Company Quick10K Filing
Quick10K
Intergroup
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$30.10 2 $70
10-K 2019-06-30 Annual: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-02-27 Shareholder Vote
8-K 2018-02-26 Shareholder Vote
SRC Spirit Realty Capital 4,092
PDM Piedmont Office Realty Trust 2,464
IRCP Irsa Propiedades Comerciales 1,374
HOME At Home Group 429
NATH Nathans Famous 286
TPHS Trinity Place 120
MAYS Mays 81
GYRO Gyrodyne 29
EMITF Elbit Imaging 5
NEN New England Realty Associates Limited Partnership 0
INTG 2019-06-30
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters.
Item 6. Selected Financial Data.
Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Note 1 - Business and Significant Accounting Policies and Practices:
Note 2 - Revenue
Note 3 - Justice Investors
Note 4 - Investment in Hotel, Net
Note 5 - Investment in Real Estate, Net
Note 6 - Investment in Marketable Securities
Note 7 - Other Investments, Net
Note 8 - Fair Value Measurements
Note 9 - Other Assets, Net
Note 10 - Related Party and Other Financing Transactions
Note 11 - Mortgage Notes Payable
Note 12 - Management Agreements
Note 13 - Concentration of Credit Risk
Note 14 - Income Taxes
Note 15 - Segment Information
Note 16 - Stock-Based Compensation Plans
Note 17 - Related Party Transactions
Note 18 - Commitments and Contingencies
Note 19 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules.
EX-14 tv527966_ex14.htm
EX-21 tv527966_ex21.htm
EX-31.1 tv527966_ex31-1.htm
EX-31.2 tv527966_ex31-2.htm
EX-32.1 tv527966_ex32-1.htm
EX-32.2 tv527966_ex32-2.htm

Intergroup Earnings 2019-06-30

INTG 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 tv527966_10k.htm FORM 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2019

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to_________

 

Commission File Number 1-10324

 

THE INTERGROUP CORPORATION

(Exact name of registrant as specified in its charter)

 

DELAWARE   13-3293645
(State or Other Jurisdiction of   (I.R.S. Employer
Incorporation or Organization)   Identification No.)

 

12121 Wilshire Boulevard, Suite 610, Los Angeles, California 90025

(Address of principal executive offices) (Zip Code)

 

(310) 889-2500

(Registrant’s telephone number, including area code)

  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered
Common Stock $.01 par value   The NASDAQ Stock Market, LLC

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes x No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

¨ Yes x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 x Yes ¨ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.

  x Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ¨   Accelerated Filer ¨
         
Non-Accelerated Filer x Smaller reporting company x
         
Emerging growth company ¨      

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):

¨ Yes x No

 

The aggregate market value of the Common Stock, no par value, held by non-affiliates computed by reference to the average bid and asked price on December 31, 2018 was $26,115,000.

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock   INTG   NASDAQ CAPITAL MARKET

 

The number of shares outstanding of registrant’s Common Stock, as of August 30, 2019 was 2,309,962.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

  

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
  PART I  
     
Item 1. Business 4
     
Item 1A. Risk Factors 9
     
Item 1B. Unresolved Staff Comments 13
     
Item 2. Properties 13
     
Item 3. Legal Proceedings 17
     
Item 4. Mine Safety Disclosures 17
     
  PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
     
Item 6. Selected Financial Data 19
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
     
Item 8. Financial Statements and Supplementary Data 24
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49
     
Item 9A. Controls and Procedures 49
     
Item 9B. Other Information 51
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance 51
     
Item 11. Executive Compensation 53
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 57
     
Item 13. Certain Relationships and Related Transactions, and Director Independence 59
     
Item 14. Principal Accounting Fees and Services 60
     
  PART IV  
     
Item 15. Exhibits, Financial Statement Schedules 60
     
Signatures   63

   

 2 

 

 

FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation reform Act of 1995. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” “may,” “could,” “might” and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance. From time to time we also provide forward-looking statements in our Forms 10-Q and 8-K, Annual Reports to Shareholders, press releases and other materials we may release to the public. Forward looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause actual results or outcomes to differ materially from those expressed in any forward-looking statement. Consequently, no forward-looking statement can be guaranteed and our actual future results may differ materially.

 

Factors that may cause actual results to differ materially from current expectations include, but are not limited to:

 

  · risks associated with the lodging industry, including competition, increases in wages, labor relations, energy and fuel costs, actual and threatened pandemics, actual and threatened terrorist attacks, and downturns in domestic and international economic and market conditions, particularly in the San Francisco Bay area;

 

  · risks associated with the real estate industry, including changes in real estate and zoning laws or regulations, increases in real property taxes, rising insurance premiums, costs of compliance with environmental laws and other governmental regulations;

 

  · the availability and terms of financing and capital and the general volatility of securities markets;

 

  · changes in the competitive environment in the hotel industry;

 

  · economic volatility and potential recessive trends;

 

  · risks related to natural disasters;

 

  · litigation; and

 

  · other risk factors discussed below in this Report.

 

We caution you not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects on our Forms 10-K and 10-Q, and Current Reports on Form 8-K filed, as well as other filings, with the Securities and Exchange Commission.

 

 3 

 

 

PART I

 

Item 1. Business.

 

GENERAL

 

The InterGroup Corporation (“InterGroup” or the “Company” and may also be referred to as “we” “us” or “our” in this report) is a Delaware corporation formed in 1985, as the successor to Mutual Real Estate Investment Trust ("M-REIT"), a New York real estate investment trust created in 1965. The Company has been a publicly-held company since M-REIT's first public offering of shares in 1966.

 

The Company was organized to buy, develop, operate, rehabilitate and dispose of real property of various types and descriptions, and to engage in such other business and investment activities as would benefit the Company and its shareholders. The Company was founded upon, and remains committed to, social responsibility. Such social responsibility was originally defined as providing decent and affordable housing to people without regard to race. In 1985, after examining the impact of federal, state and local equal housing laws, the Company determined to broaden its definition of social responsibility. The Company changed its form from a REIT to a corporation so that it could pursue a variety of investments beyond real estate and broaden its social impact to engage in any opportunity which would offer the potential to increase shareholder value within the Company's underlying commitment to social responsibility.

 

As of June 30, 2019, the Company owned approximately 82.2% of the common shares of Santa Fe Financial Corporation (“Santa Fe”), a public company (OTC Market Inc.’s Pink: SFEF). Santa Fe’s revenue is primarily generated through its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a public company (OTC Market Inc.’s Pink: PRSI). InterGroup also directly owns approximately 13.4% of Portsmouth. Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors, a California limited partnership (“Justice” or the “Partnership”). Portsmouth has a 93.3% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated with those of the Company.

 

Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”), owns a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Kearny Street Parking LLC (“Parking”) is the operator of the garage. Mezzanine is a wholly-owned subsidiary of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton). Justice had a ten-year management agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. Prism’s management agreement was terminated upon its expiration date of February 2, 2017. Justice entered into a hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of the HMA is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, not to exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base management fee payable to Interstate shall be one and seven-tenths (1.70%) of total Hotel revenue.

 

In addition to the operations of the Hotel, the Company also generates income from the ownership, management and, when appropriate, sale of real estate. Properties include sixteen apartment complexes, one commercial real estate property and three single-family houses. The properties are located throughout the United States but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property. As of June 30, 2019, all of the Company’s operating real estate properties are managed in-house.

 

The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors and its Real Estate Investment Committee. The Company may also look for new real estate investment opportunities in hotels, apartments, office buildings and development properties. The acquisition of any new real estate investments will depend on the Company’s ability to find suitable investment opportunities and the availability of sufficient financing to acquire such investments. To help fund any such acquisition, the Company may borrow funds to leverage its investment capital. The amount of any such debt will depend on a number of factors including, but not limited to, the availability of financing and the sufficiency of the acquisition property’s projected cash flows to support the operations and debt service.

 

 4 

 

 

The Company also may derive income from the investment of its cash and investment securities assets. The Company has invested in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the Company’s marketable securities and other investments.

 

HILTON HOTELS FRANCHISE LICENSE AGREEMENT

 

The Partnership entered into a Franchise License Agreement (the “License Agreement”) with the HLT Existing Franchise Holding LLC (“Hilton”) on December 10, 2004. The term of the License Agreement was for an initial period of fifteen years commencing on the date the Hotel began operating as a Hilton hotel, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, Operating and Hilton entered into an amended franchise agreement that, among other things, extended the License Agreement through 2030, and also provided the Partnership with certain key money cash incentives to be earned through 2030.

 

HOTEL MANAGEMENT COMPANY AGREEMENT

 

On February 1, 2017, Justice entered into a hotel management agreement with Interstate Management Company, LLC to manage the Hotel with an effective takeover date of February 3, 2017. The term of the hotel management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, not to exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base management fee payable to Interstate shall be one and seven-tenths (1.70%) of total Hotel revenue. For the fiscal years ended June 30, 2019 and 2018, Interstate management fees were $1,206,000 and $957,000, respectively, and are included in Hotel operating expenses in the consolidated statements of operations. As part of the HMA, Interstate, through the Partnership’s wholly-owned subsidiary, Kearny Street Parking LLC, manages the parking garage in-house.

 

CHINESE CULTURE FOUNDATION LEASE

 

On March 15, 2005, the Partnership entered into an amended lease with the Chinese Culture Foundation of San Francisco (the “Foundation”) for the third-floor space of the Hotel commonly known as the Chinese Culture Center, which the Foundation had right to occupy pursuant to a 50-year nominal rent lease that began in 1967.

 

The amended lease, among other things, requires the Partnership to pay to the Foundation a monthly event space fee in the amount of $5,000, adjusted annually based on the local Consumer Price Index. As of June 30, 2019, monthly event space fee is $6,200. The term of the amended lease expires on October 17, 2023, with an automatic extension for another 10-year term if the property continues to be operated as a hotel. Subject to certain conditions as set forth in the amended lease, the Foundation is entitled to reserve for a maximum of 75 days per calendar year for use of the event space. In the event that the Partnership needs the event space during one of the dates previously reserved by the Foundation, the Partnership shall pay the Foundation $4,000 per day for using the event space. During the fiscal years ended June 30, 2019 and 2018, the Partnership paid the Foundation $13,000 and $50,000, respectively, for using the event space on previously reserved dates by the Foundation.

 

SALES AND REFINANCINGS OF REAL ESTATE PROPERTIES

 

In July 2015, the Company purchased a residential house in Los Angeles, California as a strategic asset for $1,975,000 in cash. In August 2016, the Company obtained a $1,000,000 mortgage note payable on this property and received net proceeds of $983,000. The interest on the note is 5.75% with interest only payments for twenty-three months. In September 2018, the Company refinanced the mortgage note payable with a new mortgage in the amount of $1,000,000. The interest rate on the mortgage is 4.75% and matures in October 2048.

 

In July 2018, the Company obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest are due in July 2019. On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at our 27-unit apartment complex in Los Angeles. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. As of June 30, 2019, outstanding balance of the RLOC is $2,985,000.

 

 5 

 

 

MARKETABLE SECURITIES INVESTMENT POLICIES

 

In addition to its Hotel and real estate operations, the Company also invests from time to time in income producing instruments, corporate debt and equity securities, publicly traded investment funds, mortgage backed securities, securities issued by REITs and other companies which invest primarily in real estate.

 

The Company’s securities investments are made under the supervision of a Securities Investment Committee of the Board of Directors (the “Committee”). The Committee currently has three members and is chaired by the Company’s Chairman of the Board and President, John V. Winfield. The Committee has delegated authority to manage the portfolio to the Company’s Chairman and President together with such assistants and management committees he may engage. The Committee generally follows certain established investment guidelines for the Company’s investments. These guidelines presently include: (i) corporate equity securities should be listed on the New York Stock Exchange (NYSE), NYSE MKT, NYSE Arca or the Nasdaq Stock Market (NASDAQ); (ii) the issuer of the listed securities should be in compliance with the listing standards of the applicable national securities exchange; and (iii) investment in a particular issuer should not exceed 10% of the market value of the total portfolio. The investment guidelines do not require the Company to divest itself of investments, which initially meet these guidelines but subsequently fail to meet one or more of the investment criteria. The Committee has in the past approved non-conforming investments and may in the future approve non-conforming investments. The Committee may modify these guidelines from time to time.

 

The Company may also invest, with the approval of the Securities Investment Committee, in unlisted securities, such as convertible notes, through private placements including private equity investment funds. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments and reviewed for impairment on a periodic basis. As of June 30, 2019 and 2018, the Company had other investments of $612,000 and $813,000, respectively.

 

As part of its investment strategies, the Company may assume short positions in marketable securities. Short sales are used by the Company to potentially offset normal market risks undertaken in the course of its investing activities or to provide additional return opportunities. As of June 30, 2019 and 2018, the Company had obligations for securities sold (equities short) of $1,225,000 and $1,935,000, respectively.

 

In addition, the Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms. The margin used by the Company may fluctuate depending on market conditions. The use of leverage could be viewed as risky and the market values of the portfolio may be subject to large fluctuations. Margin balances due at June 30, 2019 and 2018 were $1,629,000 and $1,887,000, respectively.

 

As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Portsmouth and Santa Fe and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.

 

Further information with respect to investment in marketable securities and other investments of the Company is set forth in Management Discussion and Analysis of Financial Condition and Results of Operations section and Notes 5 and 6 of the Notes to Consolidated Financial Statements.

 

Seasonality

 

Hotel’s operations historically have been seasonal. Like most hotels in the San Francisco area, the Hotel generally maintains high occupancy and room rates during the entire year except for the weeks starting Thanksgiving through the end of the calendar year due to the holiday season. These seasonal patterns can be expected to cause fluctuations in the quarterly revenues of the Hotel.

 

 6 

 

 

Competition

 

The hotel industry is highly competitive. Competition is based on a number of factors, most notably convenience of location, brand affiliation, price, range of services and guest amenities or accommodations offered and quality of customer service. Competition is often specific to the individual market in which properties are located. The San Francisco market is a very competitive market with a high supply of guest rooms and meeting space in the area. During fiscal year 2019, we installed an advanced state-of-the-art internet system which included a rewiring of the entire hotel with the best possible Ethernet cabling and fiber. Specifically, the complete overhaul of the infrastructure of the Internet in the guest rooms and meeting space will enable the Hotel to compete in this market from a technology perspective. This investment is allowing the Hotel to go to market with measurable statistics that will help win the much-coveted technology company meetings. We installed 55” and 65” 4K smart televisions in all guest rooms and common areas during fiscal year 2019. In fiscal 2018, an architecture firm was contracted to design the new guest rooms which have recently been approved by Hilton and the model rooms are underway. We plan to bring back into service 14 guest rooms on the 5th floor as part of the initial phase of this renovation project and the next phase will include additional rooms being added on the 26th and 27th floors. We anticipate our window washing equipment to be completed within the second quarter of fiscal year 2020.

 

Our highest priority is guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition and is critical to the Hotel’s objective of building sustainable guest loyalty. In order to make a large impact on guest experience, the Hotel will continue training team members on Hilton brand standards and guest satisfaction, hiring and retaining talents in key operations, and enhancing the arrival experience.

