . The change is primarily attributable to gains from marketable securities and sale of real estates.Hotel Operations
The Company had net loss from Hotel operations of
- 26 -
The following table sets forth a more detailed presentation of Hotel operations
for the nine months ended
For the nine months endedMarch 31, 2021
2020 Hotel revenues: Hotel rooms$ 7,842,000 $ 35,453,000 Food and beverage 130,000 3,521,000 Garage 1,373,000 2,162,000 Other operating departments 91,000 453,000 Total hotel revenues 9,436,000 41,589,000 Operating expenses excluding depreciation and amortization (14,156,000 ) (33,138,000 ) Operating (loss) income before interest, depreciation and amortization (4,720,000 )
8,451,000
Interest expense - mortgage (5,010,000 ) (5,190,000 ) Depreciation and amortization expense (1,690,000 ) (1,801,000 ) Net (loss) income from Hotel operations$ (11,420,000 ) $
1,460,000 For the nine months endedMarch 31, 2021 , the Hotel had operating loss of$4,720,000 before interest expense, depreciation and amortization on total operating revenues of$9,436,000 compared to operating income of$8,451,000 before interest expense, depreciation and amortization on total operating revenues of$41,589,000 for the nine months endedMarch 31, 2020 . For the nine months endedMarch 31, 2021 , room revenues decreased by$27,611,000 , food and beverage revenue decreased by$3,391,000 , and garage revenue decreased by$789,000 , compared to the nine months endedMarch 31, 2020 . The year over year decline in all areas are result of the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak sinceMarch 2020 . Total operating expenses decreased by$18,982,000 due to decrease in salaries and wages, rooms commission, credit card fees, management fees, and franchise fees. The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the nine months endedMarch 31, 2021
and
2020.
Nine Months Average Average
Ended March 31, Daily Rate Occupancy % RevPAR
2021 $ 106 49 % $ 52
2020 $ 256 91 % $ 233
The Hotel's revenues decreased by 77% for the nine months ended March 31, 2021 ,
as compared to the nine months ended March 31, 2020 . Average daily rate
decreased by $150 , average occupancy decreased by 42%, and RevPAR decreased by
$181 for the nine months ended March 31, 2021 , compared to the nine monthsendedMarch 31, 2020 . Real Estate Operations
Net income from real estate operations for the nine months endedMarch 31, 2021 increased by$11,524,000 compared to the nine months endedMarch 31, 2020 . The change year over year is due to the sale of theSanta Fe's 27-unit apartment complex located inSanta Monica, California for$15,650,000 . All of the 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 gain on marketable securities of$8,937,000 for the nine months endedMarch 31, 2021 compared to a net loss on marketable securities of$2,961,000 for the nine months endedMarch 31, 2020 . For the nine months endedMarch 31, 2021 , the Company had a net realized loss of$667,000 and a net unrealized gain of$9,604,000 . For the nine months endedMarch 31, 2020 , the Company had a net realized loss of$1,190,000 and a net unrealized loss of$1,771,000 . Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities see theMarketable Securities section below. - 27 -
The Company and its subsidiaries, Portsmouth andSanta Fe , compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax expense during the nine months endedMarch 31, 2021 and 2020 represent primarily the income tax effect of the pretax income (loss) at InterGroup,Santa Fe , and Portsmouth, which includes its share in net income (loss) of Justice. MARKETABLE SECURITIES The following table shows the composition of the Company's marketable securities portfolio as ofMarch 31, 2021 andJune 30, 2020 by selected industry groups. As of % of Total March 31, 2021 Investment Industry Group Fair Value Securities REITs and real estate companies$ 11,190,000 30.1 % Financial services 7,033,000 19.0 % Energy 5,977,000 16.2 % Industrials 3,294,000 8.9 % Basic material 3,055,000 8.3 % Consumer cyclical 2,350,000 6.4 % Technology 1,397,000 3.8 % Healthcare 1,285,000 3.5 % Other 736,000 2.0 % Communication services 679,000 1.8 %$ 36,996,000 100.0 % As of % of Total June 30, 2020 Investment Industry Group Fair Value Securities REITs and real estate companies$ 2,365,000 38.3 % Basic material 1,209,000 19.6 % Energy 767,000 12.4 % Industrials 484,000 7.8 % Corporate bonds 417,000 6.7 % Consumer cyclical 295,000 4.8 % Financial services 282,000 4.6 % Communication services 157,000 2.5 % Technology 121,000 2.0 % Other 81,000 1.3 %$ 6,178,000 100.0 % As ofMarch 31, 2021 , the Company's investment portfolio is diversified with 136 different equity positions. The Company does not hold any equity security that is more than 10% of the equity value of the portfolio. The largest security position represents 9% of the portfolio and consists of the common stock of Colony Financial Inc. (NYSE: CLNY) which is included in the REITs and real estate companies' industry group. As ofJune 30, 2020 , the Company's investment portfolio is diversified with 59 different equity positions. The Company holds two equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 19% 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. - 28 -
The following table shows the net income (loss) on the Company's marketable securities and the associated margin interest and trading expenses for the respective periods:
For the three months ended March 31, 2021 2020
Net gain (loss) on marketable securities
(30,000 ) (103,000 )
Dividend and interest income 158,000 105,000
Margin interest expense (238,000 ) (114,000 )
Trading and management expenses (124,000 )
(142,000 )
Net income (loss) from investment transactions
For the nine months ended March 31, 2021 2020
Net gain (loss) on marketable securities
(119,000 ) (103,000 )
Dividend and interest income 363,000 346,000
Margin interest expense (519,000 ) (366,000 )
Trading and management expenses (399,000 )
(424,000 )
Net income (loss) from investment transactions
FINANCIAL CONDITION AND LIQUIDITY
