NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Description
of the Business
The
InterGroup Corporation, a Delaware corporation, (“InterGroup” or the “Company”) was formed to buy, develop,
operate and dispose of real property and to engage in various investment activities to benefit the Company and its shareholders.
As
of June 30, 2020, the Company had the power to vote 87.4% 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 3.7% interest in the common
stock in Santa Fe owned by the Company’s Chairman and CEO, John V. Winfield, pursuant to a voting trust agreement entered
into on June 30, 1998. Mr. Winfield, Chairman of the Board of both Santa Fe and InterGroup, is a control person of both entities.
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 has a 93.3% limited partnership interest in Justice Investors, a California limited
partnership (“Justice” or the “Partnership”) and is the sole general partner. Justice was formed in 1967
to acquire real property in San Francisco, California. As of June 30, 2020, the Partnership has approximately 23 voting limited
partners. InterGroup also directly owns approximately 13.7% 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 of the HMA, base
management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. The HMA also provides
for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the form of a self-exhausting, interest
free note payable in the amount of $2,000,000 in a separate key money agreement. As of June 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 of June 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. 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.
In
addition to the operations of the Hotel, the Company also generates income from the ownership of real estate. Properties include
apartment complexes, commercial real estate, and three single-family houses as strategic investments. The properties are located
throughout the United States, but are concentrated in Texas and Southern California. The Company also has investments in unimproved
real property. All of the Company’s residential rental properties are managed in-house.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and Santa Fe. All significant inter-company transactions
and balances have been eliminated.
Investment
in Hotel, Net
Property
and equipment are stated at cost. Building improvements are depreciated on a straight-line basis over their useful lives ranging
from 3 to 39 years. Furniture, fixtures, and equipment are depreciated on a straight-line basis over their useful lives ranging
from 3 to 7 years.
Repairs
and maintenance are charged to expense as incurred. Costs of significant renewals and improvements are capitalized and depreciated
over the shorter of its remaining estimated useful life or life of the asset. The cost of assets sold or retired, and the related
accumulated depreciation are removed from the accounts; any resulting gain or loss is included in other income (expenses).
The
Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable in accordance with generally accepted accounting principles (“GAAP”). If the carrying
amount of the asset, including any intangible assets associated with that asset, exceeds its estimated undiscounted net cash flow,
before interest, the Partnership will recognize an impairment loss equal to the difference between the asset’s carrying
amount and its estimated fair value. If impairment is recognized, the reduced carrying amount of the asset will be accounted for
as its new cost. For a depreciable asset, the new cost will be depreciated over the asset’s remaining useful life. Generally,
fair values are estimated using discounted cash flow, replacement cost or market comparison analyses. The process of evaluating
for impairment requires estimates as to future events and conditions, which are subject to varying market and economic factors.
Therefore, it is reasonably possible that a change in estimate resulting from judgments as to future events could occur which
would affect the recorded amounts of the property. No impairment losses were recorded for the years ended June 30, 2020 and 2019.
Investment
in Real Estate, Net
Rental
properties are stated at cost less accumulated depreciation. Depreciation of rental property is provided on the straight-line
method based upon estimated useful lives of 5 to 40 years for buildings and improvements and 5 to 10 years for equipment. Expenditures
for repairs and maintenance are charged to expense as incurred and major improvements are capitalized.
The
Company also reviews its rental property assets for impairment. No impairment losses on the investment in real estate have been
recorded for the years ended June 30, 2020 and 2019.
The
fair value of the tangible assets of an acquired property, which includes land, building and improvements, is determined by valuing
the property as if they were vacant, and incorporates costs during the lease-up periods considering current market conditions
and costs to execute similar leases such lost rental revenue and tenant improvements. The value of tangible assets is depreciated
using straight-line method based upon the assets estimated useful lives.
Investment
in Marketable Securities
Marketable
securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date.
Marketable securities are classified as trading securities with all unrealized gains and losses on the Company’s investment
portfolio recorded through the consolidated statements of operations.
Other
Investments, Net
Other
investments include non-marketable securities (carried at cost, net of any impairments loss) and non-marketable debt instruments.
The Company has no significant influence or control over the entities that issue these investments. These investments are reviewed
on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary.
These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the
extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our
ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the years
ended June 30, 2020 and 2019, the Company recorded impairment losses related to other investments of $219,000 and $98,000, respectively.
As of June 30, 2020 and 2019, the allowance for impairment losses was $6,270,000 and $6,367,000, respectively.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid investments with an original maturity of three months or less when purchased and are carried
at cost, which approximates fair value. As of June 30, 2020 and 2019, the Company does not have any cash equivalents.
Restricted
Cash
Restricted
cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves
for the Hotel. It also includes key money received from Interstate that is restricted for capital improvements.
Other
Assets, Net
Other
assets include prepaid insurance, accounts receivable, franchise fees, tax refund receivable, and other miscellaneous assets.
Franchise fees are stated at cost and amortized over the life of the agreement (15 years).
Accounts
receivable from the Hotel and rental property customers are carried at cost less an allowance for doubtful accounts that is based
on management’s assessment of the collectability of accounts receivable. As of June 30, 2020, and 2019, the allowance for
doubtful accounts was $79,000 and $71,000, respectively. The Company extends unsecured credit to its customers but mitigates the
associated credit risk by performing ongoing credit evaluations of its customers.
Due
to Securities Broker
The
Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national
brokerage firms. Various securities brokers have advanced funds to the Company for the purchase of marketable securities under
standard margin agreements. These advanced funds are recorded as a liability.
Obligation
for Securities Sold
Obligation
for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date
and the fair market value of shares underlying the written call options with the obligation to deliver that security when and
if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases
of that security. Unrealized gains and losses from changes in the obligation are included in the statement of operations.
Accounts
Payable and Other Liabilities
Accounts
payable and other liabilities include trade payables, advance customer deposits, accrued wages, accrued real estate taxes, and
other liabilities.
Treasury
Stock
The
Company records the acquisition of treasury stock under the cost method. During the years ended June 30, 2020 and 2019, the Company
purchased 21,153 and 33,601 shares of treasury stock, respectively.
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”)
in an orderly transaction between market participants at the measurement date. Accounting standards for fair value measurement
establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the
use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that
market participants would use in pricing the asset or liability developed based on market data obtained from sources independent
of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy
is broken down into three levels based on the observability of inputs as follows:
Level
1–inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level
2–inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the
financial instruments.
Level
3–inputs to the valuation methodology are unobservable and significant to the fair value.
Revenue
Recognition
On
July 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach to all
contracts resulting in no cumulative adjustment to accumulated deficit. The adoption of this standard did not impact the timing
of our revenue recognition based on the short-term, day-to-day nature of our operations. See Note 3 – Revenue.
Advertising
Costs
Advertising
costs are expensed as incurred and are included in Hotel operating expenses in the consolidated statements of operations. Advertising
costs were $176,000 and $282,000 for the years ended June 30, 2020 and 2019, respectively.
Income
Taxes
Deferred
income taxes are calculated under the liability method. Deferred income tax assets and liabilities are based on differences between
the financial statement and tax basis of assets and liabilities at the current enacted tax rates. Changes in deferred income tax
assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities
attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation
allowances are established for certain deferred tax assets where realization is not likely.
We
have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and
Economic Security (CARES) Act enacted on March 27, 2020. The effect of tax law changes is required to be recognized either in
the interim period in which the legislation is enacted or reflected in the computation of the annual effective tax rate, depending
on the nature of the change. As of June 30, 2020, we evaluated the income tax provisions of the CARES Act and have determined
there to be no material effect on the fiscal year tax provision. We will continue to evaluate the income tax provisions of the
CARES Act and monitor the tax law changes that could have income tax accounting and disclosure implications.
Assets
and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when
such positions are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions.
Earnings
Per Share
Basic
net (loss) income per share is computed by dividing net (loss) income available to common stockholders by the weighted average
number of common shares outstanding. The computation of diluted net income per share is similar to the computation of basic net
income per share except that the weighted-average number of common shares is increased to include the number of additional common
shares that would have been outstanding if potential dilutive common shares had been issued. As of June 30, 2020, the Company’s
only potentially dilutive common shares are 323,195 shares that Mr. Winfield has a right to acquire pursuant to vested stock options.