 

The Hotel’s location in the San Francisco Financial District lends itself to greater opportunities over its competitors when it comes to developing relationships with the Financial District entities and the customers who regularly do business in the downtown area. The ability to capitalize on the strong midweek demand of the individual business traveler to the Financial District has been the focus during the timeframe of strong growth in the market. The Hotel will continue to focus on self-contained group business that contributes to the Food and Beverage operation and make use of the properties meeting space capabilities. Closure of the Moscone Convention Center has limited banquet revenue contribution in fiscal year 2019 but assisted in strong rate growth year over year. With the Moscone Convention Center returning to full capacity in calendar year 2019, we hope to see more growth in citywide room nights.

 

The Hotel is also subject to certain operating risks common to all of the hotel industry, which could adversely impact performance. These risks include:

 

  · Competition for guests and meetings from other hotels including competition and pricing pressure from internet wholesalers and distributors;

 

  · increases in operating costs, including wages, benefits, insurance, property taxes and energy, due to inflation and other factors, which may not be offset in the future by increased room rates;

 

  · labor strikes, disruptions or lock outs;

 

  · dependence on demand from business and leisure travelers, which may fluctuate and is seasonal;

 

  · increases in energy costs, cost of fuel, airline fares and other expenses related to travel, which may negatively affect traveling;

 

  · terrorism, terrorism alerts and warnings, wars and other military actions, pandemics or other medical events or warnings which may result in decreases in business and leisure travel;

 

  · natural disasters; and

 

  · adverse effects of downturns and recessionary conditions in international, national and/or local economies and market conditions.

 

 7 

 

 

Environmental Matters

 

In connection with the ownership of the Hotel, the Company is subject to various federal, state and local laws, ordinances and regulations relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances.

 

Environmental consultants retained by the Partnership or its lenders conducted updated Phase I environmental site assessments in fiscal year ended June 30, 2014 on the Hotel property. These Phase I assessments relied, in part, on Phase I environmental assessments prepared in connection with the Partnership’s first mortgage loan obtained in December 2013. Phase I assessments are designed to evaluate the potential for environmental contamination on properties based generally upon site inspections, facility personnel interviews, historical information and certain publicly-available databases; however, Phase I assessments will not necessarily reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at the properties.

 

Although the Phase I assessments and other environmental reports we have reviewed disclose certain conditions on our property and the use of hazardous substances in operation and maintenance activities that could pose a risk of environmental contamination or liability, we are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial position, results of operations or cash flows.

 

The Company believes that the Hotel is in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material adverse effect on the Company. The Company has not received written notice from any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present properties.

 

Competition – Rental Properties

 

The ownership, operation and leasing of multifamily rental properties are highly competitive. The Company competes with domestic and foreign financial institutions, other REITs, life insurance companies, pension trusts, trust funds, partnerships and individual investors. In addition, The Company competes for tenants in markets primarily on the basis of property location, rent charged, services provided and the design and condition of improvements. The Company also competes with other quality apartment owned by public and private companies. The number of competitive multifamily properties in a particular market could adversely affect the Company’s ability to lease its multifamily properties, as well as the rents it is able to charge. In addition, other forms of residential properties, including single family housing and town homes, provide housing alternatives to potential residents of quality apartment communities or potential purchasers of for-sale condominium units. The Company competes for residents in its apartment communities based on resident service and amenity offerings and the desirability of the Company’s locations. Resident leases at the Company’s apartment communities are priced competitively based on market conditions, supply and demand characteristics, and the quality and resident service offerings of its communities.

 

EMPLOYEES

 

As of June 30, 2019, the Company had a total of 28 full-time employees. Effective August 2014, the Company entered into a client service agreement with ADP, a professional employer organization serving as an off-site, full service human resource department for its employees. ADP personnel management services are delivered by entering into a co-employment relationship with the Company’s employees. The employees and the Company are not party to any collective bargaining agreement, and the Company believes that its employee relations are satisfactory.

 

Effective February 3, 2017, the Partnership had no employees. On February 3, 2017, Interstate assumed all labor union agreements and retained employees of their choice to continue providing services to the Hotel. As of June 30, 2019, approximately 85% of those employees were represented by one of four labor unions, and their terms of employment were determined under various collective bargaining agreements (“CBAs”) to which the Partnership was a party. During the fiscal year ended June 30, 2019, the Partnership renewed the CBA for Local 39 (Stationary Engineers), and Local 665 (Parking Employees). CBA for Local 2 (Hotel and Restaurant Employees) expired on August 13, 2018 and was renewed in August 2019. CBA for Local 856 (International Brotherhood of Teamsters) will expire on December 31, 2022.

 

Negotiation of collective bargaining agreements, which includes not just terms and conditions of employment, but scope and coverage of employees, is a regular and expected course of business operations for the Partnership and Interstate. The Partnership expects and anticipates that the terms of conditions of CBAs will have an impact on wage and benefit costs, operating expenses, and certain hotel operations during the life of each CBA, and incorporates these principles into its operating and budgetary practices. 

 

 8 

 

 

ADDITIONAL INFORMATION

 

The Company files annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The public may read and copy any materials that we file with the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.

 

Other information about the Company can be found on its website www.intgla.com. Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.

 

Item 1A. Risk Factors.

 

Adverse changes in the U.S. and global economies could negatively impact our financial performance.

 

Due to a number of factors affecting consumers, the outlook for the lodging industry remains uncertain. These factors have resulted at times in the past and could continue to result in the future in fewer customers visiting, or customers spending less, in San Francisco, as compared to prior periods. Leisure travel and other leisure activities represent discretionary expenditures, and participation in such activities tends to decline during economic downturns, during which consumers generally have less disposable income. As a result, in those times customer demand for the luxury amenities and leisure activities that we offer may decline. Furthermore, during periods of economic contraction, revenues may decrease while some of our costs remain fixed or even increase, resulting in decreased earnings.

 

Weakened global economic conditions may adversely affect our industry, business and results of operations.

 

Our overall performance depends in part on worldwide economic conditions which could adversely affect the tourism industry. According to current economic news reports, the United States and other key international economies may be subject to a recession, characterized by falling demand for a variety of goods and services, restricted credit, going concern threats to financial institutions, major multinational companies and medium and small businesses, poor liquidity, declining asset values, reduced corporate profitability, and volatility in credit, equity and foreign exchange markets. These conditions affect discretionary and leisure spending and could adversely affect our customers’ ability or willingness to travel to destinations for leisure and cutback on discretionary business travel, which could adversely affect our operating results. In addition, in a weakened economy, companies that have competing properties may reduce room rates and other prices which could also reduce our average revenues and harm our operating results.

 

We operate a single property located in San Francisco and rely on the San Francisco market. Changes adversely impacting this market could have a material effect on our business, financial condition and results of operations.

 

Our business has a limited base of operations and substantially all of our revenues are currently generated by the Hotel. Accordingly, we are subject to greater risks than a more diversified hotel or resort operator and the profitability of our operations is linked to local economic conditions in San Francisco. The combination of a decline in the local economy of San Francisco, reliance on a single location and the significant investment associated with it may cause our operating results to fluctuate significantly and may adversely affect us and materially affect our total profitability.

  

We face intense local and increasingly national competition which could impact our operations and adversely affect our business and results of operations.

 

We operate in the highly-competitive San Francisco hotel industry. The Hotel competes with other high-quality Northern California hotels and resorts. Many of these competitors seek to attract customers to their properties by providing food and beverage outlets, retail stores and other related amenities, in addition to recently renovated hotel accommodations. To the extent that we seek to enhance our revenue base by offering our own various amenities, we compete with the service offerings provided by these competitors. Many of the competing properties have themes and attractions which draw a significant number of visitors and directly compete with our operations. Some of these properties are operated by subsidiaries or divisions of large public companies that may have greater name recognition and financial and marketing resources than we do and market to the same target demographic group as we do. Various competitors are expanding and renovating their existing facilities. We believe that competition in the San Francisco hotel and resort industry is based on certain property-specific factors, including overall atmosphere, range of amenities, price, location, technology infrastructure, entertainment attractions, theme and size. Any market perception that we do not excel with respect to such property-specific factors could adversely affect our ability to compete effectively. If we are unable to compete effectively, we could lose market share, which could adversely affect our business and results of operations.

 

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The San Francisco hotel and resort industry is capital intensive; financing our renovations and future capital improvements could reduce our cash flow and adversely affect our financial performance.

 

The Hotel has an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. We will also need to make capital expenditures to comply with applicable laws and regulations.

 

Renovations and other capital improvements of hotels require significant capital expenditures. In addition, renovations and capital improvements of hotels usually generate little or no cash flow until the project’s completion. We may not be able to fund such projects solely from cash provided from our operating activities. Consequently, we will rely upon the availability of debt or equity capital and reserve funds to fund renovations and capital improvements and our ability to carry them out will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on, among other things, market conditions. No assurances can be made that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.

 

Renovations and other capital improvements may give rise to the following additional risks, among others: construction cost overruns and delays; increased prices of materials due to tariffs; temporary closures of all or a portion of the Hotel to customers; disruption in service and room availability causing reduced demand, occupancy and rates; and possible environmental issues.

 

As a result, renovations and any other future capital improvement projects may increase our expenses, reduce our cash flows and our revenues. If capital expenditures exceed our expectations, this excess would have an adverse effect on our available cash.

 

We have substantial debt, and we may incur additional indebtedness, which may negatively affect our business and financial results.

 

We have substantial debt service obligations. Our substantial debt may negatively affect our business and operations in several ways, including: requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce funds available for operations and capital expenditures, future business opportunities and other purposes; making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions; limiting our flexibility in planning for, or reacting to, changes in the business and the industry in which we operate; placing us at a competitive disadvantage compared to our competitors that have less debt; limiting our ability to borrow more money for operations, capital or to finance acquisitions in the future; and requiring us to dispose of assets, if needed, in order to make required payments of interest and principal.

  

Our business model involves high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a timely manner in response to a reduction in our revenues.

 

The costs associated with owning and operating the Hotel are significant. Some of these costs (such as property taxes and insurance costs) are fixed, meaning that such costs may not be altered in a timely manner in response to changes in demand for services. Failure to adjust our expenses may adversely affect our business and results of operations. Our real property taxes may increase as property tax rates change and as the values of properties are assessed and reassessed by tax authorities. Our real estate taxes do not depend on our revenues, and generally we could not reduce them other than by disposing of our real estate assets.

 

Insurance premiums have increased significantly in recent years, and continued escalation may result in our inability to obtain adequate insurance at acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of the Hotel. If we do not obtain adequate insurance, to the extent that any of the events not covered by an insurance policy materialize, our financial condition may be materially adversely affected.

 

In the future, our property may be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, which could reduce our cash flow and adversely affect our financial performance. If our revenues decline and we are unable to reduce our expenses in a timely manner, our business and results of operations could be adversely affected.

 

Risk of declining market values in marketable securities.

 

The Company invests from time to time in marketable securities. As a result, the Company is exposed to market volatility in connection with these investments. The Company's financial position and financial performance could be adversely affected by worsening market conditions or sluggish performance of such investments.

 

Illiquidity risk in nonmarketable securities

 

Nonmarketable securities are, by definition, instruments that are not readily salable in the capital markets, and when sold are usually at a substantial discount.  Thus, the holder is limited to return on investment from any income producing feature of the instrument, as any sale of such an instrument would be subject to a substantial discount.  Thus, a holder may need to hold such instruments for long period of time and not be able to realize a return of their cash investment should there be a need to liquidate to obtain cash at any given time.  

 

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Litigation and legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.

 

We are a party, from time to time, to various litigation claims and legal proceedings, government and regulatory inquiries and/or proceedings, including, but not limited to, intellectual property, premises liability and breach of contract claims. Material legal proceedings are described more fully in Note 18, Commitments and Contingencies, to our consolidated financial statements, included in Item 8 of this Annual Report on Form 10-K.

 

Litigation is inherently unpredictable, and defending these proceedings can result in significant ongoing expenditures and the diversion of our management’s time and attention from the operation of our business, which could have a negative effect on our business operations. Our failure to successfully defend or settle any litigation or legal proceedings could result in liabilities that, to the extent not covered by our insurance, could have a material adverse effect on our financial condition, revenue and profitability.

 

The threat of terrorism could adversely affect the number of customer visits to the Hotel.

 

The threat of terrorism has caused, and may in the future cause, a significant decrease in customer visits to San Francisco due to disruptions in commercial and leisure travel patterns and concerns about travel safety. We cannot predict the extent to which disruptions in air or other forms of travel as a result of any further terrorist act, outbreak of hostilities or escalation of war would adversely affect our financial condition, results of operations or cash flows. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.

 

We depend in part, on third party management companies for the future success of our business and the loss of one or more of their key personnel could have an adverse effect on our ability to manage our business and operate successfully and competitively, or could be negatively perceived in the capital markets.

 

The Hotel is managed by Interstate. Their ability to manage the Hotel and to operate successfully and competitively is dependent, in part, upon the efforts and continued service of their managers. The departure of key personnel of current or future management companies could have an adverse effect on our business and our ability to operate successfully and competitively, and it could be difficult to find replacements for these key personnel, as competition for such personnel is intense.

 

Seasonality and other related factors such as weather can be expected to cause quarterly fluctuations in revenue at the Hotel.

 

The hotel and resort industry is seasonal in nature. This seasonality can tend to cause quarterly fluctuations in revenues at the Hotel. Our quarterly earnings may also be adversely affected by other related factors outside our control, including weather conditions and poor economic conditions. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these quarterly fluctuations in our revenues.

 

The hotel industry is heavily regulated and failure to comply with extensive regulatory requirements may result in an adverse effect on our business.

 

The hotel industry is subject to extensive regulation and the Hotel must maintain its licenses and pay taxes and fees to continue operations. Our property is subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol. We are also subject to laws governing our relationship with our employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to remodel, refurbish or add to our property may be dependent upon our obtaining necessary building permits from local authorities. The failure to obtain any of these permits could adversely affect our ability to increase revenues and net income through capital improvements of our property. In addition, we are subject to the numerous rules and regulations relating to state and federal taxation. Compliance with these rules and regulations requires significant management attention. Furthermore, compliance costs associated with such laws, regulations and licenses are significant. Any change in the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to our business or gaming license could require us to make substantial expenditures or could otherwise negatively affect our gaming operations. Any failure to comply with all such rules and regulations could subject us to fines or audits by the applicable taxation authority.

 

Violations of laws could result in, among other things, disciplinary action. If we fail to comply with regulatory requirements, this may result in an adverse effect on our business.

 

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Uninsured and underinsured losses could adversely affect our financial condition and results of operations.

 

There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. We will use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. Uninsured and underinsured losses could harm our financial condition and results of operations. We could incur liabilities resulting from loss or injury to the Hotel or to persons at the Hotel. Claims, whether or not they have merit, could harm the reputation of the Hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.

 

In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in the Hotel, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the Hotel. In the event of a significant loss, our deductible may be high and we may be required to pay for all such repairs and, as a consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate the Hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.

 

It has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our property at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (for example, earthquake, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we were unable to obtain adequate insurance on the Hotel for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments that require us to maintain adequate insurance on the Hotel to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and the Hotel experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our financial condition and the operations of the Hotel.

 

In addition, insurance coverage for the Hotel and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

 

You may lose all or part of your investment.

 

There is no assurance that the Company’s initiatives to improve its profitability or liquidity and financial position will be successful. Accordingly, there is substantial risk that an investment in the Company will decline in value.

 

The price of the Company’s common stock may fluctuate significantly, which could negatively affect the Company and holders of its common stock.

