THE INTERGROUP CORPORATION 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. 20 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 Annual Report. The pandemic effectively eliminated our ability to generate any profits, due to the drastic decline in both leisure and business travel. As a result, management believes the ongoing length and severity of the economic downturn caused by the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results. We are also assessing the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets. As of the date of this annual report, the effects of the pandemic continue to affect our economy, business and leisure travel, and our needs to continue to curtail certain revenue generating activities at the Hotel, and until there are vaccines or other methodologies to effectively combat this pandemic, we expect that the effects will have a material adverse effect on our business. As a result of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") signed into law 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 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 ofJune 30, 2020 , Justice had used$3,568,000 in qualified expenses such as payroll expenses, mortgage interests, utilities, etc., and had a balance of$1,151,000 available for future qualified expenses. The SBA Loan - Justice is scheduled to mature 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 ofJune 30, 2020 , InterGroup had used all of the$453,000 loan proceeds in qualified payroll expenses. The SBA Loan - InterGroup is scheduled to mature onApril 27, 2022 and has a 1.00% interest rate. Both the SBA Loan - Justice and SBA Loan - InterGroup (collectively the "SBA Loans") may be forgiven if the funds are used for payroll and other qualified expenses. All payments of principal and interests are deferred untilOctober 2020 . The SBA Loans are subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. We anticipate applying for loan forgiveness shortly. All unforgiven portion of the principal and accrued interest will be due at maturity. RESULTS OF OPERATIONS As ofJune 30, 2020 , the Company owned approximately 83.7% of the common shares of its subsidiary, Santa Fe, andSanta Fe owned approximately 68.8% of the common shares ofPortsmouth Square, Inc. Intergroup also directly owns approximately 13.7% of the common shares of Portsmouth. The Company's principal sources of revenue continue to be derived from the general and limited partnership interests of its subsidiary, Portsmouth, in theJustice Investors limited partnership ("Justice" or the "Partnership"), rental income from its investments in multi-family and commercial real estate properties, and income received from investment of its cash and securities assets. Justice owns a 544-room hotel property located at750 Kearny Street ,San Francisco, California 94108, known as the "Hilton San Francisco Financial District " (the "Hotel" or the "Property") and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated
with those of the Company. The Hotel is operated by the Partnership as a full-service Hilton brand hotel pursuant to a License Agreement with Hilton. The Partnership entered into the License Agreement onDecember 10, 2004 . The term of the License Agreement was for an initial period of 15 years commencing on the reopening date, upon completion of a major renovation, with an option to extend the License Agreement for another five years, subject to certain conditions. 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 in the form of a self-exhausting, interest free note. The key money cash incentive of$4,750,000 was received onJuly 1, 2015 . As ofJune 30, 2020 and 2019, the balance of the note was$3,008,000 and$3,325,000 , respectively, and are included in related party and other notes payable in the consolidated balance sheets. OnFebruary 1, 2017 , Justice entered into a hotel management agreement ("HMA") withInterstate Management Company, LLC ("Interstate") to manage the Hotel with an effective takeover date ofFebruary 3, 2017 . The term of HMA is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of$2,000,000 under certain terms and conditions described in a separate key money agreement. As ofJune 30, 2020 and 2019, balance of the key money including accrued interests are$1,009,000 and$2,049,000 , respectively, and are included in restricted cash in the consolidated balance sheets. As ofJune 30, 2020 and 2019, balance of the unamortized portion of the key money are$1,646,000 and$1,896,000 , respectively, and are included in the related party notes payable in the consolidated balance sheets. OnOctober 25, 2019 , Interstate merged withAimbridge Hospitality ,North America's largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under theAimbridge Hospitality name in theAmericas . 21 In addition to the operations of the Hotel, the Company also generates income from the ownership and management of its real estate. Properties include sixteen apartment complexes, one commercial real estate property, and three single-family houses as strategic investments. The properties are located throughoutthe United States , but are concentrated inTexas andSouthern California . The Company also has an investment in unimproved real property
inHawaii . The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential. Fiscal Year EndedJune 30, 2020 Compared to Fiscal Year EndedJune 30, 2019
The Company had a net loss of
Hotel Operations The Company had net loss from Hotel operations of$3,768,000 for the year endedJune 30, 2020 compared to net income of$5,277,000 for the year endedJune 30, 2019 . The change was primarily attributable to the$17,042,000 decrease in Hotel revenue, offset by the$7,133,000 decrease in operating expenses.