The basic and diluted earnings per share are the same for the fiscal year ended June 30, 2020 because the Company had a net loss.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
(U.S. GAAP) requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses.
Such estimates primarily relate to the recording of allowance for doubtful accounts and allowance for impairment losses which
are based on management’s assessment of the collectability of accounts receivable and the fair market value of nonmarketable
securities, respectively, as of the end of the fiscal year. Actual results may differ from those estimates.
Debt
Issuance Costs
Debt
issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from
the carrying amount of the debt liability and are amortized over the life of the debt. Loan amortization costs are included in
interest expense in the consolidated statement of operations.
Recent
Accounting Pronouncements
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, 2020
and 2019. The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 4
and Note 10 for balances of finance lease ROU assets and liabilities, respectively.
On
June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in
place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. ASU No. 2016-13
will be effective for us as of January 1, 2023. The Company is currently reviewing the effect of ASU No. 2016-13.
NOTE
2 - 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 ended June 30,
2020, our net cash flow used in operations was $3,454,000. For the fiscal year ended June 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
of June 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 lender Wells 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. On August 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.
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently
enacted CARES Act administered by the U.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 of June 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 on April 9, 2022 and has a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA
Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of June
30, 2020, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup
is scheduled to mature on April 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 until October 2020. The SBA Loans are subject to the terms and conditions
applicable to loans administered by the U.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 in Parsippany, New Jersey on April
30, 2020, generating net proceeds of $6,814,000. In June 2020, the Company refinanced one of its California 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 from CIBC Bank USA (“CIBC”) of which $5,000,000 was available to be drawn down as of June
30, 2020; however, the outstanding balance on the revolving line of credit was paid down fully on August 28, 2020, making the
entire $8,000,000 available to be drawn down should additional liquidity be necessary. On August 28, 2020, Santa Fe sold its 27-unit
apartment complex located in Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,026,000.
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 in July 2018 to pay off the previous Fannie Mae mortgage on the property.
Furthermore, pursuant to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the
sale. 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/or Santa Fe to meet any capital calls and its other obligations during the next
twelve months and beyond. On August 28, 2020, the Board of InterGroup and Santa 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.
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.
NOTE
3 - REVENUE
Our
revenue from real estate is primarily rental income from residential and commercial property leases which is recorded when due
from residents and is recognized monthly as earned. The following table present our Hotel revenue disaggregated by revenue streams.
|
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 revenue
|
|
$
|
42,839,000
|
|
|
$
|
59,881,000
|
|
Performance
obligations
We
identified the following performance obligations for which revenue is recognized as the respective performance obligations are
satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:
|
|
●
|
Cancelable
room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest,
which is generally when the room stay occurs.
|
|
|
|
|
|
|
●
|
Noncancelable
room reservations and banquet or conference reservations represent a series of distinct goods or services provided over
time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
|
|
|
|
|
|
|
●
|
Other
ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are
considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel
guest.
|
|
|
|
|
|
|
●
|
Components
of package reservations for which each component could be sold separately to other hotel guests are considered separate
performance obligations and are satisfied as set forth above.
|
Hotel
revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package
reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms
are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the
goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within
the package based on the estimated standalone selling prices of each component.
We
do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due
to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests
staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are
rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel
stay occurs or services are rendered.
Contract
assets and liabilities
We
do not have any material contract assets as of June 30, 2020 and 2019, other than trade and other receivables, net on our consolidated
balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful
accounts that reflects our estimate of amounts that will not be collected.
We
record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented
within accounts payable and other liabilities on our consolidated balance sheets. Contract liabilities decreased to $375,000 as
of June 30, 2020 from $1,215,000 as of June 30, 2019. The decrease for the twelve months ended June 30, 2020 was primarily driven
by $840,000 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 are less than one year.
NOTE
4 – INVESTMENT IN HOTEL, NET
Investment
in Hotel consisted of the following as of:
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
June 30, 2020
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
2,738,000
|
|
|
$
|
-
|
|
|
$
|
2,738,000
|
|
|
Finance lease ROU assets
|
|
|
1,775,000
|
|
|
|
(291,000
|
)
|
|
|
1,484,000
|
|
|
Furniture and equipment
|
|
|
30,528,000
|
|
|
|
(27,498,000
|
)
|
|
|
3,030,000
|
|
|
Building and improvements
|
|
|
64,005,000
|
|
|
|
(32,488,000
|
)
|
|
|
31,517,000
|
|
|
Investment in Hotel, net
|
|
$
|
99,046,000
|
|
|
$
|
(60,277,000
|
)
|
|
$
|
38,769,000
|
|
|
|
|
|
|
|
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
5 - INVESTMENT IN REAL ESTATE, NET
At
June 30, 2020, the Company’s investment in real estate consisted of twenty properties located throughout the United States.
These properties include sixteen apartment complexes, three single-family houses as strategic investments, and one commercial
real estate property. The Company also owns unimproved land located in Maui, Hawaii.
Investment
in real estate included the following:
|
As of
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
Land
|
|
$
|
23,565,000
|
|
|
$
|
23,566,000
|
|
|
Buildings, improvements and equipment
|
|
|
69,417,000
|
|
|
|
68,369,000
|
|
|
Accumulated depreciation
|
|
|
(44,112,000
|
)
|
|
|
(41,629,000
|
)
|
|
|
|
|
48,870,000
|
|
|
|
50,306,000
|
|
|
Land held for development
|
|
|
1,468,000
|
|
|
|
1,467,000
|
|
|
Investment in real estate, net
|
|
$
|
50,338,000
|
|
|
$
|
51,773,000
|
|
NOTE
6 - INVESTMENT IN MARKETABLE SECURITIES
The
Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically
invested in corporate bonds and income producing securities, which may include interests in real estate-based companies and REITs,
where financial benefit could insure to its shareholders through income and/or capital gain.
At
June 30, 2020 and 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
|
|
|
|
|
|
Investment
|
|
Cost
|
|
|
Unrealized Gain
|
|
|
Unrealized Loss
|
|
|
Unrealized Loss
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Equities
|
|
$
|
11,459,000
|
|
|
$
|
902,000
|
|
|
$
|
(6,183,000
|
)
|
|
$
|
(5,281,000
|
)
|
|
$
|
6,178,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Equities
|
|
$
|
19,204,000
|
|
|
$
|
1,753,000
|
|
|
$
|
(11,261,000
|
)
|
|
$
|
(9,508,000
|
)
|
|
$
|
9,696,000
|
|
As
of June 30, 2020 and 2019, approximately 11% and 7% of the investment marketable securities balance above is comprised of the
common stock of Comstock Mining Inc. (“Comstock” – NYSE AMERICAN: LODE), respectively.
As
of June 30, 2020 and 2019, the Company had $5,734,000 and $11,088,000, respectively, of unrealized losses related to securities
held for over one year; of which $5,427,000 and $10,900,000 are related to its investment in Comstock, respectively.
Net
loss on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is
the composition of the two components for the years ended June 30, 2020 and 2019, respectively.
|
For the year ended June 30,
|
|
2020
|
|
|
2019
|
|
|
Realized loss on marketable securities
|
|
|
(641,000
|
)
|
|
|
(806,000
|
)
|
|
Unrealized loss on marketable securities related to Comstock
|
|
|
-
|
|
|
|
(254,000
|
)
|
|
Unrealized loss on marketable securities
|
|
|
(1,272,000
|
)
|
|
|
(673,000
|
)
|
|
Net loss on marketable securities
|
|
$
|
(1,913,000
|
)
|
|
$
|
(1,733,000
|
)
|
NOTE
7 – OTHER INVESTMENTS, NET
The
Company may also invest, with the approval of the Executive Strategic Real Estate and Securities Investment Committee and other
Company guidelines, in private investment equity funds and other unlisted securities. 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, net consist of the following:
|
Type
|
|
June
30, 2020
|
|
|
June
30, 2019
|
|
|
Private
equity hedge fund, at cost
|
|
$
|
157,000
|
|
|
$
|
376,000
|
|
|
Other
investments
|
|
|
121,000
|
|
|
|
236,000
|
|
|
|
|
$
|
278,000
|
|
|
$
|
612,000
|
|
NOTE
8 - FAIR VALUE MEASUREMENTS
The
carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate
fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities, due
to securities broker and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable
and mortgage notes payable).