 

The market price of the Company’s common stock may fluctuate significantly from time to time as a result of many factors, including: investors’ perceptions of the Company and its prospects; investors’ perceptions of the Company’s and/or the industry’s risk and return characteristics relative to other investment alternatives; difficulties between actual financial and operating results and those expected by investors and analysts; changes in our capital structure; trading volume fluctuations; actual or anticipated fluctuations in quarterly financial and operational results; volatility in the equity securities market; and sales, or anticipated sales, of large blocks of the Company’s common stock.

 

The concentrated beneficial ownership of our common stock and the ability it affords to control our business may limit or eliminate other shareholders' ability to influence corporate affairs.

 

The Company’s President, Chief Executive Officer, and Chairman of the Board of Directors, John V. Winfield, owns more than 60% of the Company’s outstanding common stock. Because of this concentrated stock ownership, Mr. Winfield will be in a position to significantly influence the election of the Company’s board of directors and all other decisions on all matters requiring shareholder approval. As a result, the ability of other shareholders to determine the management and policies of the Company is significantly limited. The interests of the Company’s largest shareholder may differ from the interests of other shareholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of officers and directors and other business decisions. This level of control may also have an adverse impact on the market value of our shares because our largest shareholder may institute or undertake transactions, policies or programs that may result in losses, may not take any steps to increase our visibility in the financial community and/or may sell sufficient numbers of shares to significantly decrease our price per share.

 

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Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

SAN FRANCISCO HOTEL PROPERTY

 

The Hotel is owned by the Partnership through its wholly-owned subsidiary, Justice Operating Company, LLC, a Delaware limited liability company (“Operating”). The Hotel is centrally located in the Financial District in San Francisco, one block from the Transamerica Pyramid. The Embarcadero Center is within walking distance and North Beach is two blocks away.  Chinatown is directly across the bridge that runs from the Hotel to Portsmouth Square Park. The Hotel is a 31-story (including parking garage), steel and concrete, A-frame building, built in 1970. The Hotel has 544 well-appointed guest rooms and luxury suites situated on 22 floors.  The third floor houses the Chinese Culture Center and grand ballroom.  The Hotel has approximately 22,000 square feet of meeting room space, including the grand ballroom. Other features of the Hotel include a 5-level underground parking garage and pedestrian bridge across Kearny Street connecting the Hotel and the Chinese Culture Center with Portsmouth Square Park in Chinatown. The bridge, built and owned by the Partnership, is included in the lease to the Chinese Culture Center. 

 

The Partnership expects either to expend or to set aside, at least 4% of gross annual Hotel revenues each year for capital improvements or renovations as required by its senior lender.  In the opinion of management, the Hotel is adequately covered by insurance.

 

HOTEL FINANCINGS

 

On December 18, 2013: (i) Operating entered into a loan agreement (“Mortgage Loan Agreement”) with Bank of America (“Mortgage Lender”); and (ii) Justice Mezzanine Company, LLC, a Delaware limited liability company (“Mezzanine”), entered into a mezzanine loan agreement (“Mezzanine Loan Agreement” and, together with the Mortgage Loan Agreement, the “Loan Agreements”) with ISBI San Francisco Mezz Lender LLC (“Mezzanine Lender” and, together with Mortgage Lender, the “Lenders”). The Partnership is the sole member of Mezzanine, and Mezzanine is the sole member of Operating.

 

The Loan Agreements provide for a $97,000,000 Mortgage Loan and a $20,000,000 Mezzanine Loan. The proceeds of the Loan Agreements were used to fund the redemption of limited partnership interests and the pay-off of the prior mortgage.

 

The Mortgage Loan is secured by the Partnership’s principal asset, the Hotel. The Mortgage Loan bears an interest rate of 5.275% per annum and matures in January 2024. The term of the loan is ten years with interest only due in the first three years and principal and interest payments to be made during the remaining seven years of the loan based on a thirty-year amortization schedule. The Mortgage Loan also requires payments for impounds related to property tax, insurance and capital improvement reserves. As additional security for the Mortgage Loan, there is a limited guaranty (“Mortgage Guaranty”) executed by the Company in favor of Mortgage Lender.

 

The Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The Mezzanine Loan bears interest at 9.75% per annum and matures on January 1, 2024. Interest only payments are due monthly. As additional security for the Mezzanine Loan, there is a limited guaranty executed by the Company in favor of Mezzanine Lender (the “Mezzanine Guaranty” and, together with the Mortgage Guaranty, the “Guaranties”).

 

The Guaranties are limited to what are commonly referred to as “bad boy” acts, including: (i) fraud or intentional misrepresentations; (ii) gross negligence or willful misconduct; (iii) misapplication or misappropriation of rents, security deposits, insurance or condemnation proceeds; and (iv) failure to pay taxes or insurance. The Guaranties are full recourse guaranties under identified circumstances, including failure to maintain “single purpose” status which is a factor in a consolidation of Operating or Mezzanine in a bankruptcy of another person, transfer or encumbrance of the Property in violation of the applicable loan documents, Operating or Mezzanine incurring debts that are not permitted, and the Property becoming subject to a bankruptcy proceeding. Pursuant to the Guaranties, the Partnership is required to maintain a certain minimum net worth and liquidity. Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain a certain net worth and liquidity. As of June 30, 2019, management believes that InterGroup is in compliance with both requirements.

 

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Each of the Loan Agreements contains customary representations and warranties, events of default, reporting requirements, affirmative covenants and negative covenants, which impose restrictions on, among other things, organizational changes of the respective borrower, operations of the Property, agreements with affiliates and third parties. Each of the Loan Agreements also provides for mandatory prepayments under certain circumstances (including casualty or condemnation events) and voluntary prepayments, subject to satisfaction of prescribed conditions set forth in the Loan Agreements.

 

On July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year fixed interest, with a term of two years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The proceeds of the loan were applied to the July 2014 payments to Justice Holdings Company, LLC (“Holdings”) in connection with the redemption of limited partnership interests. The loan was extended to December 31, 2019. As of June 30, 2019, the balance of the loan was $3,000,000. 

 

In April 2017, Portsmouth obtained from InterGroup an unsecured short-term loan in the principal amount of $1,000,000 at 5% per year fixed interest, with a term of five months and maturing September 6, 2017. Accrued interest and monthly principal installments in the amount of $200,000 were due and payable commencing on May 1, 2017 and continuing on the first day of each calendar month thereafter, until five months after the date of the loan at which time any unpaid balance of principal and interest on the note was due and payable. The loan was extended to September 15, 2017 and paid off on September 13, 2017.

 

On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off without any prepayment penalty. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. See Note 19 – Subsequent Events.

 

RENTAL PROPERTIES

 

As June 30, 2019, the Company's investment in real estate consisted of twenty properties located throughout the United States, with a concentration in Texas and Southern California. These properties include sixteen apartment complexes, three single-family houses as strategic investments and one commercial real estate property. All properties are operating properties. In addition to the properties, the Company owns approximately 2 acres of unimproved land in Maui, Hawaii. As of June 30, 2019, all of the Company’s operating real estate properties are managed in-house.

  

Description of Properties

 

Las Colinas, Texas. The Las Colinas property is a water front apartment community along Beaver Creek that was developed in 1993 with 358 units on approximately 15.6 acres of land. The Company acquired the complex on April 30, 2004 for approximately $27,145,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 27.5 years. Real estate property taxes for the year ended June 30, 2019 were approximately $1,014,000. The outstanding mortgage balance was approximately $16,974,000 at June 30, 2019 with an interest rate of 3.73% and the maturity date of the mortgage is December 1, 2022.

 

Morris County, New Jersey. The Morris County property is a two-story garden apartment complex that was completed in June 1964 with 151 units on approximately 8 acres of land. The Company acquired the complex on September 15, 1967 at an initial cost of approximately $1,600,000. Real estate property taxes for the year ended June 30, 2019 were approximately $241,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $8,737,000 at June 30, 2019 and the maturity date of the mortgage is July 31, 2022 with interest rate fixed at 3.51%. In June 2014, the Company obtained a second mortgage on this property in the amount of $2,701,000. The term of the loan is approximately 8 years with the interest rate fixed at 4.51%. The outstanding mortgage balance was approximately $2,512,000 at June 30, 2019. The loan matures in August 2022.

 

St. Louis, Missouri. The St. Louis property is a two-story project with 264 units on approximately 17.5 acres. The Company acquired the complex on November 1, 1968 at an initial cost of $2,328,000. For the year ended June 30, 2019, real estate property taxes were approximately $197,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $5,365,000 at June 30, 2019 with an interest rate of 4.05% and the maturity date of the mortgage is May 31, 2023.

 

Florence, Kentucky. The Florence property is a three-story apartment complex with 157 units on approximately 6.0 acres. The Company acquired the property on December 20, 1972 at an initial cost of approximately $1,995,000. For the year ended June 30, 2019, real estate property taxes were approximately $64,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In March 2015, the Company refinanced the $3,636,000 mortgage note payable for a new mortgage in the amount of $3,492,000. The Company paid down approximately $210,000 of the old mortgage as part of the refinancing. The new mortgage has a fixed interest rate of 3.87% for ten years and matures in April 2025. The outstanding mortgage balance was approximately $3,222,000 at June 30, 2019.

 

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Los Angeles, California. The Company owns one commercial property, twelve apartment complexes, and three single-family houses in the general area of West Los Angeles.

 

The first Los Angeles commercial property is a 5,500 square foot, two story building that served as the Company's corporate offices until it was leased out, effective October 1, 2009 and the Company leased a new space for its corporate office. The Company acquired the building on March 4, 1999 for $1,876,000. The property taxes for the year ended June 30, 2019 were approximately $31,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In April 2016, the Company refinanced the $1,007,000 mortgage note payable for a new mortgage in the amount of $921,000. The new mortgage has a fixed interest rate swap with the floating rate loan. By combing both rates rate through maturity of the credit facility (1.49% swap + 2.50% credit spread), the all-in fixed rate is 3.99%. The outstanding mortgage balance was approximately $806,000 at June 30, 2019 and the note matures in January 2021.

 

The first Los Angeles apartment complex is a 10,600 square foot two-story apartment with 12 units. The Company acquired the property on July 30, 1999 at an initial cost of approximately $1,305,000. For the year ended June 30, 2019, real estate property taxes were approximately $22,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In June 2016, the Company refinanced the $2,095,000 mortgage note payable for a new mortgage in the amount of $2,300,000 with an interest rate of 3.59%. The outstanding mortgage balance was approximately $2,172,000 at June 30, 2019 and the maturity date of the mortgage is June 23, 2026.

 

The second Los Angeles apartment complex is a 29,000 square foot three-story apartment with 27 units. This complex is held by Intergroup Woodland Village, Inc. ("Woodland Village"), which is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The property was acquired on September 29, 1999 at an initial cost of approximately $4,075,000. For the year ended June 30, 2019, real estate property taxes were approximately $66,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $2,843,000 at June 30, 2018 with an interest rate of 4.85% and the maturity date of the mortgage was December 1, 2020. In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage.

 

The third Los Angeles apartment complex is a 12,700 square foot apartment with 14 units. The Company acquired the property on October 20, 1999 at an initial cost of approximately $2,150,000. For the year ended June 30, 2019, real estate property taxes were approximately $37,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $1,632,000 at June 30, 2019 with an interest rate of 5.89% and the maturity date of the mortgage is March 1, 2021.

 

The fourth Los Angeles apartment complex is a 10,500 square foot apartment with 9 units. The Company acquired the property on November 10, 1999 at an initial cost of approximately $1,675,000. For the year ended June 30, 2019, real estate property taxes were approximately $29,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $1,112,000 at June 30, 2019 with an interest rate of 5.89% and the maturity date of the mortgage is March 1, 2021.

 

The fifth Los Angeles apartment complex is a 26,100 square foot two-story apartment with 31 units. The Company acquired the property on May 26, 2000 at an initial cost of approximately $7,500,000. For the year ended June 30, 2019, real estate property taxes were approximately $115,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $4,927,000 at June 30, 2019 with an interest rate of 4.85% and the maturity date of the mortgage is December 1, 2020.

 

The sixth Los Angeles apartment complex is a 27,600 square foot two-story apartment with 30 units. The Company acquired the property on July 7, 2000 at an initial cost of approximately $4,411,000. For the year ended June 30, 2019, real estate property taxes were approximately $74,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $5,765,000 at June 30, 2019 with an interest rate of 5.97% and the maturity date of the mortgage is September 1, 2022.

 

The seventh Los Angeles apartment complex is a 3,000 square foot apartment with 4 units. The Company acquired the property on July 19, 2000 at an initial cost of approximately $1,070,000. For the year ended June 30, 2019, real estate property taxes were approximately $17,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $343,000 at June 30, 2019 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The eighth Los Angeles apartment complex is a 4,500 square foot two-story apartment with 4 units. The Company acquired the property on July 28, 2000 at an initial cost of approximately $1,005,000. For the year ended June 30, 2019, real estate property taxes were approximately $16,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $579,000 at June 30, 2019 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

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The ninth Los Angeles apartment complex is a 7,500 square foot apartment with 7 units. The Company acquired the property on August 9, 2000 at an initial cost of approximately $1,308,000. For the year ended June 30, 2019, real estate property taxes were approximately $22,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $846,000 at June 30, 2019 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The tenth Los Angeles apartment complex is a 13,000 square foot two-story apartment with 8 units. The Company acquired the property on May 1, 2001 at an initial cost of approximately $1,206,000. For the year ended June 30, 2019, real estate property taxes were approximately $20,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In July 2013, the Company refinanced its $466,000 adjustable rate mortgage note payable on this property for a new 30-year mortgage in the amount of $500,000. The interest rate on the new loan is fixed at 3.75% per annum for the first five years and variable for the remaining of the term. The note matures in July 2043. The outstanding mortgage balance was approximately $440,000 at June 30, 2019.

 

The eleventh Los Angeles apartment complex, which is owned 100% by the Company’s subsidiary Santa Fe, is a 4,200 square foot two-story apartment with 2 units. Santa Fe acquired the property on February 1, 2002 at an initial cost of approximately $785,000. For the year ended June 30, 2019, real estate property taxes were approximately $12,000. Depreciation is recorded on the straight-line method based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $347,000 at June 30, 2019 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The twelfth apartment which is located in Marina del Rey, California, is a 6,316 square foot two-story apartment with 9 units. The Company acquired the property on April 29, 2011 at an initial cost of approximately $4,000,000. For the year ended June 30, 2019, real estate property taxes were approximately $55,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 27.5 years. The outstanding mortgage balance was approximately $1,303,000 at June 30, 2019 with an interest rate of 5.60% and the maturity date of the mortgage is May 1, 2021.

 

The first Los Angeles single-family house is a 2,771 square foot home. The Company acquired the property on November 9, 2000 at an initial cost of approximately $660,000. For the year ended June 30, 2019, real estate property taxes were approximately $11,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $373,000 at June 30, 2019 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The second Los Angeles single-family house is a 2,201 square foot home. The Company acquired the property on August 22, 2003 at an initial cost of approximately $700,000. For the year ended June 30, 2019, real estate property taxes were approximately $12,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $399,000 at June 30, 2019 with an interest rate of 3.75% and the maturity date of the mortgage is September 1, 2042.

