PORTSMOUTH SQUARE, INC. NEGATIVE EFFECTS OF CIVIL AUTHORITY ACTIONS ON OUR BUSINESS
OnFebruary 25, 2020 , theCity of San Francisco issued the proclamation by the Mayor declaring the existence of a local emergency. The negative effects of the civil authority actions related to the novel strain of coronavirus ("COVID-19") on our business have been significant. InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many businesses, including ours. To mitigate the harm from the pandemic, onMarch 16, 2020 , the City and County ofSan Francisco , along with a group of five otherBay Area counties and theCity of Berkeley , issued parallel health officer orders imposing shelter in place limitations across theBay Area , requiring everyone to stay safe at home except for certain essential needs. SinceFebruary 2020 , several unfavorable events and civil authority actions have unfolded causing demand for our hotel rooms to suffer including cancellations of all citywide conventions, reduction of flights in and out of theBay Area and decline in both leisure and business travel. InDecember 2020 , due to the surge in COVID-19 cases and hospitalizations, the Health Officer of the City and County ofSan Francisco suspended or restricted certain activities. Health Order C19-07q (the "Order") incorporates suspensions, reductions in capacity limits, and other restrictions contained in the Regional Stay At Home Order issued by theCalifornia Department of Public Health onDecember 3, 2020 . EffectiveDecember 17, 2020 , theBay Area Region , includingSan Francisco , was required to comply with the State'sDecember 3, 2020 Regional Stay-at-Home Order. The Order strongly discouraged anyone in the County from travelling for leisure, recreation, business, or other purposes that could be postponed until after the surge. With limited exceptions, this Order imposed a mandatory quarantine on anyone traveling, moving, or returning to the County from anywhere outside theBay Area . EffectiveJanuary 20, 2021 , Health Order C19- 07r revised and replaced the previous Order; it continued to temporarily prohibit certain businesses and activities from resuming but allowed certain other businesses, activities, travel, and governmental functions to occur subject to specified health and safety restrictions, limitations, and conditions to limit the transmission of COVID-19. OnMarch 24, 2021 , the City and County ofSan Francisco announced it moved into the orange tier which removed the suggested Shelter in Place for guests travelling toSan Francisco . This was a very positive step for the hotel community. This tier opened activities in the city including expanded restaurant capacities, museums, and attractions. For the hotel it allowed for guests to gather in public spaces and for outlets and amenities to open at limited capacities including fitness centers. It did not change the very stringent cleaning and sanitation requirements set forth by the Health Officer of the City and County ofSan Francisco which proved to be a costly measure to maintain. EffectiveMay 6, 2021 , the City and County ofSan Francisco moved into the yellow tier guidelines. We continue to closely monitor the very fluid changes that theCenter for Disease Control ,San Francisco Department of Health and other authorities implement with regards to the COVID-19 pandemic. OnAugust 20, 2021 ,San Francisco announced vaccination requirements for indoor activities. This order requires restaurants, theaters, and entertainment venues where food or drink is served inside, as well as gyms, recreation facilities, yoga studios, dance studios and other fitness establishments, clubs involving elevated breathing to show proof of vaccination. OnJanuary 11, 2022 , a new Health Order has been issued. The primary change to the Order is to comply with changes the State made lowering the threshold for mega events to 500 attendees indoor and 5,000 attendees outdoor beginningJanuary 15, 2022 . OnMarch 17, 2022 , theState of California announced that beginning onApril 1, 2022 , it will no longer require that people attending Indoor Mega-Event (i.e., events with 1,000 or more attendees) provide proof of vaccination or negative testing to gain entry. Instead, the State strongly recommend that venues hosting Indoor Mega-Events continue to impose that requirement. 