The
assets measured at fair value on a recurring basis are as follows:
|
As of June 30, 2020
|
|
|
|
|
|
|
Level 1
|
|
|
Assets:
|
|
|
|
|
|
Investment in marketable securities:
|
|
|
|
|
|
REITs and real estate companies
|
|
$
|
2,365,000
|
|
|
Basic material
|
|
|
1,209,000
|
|
|
Energy
|
|
|
767,000
|
|
|
Industrials
|
|
|
484,000
|
|
|
Corporate bonds
|
|
|
417,000
|
|
|
Other
|
|
|
936,000
|
|
|
|
|
$
|
6,178,000
|
|
|
As of June 30, 2019
|
|
|
|
|
|
|
Level 1
|
|
|
Assets:
|
|
|
|
|
|
Investment in marketable securities:
|
|
|
|
|
|
REITs and real estate companies
|
|
$
|
3,069,000
|
|
|
Consumer cyclical
|
|
|
1,448,000
|
|
|
Corporate bonds
|
|
|
1,420,000
|
|
|
Financial services
|
|
|
951,000
|
|
|
Energy
|
|
|
950,000
|
|
|
Other
|
|
|
1,858,000
|
|
|
|
|
$
|
9,696,000
|
|
The
fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance
sheet date.
Financial
assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other
investments in non-marketable securities,” that were initially measured at cost and have been written down to fair value
as a result of impairment or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange
for old instruments (i.e., debt instruments). The following table shows the fair value hierarchy for these assets measured at
fair value on a non-recurring basis as follows:
|
Assets
|
|
Level 3
|
|
|
June 30, 2020
|
|
|
Net loss for the year
ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
278,000
|
|
|
$
|
278,000
|
|
|
$
|
(219,000
|
)
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
Assets
|
|
Level 3
|
|
|
June 30, 2019
|
|
|
ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
612,000
|
|
|
$
|
612,000
|
|
|
$
|
(98,000
|
)
|
For
fiscal years ended June 30, 2020 and 2019, we received distribution from other non-marketable investments of $115,000 and $103,000,
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. These investments are reviewed on a periodic basis for other-than-temporary
impairment. When determining the fair value of these investments on a non-recurring basis, the Company uses valuation techniques
such as the market approach and the unobservable inputs include factors such as conversion ratios and the stock price of the underlying
convertible instruments. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors
include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which
fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold
the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
NOTE
9 – OTHER ASSETS, NET
Other
assets consist of the following as of June 30:
|
|
|
|
2020
|
|
|
|
2019
|
|
|
Accounts receivable, net
|
|
$
|
504,000
|
|
|
$
|
852,000
|
|
|
Prepaid expenses
|
|
|
673,000
|
|
|
|
747,000
|
|
|
Miscellaneous assets, net
|
|
|
808,000
|
|
|
|
763,000
|
|
|
Total other assets
|
|
$
|
1,985,000
|
|
|
$
|
2,362,000
|
|
NOTE
10 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The
following summarizes the balances of related party and other notes payable as of June 30, 2020 and 2019, respectively.
|
As of June 30,
|
|
2020
|
|
|
2019
|
|
|
Note payable - Hilton
|
|
$
|
3,008,000
|
|
|
$
|
3,325,000
|
|
|
Note payable - Interstate
|
|
|
1,646,000
|
|
|
|
1,896,000
|
|
|
Other notes payable - SBA Loans
|
|
|
5,172,000
|
|
|
|
-
|
|
|
Other notes payable
|
|
|
-
|
|
|
|
40,000
|
|
|
Total related party and other notes payable
|
|
$
|
9,826,000
|
|
|
$
|
5,261,000
|
|
Note
payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately
$316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.
On
February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February
3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically
renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate
to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and
conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts
over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. As of June 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. Unamortized portion of the key money is included in the related party notes
payable in the 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 a subsidiary of Santa
Fe and the Company. 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 interests 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. In July 2020, the $2,969,000 mortgage due to InterGroup and the RLOC
was extended to July 2021.
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.
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently
enacted CARES Act administered by the U.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 of June 30, 2020, Justice had used $3,568,000 in qualified expenses and had a balance of $1,151,000 available
for future qualified expenses. The SBA Loan - Justice is scheduled to mature on April 9, 2022 and has a 1.00% interest rate. On
April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES
Act and received loan proceeds in the amount of $453,000. As of June 30, 2020, InterGroup had used all of the $453,000 loan proceeds
in qualified payroll expenses. The SBA Loan – InterGroup is scheduled to mature on April 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 until October
2020. The SBA Loans are subject to the terms and conditions applicable to loans administered by the U.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. As of June 30, 2020, balance of the SBA Loans total $5,172,000 and are included in other
notes payable in the consolidated balance sheets.
As
of June 30, 2020, the Company had finance lease obligations outstanding of $1,098,000. These finance leases expire in various
years through 2023 at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases
as of June 30, 2020 are as follows:
|
For the year ending June 30,
|
|
|
|
|
|
2021
|
|
$
|
503,000
|
|
|
2022
|
|
|
492,000
|
|
|
2023
|
|
|
188,000
|
|
|
Total minimum lease payments
|
|
|
1,183,000
|
|
|
Less interest on finance lease
|
|
|
(85,000
|
)
|
|
Present value of future minimum lease payments
|
|
$
|
1,098,000
|
|
Future
minimum principal payments for all related party and other financing transactions are as follows:
|
For the year ending June 30,
|
|
|
|
|
|
2021
|
|
$
|
1,016,000
|
|
|
2022
|
|
|
9,190,000
|
|
|
2023
|
|
|
750,000
|
|
|
2024
|
|
|
567,000
|
|
|
2025
|
|
|
567,000
|
|
|
Thereafter
|
|
|
1,819,000
|
|
|
|
|
$
|
13,909,000
|
|
On
July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year
fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid
at any time without penalty. The loan was extended to July 1, 2021. The balance of this loan is $3,000,000 as of June 30, 2020
and 2019, and is eliminated in the consolidated balance sheets.
On
February 5, 2020, Santa Fe acquired additional 44.6% interest in Woodland Village from InterGroup by issuing 97,500 shares of
its common stock to InterGroup. As a result of the transaction, Woodland Village became a wholly owned subsidiary of Santa Fe.
The transaction is being made pursuant to a Contribution Agreement (the “Contribution Agreement”) between Santa Fe
and InterGroup, dated February 5, 2020. The Contribution Agreement also contains a provision for a potential subsequent earn out
to InterGroup pursuant to terms set forth therein.
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 Executive Strategic Real Estate and Securities Investment Committee, the Company’s President and Chief Executive
Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority
granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Board of Portsmouth
and Santa Fe and oversees the investment activity of those companies. Effective June 2016, Mr. Winfield became the Managing Director
of Justice. 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
11 - MORTGAGE NOTES PAYABLE
On
December 18, 2013: (i) Justice Operating Company, LLC, a Delaware limited liability company (“Operating”), entered
into a loan agreement (“Mortgage Loan Agreement”) with Bank of America (“Mortgage Lender”); and (ii) Justice
Mezzanine Company, a Delaware limited liability company (“Mezzanine”), entered into a mezzanine loan agreement (“Mezzanine
Loan Agreement” and, together with the Mortgage Loan Agreement, the “Loan Agreements”) with ISBI San Francisco
Mezz Lender LLC (“Mezzanine Lender” and, together with Mortgage Lender, the “Lenders”). The Partnership
is the sole member of Mezzanine, and Mezzanine is the sole member of Operating.
The
Loan Agreements provide for a $97,000,000 Mortgage Loan and a $20,000,000 Mezzanine Loan. The proceeds of the Loan Agreements
were used to fund the redemption of limited partnership interests and the pay-off of the prior mortgage.