 

The third Los Angeles single-family house is a 2,387 square foot home. The company acquired the property in July of 2015 as a strategic asset for $1,975,000 in cash. In August 2016, the Company obtained a $1,000,000 mortgage note payable and received net proceeds of $983,000. The interest on note is 4.50% with interest only payments for twenty-three months. On August 31, 2018, $1,005,000 was drawn from the RLOC to pay off the mortgage note payable. On September 28, 2018, the Company obtained a new mortgage note payable in the amount of $1,000,000 for this property with interest rates fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The mortgage note payable matures in October 2048. $995,000 received as a result of the refinance was used to pay down the RLOC. The outstanding mortgage balance was approximately $990,000 at June 30, 2019. For the year ended June 30, 2019, real estate property taxes were approximately $25,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years.

 

In August 2004, the Company purchased an approximately two-acre parcel of unimproved land in Kihei, Maui, Hawaii for $1,467,000. The Company has engaged the services of certain professionals to develop the property. After the completion of this predevelopment phase, we will determine whether it is more advantageous to sell the entitled property or to commence with construction.

 

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MORTGAGES

 

Further information with respect to mortgage notes payable of the Company is set forth in Note 11 of the Notes to Consolidated Financial Statements.

 

ECONOMIC AND PHYSICAL OCCUPANCY RATES

 

The Company leases units in its residential rental properties on a short-term basis, with no lease extending beyond one year. The economic occupancy (gross potential less rent below market, vacancy loss, bad debt, discounts and concessions divided by gross potential rent) and the physical occupancy (gross potential rent less vacancy loss divided by gross potential rent) for each of the Company's operating properties for fiscal year ended June 30, 2019 are provided below.

   

    Economic     Physical  
Property   Occupancy     Occupancy  
1.  Las Colinas, TX      95 %      100 %
2.  Morris County, NJ      94 %      95 %
3.  St. Louis, MO      83 %      91 %
4.  Florence, KY      94 %      97 %
5.  Los Angeles, CA (1)      87 %      96 %
6.  Los Angeles, CA (2)      35 %      51 %
7.  Los Angeles, CA (3)      87 %      82 %
8. Los Angeles, CA (4)      100 %      96 %
9. Los Angeles, CA (5)      71 %      87 %
10. Los Angeles, CA (6)      96 %      97 %
11. Los Angeles, CA (7)      90 %      92 %
12. Los Angeles, CA (8)      100 %      100 %
13. Los Angeles, CA (9)      98 %      98 %
14. Los Angeles, CA (10)      100 %      100 %
15. Los Angeles, CA (11)      87 %      89 %
16. Los Angeles, CA (12)      79 %      85 %
17. Los Angeles, CA (13)      32      32 %
18. Los Angeles, CA (14)      100 %      100 %
19. Los Angeles, CA (15)      100 %      100 %

  

The Company’s Los Angeles, California properties are subject to various rent control laws, ordinances and regulations which impact the Company’s ability to adjust and achieve higher rental rates.

 

Item 3. Legal Proceedings.

 

In April 2014, the Partnership commenced an arbitration action against Glaser Weil Fink Howard Avchen & Shapiro, LLP (formerly known as Glaser Weil Fink Jacobs Howard Avchen & Shapiro, LLP), Brett J. Cohen, Gary N. Jacobs, Janet S. McCloud, Paul B. Salvaty, and Joseph K. Fletcher III (collectively, the “Respondents”) in connection with the redemption transaction. The arbitration alleged legal malpractice against the Respondents and sought declaratory relief regarding provisions of the option agreement in the redemption transaction and regarding the engagement letter with Respondents. Prior to arbitration proceedings, the parties agreed in principle to settle the matter, and entered into a settlement agreement and mutual general release in April 2018. The Respondents agreed to pay $8,300,000 to the Partnership, which was received in May 2018. For the fiscal year ended June 30, 2018, $5,575,000 was recorded as a recovery of legal settlement cost and $2,725,000 was recorded as a reduction of legal expense.

 

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or result of operations when resolved. 

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

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PART II

 

Item 5. Market for Common Equity and Related Stockholder Matters.

 

MARKET INFORMATION

 

The Company's Common Stock is listed and trades on the NASDAQ Capital Market tier of the NASDAQ Stock Market, LLC under the symbol: “INTG”. The following table sets forth the high and low sales prices for the Company’s common stock for each quarter of the last two fiscal years ended June 30, 2019 and 2018 as reported by NASDAQ.

  

Fiscal 2019   High     Low  
             
First Quarter (7/ 1 to 9/30)   $ 39.35     $ 27.25  
Second Quarter (10/1 to 12/31)   $ 35.00     $ 29.26  
Third Quarter (1/1 to 3/31)   $ 33.60     $ 29.20  
Fourth Quarter (4/1 to 6/30)   $ 32.09     $ 29.97  

  

Fiscal 2018   High     Low  
             
First Quarter (7/ 1 to 9/30)   $ 27.65     $ 23.10  
Second Quarter (10/1 to 12/31)   $ 24.80     $ 22.70  
Third Quarter (1/1 to 3/31)   $ 25.17     $ 22.45  
Fourth Quarter (4/1 to 6/30)   $ 27.00     $ 23.10  

  

As of June 30, 2019, the approximate number of holders of record of the Company’s Common Stock was 220. Such number of owners was determined from the Company’s shareholders records and does not include beneficial owners of the Company’s Common Stock whose shares are held in names of various brokers, clearing agencies or other nominees.

 

DIVIDENDS

 

The Company has not declared any cash dividends on its common stock and does not foresee issuing cash dividends in the near future.

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.

 

This information appears in Part III, Item 12 of this report.

 

ISSUER PURCHASES OF EQUITY SECURITIES

  

The following table reflects purchases of InterGroup’s common stock made by The InterGroup Corporation, for its own account, during the fourth quarter of its fiscal year ending June 30, 2019.

 

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SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

 

                (c) Total Number     (d) Maximum Number  
    (a) Total     (b)     of Shares Purchased     of shares that May  
Fiscal   Number of     Average     as Part of Publicly     Yet be Purchased  
2019   Shares     Price Paid     Announced Plans     Under the Plans  
Period   Purchased     Per Share     or Programs     or Programs  
                         
Month #1 (April 1- April 30)     -       -       -       22,072  
                                 
Month #2 (May 1- May 31)     6,400     31.07       6,400       15,672  
                                 
Month #3 (June 1- June 30)     11,000     $ 31.12       11,000       4,672  
                                 
TOTAL:     17,400     $ 31.10       17,400       4,672  

   

The Company has only one stock repurchase program. The program was initially announced on January 13, 1998 and was amended on February 10, 2003 and October 12, 2004. The total number of shares authorized to be repurchased pursuant to those prior authorizations was 870,000, adjusted for stock splits. On June 3, 2009, the Board of Directors authorized the Company to purchase up to an additional 125,000 shares of Company’s common stock. On November 15, 2012, the Board of Directors authorized the Company to purchase up to an additional 100,000 shares of Company’s common stock. The purchases will be made, in the discretion of management, from time to time, in the open market or through privately negotiated third party transactions depending on market conditions and other factors. The Company’s repurchase program has no expiration date and can be amended and increased, from time to time, in the discretion of the Board of Directors. No plan or program expired during the period covered by the table.

 

Item 6. Selected Financial Data.

 

Not required for smaller reporting companies.

 

Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations.

 

RESULTS OF OPERATIONS

 

As of June 30, 2019, the Company owned approximately 82.2% of the common shares of its subsidiary, Santa Fe, and Santa Fe owned approximately 68.8% of the common shares of Portsmouth Square, Inc. Intergroup also directly owns approximately 13.4% of the common shares of Portsmouth. The Company's principal sources of revenue continue to be derived from the general and limited partnership interests of its subsidiary, Portsmouth, in the Justice Investors limited partnership (“Justice” or the “Partnership”), rental income from its investments in multi-family and commercial real estate properties, and income received from investment of its cash and securities assets. Justice owns a 544-room hotel property located at 750 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 on December 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. On June 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 in the form of a self-exhausting, interest free note. The key money cash incentive of $4,750,000 was received on July 1, 2015. As of June 30, 2019 and 2018, the balance of the note was $3,325,000 and $3,642,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets.

 

On February 1, 2017, Justice entered into a hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017.   The term of HMA 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. 

  

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In addition to the operations of the Hotel, the Company also generates income from the ownership and management of its real estate. Properties include sixteen apartment complexes, one commercial real estate property, and three single-family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property in Hawaii.

 

The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential.

 

Fiscal Year Ended June 30, 2019 Compared to Fiscal Year Ended June 30, 2018 

 

The Company had a net income of $2,814,000 for the year ended June 30, 2019 compared to a net income of $5,813,000 for the year ended June 30, 2018. The decrease in net income was primarily attributable to the $8,300,000 settlement proceeds received related to the Glaser matter which was credited to operating expenses and restructuring costs in fiscal year 2018. The $8,300,000 increase in expenses was offset by increase in revenue and decrease in income taxes.

 

Hotel Operations

 

The Company had net income from Hotel operations of $5,277,000 for the year ended June 30, 2019 compared to net income of $12,827,000 for the year ended June 30, 2018. The decrease in net income was primarily attributable to the $8,300,000 settlement proceeds received related to the Glaser matter which was credited to operating expenses and restructuring costs in fiscal year 2018.

  

The following table sets forth a more detailed presentation of Hotel operations for the years ended June 30, 2019 and 2018.

  

For the year ended June 30,   2019     2018  
Hotel revenues:                
Hotel rooms   $ 51,243,000     $ 46,475,000  
Food and beverage     5,353,000       7,222,000  
Garage     2,875,000       3,011,000  
Other operating departments     410,000       391,000  
Total hotel revenues     59,881,000       57,099,000  
Operating expenses, excluding non-recurring charges, interest, depreciation and amortization     (44,466,000 )     (40,103,000 )
Operating income before non-recurring charges, interest, depreciation and amortization     15,415,000       16,996,000  
Recovery of legal settlement costs         -       5,775,000  
Income before interest, depreciation and amortization     15,415,000       22,771,000  
Loss on disposal of assets     (398,000  )     -  
Interest expense – mortgage     (7,234,000 )     (7,237,000 )
Depreciation and amortization expense     (2,506,000 )     (2,707,000 )
                 
Net income from Hotel operations   $ 5,277,000     $ 12,827,000  

 

For the year ended June 30, 2019, the Hotel generated operating income of $15,415,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of $59,881,000 compared to operating income of $16,996,000 before non-recurring charges, interest, depreciation, and amortization on total operating revenues of $57,099,000 for the year ended June 30, 2018. Room revenues increased by $4,768,000 for the year ended June 30, 2019 compared to the year ended June 30, 2018 primarily as a result of increased occupancy due to changes of our sales strategy along with maximizing midweek rate by limiting group business over peak days. The Hotel focused on sellout efficiency specifically on shoulder days and months. Food and beverage revenue decreased by $1,869,000 for the year ended June 30, 2019 compared to the year ended June 30, 2018 primarily due to the strategy of capturing higher rated transient rooms midweek and limiting group discounted business offered which reduced the number of banquet events.

 

Operating expenses increased by $4,363,000 for the year ended June 30, 2019 to $44,466,000 compared to the year ended June 30, 2018 of $40,103,000 primarily due to the receipt of settlement proceeds related to the Glaser matter in fiscal year 2018. Settlement proceeds of $8,300,000 were received during fiscal year ended June 30, 2018, of which $2,725,000 was credited to legal expense. Rooms department operating expenses also increased in fiscal year 2019 by $1,198,000 primarily due to increased group commissions and labor costs as occupancy increased.

 

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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, 2019 and 2018.

 

For the Year 
Ended June 30,
  Average
Daily Rate
   Average 
Occupancy %
   RevPAR 
             
2019  $268    96%  $257 
2018  $250    94%  $235 

 

The Hotel was able to grow occupancy while increasing rate resulting in a 9% RevPAR growth, far exceeding market performance. The Hotel successfully grew midweek rate while slightly increasing occupancy in a market that is seeing occupancy declines.  

 

We believe that enhancing the Hotel’s technology is critical to remain competitive in the market place and to that end, we are currently working with all Hilton approved vendors to upgrade all technical aspects of the Hotel. Implementation of state-of-the-art systems such as the new internet system from Cisco and 4K smart televisions that are in every room and common areas will set us apart from our competitors. We have made ten additional rooms available by eliminating the Justice administrative office from the Hotel and relocating the accounting department to administrative space and eliminated the unprofitable Wellness Center that was added by previous management. We anticipate that the additional ten rooms will be placed into service within the fiscal year ending June 30, 2020 as design delays pushed the project into our next fiscal year. Additionally, the fitness center which is occupying the equivalent of five rooms and the executive lounge which is occupying the equivalent of three rooms, will be relocated to a different area within the Hotel. The eight equivalent rooms will be placed back into service. Part of this renovation will be funded by the Hotel’s furniture, fixture and equipment reserve account with our lender as well as the $2,000,000 key money incentive provided by Interstate. Lastly, we anticipate the completion of the installation of a complete exterior building maintenance system by the end of our quarter ending December 31, 2019 which will enable periodic window washing. 

 

Real Estate Operations

 

Revenue from real estate operations increased to $14,872,000 for the year ended June 30, 2019 from $14,480,000 for the year ended June 30, 2018 primarily as a result of increased occupancy. Real estate operating expenses increased to $7,810,000 from $7,579,000 primarily as a result of increased utility cost and real estate taxes. Management continues to review and analyze the Company’s real estate operations to improve occupancy and rental rates and to reduce expenses and improve efficiencies.

 

Investment Transactions

 

The Company had a net loss on marketable securities of $1,733,000 for the year ended June 30, 2019 compared to a net loss on marketable securities of $1,777,000 for the year ended June 30, 2018. For the year ended June 30, 2019, the Company had a net unrealized loss of $254,000 and zero realized 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, 2018, the Company had an unrealized loss of $2,337,000 and a realized loss of $6,007,000, related to the Company’s investment in the common stock of Comstock.

 

As of June 30, 2019 and 2018, investments in Comstock represent approximately 7% of the Company’s investment portfolio. For the year ended June 30, 2019, the Company had a net realized loss of $806,000 and a net unrealized loss of $927,000. For the year ended June 30, 2018, the Company had a net realized loss of $5,375,000 and a net unrealized gain of $3,598,000. 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 years ended June 30, 2019 and 2018, the Company performed an impairment analysis of its other investments and determined that its investments had other than temporary impairment and recorded impairment losses of $98,000 and $200,000, respectively.

 

The Company and its subsidiaries, Portsmouth and Santa Fe, compute and file income tax returns and prepare discrete income tax provisions for financial reporting. The income tax benefit (expense) during the years ended June 30, 2019 and 2018 represents primarily the combined income tax effect of Portsmouth’s pretax income which includes its share in net income from the Hotel and the pre-tax loss from Intergroup (standalone).

 

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MARKETABLE SECURITIES AND OTHER INVESTMENTS

 

As of June 30, 2019 and 2018, the Company had investments in marketable equity securities of $9,696,000 and $13,841,000, respectively. The following table shows the composition of the Company’s marketable securities portfolio by selected industry groups:

 

          % of Total  
As of June 30, 2019         Investment  
Industry Group   Fair Value     Securities  
             
REITs and real estate companies   $ 3,069,000       31.7 %
Consumer cyclical     1,448,000       14.9 %
Corporate bonds     1,420,000       14.6 %
Financial services     951,000       9.8 %
Energy     950,000       9.8 %
Other     1,858,000       19.2 %
    $ 9,696,000       100.0 %

  

          % of Total  
As of June 30, 2018         Investment  
Industry Group   Fair Value     Securities  
             
REITs and real estate companies   $ 4,300,000       31.1 %
Corporate bonds     2,282,000       16.5 %
Technology     1,813,000       13.1 %
Healthcare     1,777,000       12.8 %
Communications     1,071,000       7.7 %
Other     2,598,000       18.8 %
    $ 13,841,000       100.0 %

 

The Company’s investment portfolio is diversified with 29 different equity positions The Company holds three equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 17.9% of the portfolio and consists of the common stock of American Realty Investors, Inc. which is included in the REITs and real estate companies 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 years.