18 TheSan Francisco hospitality market has seen the two largest citywide events go virtual with DreamForce inSeptember 2021 andJP Morgan Healthcare Conference inJanuary 2022 .RSA Conference originally scheduled forFebruary 2022 was moved toJune 2022 and Google Cloud Next was cancelled for 2022. As of the date of this report, the market is seeing slow and steady improvement month over month. Rates in the market grew roughly 20% fromFebruary 2022 toMarch 2022 as demand is steadily increasing, particularly midweek where it has been the softest. Demand generators are returning to the market with the largest beingGame Developers Conference inMarch 2022 . Although it was approximately half of the pre-COVID attendance, it lifted the market to the best RevPAR we have seen sinceMarch 2020 .April 2022 continued the trend with midweek rates rising and another strong performance from the RIMS citywide. May was another strong month with increasing leisure demand and another successful citywide inAmerican Thoracic Society , RevPAR grew 10% month over month. June was the strongest month since the pandemic with rates growing$35 almost 15% just from the previous month driven by strong summer travel and the most successful citywide since the pandemic began in RSA. The hotel achieved a significant benchmark breaking the $4MM mark in total revenues for the first time since January of 2020. July andAugust 2022 performed strong as well as we closed out the expected demand from summer travel along with an increase in much needed Business Travel and small groups to the hotel.April 2022 continued the trend with midweek rates rising and another strong performance from the RIMS citywide. May was another strong month with increasing leisure demand and another successful citywide inAmerican Thoracic Society , RevPAR grew 10% month over month. June was the strongest month since the pandemic with rates growing$35 almost 15% just from the previous month driven by strong summer travel and the most successful citywide since the pandemic began in RSA. The hotel achieved a significant benchmark breaking the $4MM mark in total revenues for the first time since January of 2020. July andAugust 2022 performed strong as well as we closed out the expected demand from summer travel along with an increase in much needed Business Travel and small groups to the hotel.
As a result of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") signed into law onMarch 27, 2020 , additional avenues of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs administered by theSmall Business Administration ("SBA"). The CARES Act includes, among other things, provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. The CARES Act also established a Paycheck Protection Program ("PPP"), whereby certain small businesses are eligible for a loan to fund payroll expenses, rent, and related costs. OnApril 9, 2020 , Justice entered into a loan agreement ("SBA Loan") withCIBC Bank USA under the CARES Act. Justice received proceeds of$4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice used proceeds from the SBA Loan for payroll costs and other qualified expenses. The SBA Loan was scheduled to mature onApril 9, 2022 with a 1.00% interest rate and was subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. OnJune 10, 2021 , the SBA Loan was forgiven in full and$4,719,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year endedJune 30, 2021 .
OnFebruary 3, 2021 , Justice entered into a second loan agreement ("Second SBA Loan") withCIBC Bank USA administered by the SBA. Justice received proceeds of$2,000,000 from the Second SBA Loan. As ofJune 30, 2021 , Justice used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan was scheduled to mature onFebruary 3, 2026 , had a 1.00% interest rate, and was subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. OnNovember 19, 2021 , the Second SBA Loan was forgiven in full and$2,000,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year endedJune 30, 2022 . 19 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. Fiscal Year EndedJune 30, 2022 Compared to Fiscal Year EndedJune 30, 2021 The Company had net loss of$6,565,000 for the year endedJune 30, 2022 compared to net loss of$5,286,000 for the year endedJune 30, 2021 . Increase in Hotel revenue is offset by increased operating expenses, loss on asset disposal, reduced gain from debt extinguishment, and loss on marketable securities. The Company had net loss from Hotel operations of$4,050,000 for the year endedJune 30, 2022 compared to net loss of$7,873,000 for the year endedJune 30, 2021 . The change was primarily attributable to the$16,866,000 increase in Hotel revenue, offset by$9,540,000 increase in operating expenses.
