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 has suspended or restricted certain activities. Health Order C19-07q (the "Order") incorporates suspensions, reductions in capacity limits, and other restrictions contained in the Regional Stay At Home Order issued by theCalifornia Department of Public Health onDecember 3, 2020 . EffectiveDecember 17, 2020 , theBay Area Region , includingSan Francisco , is required to comply with the State'sDecember 3, 2020 Regional Stay-at-Home Order. The Order strongly discourages anyone in the County from travelling for leisure, recreation, business or other purposes that can be postponed until after the current surge. With limited exceptions, this Order imposed a mandatory quarantine on anyone traveling, moving, or returning to the County from anywhere outside theBay Area . EffectiveJanuary 20, 2021 , Health Order C19- 07r revised and replaced the previous Order; it continues to temporarily prohibit certain businesses and activities from resuming but allows certain other businesses, activities, travel and governmental functions to occur subject to specified health and safety restrictions, limitations, and conditions to limit the transmission of COVID-19. Quarantine and isolation requirements and recommendations upon moving to, traveling to, or returning to the County have not changed from the previous Order. OnMarch 24, 2021 , the City and County ofSan Francisco announced it moved into the orange tier which removed the suggested Shelter in Place for guests travelling toSan Francisco . This was a very positive step for the hotel community. This tier opens up activities in the city including expanded restaurant capacities, museums and attractions. For the hotel it allows for guests to gather in public spaces and for outlets and amenities to open up at limited capacities including fitness centers. It does not change the very stringent cleaning and sanitation requirements set forth by the Health Officer of the City and County ofSan Francisco which proves to be a costly measure to maintain. EffectiveMay 6, 2021 , the City and County ofSan Francisco moved
into the yellow tier guidelines. In response to the decrease in demand, we have since furloughed all managers at the Hotel except for members of the executive team and continue to limit hourly staff to a minimum. By the end ofMarch 2020 , we had temporarily closed all of our food and beverage outlets, valet parking, concierge and bell services, fitness center, as well as the executive lounge facility. We continue to implement social distancing standards and cleaning processes designed by Interstate and Hilton to keep employees and guests safe. The full impact and duration of the COVID-19 outbreak continues to evolve as of the date of this report. The pandemic effectively eliminated our ability to generate any profits, due to the drastic decline in both leisure and business travel. As a result, management believes the ongoing length and severity of the economic downturn caused by the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results. We are also assessing the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets. As of the date of this report, the effects of the pandemic continue to affect our economy, business and leisure travel, and our needs to continue to curtail certain revenue generating activities at the Hotel. We expect that the effects will have a material adverse effect on our business until the pandemic ends. As a result of the 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 is 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. 16
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 had used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan is scheduled to mature onFebruary 3, 2026 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. Justice submitted its application for full loan forgiveness onSeptember 3, 2021 . RESULTS OF OPERATIONS The Company's principal business is conducted through its general and limited partnership interest in theJustice Investors Limited Partnership ("Justice" or the "Partnership"). Justice owns a 544-room hotel property located at750 Kearny Street ,San Francisco, California 94108, known as the "Hilton San Francisco Financial District " (the "Hotel" or the "Property") and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company. The Hotel is operated by the Partnership as a full-service Hilton brand hotel pursuant to a License Agreement with Hilton. The Partnership entered into the License Agreement onDecember 10, 2004 . The term of the License Agreement was for an initial period of 15 years commencing on the reopening date, upon completion of a major renovation, with an option to extend the License Agreement for another five years, subject to certain conditions. OnJune 26, 2015 , the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money incentive fee in the form of a self-exhausting, interest free note payable to be earned through 2030. The key money incentive fee of$4,750,000 was received onJuly 1, 2015 . As ofJune 30, 2021 and 2020, the balance of the note was$2,692,000 and$3,008,000 , respectively, and are included in related party and other notes payable in the consolidated balance sheets. OnFebruary 1, 2017 , Justice entered into a Hotel management agreement ("HMA") withInterstate Management Company, LLC ("Interstate") to manage the Hotel with an effective takeover date ofFebruary 3, 2017 . The term of 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. As ofJune 30, 2020 , balance of the key money including accrued interest was$1,009,000 and is included in restricted cash in the consolidated balance sheets. As ofJune 30, 2021 , the key money balance was zero as the Hotel obtained approval from Interstate to use the funds for hotel operations during the first quarter of fiscal year 2021. As ofJune 30, 2021 and 2020, balance of the unamortized portion of the key money are$1,396,000 and$1,646,000 , respectively, and are included in the related party notes payable in the consolidated balance sheets. OnOctober 25, 2019 , Interstate merged withAimbridge Hospitality ,North America's largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under theAimbridge Hospitality name in theAmericas . Fiscal Year EndedJune 30, 2021 Compared to Fiscal Year EndedJune 30, 2020
