PORTSMOUTH SQUARE, INC. FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "may," "could," "might" and similar expressions, are intended to identify forward-looking statements.
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; partnership distributions; 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, 2019 . 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. OnMarch 25, 2020 , pursuant to Section 36 of the Securities Exchange Act of 194, theSecurities and Exchange Commission issued Order Release No. 34-88465 (the "Order") granting exemptions to registrants subject to the reporting requirements of the Exchange Act Section 13(a) or 15(d) due to circumstances related to the coronavirus disease 2019 ("COVID-19"). Due to the circumstances related to COVID-19, the Company has relied on the Order with respect to this Quarterly Report on Form 10-Q ("Form 10-Q") for the period endedMarch 31, 2020 . Absent the Order, the Form 10-Q was due onMay 15, 2020 . The Company was unable to file the Form 10-Q on a timely basis due to delays in the preparation and final review of the Form 10-Q by the relevant parties within the Company, due in part by the attention and resources the Company has focused on addressing the severe impacts of the COVID-19 pandemic on our business and operations.
Negative Effects of COVID-19 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 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 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. 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. As of the date of this Quarterly Report, we have temporarily closed all of our food and beverage outlets. We continue to implement social distancing standards 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 Quarterly 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 for the fiscal year endingJune 30, 2020 . 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 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. We are currently evaluating the impact of the provisions of the CARES Act. 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. As described in Note 12 - Subsequent Events, onApril 9, 2020 , Justice entered into a loan agreement ("SBA Loan") withCIBC Bank USA under the CARES Act. The Company received proceeds of$4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, the Company will use proceeds from the SBA Loan primarily for payroll costs. The SBA Loan is scheduled to mature onApril 9, 2022 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. The loan may be forgiven if the funds are used for payroll and other qualified expenses. New guidance on the criteria for forgiveness continues to be released. -19- RESULTS OF OPERATIONS
The Company's principal source of revenue continues to be derived from its general and limited partnership interest in theJustice Investors Limited Partnership ("Justice" or the "Partnership") inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. Justice owns the Hotel 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 Franchise License Agreement (the "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 opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. OnJune 26, 2015 , the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received onJuly 1, 2015 . OnFebruary 1, 2017 , Justice entered into a Hotel management agreement ("HMA") withInterstate Management Company, LLC ("Interstate") to manage the Hotel and related facilities with an effective takeover date ofFebruary 3, 2017 . The term of HMA is for an initial period of ten 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.
Three Months Ended
The Company had net loss of$1,205,000 for the three months endedMarch 31, 2020 compared to net income of$809,000 for the three months endedMarch 31, 2019 . The change is primarily attributable to the decrease in Hotel revenue.
The following table sets forth a more detailed presentation of Hotel operations
for the three months ended
For the three months endedMarch 31, 2020
2019 Hotel revenues: Hotel rooms$ 9,642,000 $ 13,521,000 Food and beverage 874,000 1,218,000 Garage 650,000 652,000 Other operating departments 93,000 78,000 Total hotel revenues 11,259,000 15,469,000 Operating expenses excluding depreciation and amortization (10,060,000 ) (11,378,000 ) Operating income before interest, depreciation and amortization 1,199,000 4,091,000 Loss on disposal of assets - (398,000 ) Interest expense - mortgage (1,793,000 ) (1,941,000 )
Depreciation and amortization expense (547,000 ) (561,000 ) Net (loss) income from Hotel operations$ (1,141,000 ) $
1,191,000 For the three months endedMarch 31, 2020 , the Hotel had operating income of$1,199,000 before interest expense, depreciation and amortization on total operating revenues of$11,259,000 compared to operating income of$4,091,000 before interest expense, depreciation and amortization on total operating revenues of$15,469,000 for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , room revenues decreased by$3,879,000 , and food and beverage revenue decreased by$344,000 , compared to the three months endedMarch 31, 2019 . The year over year decline in both 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 . Revenue from garage and other operating departments increased mainly due to increase in cancellation revenue. -20- Total operating expenses decreased by$1,318,000 due to decrease in salaries and wages, rooms commission, credit card fees, management fees, franchise fees,
and legal fees. The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months endedMarch 31, 2020 and 2019. Three Months Average Average Ended March 31, Daily Rate Occupancy % RevPAR 2020$ 242 76%$ 184 2019$ 290 95%$ 276 The Hotel's revenues decreased by 27% this quarter as compared to the previous comparable quarter. Average daily rate decreased by$48 , average occupancy dropped 19%, and RevPAR decreased by$92 for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Investment Transactions The Company had a net loss on marketable securities of$307,000 for the three months endedMarch 31, 2020 compared to a net gain on marketable securities of$144,000 for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , the Company had a net realized loss of$192,000 and a net unrealized loss of$115,000 . For the three months endedMarch 31, 2019 , the Company had a net realized loss of$80,000 and a net unrealized gain of$224,000 . 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 consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax (expense) benefit during the three months endedMarch 31, 2020 and 2019 represents the income tax effect on the Company's pretax income (loss) which includes its share in the net income (loss) of the Hotel.
