PORTSMOUTH SQUARE, INC. FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended
("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended ("Exchange Act"). Forward-looking statements include, but are not
limited to, statements related to our expectations regarding the performance of
our business, our financial results, our liquidity and capital resources, the
impact to our business and financial condition, and measures being taken in
response to the novel strain of coronavirus and the disease it causes
("COVID-19"), the effects of competition and the effects of future legislation
or regulations and other non-historical statements. Forward-looking statements
include all statements that are not historical facts, and in some cases, can be
identified by the use of forward-looking terminology such as the words
"outlook," "believes," "expects," "potential," "continues," "may," "will,"
"should," "could," "seeks," "projects," "predicts," "intends," "plans,"
"estimates," "anticipates" or the negative version of these words or other
comparable words. You should not rely on forward-looking statements since they
involve known and unknown risks, uncertainties and other factors which are, in
some cases, beyond our control and which could materially affect our results of
operations, financial condition, cash flows, performance or future achievements
or events.
Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry; the impact of terrorism and war on the national and international economies, including tourism, securities markets, energy and fuel costs; natural disasters; general economic conditions and competition in the hotel industry in theSan Francisco area; seasonality, labor relations and labor disruptions; actual and threatened pandemics such as swine flu or the outbreak of COVID-19 or similar outbreaks; the ability to obtain financing at favorable interest rates and terms; securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company's Annual Report on Form 10-K for the fiscal year endedJune 30, 2022 . These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. COVID19 UPDATE
The novel strain of coronavirus and the disease it causes ("COVID-19") have
continued to affect the hospitality industry and our business. Beginning in
March 2020 , travel restrictions and mandated closings of non-essential
businesses were imposed, which resulted in temporary suspensions of operations
in many hotels in San Francisco , however, the Company did not suspend operations
and did not close the hotel. As vaccination rates across the country increased
and COVID-19 related restrictions were eased or removed, we saw an increase in
travel and hospitality spending beginning in the second calendar quarter of
2021. During the second quarter of calendar year 2022, we continued to witness
robust leisure demand and an acceleration in group and business transient
demand. However, the potential for an economic slowdown or a recession during
the second half of 2022 may disrupt the positive momentum at the Company's
hotel
and our industry.
We believe the distribution of the COVID-19 vaccine during 2021 drove the
improvement in traveler sentiment we experienced and resulted in an improvement
in occupancy, Average Daily Rate ("ADR") and Revenue per Available Room
("RevPAR") during 2021. If additional virus variants emerge causing re-imposed
widespread travel restrictions, the hospitality industry will be negatively
affected. While there can be no assurances that the Company will not experience
further fluctuations in hotel revenues or earnings due to the uncertainty of
COVID-19 and other macroeconomic factors, such as inflation, increases in
interest rates, potential economic slowdown or a recession and geopolitical
conflicts, we expect to continue to recover through the remainder of fiscal year
2023 based on current demand trends.
- 16 -
RESULTS OF OPERATIONS
The Company's principal source of revenue continues to be derived from its ownership inJustice Operating Company, LLC ("Operating") inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. Operating owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Operating have been consolidated with those of the Company.
Three Months Ended
The Company had net loss of$9,000 for the three months endedSeptember 30, 2022 compared to net loss of$1,975,000 for the three months endedSeptember 30, 2021 . The decrease is primarily attributable to the increase in Hotel revenue, offset by operating expenses.Hotel Operations
The Company had net income from Hotel operations of
The following table sets forth a more detailed presentation of Hotel operations
for the three months ended
For the three months endedSeptember 30, 2022
2021 Hotel revenues: Hotel rooms$ 10,803,000 $ 5,562,000 Food and beverage 535,000 266,000 Garage 822,000 907,000 Other operating departments 150,000 70,000 Total hotel revenues 12,310,000 6,805,000 Operating expenses excluding depreciation and amortization (9,306,000 ) (6,333,000 ) Operating income before interest, depreciation and amortization 3,004,000
472,000
Interest expense (2,062,000 ) (1,898,000 ) Depreciation and amortization expense (627,000 ) (529,000 ) Net income (loss) from Hotel operations$ 315,000 $ (1,955,000 )
For the three months ended
For the three months endedSeptember 30, 2022 , room revenues increased by$5,241,000 , food and beverage revenue increased by$269,000 and garage decreased by$85,000 due to less people driving into the City and taking public transportation as the COVID-19 pandemic subsided and restrictions were lifted, compared to the three months endedSeptember 30, 2021 . The year over year increase in all the revenue sources except for garage revenues are as a result of the recovery from the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak sinceMarch 2020 . Total operating expenses increased by$2,973,000 due to increase in salaries and wages, commission, credit card fees, management fees, and franchise fees. - 17 - The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months endedSeptember 30 ,