The
Mortgage Loan is secured by the Partnership’s principal asset, the Hilton San Francisco-Financial District (the “Property”).
The Mortgage Loan bears an interest rate of 5.275% per annum and matures in January 2024. The term of the loan is 10 years with
interest only due in the first three years and principle and interest on the remaining seven years of the loan based on a thirty-year
amortization schedule. The Mortgage Loan also requires payments for impounds related to property tax, insurance and capital improvement
reserves. As additional security for the Mortgage Loan, there is a limited guaranty (“Mortgage Guaranty”) executed
by Portsmouth in favor of the Mortgage Lender.
The
Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The
Mezzanine Loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. Interest only payments were due
monthly. On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New
Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off.
Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.
As additional security for the new mezzanine loan, there is a limited guaranty executed by the Partnership and Portsmouth in favor
of Cred Reit Holdco LLC (the “Mezzanine Guaranty” and, together with the Mortgage Guaranty, the “Guaranties”).
The
Guaranties are limited to what are commonly referred to as “bad boy” acts, including: (i) fraud or intentional misrepresentations;
(ii) gross negligence or willful misconduct; (iii) misapplication or misappropriation of rents, security deposits, insurance or
condemnation proceeds; and (iv) failure to pay taxes or insurance. The Guaranties are full recourse guaranties under identified
circumstances, including failure to maintain “single purpose” status which is a factor in a consolidation of Operating
or Mezzanine in a bankruptcy of another person, transfer or encumbrance of the Property in violation of the applicable loan documents,
Operating or Mezzanine incurring debts that are not permitted, and the Property becoming subject to a bankruptcy proceeding. Pursuant
to the Guaranties, the Partnership is required to maintain a certain minimum net worth and liquidity. Effective as of May 12,
2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental
indemnity for 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 June 30, 2020 and 2019, InterGroup
is in compliance with both requirements. However, due to the Hotel’s current low occupancy and its negative impact on the
Hotel’s cash flow, Justice Operating Company, LLC is not meeting certain of its loan covenants such as the Debt Service
Coverage Ratio (“DSCR”) which would trigger the creation of a lock-box and cash sweep by the Lender for all cash collected
by the Hotel, and under certain terms, would allow the Lender to request Operating to replace its hotel management company. The
DSCR for Operating has been below 1.00 for the last two quarters during fiscal year 2020 while it is required to maintain a DSCR
of at least 1.10 to 1.00 for two consecutive quarters. However, such lockbox has been created and utilized from the loan inception
and will be in place up to loan maturity regardless of the DSCR.
Each
of the Loan Agreements contains customary representations and warranties, events of default, reporting requirements, affirmative
covenants and negative covenants, which impose restrictions on, among other things, organizational changes of the respective borrower,
operations of the Property, agreements with affiliates and third parties. Each of the Loan Agreements also provides for mandatory
prepayments under certain circumstances (including casualty or condemnation events) and voluntary prepayments, subject to satisfaction
of prescribed conditions set forth in the Loan Agreements.
In
August 2018, $1,005,000 was drawn from the Company’s RLOC with CIBC to pay off a mortgage note payable on its single-family
house located in Los Angeles, California. In September 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. $995,000 received as a result of the refinance was used to pay down the
RLOC.
In
April 2020, the Company refinanced its $8,453,000 and $2,469,000 mortgage notes payable on its 151-unit apartment complex in Parsippany,
New Jersey and obtained a new mortgage note payable for $18,370,000. The Company received net proceeds of $6,814,000 as a result
of the refinance. Interest rate on the mortgage is fixed at 3.17% for ten years and the mortgage matures in May 2030. The Company
recorded loss on debt extinguishment of approximately $687,000 as a result of the refinance which represent prepayment premium
on prior mortgage notes payables.
In
June 2020, the Company refinanced its $1,274,000 mortgage note payable on its 9-unit apartment complex in Marina del Rey, California
and obtained a new mortgage note payable for $2,600,000. The Company received net proceeds of $1,144,000 as a result of the refinance.
Interest rate on the mortgage is fixed at 3.09% for ten years and the mortgage matures in July 2030.
Each
mortgage notes payable is secured by real estate or the Hotel. As of June 30, 2020 and 2019, the mortgage notes payables are summarized
as follows:
|
|
|
As
of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Note
|
|
Note
|
|
|
|
|
|
|
|
Property
|
|
of
Units
|
|
Origination
Date
|
|
Maturity
Date
|
|
Mortgage
Balance
|
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SF
Hotel
|
|
544
rooms
|
|
December
|
|
2013
|
|
January
|
|
2024
|
|
$
|
92,292,000
|
|
|
|
5.28
|
%
|
|
SF
Hotel
|
|
544
rooms
|
|
July
|
|
2019
|
|
January
|
|
2024
|
|
|
20,000,000
|
|
|
|
7.25
|
%
|
|
|
|
|
|
Mortgage
notes payable - Hotel
|
|
|
|
|
112,292,000
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs
|
|
|
|
|
(896,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
mortgage notes payable - Hotel
|
|
|
|
$
|
111,396,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florence
|
|
157
|
|
March
|
|
2015
|
|
April
|
|
2025
|
|
$
|
3,150,000
|
|
|
|
3.87
|
%
|
|
Las
Colinas
|
|
358
|
|
November
|
|
2012
|
|
December
|
|
2022
|
|
|
16,529,000
|
|
|
|
3.73
|
%
|
|
Morris
County
|
|
151
|
|
April
|
|
2020
|
|
May
|
|
2030
|
|
|
18,341,000
|
|
|
|
3.17
|
%
|
|
St.
Louis
|
|
264
|
|
May
|
|
2013
|
|
May
|
|
2023
|
|
|
5,236,000
|
|
|
|
4.05
|
%
|
|
Los
Angeles
|
|
4
|
|
September
|
|
2012
|
|
September
|
|
2042
|
|
|
333,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
2
|
|
September
|
|
2012
|
|
September
|
|
2042
|
|
|
337,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
1
|
|
August
|
|
2012
|
|
September
|
|
2042
|
|
|
363,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
31
|
|
November
|
|
2010
|
|
December
|
|
2020
|
|
|
4,800,000
|
|
|
|
4.85
|
%
|
|
Los
Angeles
|
|
30
|
|
August
|
|
2007
|
|
September
|
|
2022
|
|
|
5,614,000
|
|
|
|
5.97
|
%
|
|
Los
Angeles
|
|
14
|
|
April
|
|
2011
|
|
March
|
|
2021
|
|
|
1,597,000
|
|
|
|
5.89
|
%
|
|
Los
Angeles
|
|
12
|
|
June
|
|
2016
|
|
June
|
|
2026
|
|
|
2,125,000
|
|
|
|
3.59
|
%
|
|
Los
Angeles
|
|
9
|
|
June
|
|
2020
|
|
July
|
|
2030
|
|
|
2,600,000
|
|
|
|
3.09
|
%
|
|
Los
Angeles
|
|
9
|
|
April
|
|
2011
|
|
March
|
|
2021
|
|
|
1,088,000
|
|
|
|
5.89
|
%
|
|
Los
Angeles
|
|
8
|
|
July
|
|
2013
|
|
July
|
|
2043
|
|
|
428,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
7
|
|
August
|
|
2012
|
|
September
|
|
2042
|
|
|
823,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
4
|
|
August
|
|
2012
|
|
September
|
|
2042
|
|
|
563,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
1
|
|
September
|
|
2012
|
|
September
|
|
2042
|
|
|
388,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
1
|
|
September
|
|
2018
|
|
October
|
|
2048
|
|
|
974,000
|
|
|
|
4.75
|
%
|
|
Los
Angeles
|
|
Office
|
|
April
|
|
2016
|
|
January
|
|
2021
|
|
|
770,000
|
|
|
|
2.67
|
%
|
|
|
|
|
|
Mortgage
notes payable - real estate
|
|
|
|
|
66,059,000
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs
|
|
|
|
|
(447,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
mortgage notes payable - real estate
|
|
|
|
$
|
65,612,000
|
|
|
|
|
|
|
|
|
As
of June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Note
|
|
Note
|
|
|
|
|
|
|
|
Property
|
|
of
Units
|
|
Origination
Date
|
|
Maturity
Date
|
|
Mortgage
Balance
|
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SF
Hotel
|
|
544
rooms
|
|
December
|
|
2013
|
|
January
|
|
2024
|
|
$
|
93,746,000
|
|
|
|
5.28
|
%
|
|
SF
Hotel
|
|
544
rooms
|
|
December
|
|
2013
|
|
January
|
|
2024
|
|
|
20,000,000
|
|
|
|
9.75
|
%
|
|
|
|
|
|
Mortgage
notes payable - Hotel
|
|
|
|
|
113,746,000
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs
|
|
|
|
|
(659,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
mortgage notes payable - Hotel
|
|
|
|
$
|
113,087,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florence
|
|
157
|
|
March
|
|
2015
|
|
April
|
|
2025
|
|
$
|
3,222,000
|
|
|
|
3.87
|
%
|
|
Las
Colinas
|
|
358
|
|
November
|
|
2012
|
|
December
|
|
2022
|
|
|
16,974,000
|
|
|
|
3.73
|
%
|
|
Morris
County
|
|
151
|
|
July
|
|
2012
|
|
August
|
|
2022
|
|
|
8,737,000
|
|
|
|
3.51
|
%
|
|
Morris
County
|
|
151
|
|
June
|
|
2014
|
|
August
|
|
2022
|
|
|
2,512,000
|
|
|
|
4.51
|
%
|
|
St.