Nine Months Ended
The Company had net income of$146,000 for the nine months endedMarch 31, 2020 compared to net income of$2,252,000 for the nine months endedMarch 31, 2019 . The change is primarily attributable to the decrease in Hotel revenue.Hotel Operations Net income from Hotel operations was$1,257,000 for the nine months endedMarch 31, 2020 compared to net income of$3,973,000 for the nine months endedMarch 31, 2019 . The decrease in net income is primarily due to decrease in revenue. -21-
The following table sets forth a more detailed presentation of Hotel operations
for the nine months ended
For the nine months endedMarch 31, 2020
2019 Hotel revenues: Hotel rooms$ 35,453,000 $ 38,608,000 Food and beverage 3,521,000 4,232,000 Garage 2,162,000 2,160,000 Other operating departments 453,000 276,000 Total hotel revenues 41,589,000 45,276,000 Operating expenses excluding depreciation and amortization (33,138,000 ) (33,424,000 ) Operating income before interest, depreciation and amortization 8,451,000 11,852,000 Loss on disposal of assets - (398,000 ) Interest expense - mortgage (5,541,000 ) (5,733,000 ) Depreciation and amortization expense (1,653,000 ) (1,748,000 ) Net income from Hotel operations$ 1,257,000 $
3,973,000
For the nine months ended
For the nine months endedMarch 31, 2020 , room revenues decreased by$3,155,000 and food and beverage revenue decreased by$711,000 . The year over year decline in both 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 . Garage revenue remained consistent year over year. Revenue from other operating departments increased by$177,000 as a result of increase in cancellation revenue.
Total operating expenses decreased 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
nine months ended March 31, 2020 and 2019.
Nine Months Average Average
Ended March 31, Daily Rate Occupancy % RevPAR
2020 $ 256 91 % $ 233
2019 $ 269 96 % $ 259 The Hotel's total revenues decreased by 8% for the nine months endedMarch 31, 2020 as compared to the nine months endedMarch 31, 2019 . Average daily rate decreased by$13 and RevPAR decreased by$26 for the nine months endedMarch 31, 2020 compared to the nine months endedMarch 31, 2019 . Average occupancy dropped by 5% during the nine months endedMarch 31, 2020 versus the comparable period. Investment Transactions The Company had a net loss on marketable securities of$521,000 for the nine months endedMarch 31, 2020 compared to a net loss on marketable securities of$309,000 for the nine months endedMarch 31, 2019 . For the nine months endedMarch 31, 2020 , the Company had a net realized loss of$175,000 and a net unrealized loss of$346,000 . For the nine months endedMarch 31, 2019 , the Company had a net realized gain of$68,000 and a net unrealized loss of$377,000 . Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities see theMarketable Securities section below. -22- The Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the nine months endedMarch 31, 2020 and 2019 represents the income tax effect on the Company's pretax income which includes its share in the net income of the Hotel. MARKETABLE SECURITIES The following table shows the composition of the Company's marketable securities portfolio as ofMarch 31, 2020 andJune 30, 2019 by selected industry groups. % of Total As of March 31, 2020 Investment Industry Group Fair Value Securities Basic materials$ 170,000 51.4 % REITs and real estate companies 158,000 47.7 % Consumer cyclical 3,000 0.9 %$ 331,000 100.0 % % of Total As of June 30, 2019 Investment Industry Group Fair Value Securities REITs and real estate companies$ 451,000 31.7 % Basic materials 351,000 24.6 % Consumer cyclical 318,000 22.3 % Financial Services 165,000 11.6 % Energy 98,000 6.9 % Healthcare 42,000 2.9 %$ 1,425,000 100.0 % As ofMarch 31, 2020 , the Company's investment portfolio includes four 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 48% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL), which is included in the REITs and real estate companies' industry group. The second largest security position represents 43% of the portfolio and consists of the common stock of Comstock, which is included in the basic materials industry group. As ofJune 30, 2019 , the Company's investment portfolio includes approximately eleven equity positions. The Company holds five equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 24% of the portfolio and consists of the common stock of Comstock, which is included in the basic materials industry group. -23-
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
41,000 105,000
Margin interest expense (5,000 ) (8,000 )
Trading and management expenses (28,000 ) (33,000 )
$ (337,000 ) $ 172,000
For the nine months ended March 31, 2020 2019
Net loss on marketable securities
129,000 125,000
Margin interest expense (19,000 ) (37,000 )
Trading and management expenses (84,000 ) (99,000 )
$ (533,000 ) $ (356,000 ) FINANCIAL CONDITION AND LIQUIDITY