The Company had net loss of
The Company had net loss from Hotel operations of$7,873,000 for the year endedJune 30, 2021 compared to net loss of$4,012,000 for the year endedJune 30, 2020 . The change was primarily attributable to the$28,171,000 decrease in Hotel revenue, offset by the$19,422,000 decrease in operating expenses. 17
The following table sets forth a more detailed presentation of Hotel operations
for the years ended
For the year ended June 30, 2021 2020 Hotel revenues: Hotel rooms$ 12,138,000 $ 36,465,000 Food and beverage 293,000 3,529,000 Garage 2,117,000 2,368,000 Other operating departments 120,000 477,000 Total hotel revenues 14,668,000 42,839,000 Operating expenses excluding depreciation and amortization (17,911,000 ) (37,333,000 ) Operating (loss) income before interest, depreciation and amortization (3,243,000 )
5,506,000 Gain on sale of assets 12,000 - Gain on forgiveness of debt 4,719,000 - Interest expense - mortgage (7,282,000 ) (7,326,000 ) Depreciation and amortization expense (2,079,000 ) (2,192,000 ) Net loss from Hotel operations$ (7,873,000 ) $ (4,012,000 ) For the year endedJune 30, 2021 , the Hotel had operating loss of$3,243,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of$14,668,000 compared to operating income of$5,506,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of$42,839,000 for the year endedJune 30, 2020 . Room revenues decreased by$24,327,000 for the year endedJune 30, 2021 compared to the year endedJune 30, 2020 , food and beverage revenue decreased by$3,236,000 , revenue from garage decreased by$251,000 , and revenue from other operating departments decreased by$357,000 . The year over year decline in all areas are result of the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak inMarch 2020 which continues to affect us. The following table sets forth the monthly average occupancy percentage of the Hotel for the fiscal years endedJune 30, 2021 and 2020. Month July August September October November December January February March April May June Fiscal Year Year 2020 2020 2020 2020 2020 2020 2021 2021 2021 2021 2021 2021 2020 - 2021 Average Occupancy % 44 % 55 % 62 % 64 % 52 % 30 % 29 % 45 % 67 % 66 % 71 % 78 % 55 % Month July August September
October November December January February March April May June Fiscal Year
Year 2019 2019 2019 2019 2019 2019 2020 2020 2020 2020 2020 2020 2019 - 2020
Average Occupancy % 98 % 99 % 98 % 97 % 99 % 98 % 96 % 96 % 35 % 10 % 27 % 34 % 74 %
Operating expenses decreased by $19,422,000 for the year ended June 30, 2021 to
$17,911,000 compared to the year ended June 30, 2020 of $37,333,000 primarily
due to decrease in salaries and wages, rooms commission, credit card fees,
management fees, and franchise fees.
The following table sets forth the average daily room rate, average occupancy
percentage and room revenue per available room ("RevPAR") of the Hotel for the
year ended June 30, 2021 and 2020.
For the Year Average Average
Ended June 30, Daily Rate Occupancy % RevPAR
2021 $ 111 55 % $ 61
2020 $ 248 74 % $ 183
The Hotel's revenues decreased by 65% year over year. Average daily rate
decreased by $137 , average occupancy dropped 19%, and RevPAR decreased by $122
for the twelve months ended June 30, 2021 compared to the twelve months ended
June 30, 2020 .
In order to provide our guests with best-in-class technology experience, we completed the upgrade of our new internet system from Cisco including a complete hotel re-cabling with the latest Ethernet and fiber and installed new 55" smart 4K televisions and Hilton's stay connected internet streaming products, including Netflix streaming. We also replaced mattresses and pillows in all guestrooms during the fiscal year endedJune 30, 2020 . Replacement of all corridor floor coverings was completed inJuly 2021 and a guestroom carpet replacement program commenced inJune 2021 and is scheduled to be completed prior to fiscal year endingJune 30, 2022 . The COVID-19 pandemic and design delays have pushed back the plans for the conversion of the Justice offices, Fitness Center, SPA andExecutive Lounge ; projects that would add 19 guest rooms to our inventory. The long-term value of these rooms is in utilizing them as income producing guest rooms, and we will work to implement a new timeline as business returns. Part of this renovation will be funded by the Hotel's furniture, fixture and equipment reserve account with our lender. Lastly, the Hotel completed the installation of a complete exterior building maintenance system which will enable periodic window washing, replaced and upgraded all computers in the business center and administrative offices. 18 The Company had a net gain on marketable securities of$1,399,000 for the year endedJune 30, 2021 compared to a net loss on marketable securities of$322,000 for the year endedJune 30, 2020 . For the year endedJune 30, 2021 , the Company had$1,031,000 net gain related to the Company's investment in the common stock of Comstock Mining Inc. ("Comstock" - NYSE MKT: LODE). For the year endedJune 30, 2020 , the Company had net zero gain related to the Company's investment in the common stock of Comstock. As ofJune 30, 2021 and 2020, investments in Comstock represent approximately 19% and 60%, respectively, of the Company's investment portfolio. For the year endedJune 30, 2021 , the Company had a net realized loss of$540,000 and a net unrealized gain of$1,939,000 . For the year endedJune 30, 2020 , the Company had a net realized loss of$177,000 and a net unrealized loss of$145,000 . 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. During the year endedJune 30, 2021 and 2020, the Company performed an impairment analysis of its other investments and determined its investments had other than temporary impairments and recorded impairment losses of$38,000
and$80,000 , 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, 2021 and 2020 represents the income tax effect on the Company's pretax loss which include its share in net loss of the Hotel.