Louis
|
|
264
|
|
May
|
|
2013
|
|
May
|
|
2023
|
|
|
5,365,000
|
|
|
|
4.05
|
%
|
|
Los
Angeles
|
|
4
|
|
September
|
|
2012
|
|
September
|
|
2042
|
|
|
343,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
2
|
|
September
|
|
2012
|
|
September
|
|
2042
|
|
|
347,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
1
|
|
August
|
|
2012
|
|
September
|
|
2042
|
|
|
373,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
31
|
|
November
|
|
2010
|
|
December
|
|
2020
|
|
|
4,927,000
|
|
|
|
4.85
|
%
|
|
Los
Angeles
|
|
30
|
|
August
|
|
2007
|
|
September
|
|
2022
|
|
|
5,765,000
|
|
|
|
5.97
|
%
|
|
Los
Angeles
|
|
14
|
|
April
|
|
2011
|
|
March
|
|
2021
|
|
|
1,632,000
|
|
|
|
5.89
|
%
|
|
Los
Angeles
|
|
12
|
|
June
|
|
2016
|
|
June
|
|
2026
|
|
|
2,172,000
|
|
|
|
3.59
|
%
|
|
Los
Angeles
|
|
9
|
|
April
|
|
2011
|
|
May
|
|
2021
|
|
|
1,303,000
|
|
|
|
5.60
|
%
|
|
Los
Angeles
|
|
9
|
|
April
|
|
2011
|
|
March
|
|
2021
|
|
|
1,112,000
|
|
|
|
5.89
|
%
|
|
Los
Angeles
|
|
8
|
|
July
|
|
2013
|
|
July
|
|
2043
|
|
|
440,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
7
|
|
August
|
|
2012
|
|
September
|
|
2042
|
|
|
846,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
4
|
|
August
|
|
2012
|
|
September
|
|
2042
|
|
|
579,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
1
|
|
September
|
|
2012
|
|
September
|
|
2042
|
|
|
399,000
|
|
|
|
3.75
|
%
|
|
Los
Angeles
|
|
1
|
|
September
|
|
2018
|
|
October
|
|
2048
|
|
|
990,000
|
|
|
|
4.75
|
%
|
|
Los
Angeles
|
|
Office
|
|
April
|
|
2016
|
|
January
|
|
2021
|
|
|
806,000
|
|
|
|
4.91
|
%
|
|
|
|
|
|
Mortgage
notes payable - real estate
|
|
|
|
|
58,844,000
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs
|
|
|
|
|
(273,000
|
)
|
|
|
|
|
|
|
|
|
|
Total
mortgage notes payable - real estate
|
|
|
|
$
|
58,571,000
|
|
|
|
|
|
Future
minimum payments for all mortgage notes payable are as follows:
|
For the year ending June 30,
|
|
|
|
|
|
2021
|
|
$
|
11,211,000
|
|
|
2022
|
|
|
3,101,000
|
|
|
2023
|
|
|
28,244,000
|
|
|
2024
|
|
|
108,113,000
|
|
|
2025
|
|
|
3,494,000
|
|
|
Thereafter
|
|
|
24,188,000
|
|
|
|
|
$
|
178,351,000
|
|
NOTE
12 – MANAGEMENT AGREEMENTS
On
February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC
(“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of 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 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. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing
on the second (2nd) anniversary of the takeover date. The key money is included in restricted cash balances in the
consolidated balance sheets. As of June 30, 2020 and 2019, balance of the key money including accrued interests are $1,009,000
and $2,049,000, respectively. As of June 30, 2020 and 2019, unamortized portion of the key money was $1,646,000 and $1,896,000,
respectively, and are included in related party and other notes payable in the consolidated balance sheets. During the years ended
June 30, 2020 and 2019, Interstate management fees were $341,000 and $1,206,000, respectively, and are included in Hotel operating
expenses in the consolidated statements of operations.
NOTE
13 – CONCENTRATION OF CREDIT RISK
As
of June 30, 2020 and 2019, all accounts receivables are related to Hotel customers. The Hotel had two customers that accounted
for 95%, or $239,000 of accounts receivable at June 30, 2020, and one customer that accounted for 32%, or $272,000 of accounts
receivable at June 30, 2019.
The
Company maintains its cash and cash equivalents and restricted cash with various financial institutions that are monitored regularly
for credit quality. At times, such cash and cash equivalents holdings may be in excess of the Federal Deposit Insurance Corporation
(“FDIC”) or other federally insured limits.
NOTE
14 – INCOME TAXES
The
provision for the Company’s income tax (expense) benefit is comprised of the following:
|
For the years ended June 30,
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
$
|
(57,000
|
)
|
|
$
|
(1,387,000
|
)
|
|
Deferred tax benefit
|
|
|
1,828,000
|
|
|
|
2,563,000
|
|
|
|
|
|
1,771,000
|
|
|
|
1,176,000
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
|
(64,000
|
)
|
|
|
(25,000
|
)
|
|
Deferred tax benefit (expense)
|
|
|
1,087,000
|
|
|
|
(850,000
|
)
|
|
|
|
|
1,023,000
|
|
|
|
(875,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit
|
|
$
|
2,794,000
|
|
|
$
|
301,000
|
|
The
provision for income taxes differs from the amount of income tax computed by applying the federal statutory income tax rate to
income before taxes as a result of the following differences:
|
For the years ended June 30,
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Statutory federal tax rate
|
|
$
|
1,593,000
|
|
|
$
|
(457,000
|
)
|
|
State income taxes, net of federal tax benefit
|
|
|
812,000
|
|
|
|
(972,000
|
)
|
|
Dividend received deduction
|
|
|
18,000
|
|
|
|
16,000
|
|
|
Disallowed interest
|
|
|
504,000
|
|
|
|
-
|
|
|
Valuation allowance
|
|
|
49,000
|
|
|
|
2,158,000
|
|
|
Basis difference in investments
|
|
|
39,000
|
|
|
|
815,000
|
|
|
Carryback tax payable
|
|
|
-
|
|
|
|
(1,140,000
|
)
|
|
Other
|
|
|
(221,000
|
)
|
|
|
(119,000
|
)
|
|
|
|
$
|
2,794,000
|
|
|
$
|
301,000
|
|
The
components of the deferred tax asset and liabilities are as follows:
|
|
|
June 30, 2020
|
|
|
June 30, 2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
8,713,000
|
|
|
$
|
6,810,000
|
|
|
Capital loss carryforwards
|
|
|
1,074,000
|
|
|
|
1,283,000
|
|
|
Investment impairment reserve
|
|
|
1,156,000
|
|
|
|
1,295,000
|
|
|
Accruals and reserves
|
|
|
871,000
|
|
|
|
1,095,000
|
|
|
Interest expense
|
|
|
1,498,000
|
|
|
|
162,000
|
|
|
Tax credits
|
|
|
563,000
|
|
|
|
619,000
|
|
|
Unrealized loss on marketable securities
|
|
|
1,591,000
|
|
|
|
547,000
|
|
|
Other
|
|
|
221,000
|
|
|
|
231,000
|
|
|
Valuation allowance
|
|
|
(497,000
|
)
|
|
|
(524,000
|
)
|
|
|
|
|
15,190,000
|
|
|
|
11,518,000
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Equity earnings
|
|
|
(4,306,000
|
)
|
|
|
(3,188,000
|
)
|
|
Deferred gains on real estate sale and depreciation
|
|
|
(6,249,000
|
)
|
|
|
(6,844,000
|
)
|
|
State taxes
|
|
|
(252,000
|
)
|
|
|
(18,000
|
)
|
|
|
|
|
(10,807,000
|
)
|
|
|
(10,050,000
|
)
|
|
Net deferred tax asset
|
|
$
|
4,383,000
|
|
|
$
|
1,468,000
|
|
Management
considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets.