  

For the years ended June 30,   2019     2018  
Net loss on marketable securities   $ (1,733,000 )   $ (1,777,000 )
Net unrealized loss on other investments          -       (42,000 )
Impairment loss on other investments     (98,000 )     (200,000 )
Dividend and interest income     484,000       277,000  
Margin interest expense     (576,000 )     (632,000 )
Trading expenses     (574,000 )     (555,000 )
    $ (2,497,000 )   $ (2,929,000 )

 

FINANCIAL CONDITION AND LIQUIDITY

 

The Company’s cash flows are primarily generated from its Hotel operations, general partner management fees from Justice Investors, and its real estate operations. The Company may also receive cash generated from the investment of its cash and marketable securities and other investments.

 

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To fund the redemption of limited partnership interests and to repay the prior mortgage, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December of 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum and matures in January 2024. As additional security for the mortgage loan, there is a limited guaranty executed by the Company in favor of Mortgage Lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine loan bears interest at 9.75% per annum and matures in January 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by the Company in favor of mezzanine lender. Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. See Note 19 – Subsequent Events.

 

Management believes that its cash, securities assets, real estate and the cash flows generated from those assets and from partnership management fees, will be adequate to meet the Company’s current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel and other real estate properties to support additional borrowings if necessary.

 

MATERIAL CONTRACTUAL OBLIGATIONS

 

The following table provides a summary of the Company’s material financial obligations which also includes interest.

 

    Total     Year 1     Year 2     Year 3     Year 4     Year 5     Thereafter  
Mortgage notes payable   $ 172,589,000     $ 3,054,000     $ 12,483,000     $ 3,095,000     $ 37,812,000     $ 107,656,000     $ 8,489,000  
Other notes payable     9,732,000       4,005,000       1,006,000       1,022,000       744,000       567,000       2,388,000  
Interest     38,131,000       9,054,000       8,601,000       8,148,000       7,013,000       3,401,000       1,914,000  
Total   $ 220,452,000     $ 16,113,000     $ 22,090,000     $ 12,265,000     $ 45,569,000     $ 111,624,000     $ 12,791,000  

 

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. 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.

 

The Company's residential rental properties provide income from short-term operating leases and no lease extends beyond one year. Rental increases are expected to offset anticipated increased property operating expenses.

 

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.

  

 23 

 

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Not required for smaller reporting companies.

 

Item 8. Financial Statements and Supplementary Data.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE
   
Report of Independent Registered Public Accounting Firm 25
   
Consolidated Balance Sheets - June 30, 2019 and 2018 26
   
Consolidated Statements of Operations - For years ended June 30, 2019 and 2018 27
   
Consolidated Statements of Shareholders’ Deficit - For years ended June 30, 2019 and 2018 28
   
Consolidated Statements of Cash Flows - For years ended June 30, 2019 and 2018 29
   
Notes to the Consolidated Financial Statements 30

 

 24 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of

The Intergroup Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of The Intergroup Corporation and its subsidiaries (the “Company”) as of June 30, 2019 and 2018, the related consolidated statements of operations, shareholders’ deficit and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2019 and 2018, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Changes in Accounting Principle

 

As discussed in Note 2 to the consolidated financial statements, effective July 1, 2018 the Company changed its method of accounting for revenue recognition due to the adoption of Accounting Standards Codification Topic No. 606.

 

The Company adopted ASU 2016-18, Restricted Cash, effective July 1, 2018. The adoption of ASU 2016-18 impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Moss Adams LLP

 

Irvine, California

August 30, 2019

 

We have served as the Company’s auditor since 2017.

 

 25 

 

 

THE INTERGROUP CORPORATION

CONSOLIDATED BALANCE SHEETS

 

As of June 30,   2019     2018  
             
ASSETS                
Investment in Hotel, net   $ 39,836,000     $ 40,961,000  
Investment in real estate, net     51,773,000       53,369,000  
Investment in marketable securities     9,696,000       13,841,000  
Other investments, net     612,000       813,000  
Cash and cash equivalents     11,837,000       8,053,000  
Restricted cash     13,295,000       9,458,000  
Other assets, net     2,362,000       5,185,000  
Deferred tax asset     1,468,000       -  
                 
Total assets   $ 130,879,000     $ 131,680,000  
                 
LIABILITIES AND SHAREHOLDERS' DEFICIT                
Liabilities:                
Accounts payable and other liabilities   $ 3,819,000     $ 3,299,000  
Accounts payable and other liabilities - Hotel     11,245,000       9,946,000  
Due to securities broker     1,629,000       1,887,000  
Obligations for securities sold     1,225,000       1,935,000  
Related party and other notes payable     5,261,000       5,735,000  
Capital leases     1,486,000       1,355,000  
Line of credit payable     2,985,000       -  
Mortgage notes payable - Hotel     113,087,000       114,372,000  
Mortgage notes payable - real estate     58,571,000       62,873,000  
Deferred tax liability     -       245,000  
Total liabilities     199,308,000       201,647,000  
                 
Commitments and contingencies - Note 18                
                 
Shareholders' deficit:                
Preferred stock, $.01 par value, 100,000 shares authorized; none issued     -       -  
Common stock, $.01 par value, 4,000,000 shares authorized; 3,404,982 and 3,395,616 issued; 2,309,962 and 2,334,197 outstanding as of June 30, 2019 and 2018     33,000       33,000  
Additional paid-in capital     10,342,000       10,522,000  
Accumulated deficit     (39,760,000 )     (41,217,000 )
Treasury stock, at cost, 1,095,020 and 1,061,419 shares as of June 30, 2019 and 2018     (14,347,000 )     (13,268,000 )
Total Intergroup shareholders' deficit     (43,732,000 )     (43,930,000 )
Noncontrolling interest     (24,697,000 )     (26,037,000 )
Total shareholders' deficit     (68,429,000 )     (69,967,000 )
                 
Total liabilities and shareholders' deficit   $ 130,879,000     $ 131,680,000  

 

The accompanying notes are an integral part of these consolidated financial statements.

  

 26 

 

 

THE INTERGROUP CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

  

For the years ended June 30,   2019     2018  
Revenues:                
Hotel   $ 59,881,000     $ 57,099,000  
Real estate     14,872,000       14,480,000  
Total revenues     74,753,000       71,579,000  
Costs and operating expenses:                
Hotel operating expenses     (44,466,000 )     (40,103,000 )
Recovery of legal settlement costs     -       5,775,000  
Real estate operating expenses     (7,810,000 )     (7,579,000 )
Depreciation and amortization expense     (4,935,000 )     (5,054,000 )
General and administrative expense     (2,346,000 )     (3,053,000 )
                 
Total costs and operating expenses     (59,557,000 )     (50,014,000 )
                 
Income from operations     15,196,000       21,565,000  
Other income (expense):                
Interest expense - mortgage     (9,788,000 )     (9,767,000 )
Loss on disposal of assets     (398,000 )     -  
Net loss on marketable securities     (1,733,000 )     (1,777,000 )
Net unrealized loss on other investments     -       (42,000 )
Impairment loss on other investments     (98,000 )     (200,000 )
Dividend and interest income     484,000       277,000  
Trading and margin interest expense     (1,150,000 )     (1,187,000 )
Net other expense     (12,683,000 )     (12,696,000 )
Income before income taxes     2,513,000       8,869,000  
Income tax benefit (expense)     301,000       (3,056,000
Net income     2,814,000       5,813,000  
Less: Net income attributable to the noncontrolling interest     (1,357,000 )     (1,732,000
Net income attributable to InterGroup   $ 1,457,000     $ 4,081,000  
                 
Net income per share                
Basic   $ 1.21     $ 2.47  
Diluted   $ 1.06     $ 2.18  
Net income per share attributable to InterGroup                
Basic   $ 0.63     $ 1.73  
Diluted   $ 0.55     $ 1.53  
                 
Weighted average number of common shares outstanding     2,328,156       2,354,489  
Weighted average number of diluted shares outstanding     2,658,551       2,672,489  

 

The accompanying notes are an integral part of these consolidated financial statements.

  

 27 

 

 

THE INTERGROUP CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT

  

                Additional                 InterGroup           Total  
     Common Stock     Paid-in           Treasury     Shareholders'     Noncontrolling     Shareholders'  
    Shares     Amount     Capital     Accumulated Deficit     Stock     Deficit     Interest     Deficit  
                                                 
Balance at July 1, 2017     3,395,616       33,000       10,346,000       (45,298,000 )     (12,626,000 )     (47,545,000 )     (27,773,000 )     (75,318,000 )
                                                                 
Net Income     -       -       -       4,081,000       -       4,081,000       1,732,000       5,813,000  
                                                                 
Stock options expense     -       -       184,000       -       -       184,000       -       184,000  
                                                                 
Investment in Santa Fe     -       -       (8,000 )     -       -       (8,000 )     4,000       (4,000 )
                                                                 
Purchase of treasury stock     -       -       -       -       (642,000 )     (642,000 )     -       (642,000 )
                                                                 
Balance at June 30, 2018     3,395,616     $ 33,000     $ 10,522,000     $ (41,217,000 )   $ (13,268,000 )   $ (43,930,000 )   $ (26,037,000 )   $ (69,967,000 )
                                                                 
Net Income     -       -       -       1,457,000       -       1,457,000       1,357,000       2,814,000  
                                                                 
Issuance of stock     9,366       -       -       -       -       -       -       -  
                                                                 
Stock options expense     -       -       76,000       -       -       76,000       -       76,000  
                                                                 
Investment in Santa Fe     -       -       (256,000 )     -       -       (256,000 )     133,000       (123,000 )
                                                                 
Investment in Justice                                                     (150,000 )     (150,000 )
                                                                 
Purchase of treasury stock     -       -       -       -       (1,079,000 )     (1,079,000 )     -       (1,079,000 )
                                                                 
Balance at June 30, 2019     3,404,982     $ 33,000     $ 10,342,000     $ (39,760,000 )   $ (14,347,000 )   $ (43,732,000 )   $ (24,697,000 )   $ (68,429,000 )

 

The accompanying notes are an integral part of these consolidated financial statements.

  

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THE INTERGROUP CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the years ended June 30,   2019     2018  
Cash flows from operating activities:                
Net income   $ 2,814,000     $ 5,813,000  
Adjustments to reconcile net loss to net cash provided by operating activities:                
Net unrealized loss (gain) on marketable securities     927,000       (3,598,000
Deferred taxes     (1,713,000 )     4,352,000  
Loss on disposal of assets     398,000       -  
Unrealized loss on other investments     -       42,000  
Impairment loss on other investments     98,000       200,000  
Depreciation and amortization     4,777,000       4,776,000  
Stock compensation expense     76,000       184,000  
Changes in assets and liabilities:                
Investment in marketable securities     3,218,000       6,934,000  
Other assets, net     2,823,000       (1,820,000 )
Accounts payable and other liabilities     1,819,000       (2,535,000 )
Due to securities broker     (258,000     (1,125,000
Obligations for securities sold     (710,000 )     (1,775,000 )
Net cash provided by operating activities     14,269,000       11,448,000  
                 
Cash flows from investing activities:                
Investment in Hotel, net     (1,397,000 )     (212,000 )
Investment in real estate, net     (833,000 )     (732,000 )
Proceeds from other investments     103,000       156,000  
Investment in Santa Fe     (123,000 )     (4,000 )
Investment in Justice     (150,000 )     -  
Net cash used in investing activities     (2,400,000 )     (792,000 )
                 
Cash flows from financing activities:                
Net payments of mortgage and other notes payable     (6,154,000 )     (2,776,000 )
Proceeds from line of credit     2,985,000       -  
Purchase of treasury stock     (1,079,000 )     (642,000 )
Net cash used in financing activities     (4,248,000 )     (3,418,000 )
                 
Net increase in cash, cash equivalents and restricted cash:     7,621,000       7,238,000  
Cash, cash equivalents and restricted cash at the beginning of the year     17,511,000       10,273,000  
Cash, cash equivalents and restricted cash at the end of the year   $ 25,132,000     $ 17,511,000  
                 
Supplemental information:                
Income taxes paid (refunds received)   $ (1,239,000 )   $ 171,000  
Interests paid   $ 10,011,000     $ 10,399,000  
                 
Non-cash transactions:                
Additions to Hotel equipment through capital lease   $ 382,000     $ 1,364,000  

 

The accompanying notes are an integral part of these consolidated financial statements.

  

 29 

 

 

THE INTERGROUP CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES:

 

Description of the Business

 

The InterGroup Corporation, a Delaware corporation, (“InterGroup” or the “Company”) was formed to buy, develop, operate and dispose of real property and to engage in various investment activities to benefit the Company and its shareholders.

 

As of June 30, 2019, the Company had the power to vote 86.1% of the voting shares of Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB: SFEF). This percentage includes the power to vote an approximately 4% interest in the common stock in Santa Fe owned by the Company’s Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998.

 

Santa Fe’s primary business is conducted through the management of its 68.8% owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), a public company (OTCBB: PRSI). Portsmouth has a 93.3% limited partnership interest in Justice and is the sole general partner. InterGroup also directly owns approximately 13.4% of the common stock of Portsmouth.

 

Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”), owns a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Kearny Street Parking LLC (“Parking”) is the operator of the garage. Mezzanine is a wholly-owned subsidiary of the Partnership; Operating is a wholly-owned subsidiary of Mezzanine. Mezzanine is the borrower under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating. The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton). Justice had a ten-year management agreement with Prism Hospitality L.P. (“Prism”) to perform certain management functions for the Hotel. Prism’s management agreement was terminated upon its expiration date of February 3, 2017. Effective December 1, 2013, GMP Management, Inc. (“GMP”), a company owned by a Justice limited partner and a related party, also provided management services for the Partnership pursuant to a management services agreement, with a three-year term, subject to the Partnership’s right to terminate earlier for cause. In June 2016, GMP resigned. On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the form of a self-exhausting, interest free note payable in the amount of $2,000,000 in a separate key money agreement. The $2,000,000 is included in restricted cash balances in the consolidated balance sheets as of June 30, 2019 and 2018. As of June 30, 2019 and 2018, unamortized portion of the key money was $1,896,000 and $2,000,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets.

 

In addition to the operations of the Hotel, the Company also generates income from the ownership of real estate. Properties include apartment complexes, commercial real estate, and three single-family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has investments in unimproved real property. All of the Company’s residential rental properties are managed in-house.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and Santa Fe. All significant inter-company transactions and balances have been eliminated.

 

Investment in Hotel, Net

 

Property and equipment are stated at cost. Building improvements are depreciated on a straight-line basis over their useful lives ranging from 3 to 39 years. Furniture, fixtures, and equipment are depreciated on a straight-line basis over their useful lives ranging from 3 to 7 years.

 

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Repairs and maintenance are charged to expense as incurred. Costs of significant renewals and improvements are capitalized and depreciated over the shorter of its remaining estimated useful life or life of the asset. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts; any resulting gain or loss is included in other income (expenses).