The Company had cash and cash equivalents of$8,880,000 and$14,163,000 as ofMarch 31, 2021 andJune 30, 2020 , respectively. The Company had net funds available from its investments in marketable securities of$22,714,000 as ofMarch 31, 2021 after$9,021,000 due to securities broker and$5,261,000 obligations for securities sold. As ofJune 30, 2020 , the Company had net funds available from investments in marketable securities of$4,308,000 after$1,576,000 due to securities broker and$294,000 obligations for securities sold. In addition, the Hotel had$5,785,000 and$10,666,000 of restricted cash held by its senior lenderWells Fargo Bank, N.A. ("Lender") as ofMarch 31, 2021 andJune 30, 2020 , respectively. Of the$10,666,000 restricted cash held as ofJune 30, 2020 ,$2,432,000 was for a possible future property improvement plan ("PIP") requested by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i)January 2030 , which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. OnAugust 19, 2020 , Lender released PIP deposits in the amount of$2,379,000 to the Hotel. The funds were utilized to fund operating expenses, including franchise and management fees and other expenses. OnApril 9, 2020 , Justice entered into a loan agreement ("SBA Loan - Justice") withCIBC Bank USA under the recently enacted CARES Act administered by theU.S. Small Business Administration . The Partnership received proceeds of$4,719,000 from the SBA Loan - Justice. In accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As ofMarch 31, 2021 , Justice had used all proceeds of the SBA Loan - Justice in qualified expenses. The SBA Loan - Justice is scheduled to mature onApril 9, 2022 and has a 1.00% interest rate. OnApril 27, 2020 , InterGroup entered into a loan agreement ("SBA Loan - InterGroup") withCIBC Bank USA under the CARES Act and received loan proceeds in the amount of$453,000 . As ofMarch 31, 2021 , InterGroup had used all of the$453,000 loan proceeds in qualified payroll expenses. The SBA Loan - InterGroup was scheduled to mature onApril 27, 2022 and had a 1.00% interest rate. The SBA Loans are subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. If the SBA approves the forgiveness amount, all payments of principal and interest are deferred until the date the forgiveness amount is remitted by the SBA to CIBC. If the SBA does not forgive any amount of the loan, payments would start within 30 days. All unforgiven portion of the principal and accrued interest will be due at maturity. During the quarter endedDecember 31, 2020 , Justice and InterGroup submitted applications for full loan forgiveness. As ofMarch 31, 2021 , the SBA has not forgiven the SBA Loan - Justice. As ofMarch 31, 2021 , the SBA has forgiven the full$453,000 of the SBA Loan - InterGroup. - 29 -
OnFebruary 3, 2021 , Justice entered into a second loan agreement ("Second SBA Loan") withCIBC Bank USA administered by the SBA. Justice received proceeds of$2,000,000 from the Second SBA Loan. Justice will use proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan is scheduled to mature onFebruary 3, 2026 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. As ofMarch 31, 2021 , unused portion of the Second SBA Loan was$350,000 . In order to increase its liquidity position and to take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex inParsippany, New Jersey onApril 30, 2020 , generating net proceeds of$6,814,000 . InJune 2020 , InterGroup refinanced one of itsCalifornia properties and generated net proceeds of$1,144,000 . During the nine months endedMarch 31, 2021 , InterGroup completed refinancing on three of itsCalifornia properties and generated net proceeds of$5,384,000 . InterGroup is currently evaluating other refinancing opportunities and it could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. InterGroup has an uncollateralized$8,000,000 revolving line of credit fromCIBC Bank USA ("CIBC") and the entire$8,000,000 is available to be drawn down as ofMarch 31, 2021 should additional liquidity be necessary. OnAugust 28, 2020 ,Santa Fe sold its 27-unit apartment complex located inSanta Monica, California for$15,650,000 and realized a gain on the sale of approximately$12,043,000 .Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards.Santa Fe received net proceeds of$12,163,000 after selling costs and repayment of InterGroup's RLOC of$2,985,000 as InterGroup had drawn on its RLOC inJuly 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement betweenSanta Fe and InterGroup,Santa Fe paid InterGroup$662,000 from the sale. As the sole general partner of Justice that controls approximately 97.5% of the voting interest in the Partnership, Portsmouth has the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup to meet any capital calls and its other obligations during the next twelve months and beyond. OnAugust 28, 2020 , theBoard of InterGroup passed resolution to provide funding to Portsmouth if necessary. OnDecember 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 . SinceDecember 2020 , InterGroup has advanced$2,950,000 to Justice per the aforementioned loan modification agreement. The Partnership is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital. 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 and low revenue per available room ("RevPAR") were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan. - 30 -
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of
3 Months Year Year Year Year
Total 2021 2022 2023 2024 2025 Thereafter
Mortgage and subordinated notes payable
7,502,000 119,000 5,200,000 183,000 - - 2,000,000
Related party notes payable 4,228,000 379,000
567,000 567,000 567,000 567,000 1,581,000
Interest 30,600,000 1,816,000 8,778,000 7,981,000 4,761,000 1,243,000 6,021,000
Total $ 223,371,000 $ 3,078,000 $ 17,744,000 $ 37,201,000 $ 113,735,000 $ 5,607,000 $ 46,006,000
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 nine months endedMarch 31, 2021 . Please refer to the Company's Annual Report on Form 10-K for the year endedJune 30, 2020 for a summary of the critical accounting policies.
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