The following table sets forth a more detailed presentation of Hotel operations
for the years ended
For the year ended June 30, 2020 2019 Hotel revenues: Hotel rooms$ 36,465,000 $ 51,243,000 Food and beverage 3,529,000 5,353,000 Garage 2,368,000 2,875,000 Other operating departments 477,000 410,000 Total hotel revenues 42,839,000 59,881,000 Operating expenses excluding depreciation and amortization (37,333,000 ) (44,466,000 ) Operating income before interest, depreciation and amortization 5,506,000 15,415,000 Loss on disposal of assets - (398,000 ) Interest expense - mortgage (6,885,000 ) (7,234,000 )
Depreciation and amortization expense (2,389,000 ) (2,506,000 ) Net (loss) income from Hotel operations$ (3,768,000 )
$ 5,277,000 22 For the year endedJune 30, 2020 , the Hotel generated operating income of$5,506,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of$42,839,000 compared to operating income of$15,415,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of$59,881,000 for the year endedJune 30, 2019 . Room revenues decreased by$14,778,000 for the year endedJune 30, 2020 compared to the year endedJune 30, 2019 , food and beverage revenue decreased by$1,824,000 , and revenue from garage decreased by$507,000 . The year over year decline in all areas are result of the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak inMarch 2020 which continues to affect us. Revenue from other operating departments increased year over year mainly due to increase in cancellation revenue. The following table sets forth the monthly average occupancy percentage of the Hotel for the fiscal years endedJune 30, 2020 and 2019. Month July August September October November December January February March April May June Fiscal Year Year 2019 2019 2019 2019 2019 2019 2020 2020 2020 2020 2020 2020 2019 - 2020 Average Occupancy % 98 % 99 % 98 % 97 % 99 % 98 % 96 % 96 % 35 % 10 % 27 % 34 % 74 % Fiscal Year Year 2018 2018 2018 2018 2018 2018 2019 2019 2019 2019 2019 2019 2018 - 2019 Average Occupancy % 98 % 98 % 97 % 97 % 95 % 98 % 94 % 97 % 94 % 96 % 96 % 98 % 96 %
Operating expenses decreased by$7,133,000 for the year endedJune 30, 2020 to$37,333,000 compared to the year endedJune 30, 2019 of$44,466,000 primarily due to decrease in salaries and wages, rooms commission, credit card fees, management fees, and franchise fees. The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room ("RevPAR") of the Hotel for the year endedJune 30, 2020 and 2019. For the Year Average Average Ended June 30, Daily Rate Occupancy % RevPAR 2020$ 248 74 %$ 183 2019$ 268 96 %$ 257 The Hotel's revenues decreased by 28% year over year. Average daily rate decreased by$20 , average occupancy dropped 22%, and RevPAR decreased by$74 for the twelve months endedJune 30, 2020 compared to the twelve months endedJune 30, 2019 .