 

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with generally accepted accounting principles (“GAAP”). If the carrying amount of the asset, including any intangible assets associated with that asset, exceeds its estimated undiscounted net cash flow, before interest, the Partnership will recognize an impairment loss equal to the difference between its carrying amount and its estimated fair value. If impairment is recognized, the reduced carrying amount of the asset will be accounted for as its new cost. For a depreciable asset, the new cost will be depreciated over the asset’s remaining useful life. Generally, fair values are estimated using discounted cash flow, replacement cost or market comparison analyses. The process of evaluating for impairment requires estimates as to future events and conditions, which are subject to varying market and economic factors. Therefore, it is reasonably possible that a change in estimate resulting from judgments as to future events could occur which would affect the recorded amounts of the property. No impairment losses were recorded for the years ended June 30, 2019 and 2018. 

 

Investment in Real Estate, Net

 

Rental properties are stated at cost less accumulated depreciation. Depreciation of rental property is provided on the straight-line method based upon estimated useful lives of 5 to 40 years for buildings and improvements and 5 to 10 years for equipment. Expenditures for repairs and maintenance are charged to expense as incurred and major improvements are capitalized.

 

The Company also reviews its rental property assets for impairment. No impairment losses on the investment in real estate have been recorded for the years ended June 30, 2019 and 2018.

 

The fair value of the tangible assets of an acquired property, which includes land, building and improvements, is determined by valuing the property as if they were vacant, and incorporates costs during the lease-up periods considering current market conditions and costs to execute similar leases such lost rental revenue and tenant improvements. The value of tangible assets is depreciated using straight-line method based upon the assets estimated useful lives.

 

Investment in Marketable Securities

 

Marketable securities are stated at fair value as determined by the most recently traded price of each security at the balance sheet date. Marketable securities are classified as trading securities with all unrealized gains and losses on the Company's investment portfolio recorded through the consolidated statements of operations.

 

Other Investments, Net

 

Other investments include non-marketable securities (carried at cost, net of any impairments loss) and non-marketable debt instruments. The Company has no significant influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. For the years ended June 30, 2019 and 2018, the Company recorded impairment losses related to other investments of $98,000 and $200,000, respectively. As of June 30, 2019 and 2018, the allowance for impairment losses was $6,367,000 and $6,269,000, respectively.

 

Cash and Cash Equivalents

 

Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased and are carried at cost, which approximates fair value. As of June 30, 2019 and 2018, the Company does not have any cash equivalents.

 

Restricted Cash

 

Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel. It also includes key money received from Interstate that is restricted for capital improvements.

 

Other Assets, Net

 

Other assets include prepaid insurance, accounts receivable, franchise fees, tax refund receivable, and other miscellaneous assets. Franchise fees are stated at cost and amortized over the life of the agreement (15 years).

 

 31 

 

 

Accounts receivable from the Hotel and rental property customers are carried at cost less an allowance for doubtful accounts that is based on management’s assessment of the collectability of accounts receivable. The Company extends unsecured credit to its customers but mitigates the associated credit risk by performing ongoing credit evaluations of its customers.

 

Due to Securities Broker

 

The Company may utilize margin for its marketable securities purchases through the use of standard margin agreements with national brokerage firms. Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.

 

Obligation for Securities Sold

 

Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the statement of operations.

 

Accounts Payable and Other Liabilities

 

Accounts payable and other liabilities include trade payables, advance customer deposits, accrued wages, accrued real estate taxes, and other liabilities.

 

Treasury Stock

 

The Company records the acquisition of treasury stock under the cost method. During the years ended June 30, 2019 and 2018, the Company purchased 33,601 and 25,527 shares of treasury stock, respectively.

 

Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. Accounting standards for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the observability of inputs as follows:

 

Level 1–inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2–inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.

 

Level 3–inputs to the valuation methodology are unobservable and significant to the fair value.

 

Revenue Recognition

 

On July 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective approach to all contracts resulting in no cumulative adjustment to accumulated deficit. The adoption of this standard did not impact the timing of our revenue recognition based on the short-term, day-to-day nature of our operations. See Note 2 – Revenue.

 

Advertising Costs

 

Advertising costs are expensed as incurred and are included in Hotel operating expenses in the consolidated statements of operations. Advertising costs were $282,000 and $302,000 for the years ended June 30, 2019 and 2018, respectively.

 

 32 

 

 

Income Taxes

 

Deferred income taxes are calculated under the liability method. Deferred income tax assets and liabilities are based on differences between the financial statement and tax basis of assets and liabilities at the current enacted tax rates. Changes in deferred income tax assets and liabilities are included as a component of income tax expense. Changes in deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation allowances are established for certain deferred tax assets where realization is not likely.

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing corporate income tax by, among other things, lowering corporate income tax rates. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. The decrease in corporate tax rate reduced the Company’s deferred tax assets and liabilities to the lower federal base rate of 21%. As a result, a provisional net credit of $404,000 was included in the income tax expense for the year ended June 30, 2018. 

 

Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions.

  

Earnings Per Share

 

Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. The computation of diluted net income per share is similar to the computation of basic net income per share except that the weighted-average number of common shares is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued. The Company's only potentially dilutive common shares are stock options.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to the recording of allowance for doubtful accounts and allowance for impairment losses which are based on management’s assessment of the collectability of accounts receivable and the fair market value of nonmarketable securities, respectively, as of the end of the fiscal year. Actual results may differ from those estimates.

 

Debt Issuance Costs

 

Debt issuance costs related to a recognized debt liability are presented in the consolidated balance sheets as a direct deduction from the carrying amount of the debt liability and are amortized over the life of the debt. Loan amortization costs are included in interest expense in the consolidated statement of operations.

  

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delays the effective date of ASU 2014-09 by one year. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (ASU 2016-08) which clarifies the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We applied the modified retrospective transition method to all contracts upon the adoption of ASU 2014-09 effective July 1, 2018. We provided the additional required disclosures, but the cumulative adjustment from our comparative periods was zero in our consolidated financial statements. See Note 2 – Revenue.

 

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In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-18, Restricted Cash. ASU 2016-18 requires companies to include restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Additionally, ASU 2016-18 requires a disclosure of a reconciliation between the statement of financial position and the statement of cash flows when the balance sheet includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. ASU 2016-18 is effective for reporting periods beginning after December 15, 2017, with early adoption permitted, and will be applied retrospectively to all periods presented. The Company adopted ASU 2016-18 effective July 1, 2018. The adoption of ASU 2016-18 impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases, including operating leases, to be recognized in the statement of financial position as right-of-use assets and lease liabilities by lessees. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. We adopted ASU 2016-02 on July 1, 2019. The Company is currently reviewing the effect of ASU No. 2016-02.

 

On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2020. The Company is currently reviewing the effect of ASU No. 2016-13.

 

NOTE 2 - REVENUE

 

Our revenue from real estate is primarily rental income from residential and commercial property leases which is recorded when due from residents and is recognized monthly as earned. The following table present our Hotel revenue disaggregated by revenue streams.

 

For the year ended June 30,  2019   2018 
Hotel revenues:          
Hotel rooms  $51,243,000   $46,475,000 
Food and beverage   5,353,000    7,222,000 
Garage   2,875,000    3,011,000 
Other operating departments   410,000    391,000 
Total Hotel revenue  $59,881,000   $57,099,000 

 

Performance obligations

 

We identified the following performance obligations for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:

 

Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
   
Noncancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
   
Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
   
Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.

 

Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.

 

We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.

 

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Contract assets and liabilities

 

We do not have any material contract assets as of June 30, 2019 and 2018, other than trade and other receivables, net on our consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.

 

We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our consolidated balance sheets. Contract liabilities increased to $1,215,000 as of June 30, 2019 from $571,000 as of June 30, 2018. The increase for the fiscal year ended June 30, 2019 was primarily driven by deposits received from upcoming groups, offset by $563,000 revenue recognized that was included in the advanced deposits balance as of June 30, 2018.

 

Contract costs

 

We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers are less than one year.

 

NOTE 3 - JUSTICE INVESTORS

 

Justice Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”), was formed in 1967 to acquire real property in San Francisco, California, for the development and lease of the Hotel and related facilities. The Partnership has one general partner, Portsmouth Square, Inc., a California corporation (“Portsmouth”) and approximately 23 voting limited partners, including Portsmouth.

 

Management believes that the revenues and cash flows expected to be generated from the operations of the Hotel, garage and leases will be sufficient to meet all of the Partnership’s current and future obligations and financial requirements. Management also believes that there is significant appreciated value in the Hotel property in excess of the net book value to support additional borrowings, if necessary.

 

NOTE 4 – INVESTMENT IN HOTEL, NET

 

Investment in Hotel consisted of the following as of:

 

          Accumulated     Net Book  
June 30, 2019   Cost     Depreciation     Value  
                   
Land   $ 2,738,000     $ -     $ 2,738,000  
Furniture and equipment     31,106,000       (26,877,000 )     4,229,000  
Building and improvements     63,879,000       (31,010,000 )     32,869,000  
    $ 97,723,000     $ (57,887,000 )   $ 39,836,000  

 

          Accumulated     Net Book  
June 30, 2018   Cost     Depreciation     Value  
                   
Land   $ 2,738,000     $ -     $ 2,738,000  
Furniture and equipment     29,350,000       (25,876,000 )     3,474,000  
Building and improvements     64,336,000       (29,587,000 )     34,749,000  
    $ 96,424,000     $ (55,463,000 )   $ 40,961,000  

 

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NOTE 5 - INVESTMENT IN REAL ESTATE, NET

 

At June 30, 2019, the Company's investment in real estate consisted of twenty properties located throughout the United States. These properties include sixteen apartment complexes, three single-family houses as strategic investments, and one commercial real estate property. The Company also owns unimproved land located in Maui, Hawaii.

 

Investment in real estate included the following:

 

As of June 30,   2019     2018  
Land   $ 25,033,000     $ 25,033,000  
Buildings, improvements and equipment     68,369,000       67,536,000  
Accumulated depreciation     (41,629,000 )     (39,200,000 )
    $ 51,773,000     $ 53,369,000  

 

NOTE 6 - INVESTMENT IN MARKETABLE SECURITIES

 

The Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically invested in corporate bonds and income producing securities, which may include interests in real estate-based companies and REITs, where financial benefit could insure to its shareholders through income and/or capital gain.

 

At June 30, 2019 and 2018, all of the Company’s marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:

 

          Gross     Gross     Net     Fair  
Investment   Cost     Unrealized Gain     Unrealized Loss     Unrealized Loss     Value  
                               
As of June 30, 2019                                        
Corporate Equities   $ 19,204,000     $ 1,753,000     $ (11,261,000 )   $ (9,508,000 )   $ 9,696,000  
                                         
As of June 30, 2018                                        
Corporate Equities   $ 22,388,000     $ 2,450,000     $ (10,997,000 )   $ (8,547,000 )   $ 13,841,000  

 

As of June 30, 2019 and 2018, approximately 7% of the investment marketable securities balance above is comprised of the common stock of Comstock Mining Inc (“Comstock”).

 

As of June 30, 2019 and 2018, the Company had $11,088,000 and $10,819,000, respectively, of unrealized losses related to securities held for over one year; of which $10,900,000 and $10,646,000 are related to its investment in Comstock, respectively.

 

Net loss on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the two components for the years ended June 30, 2019 and 2018, respectively.

 

For the year ended June 30,   2019     2018  
Realized loss on marketable securities related to Comstock   $ -     $ (6,007,000 )
Realized (loss) gain on marketable securities     (806,000 )     632,000  
Unrealized loss on marketable securities related to Comstock     (254,000 )     (2,337,000 )
Unrealized (loss) gain on marketable securities     (673,000 )     5,935,000  
Net loss on marketable securities   $ (1,733,000 )   $ (1,777,000 )

 

NOTE 7 – OTHER INVESTMENTS, NET

 

The Company may also invest, with the approval of the Securities Investment Committee and other Company guidelines, in private investment equity funds and other unlisted securities. Those investments in non-marketable securities are carried at cost on the Company’s balance sheet as part of other investments, net of other than temporary impairment losses.

 

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Other investments, net consist of the following:

 

Type   June 30, 2019     June 30, 2018  
Private equity hedge fund, at cost   $ 376,000     $ 554,000  
Other investments     236,000       259,000  
    $ 612,000     $ 813,000  

 

NOTE 8 - FAIR VALUE MEASUREMENTS

 

The carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities, due to securities broker and obligations for securities sold) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable). The assets measured at fair value on a recurring basis are as follows:

 

As of June 30, 2019      
    Level 1  
Assets:        
Investment in marketable securities:        
REITs and real estate companies   $ 3,069,000  
Consumer cyclical     1,448,000  
Corporate bonds     1,420,000  
Financial services     951,000  
Energy     950,000  
Other     1,858,000  
    $ 9,696,000  

 

As of June 30, 2018      
    Level 1  
Assets:        
Investment in marketable securities:        
REITs and real estate companies   $ 4,300,000  
Corporate bonds     2,282,000  
Technology     1,813,000  
Healthcare     1,777,000  
Communications     1,071,000  
Other     2,598,000  
    $ 13,841,000  

 

The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.

 

Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other investments in non-marketable securities,” that were initially measured at cost and have been written down to fair value as a result of impairment or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments). The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:

 

                Net loss for the year  
Assets   Level 3     June 30, 2019     ended June 30, 2019  
                         
Other non-marketable investments   $ 612,000     $ 612,000     $ (98,000 )

 

                Net loss for the year  
Assets   Level 3     June 30, 2018     ended June 30, 2018  
                         
Other non-marketable investments   $ 813,000     $ 813,000     $ (242,000 )

 

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For fiscal years ended June 30, 2019 and 2018, we received distribution from other non-marketable investments of $103,000 and $131,000, respectively.

 

Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. When determining the fair value of these investments on a non-recurring basis, the Company uses valuation techniques such as the market approach and the unobservable inputs include factors such as conversion ratios and the stock price of the underlying convertible instruments. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

 

NOTE 9 – OTHER ASSETS, NET

 

Other assets consist of the following as of June 30:

 

    2019     2018  
Accounts receivable, net   $ 852,000     $ 1,843,000  
Prepaid expenses     747,000       490,000  
Miscellaneous assets, net     763,000       1,159,000  
Tax Refund Receivable     -       1,693,000  
Total other assets   $ 2,362,000     $ 5,185,000  

 

As mentioned in Note 6 – Investment in Marketable Securities, the Company had realized loss of $6,007,000 in fiscal year ended June 30, 2018 related to the sale of common stock of Comstock. During fiscal year 2019, the Company filed a carry back claim to carry back this loss to fiscal year ended June 30, 2015. The carry back claim generated a federal income tax refund of approximately $1,860,000 which is included in other assets in the consolidated balance sheet as of June 30, 2018. The $1,860,000 refund was received in March 2019.

 

NOTE 10 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS

  

Included in the balance of the related party note payable at June 30, 2019 and 2018 is the obligation to Hilton (Franchisor) in the form of a self-exhausting, interest free development incentive note which will be reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton. As of June 30, 2019 and 2018, the balance of the note was $3,325,000 and $3,642,000, respectively.

 

On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution is a self-exhausting, interest free note and shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. The $2,000,000 is included in restricted cash balances in the consolidated balance sheets as of June 30, 2019 and 2018. As of June 30, 2019 and 2018, unamortized portion of the key money was $1,896,000 and $2,000,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets.