2022 and 2021. Three Months Average Average
Ended
2022 $ 230 94 % $ 216
2021 $ 141 79 % $ 111 The Hotel's revenues increased by 81% this quarter as compared to the previous
comparable quarter. Average daily rate increased by
Investment Transactions The Company had a net loss on marketable securities of$10,000 for the three months endedSeptember 30, 2022 compared to a net loss on marketable securities of$445,000 for the three months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2022 , the Company had a net realized loss of$100,000 and a net unrealized gain of$90,000 . For the three months endedSeptember 30, 2021 , the Company had a net realized loss of$45,000 and a net unrealized loss of$400,000 . Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities see theMarketable Securities section below. The Company consolidated Justice ("Hotel") for financial reporting purposes and was not taxed on its non-controlling interest in the Hotel. However, effectiveJuly 15, 2021 , the Company become the owner of 100% of Justice and will include all the Hotel's income and expense accounts into its income taxes calculations going forward. The income tax benefit during the three months endedSeptember 30, 2022 and 2021 represent the income tax effect on the Company's pretax loss which includes the operations of the Hotel. MARKETABLE SECURITIES The following table shows the composition of the Company's marketable securities portfolio as ofSeptember 30, 2022 andJune 30, 2022 by selected industry groups. % of Total As of September 30, 2022 Investment Industry Group Fair Value Securities REITs and real estate companies$ 181,000 61.4 % Communication services 93,000 31.5 % Utilities 11,000 3.7 % Basic materials 9,000 3.1 % Energy 1,000 0.3 %$ 295,000 100.0 % - 18 - % of Total As of June 30, 2022 Investment Industry Group Fair Value Securities Communication services$ 355,000 65.6 % REITs and real estate companies 162,000 29.9 % Basic materials 18,000 3.3 % Utilities 5,000 0.9 % Technology 1,000 0.3 %$ 541,000 100.0 %
As ofSeptember 30, 2022 , the Company's investment portfolio includes five equity positions. The Company holds two equity securities that are more than 10% of the equity value of the portfolio. The largest security position represents 61% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL) and is included in REITS and real estate companies industry group. As ofJune 30, 2022 , the Company held five different equity positions in its investment portfolio. The Company held two equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 66% of the portfolio and consists of the common stock of Paramount Global - Preferred Stock (NASDAQ: PARAP), which is included in the communication services industry group.
The following table shows the net loss on the Company's marketable securities and the associated margin interest and trading expenses for the respective periods:
For the three months ended September 30, 2022 2021
Net loss on marketable securities
26,000 34,000
Margin interest expense (6,000 ) (16,000 )
Trading and management expenses (28,000 ) (40,000 )
$ (18,000 ) $ (467,000 )
- 19 -
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL SOURCES
The Company had cash, cash equivalents and restricted cash of$8,917,000 and$8,888,000 as ofSeptember 30, 2022 andJune 30, 2022 , respectively. The Company had marketable securities, net of margin due to securities brokers, of$295,000 and$411,000 as ofSeptember 30, 2022 andJune 30, 2022 , respectively. These marketable securities are short-term investments and liquid in nature. OnDecember 16, 2020 , Justice and InterGroup entered into a loan modification agreement which increased Justice's borrowing from InterGroup as needed up to$10,000,000 and extended the maturity date of the loan toJuly 31, 2021 . The maturity date was extended toJuly 31, 2023 . Upon the dissolution of Justice inDecember 2021 , Portsmouth assumed Justice's note payable to InterGroup in the amount of$11,350,000 . OnDecember 31, 2021 , Portsmouth and InterGroup entered into a loan modification agreement which increased Portsmouth's borrowing from InterGroup as needed up to$16,000,000 . During the fiscal year endingJune 30, 2022 , InterGroup advanced$7,550,000 to the Hotel, bringing the total amount due to InterGroup to$14,200,000 as ofJune 30, 2022 . During the three months endedSeptember 30, 2022 , the Company did not need any additional funding and does not anticipate any need for funding from InterGroup in the near future. The Company could amend its by-laws and increase the number of authorized shares to issue additional shares to raise capital in the public markets if needed. 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. 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 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 occupancy and revenue per occupied room ("RevPAR", calculated by multiplying the hotel's average daily room rate by its occupancy percentage) were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of
9 Months Year Year Year Year
Total 2023 2024 2025 2026 2027 Thereafter
Mortgage notes payable $ 108,554,000 $ 1,315,000 $ 107,239,000 $ - $ - $ - $ -
Related party notes payable 17,579,000 425,000 14,767,000 567,000 567,000 463,000 790,000
Interest 8,408,000 5,341,000 3,067,000 - - - -
Total $ 134,541,000 $ 7,081,000 $ 125,073,000 $ 567,000 $ 567,000 $ 463,000 $ 790,000 OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
IMPACT OF INFLATION Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Aimbridge has the power and ability under the terms of its management agreement to adjust Hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. For the two most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material. - 20 -
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an ongoing basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company's critical accounting policies during the nine months endedSeptember 30, 2022 .
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