The following table sets forth a more detailed presentation of Hotel operations
for the years ended
For the year ended June 30, 2022 2021 Hotel revenues: Hotel rooms$ 26,599,000 $ 12,138,000 Food and beverage 1,471,000 293,000 Garage 3,112,000 2,117,000 Other operating departments 352,000 120,000 Total hotel revenues 31,534,000 14,668,000 Operating expenses excluding depreciation and amortization (27,451,000 )
(17,911,000 ) Operating income (loss) before interest, depreciation, and amortization
4,083,000 (3,243,000 )
Gain on disposal or sale of assets - 12,000
Gain on forgiveness of debt 2,000,000
4,719,000
Interest expense - mortgage (7,924,000 ) (7,282,000 ) Depreciation and amortization expense (2,209,000 ) (2,079,000 ) Net loss from Hotel operations$ (4,050,000 )
$ (7,873,000 ) For the year endedJune 30, 2022 , the Hotel had operating income of$4,083,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of$31,534,000 compared to operating loss of$3,243,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of$14,668,000 for the year endedJune 30, 2021 . Room revenues increased by$14,461,000 for the year endedJune 30, 2022 compared to the year endedJune 30, 2021 , food and beverage revenue increased by$1,178,000 , revenue from garage increased by$995,000 , and revenue from other operating departments increased by$232,000 . The year over year increase in all areas are result of 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 . The following table sets forth the monthly average occupancy percentage of the Hotel for the fiscal years endedJune 30, 2022 and 2021.
Month Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Fiscal Year
Year 2021 2021 2021 2021 2021 2021 2022 2022 2022 2022 2022 2022 2021 - 2022
Average Occupancy % 82 % 77 % 76 % 79 % 72 % 74 % 68 % 74 % 81 % 87 % 90 % 95 % 80 %
Year 2020 2020 2020 2020 2020 2020 2021 2021 2021 2021 2021 2021 2020 - 2021Average Occupancy % 44 % 55 % 62 % 64 % 52 % 30 % 29 % 45 % 67 % 66 % 71 % 78 %
55 %
20
Total operating expenses increased by
The following table sets forth the average daily room rate, average occupancy
percentage and room revenue per available room ("RevPAR") of the Hotel for the
year ended June 30, 2022 and 2021.
For the Year Average Average
Ended June 30, Daily Rate Occupancy % RevPAR
2022 $ 168 80 % $ 134
2021 $ 111 55 % $ 61
The Hotel's revenues increased by 115% year over year. Average daily rate
increased by $57 , average occupancy increased 25%, and RevPAR increased by $73
for the twelve months ended June 30, 2022 compared to the twelve months ended
June 30, 2021 .
The Hotel has taken advantage of the softer demand to take on many improvement
projects. We have replaced the wall vinyl in several areas in the lobby and
replaced all the art to represent more of the iconic locations in San Francisco .
All lobby and restaurant rugs have been replaced and all public restrooms on the
first four floors have new vinyl. The Hotel has replaced most of the vinyl in
the common areas of the meeting floors and will complete the meeting rooms by
September 2022 . All guest room carpet has been replaced and a new revised model
room that has been valued engineered has been presented to the Hilton design
team and is expected to be completed by mid-year 2023. Project to repurpose the
old Justice offices, accounting offices, Spa, and Executive Lounge has begun
which would add 15 additional income producing guest rooms to our inventory.
Part of the renovation will be funded by the Hotel's furniture, fixture, and
equipment reserve account with our senior lender.
The Company had a net loss on marketable securities of $1,141,000 for the year
ended June 30, 2022 compared to a net gain on marketable securities of
$1,399,000 for the year ended June 30, 2021 . For the year ended June 30, 2022 ,
the Company had $2,056,000 net loss related to the Company's investment in the
common stock of Comstock Mining Inc. ("Comstock" - NYSE MKT: LODE). For the year
ended June 30, 2021 , the Company had $1,031,000 net gain related to the
Company's investment in the common stock of Comstock. As of June 30, 2022 and
2021, investments in Comstock represent 0% and 19%, respectively, of the
Company's investment portfolio. For the year ended June 30, 2022 , the Company
had a net realized loss of $2,489,000 and a net unrealized gain of $1,348,000 .