 

As of June 30, 2019, the Company had capital lease obligations outstanding of $1,486,000. These capital leases expire in various years through 2023 at rates ranging from 5.77% to 6.25% per annum. Minimum future lease payments for assets under capital leases as of June 30, 2019 are as follows:

 

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For the year ending June 30,      
2020   $ 493,000  
2021     492,000  
2022     482,000  
2023     182,000  
 Total minimum lease payments     1,649,000  
Less interest on capital lease     (163,000 )
Present value of future minimum lease payments   $ 1,486,000  

 

In July 2018, the Company obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest are due in July 2019. On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Woodland Village. In July 2019, the Company obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. As of June 30, 2019, outstanding balance of the RLOC was $2,985,000.

 

Future minimum principal payments for all related party and other financing transactions are as follows:

 

For the year ending June 30,      
2020   $ 4,005,000  
2021     1,006,000  
2022     1,022,000  
2023     744,000  
2024     567,000  
Thereafter     2,388,000  
    $ 9,732,000  

 

NOTE 11 - MORTGAGE NOTES PAYABLE

 

On December 18, 2013: (i) Justice Operating Company, LLC, a Delaware limited liability company (“Operating”), entered into a loan agreement (“Mortgage Loan Agreement”) with Bank of America (“Mortgage Lender”); and (ii) Justice Mezzanine Company, a Delaware limited liability company (“Mezzanine”), entered into a mezzanine loan agreement (“Mezzanine Loan Agreement” and, together with the Mortgage Loan Agreement, the “Loan Agreements”) with ISBI San Francisco Mezz Lender LLC (“Mezzanine Lender” and, together with Mortgage Lender, the “Lenders”). The Partnership is the sole member of Mezzanine, and Mezzanine is the sole member of Operating.

 

The Loan Agreements provide for a $97,000,000 Mortgage Loan and a $20,000,000 Mezzanine Loan. The proceeds of the Loan Agreements were used to fund the redemption of limited partnership interests and the pay-off of the prior mortgage.

 

The Mortgage Loan is secured by the Partnership’s principal asset, the Hilton San Francisco-Financial District (the “Property”). The Mortgage Loan bears an interest rate of 5.275% per annum and matures in January 2024. The term of the loan is 10 years with interest only due in the first three years and principal and interest on the remaining seven years of the loan based on a thirty-year amortization schedule. The Mortgage Loan also requires payments for impounds related to property tax, insurance and capital improvement reserves. As additional security for the Mortgage Loan, there is a limited guaranty (“Mortgage Guaranty”) executed by the Company in favor of Mortgage Lender.

 

The Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The Mezzanine Loan bears interest at 9.75% per annum and matures on January 1, 2024. Interest only, payments are due monthly. As additional security for the Mezzanine Loan, there is a limited guaranty executed by the Company in favor of Mezzanine Lender (the “Mezzanine Guaranty” and, together with the Mortgage Guaranty, the “Guaranties”). The Guaranties are limited to what are commonly referred to as “bad boy” acts, including: (i) fraud or intentional misrepresentations; (ii) gross negligence or willful misconduct; (iii) misapplication or misappropriation of rents, security deposits, insurance or condemnation proceeds; and (iv) failure to pay taxes or insurance. The Guaranties are full recourse guaranties under identified circumstances, including failure to maintain “single purpose” status which is a factor in a consolidation of Operating or Mezzanine in a bankruptcy of another person, transfer or encumbrance of the Property in violation of the applicable loan documents, Operating or Mezzanine incurring debts that are not permitted, and the Property becoming subject to a bankruptcy proceeding. Pursuant to the Guaranties, the Partnership is required to maintain a certain minimum net worth and liquidity. As of June 30, 2019 and 2018, the Partnership is in compliance with both requirements.

 

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Each of the Loan Agreements contains customary representations and warranties, events of default, reporting requirements, affirmative covenants and negative covenants, which impose restrictions on, among other things, organizational changes of the respective borrower, operations of the Property, agreements with affiliates and third parties. Each of the Loan Agreements also provides for mandatory prepayments under certain circumstances (including casualty or condemnation events) and voluntary prepayments, subject to satisfaction of prescribed conditions set forth in the Loan Agreements.

 

In April 2016, the Company entered into an interest rate agreement on its $923,000 mortgage note payable on its commercial property located in Los Angeles, California in order to settle the variable rate as of March 31, 2016 of 4.22% into a fixed rate of 3.99%. The swap agreement matures in January 2021. A swap is a contractual agreement to exchange interest rate payments. As of June 30, 2019, the fair market value of the swap agreement is immaterial.

 

In June 2016, The Company refinanced its $1,929,000 mortgage note payable on its 12-unit apartment complex located in Los Angeles, California and obtained a new mortgage in the amount of $2,300,000. The interest rate on the new mortgage is 3.59% and matures in June 2026.

 

On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off with no prepayment penalty. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.

 

In August 2018, $1,005,000 was drawn from the Company’s RLOC with CIBC to pay off a mortgage note payable on its single-family house located in Los Angeles, California. In September 2018, the Company obtained a new mortgage in the amount of $1,000,000 on the same property. The interest rate on the new loan is fixed at 4.75% per annum for the first five years and variable for the remaining of the term. The note matures in October 2048. $995,000 received as a result of the refinance was used to pay down the RLOC.

 

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Each mortgage notes payable is secured by real estate or the Hotel. As of June 30, 2019 and 2018, the mortgage notes payables are summarized as follows:

 

    As of June 30, 2019                        
                                 
    Number   Note   Note            
Property   of Units   Origination Date   Maturity Date   Mortgage Balance     Interest Rate  
                                 
SF Hotel   544 rooms   December   2013   January   2024   $ 93,746,000       5.28 %
SF Hotel   544 rooms   December   2013   January   2024     20,000,000       9.75 %
        Mortgage notes payable - Hotel         113,746,000          
        Debt issuance costs         (659,000 )        
        Total mortgage notes payable - Hotel       $ 113,087,000          
                                     
Florence   157   March   2015   April   2025   $ 3,222,000       3.87 %
Las Colinas   358   November   2012   December   2022     16,974,000       3.73 %
Morris County   151   July   2012   August   2022     8,737,000       3.51 %
Morris County   151   June   2014   August   2022     2,512,000       4.51 %
St. Louis   264   May   2013   May   2023     5,365,000       4.05 %
Los Angeles   4   September   2012   September   2042     343,000       3.75 %
Los Angeles   2   September   2012   September   2042     347,000       3.75 %
Los Angeles   1   August   2012   September   2042     373,000       3.75 %
Los Angeles   31   November   2010   December   2020     4,927,000       4.85 %
Los Angeles   30   August   2007   September   2022     5,765,000       5.97 %
Los Angeles   14   April   2011   March   2021     1,632,000       5.89 %
Los Angeles   12   June   2016   June   2026     2,172,000       3.59 %
Los Angeles   9   April   2011   May   2021     1,303,000       5.60 %
Los Angeles   9   April   2011   March   2021     1,112,000       5.89 %
Los Angeles   8   July   2013   July   2043     440,000       3.75 %
Los Angeles   7   August   2012   September   2042     846,000       3.75 %
Los Angeles   4   August   2012   September   2042     579,000       3.75 %
Los Angeles   1   September   2012   September   2042     399,000       3.75 %
Los Angeles   1   September   2018   October   2048     990,000       4.75 %
Los Angeles   Office   April   2016   January   2021     806,000       4.91 %
        Mortgage notes payable - real estate         58,844,000          
        Debt issuance costs         (273,000 )        
        Total mortgage notes payable - real estate       $ 58,571,000          

 

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    As of June 30, 2018                        
                                 
    Number   Note   Note            
Property   of Units   Origination Date   Maturity Date   Mortgage Balance     Interest Rate  
                                 
SF Hotel   544 rooms   December   2013   January   2024   $ 95,018,000       5.28 %
SF Hotel   544 rooms   December   2013   January   2024     20,000,000       9.75 %
        Mortgage notes payable - Hotel         115,018,000          
        Debt issuance costs         (646,000 )        
        Total mortgage notes payable - Hotel       $ 114,372,000          
                                     
Florence   157   March   2015   April   2025   $ 3,291,000       3.87 %
Las Colinas   358   November   2012   December   2022     17,404,000       3.73 %
Morris County   151   July   2012   August   2022     9,068,000       3.51 %
Morris County   151   June   2014   August   2022     2,563,000       4.51 %
St. Louis   264   May   2013   May   2023     5,491,000       4.05 %
Los Angeles   4   September   2012   September   2042     352,000       3.75 %
Los Angeles   2   September   2012   September   2042     356,000       3.75 %
Los Angeles   1   August   2012   September   2042     383,000       3.75 %
Los Angeles   31   November   2010   December   2020     5,048,000       4.85 %
Los Angeles   30   August   2007   September   2022     5,907,000       5.97 %
Los Angeles   27   November   2010   December   2020     2,843,000       4.85 %
Los Angeles   14   April   2011   March   2021     1,665,000       5.89 %
Los Angeles   12   June   2016   June   2026     2,218,000       3.59 %
Los Angeles   9   April   2011   May   2021     1,331,000       5.60 %
Los Angeles   9   April   2011   March   2021     1,135,000       5.89 %
Los Angeles   8   July   2013   July   2043     451,000       3.75 %
Los Angeles   7   August   2012   September   2042     868,000       3.75 %
Los Angeles   4   August   2012   September   2042     594,000       3.75 %
Los Angeles   1   September   2012   September   2042     409,000       3.75 %
Los Angeles   1   August   2016   August   2018     1,000,000       5.75 %
Los Angeles   Office   April   2016   January   2021     842,000       4.55 %
        Mortgage notes payable - real estate         63,219,000          
        Debt issuance costs         (346,000 )        
        Total mortgage notes payable - real estate       $ 62,873,000          

 

Future minimum payments for all mortgage notes payable are as follows:

 

For the year ending June 30,      
2020   $ 3,054,000  
2021     12,483,000  
2022     3,095,000  
2023     37,812,000  
2024     107,656,000  
Thereafter     8,489,000  
    $ 172,589,000  

  

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NOTE 12 – MANAGEMENT AGREEMENTS

 

On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel with an effective takeover date of February 3, 2017. The term of management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2nd) anniversary of the takeover date. The $2,000,000 is included in restricted cash balances in the consolidated balance sheets as of June 30, 2019 and 2018. As of June 30, 2019 and 2018, unamortized portion of the key money was $1,896,000 and $2,000,000, respectively, and are included in related party and other notes payable in the consolidated balance sheets. During the years ended June 30, 2019 and 2018, Interstate management fees were $1,206,000 and $957,000, respectively, and are included in Hotel operating expenses in the consolidated statements of operations.

 

NOTE 13 – CONCENTRATION OF CREDIT RISK

 

As of June 30, 2019 and 2018, all accounts receivables are related to Hotel customers. The Hotel had one account that accounted for 32%, or $272,000 of accounts receivable at June 30, 2019, and two customers that accounted for 32%, or $572,000 of accounts receivable at June 30, 2018.

 

The Partnership maintains its cash and cash equivalents and restricted cash with various financial institutions that are monitored regularly for credit quality. At times, such cash and cash equivalents holdings may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) or other federally insured limits.

 

NOTE 14 – INCOME TAXES

 

The provision for the Company’s income tax expense is comprised of the following:

 

For the years ended June 30,   2019     2018  
             
Federal                
Current tax (expense) benefit   $ (1,387,000 )   $ 1,455,000  
Deferred tax benefit (expense)     2,563,000       (3,567,000 )
      1,176,000       (2,112,000 )
                 
State                
Current tax expense     (25,000 )     (227,000 )
Deferred tax expense     (850,000 )     (717,000
      (875,000 )     (944,000 )
                 
Income Tax Benefit (expense)    $  301,000     $ (3,056,000 )

 

The provision for income taxes differs from the amount of income tax computed by applying the federal statutory income tax rate to income before taxes as a result of the following differences:

 

For the years ended June 30,   2019     2018  
             
Statutory federal tax rate   $ (457,000 )   $ (2,218,000 )
State income taxes, net of federal tax benefit     (972,000 )     (623,000 )
Dividend received deduction     16,000       24,000  
Valuation allowance     2,158,000       (330,000 )
Basis difference in investments     815,000       -  
Carryback tax payable     (1,140,000 )     -  
Other     (119,000 )     91,000  
    $ 301,000     $ (3,056,000 )

 

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On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing corporate income tax by, among other things, lowering corporate income tax rates. As the Company has a June 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a statutory federal rate of approximately 28% for our fiscal year ending June 30, 2018, and 21% for subsequent fiscal years. The decrease in corporate tax rate reduced the Company’s deferred tax assets and liabilities to the lower federal base rate of 21%. As a result, a provisional net credit of $404,000 was included in the income tax expense for the year ended June 30, 2018.

 

The components of the deferred tax asset and liabilities are as follows:

 

    June 30, 2019     June 30, 2018  
Deferred tax assets:                
Net operating loss carryforwards   $ 6,810,000     $ 7,413,000  
Capital loss carryforwards     1,283,000       1,132,000  
Investment impairment reserve     1,295,000       1,276,000  
Accruals and reserves     1,095,000       766,000  
Interest expense     162,000       -  
Tax credits     619,000       733,000  
Unrealized loss on marketable securities     547,000       -  
Other     231,000       190,000  
Valuation allowance     (524,000 )     (2,610,000 )
      11,518,000       8,900,000  
Deferred tax liabilities:                
Equity earnings     (3,188,000 )     (2,564,000 )
Deferred gains on real estate sale and depreciation     (6,844,000 )     (5,638,000 )
Unrealized gains on marketable securities     -       (765,000
State taxes     (18,000 )     (178,000 )
      (10,050,000 )     (9,145,000 )
Net deferred tax asset (liability)   $ 1,468,000     $ (245,000

 

Management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of June 30, 2019, because of tax planning to generate taxable income in the future, management has determined that there is sufficient positive evidence to conclude that a significant portion of its deferred tax assets are realizable. As a result, the valuation allowance decreased by $2,086,000 and $778,000, respectively, during the fiscal years ended June 30, 2019 and 2018. 

 

As of June 30, 2019, the Company had estimated net operating losses (NOLs) of $25,447,000 and $16,583,000 for federal and state purposes, respectively. Below is the break-down of the NOLs for Intergroup, Santa Fe and Portsmouth. The carryforward expires in varying amounts through the year 2037.

 

    Federal     State  
InterGroup   $ -     $ -  
Santa Fe     9,735,000       3,913,000  
Portsmouth     15,712,000       12,670,000  
    $ 25,447,000     $ 16,583,000  

 

Utilization of the net operating loss carryover may be subject a substantial annual limitation if it should be determined that there has been a change in the ownership of more than 50 percent of the value of the Company's stock, pursuant to Section 382 of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating loss carryovers before utilization.

 

Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions are judged to not meet the “more-likely-than-not” threshold based on the technical merits of the positions. As of June 30, 2019, it has been determined there are no uncertain tax positions likely to impact the Company.

 

The Partnership files tax returns as prescribed by the tax laws of the jurisdictions in which it operates and is subject to examination by federal, state and local jurisdictions, were applicable.

 

As of June 30, 2019, tax years beginning in fiscal 2013 remain open to examination by the major tax jurisdictions and are subject to the statute of limitations.

 

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NOTE 15 – SEGMENT INFORMATION

 

The Company operates in three reportable segments, the operation of the Hotel (“Hotel Operations”), the operation of its multi-family residential properties (“Real Estate Operations”) and the investment of its cash in marketable securities and other investments (“Investment Transactions”). These three operating segments, as presented in the financial statements, reflect how management internally reviews each segment’s performance. Management also makes operational and strategic decisions based on this information.