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As ofJune 30, 2021 and 2020, the Company had investments in marketable equity securities of$3,536,000 and$565,000 , respectively. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups: % of Total As of June 30, 2021 Investment Industry Group Fair Value Securities Communication services$ 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 % % of Total As of June 30, 2020 Investment Industry Group Fair Value Securities Basic materials$ 377,000 66.7 % REITs and real estate companies 162,000 28.7 % Energy 26,000 4.6 %$ 565,000 100.0 %
As ofJune 30, 2021 , the Company held twelve different equity positions in its investment portfolio. The Company held three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 38% of the portfolio and consists of the common stock of ViacomCBS Inc. (NASDAQ: VIACP) which is included in the communication services industry group. 19
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, 2021 2020
Net gain (loss) on marketable securities
Impairment loss on other investments (38,000 ) (80,000 )
Dividend and interest income 17,000 134,000
Margin interest expense (11,000 ) (19,000 )
Trading expenses (130,000 ) (111,000 )
Net gain (loss) from marketable securities
FINANCIAL CONDITION AND LIQUIDITY
The Company had cash and cash equivalents of$2,310,000 and$4,710,000 as ofJune 30, 2021 and 2020, respectively. In addition, the Hotel had$6,222,000 and$10,666,000 of restricted cash held by its senior lenderWells Fargo Bank, N.A. ("Lender") as ofJune 30, 2021 and 2020, respectively. Of the$10,666,000 restricted cash held as ofJune 30, 2020 ,$2,432,000 was for a possible future property improvement plan ("PIP") requested by our franchisor, Hilton. However, Hilton confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i)January 2030 , which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. OnAugust 19, 2020 , Lender released PIP deposits in the amount of$2,379,000 to the Hotel. The funds were utilized to fund operating expenses, including franchise and management fees and other expenses. OnApril 9, 2020 , Justice entered into a loan agreement ("SBA Loan") 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 is 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.
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 had used all proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA Loan is scheduled to mature onFebruary 3, 2026 and has a 1.00% interest rate and is subject to the terms and conditions applicable to loans administered by theU.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. Justice submitted its application for full loan forgiveness onSeptember 3, 2021 . 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 . During the fiscal year endingJune 30, 2021 , InterGroup has advanced$3,650,000 to Justice per the aforementioned loan modification agreement. The Partnership is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order to raise additional capital. Additionally, onAugust 28, 2020 , theBoard of InterGroup passed resolutions to provide funding to Portsmouth if necessary. In order to increase its liquidity position and to take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex inParsippany, New Jersey onApril 30, 2020 , generating net proceeds of$6,814,000 . InJune 2020 , InterGroup refinanced one of itsCalifornia properties and generated net proceeds of$1,144,000 . During the fiscal year endedJune 30, 2021 , InterGroup completed refinancing on six of itsCalifornia properties and generated net proceeds of$6,762,000 . InterGroup is currently evaluating other refinancing opportunities and it could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable. InterGroup has an uncollateralized$8,000,000 revolving line of credit fromCIBC Bank USA ("CIBC") and the entire$8,000,000 is available to be drawn down as ofJune 30, 2021 should additional liquidity be necessary. 20 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, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy and low RevPAR were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However, there can be no guarantee that management will be successful with its plan.
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 2022 2023 2024 2025 2026 Thereafter
Mortgage notes payable $ 110,745,000 $ 1,632,000 $ 1,721,000 $ 107,392,000 $ - $ - $ -
PPP and other notes payable 2,664,000 481,000 183,000 - - 2,000,000 -
Related party notes payable 10,739,000 567,000 7,217,000 567,000 567,000 567,000 1,254,000
Interest 16,720,000 7,088,000 6,180,000 3,452,000 - - -
Total $ 140,868,000 $ 9,768,000 $ 15,301,000 $ 111,411,000 $ 567,000 $ 2,567,000 $ 1,254,000 OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
IMPACT OF INFLATION Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Interstate has the power and ability under the terms of its management agreement to adjust Hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. 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 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.
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