As of June 30, 2019, because of tax planning to generate taxable income in the future, management has determined that there is
sufficient positive evidence to conclude that a significant portion of its deferred tax assets are realizable. As a result, the
valuation allowance decreased by $2,086,000 during the fiscal year ended June 30, 2019.
As
of June 30, 2020, the Company had estimated net operating losses (NOLs) of $30,486,000 and $26,140,000 for federal and state purposes,
respectively. Below is the break-down of the NOLs for InterGroup, Santa Fe and Portsmouth. The carryforward expires in varying
amounts through the year 2038.
|
|
|
Federal
|
|
|
State
|
|
|
InterGroup
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Santa Fe
|
|
|
9,781,000
|
|
|
|
4,761,000
|
|
|
Portsmouth
|
|
|
20,705,000
|
|
|
|
21,379,000
|
|
|
|
|
$
|
30,486,000
|
|
|
$
|
26,140,000
|
|
Utilization
of the net operating loss carryover may be subject a substantial annual limitation if it should be determined that there has been
a change in the ownership of more than 50 percent of the value of the Company’s stock, pursuant to Section 382 of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating loss carryovers
before utilization.
Assets
and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when
such positions are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions.
As of June 30, 2020, it has been determined there are no uncertain tax positions likely to impact the Company.
The
Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates and is subject to examination
by federal, state and local jurisdictions, where applicable.
As
of June 30, 2020, tax years beginning in fiscal years 2015 and 2016 remain open to examination by the major tax jurisdictions,
and are subject to the statute of limitations.
NOTE
15 – 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 years ended June 30, 2020 and 2019. Segment income from Hotel operations consists of
the operation of the Hotel and operation of the garage. Segment income from real estate operations consists of the operation of
the rental properties. Loss from investments consists of net investment loss, dividend and interest income and investment related
expenses.
|
As of and for the year
|
|
Hotel
|
|
|
Real Estate
|
|
|
Investment
|
|
|
|
|
|
|
|
|
ended June 30, 2020
|
|
Operations
|
|
|
Operations
|
|
|
Transactions
|
|
|
Other
|
|
|
Total
|
|
|
Revenues
|
|
$
|
42,839,000
|
|
|
$
|
15,178,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
58,017,000
|
|
|
Segment operating expenses
|
|
|
(37,333,000
|
)
|
|
|
(8,051,000
|
)
|
|
|
-
|
|
|
|
(2,870,000
|
)
|
|
|
(48,254,000
|
)
|
|
Segment income (loss) from operations
|
|
|
5,506,000
|
|
|
|
7,127,000
|
|
|
|
-
|
|
|
|
(2,870,000
|
)
|
|
|
9,763,000
|
|
|
Interest expense - mortgage
|
|
|
(6,885,000
|
)
|
|
|
(2,436,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,321,000
|
)
|
|
Loss on debt extinguishment
|
|
|
-
|
|
|
|
(687,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(687,000
|
)
|
|
Depreciation and amortization expense
|
|
|
(2,389,000
|
)
|
|
|
(2,483,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,872,000
|
)
|
|
Loss from investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,766,000
|
)
|
|
|
-
|
|
|
|
(2,766,000
|
)
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,794,000
|
|
|
|
2,794,000
|
|
|
Net income (loss)
|
|
$
|
(3,768,000
|
)
|
|
$
|
1,521,000
|
|
|
$
|
(2,766,000
|
)
|
|
$
|
(76,000
|
)
|
|
$
|
(5,089,000
|
)
|
|
Total assets
|
|
$
|
56,004,000
|
|
|
$
|
50,338,000
|
|
|
$
|
6,456,000
|
|
|
$
|
17,419,000
|
|
|
$
|
130,217,000
|
|
|
As of and for the year
|
|
Hotel
|
|
|
Real Estate
|
|
|
Investment
|
|
|
|
|
|
|
|
|
ended June 30, 2019
|
|
Operations
|
|
|
Operations
|
|
|
Transactions
|
|
|
Other
|
|
|
Total
|
|
|
Revenues
|
|
$
|
59,881,000
|
|
|
$
|
14,872,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
74,753,000
|
|
|
Segment operating expenses
|
|
|
(44,466,000
|
)
|
|
|
(7,810,000
|
)
|
|
|
-
|
|
|
|
(2,346,000
|
)
|
|
|
(54,622,000
|
)
|
|
Segment income (loss) from operations
|
|
|
15,415,000
|
|
|
|
7,062,000
|
|
|
|
-
|
|
|
|
(2,346,000
|
)
|
|
|
20,131,000
|
|
|
Interest expense - mortgage
|
|
|
(7,234,000
|
)
|
|
|
(2,554,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,788,000
|
)
|
|
Loss on disposal of assets
|
|
|
(398,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(398,000
|
)
|
|
Depreciation and amortization expense
|
|
|
(2,506,000
|
)
|
|
|
(2,429,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,935,000
|
)
|
|
Loss from investments
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,497,000
|
)
|
|
|
-
|
|
|
|
(2,497,000
|
)
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
301,000
|
|
|
|
301,000
|
|
|
Net income (loss)
|
|
$
|
5,277,000
|
|
|
$
|
2,079,000
|
|
|
$
|
(2,497,000
|
)
|
|
$
|
(2,045,000
|
)
|
|
$
|
2,814,000
|
|
|
Total assets
|
|
$
|
62,148,000
|
|
|
$
|
51,773,000
|
|
|
$
|
10,308,000
|
|
|
$
|
6,650,000
|
|
|
$
|
130,879,000
|
|
NOTE
16 – STOCK-BASED COMPENSATION PLANS
The
Company follows the Statement of Financial Accounting Standards 123 (Revised), “Share-Based Payments” (“SFAS
No. 123R”), which was primarily codified into ASC Topic 718 “Compensation – Stock Compensation”, which
addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units.
The
Company currently has one equity compensation plan, which is the Intergroup 2010 Omnibus Employee Incentive Plan. The InterGroup
Corporation 2008 Restricted Stock Unit Plan (the “2008 RSU Plan”) terminated on its expiration date of December 8th,
2018 as prescribed in the plan document. Both plans have been approved by the Company’s stockholders and are described below.
Any outstanding options issued under the Key Employee Plan or the Non-Employee Director Plan remain effective in accordance with
their terms.
The
InterGroup Corporation 2008 Restricted Stock Unit Plan
On
December 3, 2008, the Board of Directors adopted, subject to shareholder approval, an equity compensation plan for its officers,
directors and key employees entitled, The InterGroup Corporation 2008 Restricted Stock Unit Plan (the “2008 RSU Plan”).
The 2008 RSU Plan was approved and ratified by the shareholders on February 18, 2009.