In order to provide our guests with best in class technology experience, we completed the upgrade of our new internet system from Cisco, and installed new 55" smart 4K televisions and Hilton's stay connected internet streaming products. We also replaced mattresses in all guestrooms during the fiscal year endedJune 30, 2020 . The COVID-19 pandemic and design delays have pushed back the plans for the conversion of the Justice offices, Fitness Center andExecutive Lounge ; projects that would add 19 guest rooms into our inventory. The long-term value of these rooms is in utilizing them as guest rooms, and we will work to implement a new timeline as business returns. Part of this renovation will be funded by the Hotel's furniture, fixture and equipment reserve account with our lender as well as the key money incentive provided by Interstate. Lastly, the Hotel completed the installation of a complete exterior building maintenance system which will enable periodic window washing, replaced and upgraded all computers in the business center and administrative offices. Real Estate Operations Revenue from real estate operations increased to$15,178,000 for the year endedJune 30, 2020 from$14,872,000 for the year endedJune 30, 2019 primarily as a result of increase in market rent. Real estate operating expenses increased to$8,051,000 from$7,810,000 primarily as a result of increase in repairs and maintenance costs. Management continues to review and analyze the Company's real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies. Investment Transactions The Company had a net loss on marketable securities of$1,913,000 for the year endedJune 30, 2020 compared to a net loss on marketable securities of$1,733,000 for the year endedJune 30, 2019 . For the year endedJune 30, 2020 and 2019, the Company had a net unrealized loss of zero and$254,000 , respectively, related to the Company's investment in the common stock of Comstock Mining Inc. ("Comstock" - NYSE MKT: LODE). As ofJune 30, 2020 and 2019, investments in Comstock represent approximately 11% and 7% of the Company's investment portfolio, respectively. For the year endedJune 30, 2020 , the Company had a net realized loss of$641,000 and a net unrealized loss of$1,272,000 . For the year endedJune 30, 2019 , the Company had a net realized loss of$806,000 and a net unrealized loss of$927,000 . 23
Gains and losses on marketable securities may fluctuate significantly from
period to period in the future and could have a significant impact on the
Company's results of operations. However, the amount of gain or loss on
marketable securities for any given period may have no predictive value and
variations in amount from period to period may have no analytical value. For a
more detailed description of the composition of the Company's marketable
securities see the
During the years endedJune 30, 2020 and 2019, the Company performed an impairment analysis of its other investments and determined that its investments had other than temporary impairment and recorded impairment losses of$219,000 and$98,000 , respectively.
The Company and its subsidiaries, Portsmouth andSanta Fe , compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax benefit during the years endedJune 30, 2020 and 2019 represents primarily the combined income tax effect of Portsmouth's pretax (loss) income which includes its share in net (loss) income from the Hotel and the pre-tax loss from InterGroup (standalone).
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As ofJune 30, 2020 and 2019, the Company had investments in marketable equity securities of$6,178,000 and$9,696,000 , respectively. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups: % of Total As of June 30, 2020 Investment Industry Group Fair Value Securities REITs and real estate companies$ 2,365,000 38.3 % Basic material 1,209,000 19.6 % Energy 767,000 12.4 % Industrials 484,000 7.8 % Corporate bonds 417,000 6.7 % Other 936,000 15.2 %$ 6,178,000 100.0 % % of Total As of June 30, 2019 Investment Industry Group Fair Value Securities REITs and real estate companies$ 3,069,000 31.7 % Consumer cyclical 1,448,000 14.9 % Corporate bonds 1,420,000 14.6 % Financial services 951,000 9.8 % Energy 950,000 9.8 % Other 1,858,000 19.2 %$ 9,696,000 100.0 %
As 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 19.4% of the portfolio and consists of the common stock of American Realty Investors, Inc. which is included in the REITs and real estate companies' industry group.
The following table shows the net loss on the Company's marketable securities and the associated margin interest and trading expenses for the respective years.