For the year ended June 30, 2021 , the Company had a net realized loss of
$540,000 and a net unrealized gain of $1,939,000 . Gains and losses on marketable
securities may fluctuate significantly from period to period in the future and
could have a significant impact on the Company's results of operations. However,
the amount of gain or loss on marketable securities for any given period may
have no predictive value and variations in amount from period to period may have
no analytical value. For a more detailed description of the composition of the
Company's marketable securities see the Marketable Securities section below.
During the year ended June 30, 2022 and 2021, the Company performed an
impairment analysis of its other investments and determined its investments had
other than temporary impairments and recorded impairment losses of $20,000 and$38,000 , respectively. The Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax benefit during the years endedJune 30, 2022 and 2021 represents the income tax effect on the Company's pretax loss which include its share in net loss of the Hotel. 21
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As ofJune 30, 2022 and 2021, the Company had investments in marketable equity securities of$541,000 and$3,536,000 , respectively. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups: % of Total As of June 30, 2022 Investment Industry Group Fair Value Securities Communication services$ 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 % % of Total As of June 30, 2021 Investment Industry Group Fair Value Securities Communication services$ 1,334,000 37.7 % Basic materials 720,000 20.3 % Industrials 653,000 18.5 % REITs and real estate companies 438,000 12.4 % Energy 250,000 7.1 % Healthcare 141,000 4.0 %$ 3,536,000 100.0 % 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 gain or loss on the Company's marketable securities and the associated margin interest and trading expenses for the respective years.
For the years ended June 30, 2022 2021
Net (loss) gain on marketable securities
(20,000 ) (38,000 )
Dividend and interest income 121,000 17,000
Margin interest expense (41,000 ) (11,000 )
Trading expenses (162,000 ) (130,000 )
Net (loss) gain from marketable securities
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL SOURCES
The Company had cash, cash equivalents and restricted cash of$8,888,000 and$8,532,000 as ofJune 30, 2022 and 2021, respectively. The Company had marketable securities, net of margin due to securities brokers, of$411,000 and$1,821,000 as ofJune 30, 2022 and 2021, 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 . As of the date of this report, 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 . 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. 22 OnApril 9, 2020 , Justice entered into a loan agreement ("SBA Loan") withCIBC Bank USA under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") administered by theU.S. Small Business Administration (the "SBA"). Justice received proceeds of$4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice used the proceeds from the SBA Loan for payroll costs and other qualified expenses. The SBA Loan was scheduled to mature onApril 9, 2022 with a 1.00% interest rate and was subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. OnJune 10, 2021 , the SBA Loan was forgiven in full and$4,719,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year endedJune 30, 2021 . OnFebruary 3, 2021 , Justice entered into a second loan agreement ("Second SBA Loan") withCIBC Bank USA administered by the SBA. Justice received proceeds of$2,000,000 from the Second SBA Loan. As ofJune 30, 2021 , Justice used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan was scheduled to mature onFebruary 3, 2026 , had a 1.00% interest rate, and was subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. OnNovember 19, 2021 , the Second SBA Loan was forgiven in full and$2,000,000 was recorded as gain on debt extinguishment on the consolidated statement of operations for the fiscal year endingJune 30, 2022 . 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 of the Company's material financial obligations which also includes interest.
Year Year Year Year Year
Total 2023 2024 2025 2026 2027 Thereafter
Mortgage notes payable $ 109,114,000 $ 1,721,000 $ 107,393,000 $ - $ - $ - $ -
Related party notes payable 17,721,000 567,000 14,767,000 567,000 567,000 462,000 791,000
Interest 11,080,000 7,871,000 3,209,000 - - - -
Total $ 137,915,000 $ 10,159,000 $ 125,369,000 $ 567,000 $ 567,000 $ 462,000 $ 791,000 OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
23 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.
CRITICAL ACCOUNTING POLICIES AND 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.
© Edgar Online, source