The
2008 RSU Plan authorizes the Company to issue restricted stock units (“RSUs”) as equity compensation to officers,
directors and key employees of the Company on such terms and conditions established by the Compensation Committee of the
Company. RSUs are not actual shares of the Company’s common stock, but rather promises to deliver common stock in the
future, subject to certain vesting requirements and other restrictions as may be determined by the Committee. Holders of RSUs
have no voting rights with respect to the underlying shares of common stock and holders are not entitled to receive any
dividends until the RSUs vest and the shares are delivered. No awards of RSUs shall vest until at least six months after
shareholder approval of the Plan. Subject to certain adjustments upon changes in capitalization, a maximum of 200,000 shares
of the common stock are available for issuance to participants under the 2008 RSU Plan. The 2008 RSU Plan will terminate ten
(10) years from December 3, 2008, unless terminated sooner by the Board of Directors. After the 2008 RSU Plan is terminated,
no awards may be granted but awards previously granted shall remain outstanding in accordance with the Plan and their
applicable terms and conditions.
The
shares of common stock to be delivered upon the vesting of an award of RSUs have been registered under the Securities Act, pursuant
to a registration statement filed on Form S-8 by the Company on June 16, 2010. The grant of RSUs is personal to the recipient
and is not transferable. Once received, shares of common stock issuable upon the vesting of the RSUs are freely transferable subject
to any requirements of Section 16(b) of the Exchange Act. Under the 2008 RSU Plan, the Compensation Committee also has the power
and authority to establish and implement an exchange program that would permit the Company to offer holders of awards issued under
prior shareholder approved compensation plans to exchange certain options for new RSUs on terms and conditions to be set by the
Committee. The exchange program is designed to increase the retention and motivational value of awards granted under prior plans.
In addition, by exchanging options for RSUs, the Company will reduce the number of shares of common stock subject to equity awards,
thereby reducing potential dilution to stockholders in the event of significant increases in the value of its common stock.
As
of June 30, 2020, there were no RSUs outstanding.
Intergroup
Corporation 2010 Omnibus Employee Incentive Plan
On
February 24, 2010, the shareholders of the Company approved The Intergroup Corporation 2010 Omnibus Employee Incentive Plan (the
“2010 Incentive Plan”), which was formally adopted by the Board of Directors following the annual meeting of shareholders.
The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards
are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those
option awards generally vest based on 5 years of continuous service. Certain option and share awards provide for accelerated vesting
if there is a change in control, as defined in the 2010 Incentive Plan. The 2010 Incentive plan as modified in December 2013,
authorizes a total of up to 400,000 shares of common stock to be issued as equity compensation to officers and employees of the
Company in an amount and in a manner to be determined by the Compensation Committee in accordance with the terms of the 2010 Incentive
Plan. The 2010 Incentive Plan authorizes the awards of several types of equity compensation including stock options, stock appreciation
rights, performance awards and other stock-based compensation. The 2010 Incentive Plan had an original expiration date of February
23, 2020, if not terminated sooner by the Board of Directors upon recommendation of the Compensation Committee. Any awards issued
under the 2010 Incentive Plan will expire under the terms of the grant agreement.
The
shares of common stock to be issued under the 2010 Incentive Plan have been registered under the Securities Act, pursuant to a
registration statement filed on Form S-8 by the Company on June 16, 2010. Once received, shares of common stock issued under the
Plan will be freely transferable subject to any requirements of Section 16 (b) of the Exchange Act.
On
March 16, 2010, the Compensation Committee authorized the grant of 100,000 stock options to the Company’s Chairman, President
and Chief Executive, John V. Winfield to purchase up to 100,000 shares of the Company’s common stock pursuant to the 2010
Incentive Plan. The exercise price of the options is $10.30, which is 100% of the fair market value of the Company’s Common
Stock as determined by reference to the closing price of the Company’s Common Stock as reported on the NASDAQ Capital Market
on March 16, 2010, the date of grant. The options had an original expiration date ten years from the date of grant, unless terminated
earlier in accordance with the terms of the 2010 Incentive Plan. The options shall be subject to both time and market based vesting
requirements, each of which must be satisfied before options are fully vested and eligible to be exercised. Pursuant to the time
vesting requirements, the options vest over a period of five years, with 20,000 options vesting upon each one-year anniversary
of the date of grant. Pursuant to the market vesting requirements, the options vest in increments of 20,000 shares upon each increase
of $2.00 or more in the market price of the Company’s common stock above the exercise price ($10.30) of the options. To
satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading days during
any one quarter. As of June 30, 2020, all the market vesting requirements have been met.
On
December 28, 2019, the Compensation Committee of the Board of Directors recommended to the Board amendments to the 2010 Incentive
Plan which would amend Section 1.3 to extend the term from ten years to sixteen years, and Section 6.4 to change “tenth
(10th) anniversary date” to “twentieth (20th) anniversary date”. This would increase the term of the 2010 Incentive
Plan to twenty years (expiring in February 2030 instead of February 2020) and also permit the existence of options with a term
longer than ten years. The purpose of the amendment to the term is to extend its existence as our only incentive plan. The purpose
of amendment of the allowable term of options is so that the Board may extend the term of the 100,000 options granted to John
Winfield on March 16, 2010 from ten years to sixteen years so that these options will terminate on March 16, 2026 instead of on
March 16, 2020, in recognition of Mr. Winfield’s contributions to and leadership of our Company. The recommended amendments
were approved by shareholders on February 25, 2020. During the fiscal year ended June 30, 2020, the Company recorded additional
stock option compensation expense in the amount of $116,000 as a result of the aforementioned amendments.
In
February 2012, the Compensation Committee awarded 90,000 stock options to the Company’s Chairman, President and Chief Executive,
John V. Winfield to purchase up to 90,000 shares of common stock. The per share exercise price of the options is $19.77 which
is the fair value of the Company’s Common Stock as reported on NASDAQ on February 28, 2012. The options expire ten years
from the date of grant. The options are subject to both time and market based vesting requirements, each of which must be satisfied
before the options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest
over a period of five years, with 18,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the
market vesting requirements, the options vest in increments of 18,000 shares upon each increase of $2.00 or more in the market
price of the Company’s common stock above the exercise price ($19.77) of the options. To satisfy this requirement, the common
stock must trade at that increased level for a period of at least ten trading days during any one quarter. As of June 30, 2020,
all of these options have met the market vesting requirements.
On
December 26, 2013, the Compensation Committee authorized, subject to shareholder approval, a grant of non-qualified and incentive
stock options for an aggregate of 160,000 shares (the “Option Grant”) to the Company’s President and Chief Executive
Officer, John V. Winfield. The stock option grant was approved by shareholders on February 19, 2014. The grant of stock options
was made pursuant to, and consistent with, the 2010 Incentive Plan, as proposed to be amended. The non-qualified stock options
are for 133,195 shares and have a term of ten years, expiring on December 26, 2023, with an exercise price of $18.65 per share.
The incentive stock options are for 26,805 shares and have a term of five years, expiring on December 26, 2018, with an exercise
price of $20.52 per share. In accordance with the terms of the 2010 Incentive Plan, the exercise prices were based on 100% and
110%, respectively, of the fair market value of the Company’s common stock as determined by reference to the closing price
of the Company’s common stock as reported on the NASDAQ Capital Market on the date of grant. The stock options are subject
to time vesting requirements, with 20% of the options vesting annually commencing on the first anniversary of the grant date.
In December 2018, Mr. Winfield exercised the 26,805 vested incentive stock options by surrendering 17,439 shares of the Company’s
common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional
compensation expense was recorded related to the issuance.
In
March 2017, the Compensation Committee awarded 18,000 stock options to the Company’s Vice President of Real Estate, David
C. Gonzalez, to purchase up to 18,000 shares of common stock. The per share exercise price of the options is $27.30 which is the
fair value of the Company’s Common Stock as reported on NASDAQ Capital Market on March 2, 2017. The options expire ten years
from the date of grant. Pursuant to the time vesting requirements, the options vest over a period of five years, with 3,600 options
vesting upon each one-year anniversary of the date of grant.
During
the years ended June 30, 2020 and 2019, the Company recorded stock option compensation expense of $142,000 and $76,000, respectively,
related to stock options previously issued and amending the 2010 Incentive Plan. As of June 30, 2020, there was an estimated total
of $18,000 unamortized compensation related to stock options which is expected to be recognized over the weighted average of 1.67
years.