For the years ended June 30, 2020 2019 Net loss on marketable securities$ (1,913,000 ) $ (1,733,000 ) Impairment loss on other investments (219,000 ) (98,000 ) Dividend and interest income 363,000 484,000 Margin interest expense (452,000 ) (576,000 ) Trading expenses (545,000 ) (574,000 )$ (2,766,000 ) $ (2,497,000 ) 24
FINANCIAL CONDITION AND LIQUIDITY
Historically, our cash flows have been primarily generated from our Hotel operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic has had a material detrimental impact on our liquidity. For the fiscal year endedJune 30, 2020 , our net cash flow used in operations was$3,454,000 . For the fiscal year endedJune 30, 2019 , our net cash flow provided by operations was$14,269,000 . We have taken several steps to preserve capital and increase liquidity at our Hotel, including implementing strict cost management measures to eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets. As ofJune 30, 2020 , we had cash, cash equivalents, and restricted cash of$28,286,000 which included$10,666,000 of restricted cash held by our Hotel senior lenderWells Fargo Bank, N.A . ("Lender"). Of the$10,666,000 restricted cash,$7,486,000 was held for furniture, fixtures and equipment ("FF&E") reserves and$2,432,000 was held for a possible future property improvement plan ("PIP") requested by our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i)January 2030 , which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. OnAugust 19, 2020 , Operating received PIP deposits in the amount of$2,379,000 held by Lender. The funds were utilized to fund operating expenses, including franchise and management fees and other expenses. 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 ofJune 30, 2020 , Justice had used$3,568,000 in qualified expenses such as payroll expenses, mortgage interests, utilities, etc., and had a balance of$1,151,000 available for future qualified expenses. The SBA Loan - Justice is scheduled to mature 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 ofJune 30, 2020 , InterGroup had used all of the$453,000 loan proceeds in qualified payroll expenses. The SBA Loan - InterGroup is scheduled to mature onApril 27, 2022 and has a 1.00% interest rate. Both the SBA Loan - Justice and SBA Loan - InterGroup (collectively the "SBA Loans") may be forgiven if the funds are used for payroll and other qualified expenses. All payments of principal and interests are deferred untilOctober 2020 . The SBA Loans are subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. We anticipate applying for loan forgiveness shortly. All unforgiven portion of the principal and accrued interest will be due at maturity. In order to increase our liquidity position, the Company refinanced its 151-unit apartment complex inParsippany, New Jersey onApril 30, 2020 , generating net proceeds of$6,814,000 . InJune 2020 , the Company refinanced one of itsCalifornia properties and generated net proceeds of$1,144,000 . We are currently evaluating other refinancing opportunities. We could refinance additional multifamily properties should the need arise; however, we do not deem it necessary at this time. The Company has an uncollateralized$8,000,000 revolving line of credit fromCIBC Bank USA ("CIBC") of which$5,000,000 was available to be drawn down as ofJune 30, 2020 ; however, the outstanding balance on the revolving line of credit was paid down fully onAugust 28, 2020 , making the entire$8,000,000 available to be drawn down 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$12,026,000 .Santa Fe will manage its federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss carryforwards.Santa Fe received net proceeds of$12,163,000 after selling costs and repayment of InterGroup's RLOC of$2,985,000 as InterGroup had drawn on its RLOC 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.Santa Fe will not seek a replacement property. As the sole general partner of Justice that controls approximately 93.3% of the voting interest in the Partnership, Portsmouth has the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup and/orSanta Fe to meet any capital calls and its other obligations during the next twelve months and beyond. OnAugust 28, 2020 , the Board of InterGroup andSanta Fe have passed resolutions, respectively, to provide funding to Portsmouth if necessary. The Partnership is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital.
25 Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company's material financial obligations which also includes interest.
Year Year Year Year Year
Total 2021 2022 2023 2024 2025 Thereafter
Mortgage notes payable $ 178,352,000 $ 11,211,000 $ 3,101,000 $ 28,244,000 $ 108,113,000 $ 3,494,000 $ 24,189,000
Related party and other notes
payable 13,909,000 1,016,000 9,190,000 750,000 567,000 567,000 1,819,000
Interest 34,492,000 8,801,000 8,418,000 7,625,000 4,412,000 904,000 4,332,000
Total $ 226,753,000 $ 21,028,000 $ 20,709,000 $ 36,619,000 $ 113,092,000 $ 4,965,000 $ 30,340,000 OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
IMPACT OF INFLATION Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Interstate has the power and ability under the terms of its management agreement to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material.
The Company's residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are expected to offset anticipated increased property operating expenses.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
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