Historically, our cash flows have been primarily generated from our Hotel operations. However, management expects that the ongoing length and severity of the economic downturn, resulting from the continuing and uncertain impact of the COVID-19 pandemic, will have a material adverse impact on our business, financial condition, liquidity and financial results. As a result of our Hotel's material decrease in occupancy and average daily rate, we expect our cash flow from operations to continue to be significantly lower than historical rates for the foreseeable future, until the pandemic resolves, and hotel occupancies return to historical rates. We have taken several steps to preserve capital and increase liquidity, including the implementation of various cost saving initiatives at our Hotel. For further discussion, see "Item 2 - Negative Effects of COVID-19 on our Business" included in this Quarterly Report. We may also receive cash generated from the investment of our cash and marketable securities, other investments, and other sources, including financing from our parent companies, Santa Fe and InterGroup. Subsequent toMarch 31, 2020 , in order to increase its liquidity positions and take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit apartment complex inParsippany, New Jersey , generating net proceeds of approximately$6,814,000 . InterGroup is also currently refinancing two of itsCalifornia properties scheduled to close in June andJuly 2020 , and it could refinance additional multifamily properties should the need arise; however, InterGroup does not deem it necessary at this time. InterGroup has an uncollateralized$8,000,000 revolving line of credit fromCIBC Bank USA ("CIBC") of which$5,000,000 is available to be drawn down as ofJune 18, 2020 , should additional liquidity be necessary. As ofMarch 31, 2020 , we had cash, cash equivalents, and restricted cash of$17,457,000 which included$11,550,000 of restricted cash held by our Hotel senior lenderWells Fargo Bank, N.A . ("Lender"). Of the total restricted cash,$7,977,000 was held for furniture, fixtures and equipment ("FF&E") reserves and$2,432,000 was held for a possible future property improvement plan ("PIP") request 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. Therefore, Justice is currently in discussions with the Lender to release the PIP deposits to the Hotel and to allow the Hotel to utilize some or all of its FF&E reserves to fund operating expenses as well as debt service. Additionally, Justice has requested to temporarily pay interest only on the senior mortgage and the suspension of the monthly FF&E reserve installment, for a combined monthly savings in cash flow of approximately$321,000 . Justice anticipates a resolution with the Lender in regard to the aforementioned requests before
June 30, 2020 . OnApril 9, 2020 , Justice entered into a loan agreement ("SBA Loan") withCIBC Bank USA under the recently enacted CARES Act administered by theU.S. Small Business Administration . Justice received proceeds of$4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice will use the proceeds from the SBA Loan primarily for payroll costs. The SBA Loan is scheduled to mature onApril 9, 2022 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. The loan may be forgiven if the funds are used for payroll and other qualified expenses. New guidance on the criteria for forgiveness continues to be released. -24-
We may also have financing availability, upon the authorization of the respective board of directors, to borrow from InterGroup to meets our obligations during the next twelve months and beyond, should the need arise.
We cannot presently estimate the full financial impact of the unprecedented COVID-19 pandemic on our business or predict the related federal, state and local civil authority actions, which are highly dependent on the severity and duration of the pandemic, but we expect that the COVID-19 closures and other imposed restrictions will continue to have a significant adverse impact on our results of operations. Due to the uncertainties associated with the COVID-19 pandemic and the indeterminate length of time it will affect the hospitality industry, we have taken proactive measures to secure our liquidity position to be able to meet our obligations for the foreseeable future, 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. 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. The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company's marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations. 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 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, cash provided by the SBA loan, 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 as of
3 Months Year Year Year Year
Total 2020 2021 2022 2023 2024 Thereafter
Mortgage notes payable $ 112,656,000 $ 364,000 -
Related party and other notes payable 9,002,000 250,000
1,016,000 4,033,000 750,000 567,000 2,386,000
Interest 24,403,000 2,123,000 6,756,000 6,283,000 6,172,000 3,069,000 -
Total $ 146,061,000 $ 2,737,000 $ 9,319,000 $ 11,948,000 $ 8,643,000 $ 111,028,000 $ 2,386,000 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 to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Critical accounting policies are those that are most significant to the presentation 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 condensed financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company's critical accounting policies during the nine months endedMarch 31, 2020 except for the adoption of ASU 2016-02. Please refer to the Company's Annual Report on Form 10-K for the year endedJune 30, 2019 for a summary of the critical accounting policies.
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