Option-pricing
models require the input of various subjective assumptions, including the option’s expected life, estimated forfeiture rates
and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s
stock price history. The Company has selected to use the simplified method for estimating the expected term. The risk-free interest
rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend
yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.
The
following table summarizes the stock options activity from July 1, 2018 through June 30, 2020:
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Remaining Life
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
July 1, 2018
|
|
|
368,000
|
|
|
$
|
17.21
|
|
|
|
4.17 years
|
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
July 1, 2019
|
|
|
341,195
|
|
|
$
|
16.95
|
|
|
|
3.07 years
|
|
|
$
|
4,680,000
|
|
|
Granted
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exchanged
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding at
|
|
June 30, 2020
|
|
|
341,195
|
|
|
$
|
16.95
|
|
|
|
3.83 years
|
|
|
$
|
3,271,000
|
|
|
Exercisable at
|
|
June 30, 2020
|
|
|
323,195
|
|
|
$
|
16.38
|
|
|
|
3.67 years
|
|
|
$
|
3,271,000
|
|
|
Vested and Expected to vest at
|
|
June 30, 2020
|
|
|
341,195
|
|
|
$
|
16.95
|
|
|
|
3.83 years
|
|
|
$
|
3,271,000
|
|
NOTE
17 – RELATED PARTY TRANSACTIONS
As
discussed in Note 10 – Related Party and Other Financing Transactions, 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 two years, payable interest
only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The proceeds of the loan
were applied to the July 2014 payments to Justice Holdings Company, LLC (“Holdings”) in connection with the redemption
of limited partnership interests. The loan was extended to July 1, 2021. The balance of this loan is $3,000,000 as of June 30,
2020 and 2019, and is eliminated in the consolidated balance sheets.
In
connection with the redemption of limited partnership interests of Justice, Justice Operating Company, LLC agreed to pay a total
of $1,550,000 in fees to certain officers and directors of the Company for services rendered in connection with the redemption
of partnership interests, refinancing of Justice’s properties and reorganization of Justice. This agreement was superseded
by a letter dated December 11, 2013 from Justice, in which Justice assumed the payment obligations of Justice Operating Company,
LLC. As of June 30, 2018, $200,000 of these fees remained payable and were paid off as of June 30, 2019.
On
February 5, 2020, the Company entered into a Contribution Agreement (the “Contribution Agreement”) with Santa Fe pursuant
to which the Company received 97,500 shares of common stock, par value $0.10 per share, of Santa Fe, in exchange for its contribution
to Santa Fe of 4,460 shares of common stock (the “Common Stock”) of Intergroup Woodland Village, Inc., an Ohio corporation
(“Transaction”). As a result of the contribution, Woodland Village became a wholly owned subsidiary of Santa Fe. Before
the issuance of the stock referenced in the preceding sentence, the Company had the power to vote 86.3% of the voting shares of
Santa Fe, which includes the power to vote an approximately 4% interest in the common stock in Santa Fe owned by the Company’s
Chairman and CEO, John V. Winfield, pursuant to a voting trust agreement entered into on June 30, 1998. Subsequent to this issuance,
the Company has the power to vote 87.4% of the issued and outstanding common stock of Santa Fe, which includes the power to vote
an approximately 3.7% interest in the common stock in Santa Fe under the aforementioned voting trust agreement. Mr. Winfield,
Chairman of the Board of both the Company and Santa Fe, is a control person of both entities.
On
February 5, 2020, after review by independent directors of the Company, and by the unanimous vote of all directors of the Company
(with Mr. Winfield abstaining), the Board approved the entry into the Contribution Agreement and the consummation of the Transaction.
The Company’s Board approved the Transaction after the receipt of a fairness opinion from a third-party independent firm.
The Board was first made aware of the Transaction in early January 2020, received information to review on or about January 17,
2020 and was given multiple opportunities to discuss the materials with management before the February 5, 2020 Board meeting.
The Contribution Agreement also contains a provision for a potential subsequent earn out to InterGroup pursuant to terms set forth
therein.
As
Chairman of the Executive Strategic Real Estate and Securities Investment Committee, the Company’s President and Chief Executive
Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority
granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Board of Portsmouth
and Santa Fe and oversees the investment activity of those companies. Effective June 2016, Mr. Winfield became the Managing Director
of Justice. 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
18 – COMMITMENTS AND CONTINGENCIES
Cash
Management Agreement
As
part of the Hotel refinancing effective December 18, 2013, Operating entered into a Cash Management Agreement with Bank of America,
N.A. (“Lender”) and Wells Fargo Bank, N.A. (“Cash Management Bank”) whereby all cash received by Operating
is to be deposited into a business checking account controlled by the Cash Management Bank up to the loan maturity date. Additionally,
other terms of the Cash Management Agreement provide that effective February 2019 or upon a Property Improvement Plan (“PIP”)
requirement by Hilton (“Franchisor”) deemed the “Cash Sweep Period” during which all excess cash generated
by Operating beyond the monthly budgeted expenses and debt services including principal and interest, insurance reserves, real
estate taxes reserve, furniture fixtures and equipment (“FF&E”) reserves, for the senior and mezzanine loans,
will be held by the Cash Management Bank for future hotel improvements as required by the date or a PIP. Currently, any and all
funds are being controlled by the Cash Management Bank according to the Cash Management Agreement.
Franchise
Agreements
The
Partnership entered into a Franchise License Agreement (the “License Agreement”) with the HLT Existing Franchise Holding
LLC (“Hilton”) on November 24, 2004. The term of the License agreement was for an initial period of 15 years commencing
on the date the Hotel began operating as a Hilton hotel, with an option to extend the License Agreement for another five years,
subject to certain conditions. On June 26, 2015, Operating and Hilton entered into an amended franchise agreement which amongst
other things extended the License Agreement through 2030, and also provided the Partnership certain key money cash incentives
to be earned through 2030.
Since
the opening of the Hotel as a full brand Hilton in January 2006, the Partnership has incurred monthly royalties, program fees
and information technology recapture charges equal to a percentage of the Hotel’s gross room revenue. Fees for such services
during fiscal year 2020 and 2019 totaled approximately $3.0 million and $4.1 million, respectively.
Hotel
Employees
Effective
February 3, 2017, the Partnership had no employees. On February 3, 2017, Interstate assumed all labor union agreements and retained
employees of their choice to continue providing services to the Hotel. As of June 30, 2020, approximately 87% of those employees
were represented by one of three labor unions, and their terms of employment were determined under various collective bargaining
agreements (“CBAs”) to which the Partnership was a party. During the fiscal year ended June 30, 2020, the Partnership
renewed the CBA for Local 2 (Hotel and Restaurant Employees). CBA for Local 856 (International Brotherhood of Teamsters) will
expire on December 31, 2022. CBA for Local 39 (Stationary Engineers) will expire on July 31, 2024.
Negotiation
of collective bargaining agreements, which includes not just terms and conditions of employment, but scope and coverage of employees,
is a regular and expected course of business operations for the Partnership and Interstate. The Partnership expects and anticipates
that the terms of conditions of CBAs will have an impact on wage and benefit costs, operating expenses, and certain hotel operations
during the life of each CBA, and incorporates these principles into its operating and budgetary practices.
Legal
Matters
The
Company may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company will
defend itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material
effect on the financial conditions or result of operations when resolved.
NOTE
19 – SUBSEQUENT EVENTS
In
July 2020, the Company entered into a second modification agreement with CIBC Bank USA (“CIBC”) which extended the
maturity date of its $8,000,000 RLOC to July 21, 2021.
On
August 19, 2020, Operating entered into a consent agreement whereby the Lender agreed to release certain PIP deposits held in
escrow for the benefit of Operating but restricted to be utilized specifically for a future PIP. Since Franchisor will not require
a PIP until the expiration of the franchise agreement in January 2030 or upon the sale of the Hotel, on August 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.
On
August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and realized
a gain on the sale of approximately $12,026,000. 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 in July 2018 to
pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the Contribution Agreement between Santa Fe
and InterGroup, Santa Fe paid InterGroup $662,000 from the sale. Santa Fe will not seek a replacement property.