 

Information below represents reported segments for the years ended June 30, 2019 and 2018. Segment income from Hotel operations consists of the operation of the Hotel and operation of the garage. Segment income from real estate operations consists of the operation of the rental properties. Loss from investments consists of net investment loss, dividend and interest income and investment related expenses.

 

As of and for the year   Hotel     Real Estate     Investment              
ended June 30, 2019   Operations     Operations     Transactions     Other     Total  
Revenues   $ 59,881,000     $ 14,872,000     $ -     $ -     $ 74,753,000  
Segment operating expenses     (44,466,000 )     (7,810,000 )     -       (2,346,000 )     (54,622,000 )
Segment income (loss) from operations     15,415,000       7,062,000       -       (2,346,000 )     20,131,000  
Interest expense - mortgage     (7,234,000 )     (2,554,000 )     -       -       (9,788,000 )
Loss on disposal of assets     (398,000 )     -       -       -       (398,000 )
Depreciation and amortization expense     (2,506,000 )     (2,429,000 )     -       -       (4,935,000 )
Loss from investments     -       -       (2,497,000 )     -       (2,497,000 )
Income tax benefit     -       -       -       301,000       301,000  
 Net income (loss)   $ 5,277,000     $ 2,079,000     $ (2,497,000 )   $ (2,045,000 )   $ 2,814,000  
Total assets   $ 62,148,000     $ 51,773,000     $ 10,308,000     $ 6,650,000     $ 130,879,000  

  

As of and for the year   Hotel     Real Estate     Investment              
ended June 30, 2018   Operations     Operations     Transactions     Other     Total  
Revenues   $ 57,099,000     $ 14,480,000     $ -     $ -     $ 71,579,000  
Segment operating expenses     (40,103,000 )     (7,579,000 )     -       (3,053,000 )     (50,735,000 )
Segment income (loss) from operations     16,996,000       6,901,000       -       (3,053,000 )     20,844,000  
Interest expense - mortgage     (7,237,000 )     (2,530,000 )     -       -       (9,767,000 )
Recovery of legal settlement costs     5,775,000                               5,775,000  
Depreciation and amortization expense     (2,707,000 )     (2,347,000 )     -       -       (5,054,000 )
Loss from investments     -       -       (2,929,000 )     -       (2,929,000 )
Income tax expense     -       -       -       (3,056,000 )     (3,056,000 )
 Net income (loss)   $ 12,827,000     $ 2,024,000     $ (2,929,000 )   $ (6,109,000 )   $ 5,813,000  
Total assets   $ 58,019,000     $ 53,369,000     $ 14,654,000     $ 5,638,000     $ 131,680,000  

 

NOTE 16 – STOCK-BASED COMPENSATION PLANS

 

The Company follows the Statement of Financial Accounting Standards 123 (Revised), "Share-Based Payments" ("SFAS No. 123R"), which was primarily codified into ASC Topic 718 “Compensation – Stock Compensation”, which addresses accounting for equity-based compensation arrangements, including employee stock options and restricted stock units. 

 

The Company currently has one equity compensation plan, which is the Intergroup 2010 Omnibus Employee Incentive Plan. The InterGroup Corporation 2008 Restricted Stock Unit Plan (the “2008 RSU Plan”) terminated on its expiration date of December 8th, 2018 as prescribed in the plan document. Both plans have been approved by the Company’s stockholders and are described below. Any outstanding options issued under the Key Employee Plan or the Non-Employee Director Plan remain effective in accordance with their terms.

 

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The InterGroup Corporation 2008 Restricted Stock Unit Plan

 

On December 3, 2008, the Board of Directors adopted, subject to shareholder approval, an equity compensation plan for its officers, directors and key employees entitled, The InterGroup Corporation 2008 Restricted Stock Unit Plan (the “2008 RSU Plan”). The 2008 RSU Plan was approved and ratified by the shareholders on February 18, 2009.

 

The 2008 RSU Plan authorizes the Company to issue restricted stock units (“RSUs”) as equity compensation to officers, directors and key employees of the Company on such terms and conditions established by the Compensation Committee of the Company. RSUs are not actual shares of the Company’s common stock, but rather promises to deliver common stock in the future, subject to certain vesting requirements and other restrictions as may be determined by the Committee. Holders of RSUs have no voting rights with respect to the underlying shares of common stock and holders are not entitled to receive any dividends until the RSUs vest and the shares are delivered. No awards of RSUs shall vest until at least six months after shareholder approval of the Plan. Subject to certain adjustments upon changes in capitalization, a maximum of 200,000 shares of the common stock are available for issuance to participants under the 2008 RSU Plan. The 2008 RSU Plan will terminate ten (10) years from December 3, 2008, unless terminated sooner by the Board of Directors. After the 2008 RSU Plan is terminated, no awards may be granted but awards previously granted shall remain outstanding in accordance with the Plan and their applicable terms and conditions.

 

The shares of common stock to be delivered upon the vesting of an award of RSUs have been registered under the Securities Act, pursuant to a registration statement filed on Form S-8 by the Company on June 16, 2010. The grant of RSUs is personal to the recipient and is not transferable. Once received, shares of common stock issuable upon the vesting of the RSUs are freely transferable subject to any requirements of Section 16(b) of the Exchange Act. Under the 2008 RSU Plan, the Compensation Committee also has the power and authority to establish and implement an exchange program that would permit the Company to offer holders of awards issued under prior shareholder approved compensation plans to exchange certain options for new RSUs on terms and conditions to be set by the Committee. The exchange program is designed to increase the retention and motivational value of awards granted under prior plans. In addition, by exchanging options for RSUs, the Company will reduce the number of shares of common stock subject to equity awards, thereby reducing potential dilution to stockholders in the event of significant increases in the value of its common stock.

 

As of June 30, 2019, there were no RSUs outstanding.

 

Intergroup Corporation 2010 Omnibus Employee Incentive Plan

 

On February 24, 2010, the shareholders of the Company approved The Intergroup Corporation 2010 Omnibus Employee Incentive Plan (the “2010 Incentive Plan”), which was formally adopted by the Board of Directors following the annual meeting of shareholders. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest based on 5 years of continuous service. Certain option and share awards provide for accelerated vesting if there is a change in control, as defined in the 2010 Incentive Plan. The 2010 Incentive plan as modified in December 2013, authorizes a total of up to 400,000 shares of common stock to be issued as equity compensation to officers and employees of the Company in an amount and in a manner to be determined by the Compensation Committee in accordance with the terms of the 2010 Incentive Plan. The 2010 Incentive Plan authorizes the awards of several types of equity compensation including stock options, stock appreciation rights, performance awards and other stock-based compensation. The 2010 Incentive Plan will expire on February 23, 2020, if not terminated sooner by the Board of Directors upon recommendation of the Compensation Committee. Any awards issued under the 2010 Incentive Plan will expire under the terms of the grant agreement.

 

The shares of common stock to be issued under the 2010 Incentive Plan have been registered under the Securities Act, pursuant to a registration statement filed on Form S-8 by the Company on June 16, 2010. Once received, shares of common stock issued under the Plan will be freely transferable subject to any requirements of Section 16 (b) of the Exchange Act.

 

On March 16, 2010, the Compensation Committee authorized the grant of 100,000 stock options to the Company’s Chairman, President and Chief Executive, John V. Winfield to purchase up to 100,000 shares of the Company’s common stock pursuant to the 2010 Incentive Plan. The exercise price of the options is $10.30, which is 100% of the fair market value of the Company’s Common Stock as determined by reference to the closing price of the Company’s Common Stock as reported on the NASDAQ Capital Market on March 16, 2010, the date of grant. The options expire ten years from the date of grant, unless terminated earlier in accordance with the terms of the 2010 Incentive Plan. The options shall be subject to both time and market based vesting requirements, each of which must be satisfied before options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest over a period of five years, with 20,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the market vesting requirements, the options vest in increments of 20,000 shares upon each increase of $2.00 or more in the market price of the Company’s common stock above the exercise price ($10.30) of the options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading days during any one quarter. As of June 30, 2019, all the market vesting requirements have been met.

 

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In February 2012, the Compensation Committee awarded 90,000 stock options to the Company’s Chairman, President and Chief Executive, John V. Winfield to purchase up to 90,000 shares of common stock. The per share exercise price of the options is $19.77 which is the fair value of the Company’s Common Stock as reported on NASDAQ on February 28, 2012. The options expire ten years from the date of grant. The options are subject to both time and market based vesting requirements, each of which must be satisfied before the options are fully vested and eligible to be exercised. Pursuant to the time vesting requirements, the options vest over a period of five years, with 18,000 options vesting upon each one-year anniversary of the date of grant. Pursuant to the market vesting requirements, the options vest in increments of 18,000 shares upon each increase of $2.00 or more in the market price of the Company’s common stock above the exercise price ($19.77) of the options. To satisfy this requirement, the common stock must trade at that increased level for a period of at least ten trading days during any one quarter. As of June 30, 2019, all of these options have met the market vesting requirements.

 

On December 26, 2013, the Compensation Committee authorized, subject to shareholder approval, a grant of non-qualified and incentive stock options for an aggregate of 160,000 shares (the “Option Grant”) to the Company’s President and Chief Executive Officer, John V. Winfield. The stock option grant was approved by shareholders on February 19, 2014. The grant of stock options was made pursuant to, and consistent with, the 2010 Incentive Plan, as proposed to be amended. The non-qualified stock options are for 133,195 shares and have a term of ten years, expiring on December 26, 2023, with an exercise price of $18.65 per share. The incentive stock options are for 26,805 shares and have a term of five years, expiring on December 26, 2018, with an exercise price of $20.52 per share. In accordance with the terms of the 2010 Incentive Plan, the exercise prices were based on 100% and 110%, respectively, of the fair market value of the Company’s common stock as determined by reference to the closing price of the Company’s common stock as reported on the NASDAQ Capital Market on the date of grant. The stock options are subject to time vesting requirements, with 20% of the options vesting annually commencing on the first anniversary of the grant date. In December 2018, Mr. Winfield exercised the 26,805 vested incentive stock options by surrendering 17,439 shares of the Company’s common stock at fair value as payment of the exercise price, resulting in a net issuance to him of 9,366 shares. No additional compensation expense was recorded related to the issuance.

 

In March 2017, the Compensation Committee awarded 18,000 stock options to the Company’s Vice President of Real Estate, David C. Gonzalez, to purchase up to 18,000 shares of common stock. The per share exercise price of the options is $27.30 which is the fair value of the Company’s Common Stock as reported on NASDAQ on March 2, 2017. The options expire ten years from the date of grant. Pursuant to the time vesting requirements, the options vest over a period of five years, with 3,600 options vesting upon each one-year anniversary of the date of grant.

 

During the years ended June 30, 2019 and 2018, the Company recorded stock option compensation expense of $76,000 and $184,000, respectively, related to stock options previously issued. As of June 30, 2019, there was an estimated total of $44,000 unamortized compensation related to stock options which is expected to be recognized over the weighted-average of 2.67 years.

 

Option-pricing models require the input of various subjective assumptions, including the option’s expected life, estimated forfeiture rates and the price volatility of the underlying stock. The expected stock price volatility is based on analysis of the Company’s stock price history. The Company has selected to use the simplified method for estimating the expected term. The risk-free interest rate is based on the U.S. Treasury interest rates whose term is consistent with the expected life of the stock options. No dividend yield is included as the Company has not issued any dividends and does not anticipate issuing any dividends in the future.

 

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The following table summarizes the stock options activity from July 1, 2017 through June 30, 2019:

 

        Number of     Weighted Average     Weighted Average     Aggregate  
        Shares     Exercise Price     Remaining Life     Intrinsic Value  
                             
Outstanding at   July 1, 2017     368,000     $ 17.21       5.17 years     $ 3,046,000  
Granted         -       -                  
Exercised         -       -                  
Forfeited         -       -                  
Exchanged         -       -                  
Outstanding at   June 30, 2018     368,000     $ 17.21       4.17 years     $ 3,505,000  
Exercisable at   June 30, 2018     318,000     $ 16.47       3.79 years     $ 3,257,000  
Vested and Expected to vest at   June 30, 2018     368,000     $ 17.21       4.17 years     $ 3,505,000  
                                     
Outstanding at   July 1, 2018     368,000     $ 17.21       4.17 years     $ 3,505,000  
Granted         -       -                  
Exercised         (26,805 )     20.52                  
Forfeited         -       -                  
Exchanged         -       -                  
Outstanding at   June 30, 2019     341,195     $ 16.95       3.07 years     $ 4,680,000  
Exercisable at   June 30, 2019     330,395     $ 16.62       2.92 years     $ 4,643,000  
Vested and Expected to vest at   June 30, 2019     341,195     $ 16.95       3.07 years     $ 4,680,000  

  

NOTE 17 – RELATED PARTY TRANSACTIONS

 

In connection with the redemption of limited partnership interests of Justice, Justice Operating Company, LLC agreed to pay a total of $1,550,000 in fees to certain officers and directors of the Company for services rendered in connection with the redemption of partnership interests, refinancing of Justice’s properties and reorganization of Justice. This agreement was superseded by a letter dated December 11, 2013 from Justice, in which Justice assumed the payment obligations of Justice Operating Company, LLC. As of June 30, 2018, $200,000 of these fees remained payable and are paid off as of June 30, 2019.  

 

As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Portsmouth and Santa Fe and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.

 

NOTE 18 – COMMITMENTS AND CONTINGENCIES

 

Franchise Agreements

 

The Partnership entered into a Franchise License Agreement (the “License Agreement”) with the HLT Existing Franchise Holding LLC (“Hilton”) on November 24, 2004. The term of the License agreement was for an initial period of 15 years commencing on the date the Hotel began operating as a Hilton hotel, with an option to extend the License Agreement for another five years, subject to certain conditions. On June 26, 2015, Operating and Hilton entered into an amended franchise agreement which amongst other things extended the License Agreement through 2030, and also provided the Partnership certain key money cash incentives to be earned through 2030.

 

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Since the opening of the Hotel in January 2006, the Partnership has incurred monthly royalties, program fees and information technology recapture charges equal to a percentage of the Hotel’s gross room revenue. Fees for such services during fiscal year 2019 and 2018 totaled approximately $4.1 million and $3.8 million, respectively.

 

Hotel Employees

 

Effective February 3, 2017, the Partnership had no employees. On February 3, 2017, Interstate assumed all labor union agreements and retained employees of their choice to continue providing services to the Hotel.  As of June 30, 2019, approximately 85% of those employees were represented by one of four labor unions, and their terms of employment were determined under a collective bargaining agreement (“CBA”) to which the Partnership was a party. During the fiscal year ended June 30, 2019, the Partnership renewed the CBA for Local 39 (Stationary Engineers), and Local 665 (Parking Employees). CBA for Local 2 (Hotel and Restaurant Employees) expired on August 13, 2018 and was renewed in August 2019. CBA for Local 856 (International Brotherhood of Teamsters) will expire on December 31, 2022.

 

Negotiation of collective bargaining agreements, which includes not just terms and conditions of employment, but scope and coverage of employees, is a regular and expected course of business operations for the Partnership and Interstate. The Partnership expects and anticipates that the terms of conditions of CBAs will have an impact on wage and benefit costs, operating expenses, and certain hotel operations during the life of each CBA, and incorporates these principles into its operating and budgetary practices.

 

Legal Matters

  

In April 2014, the Partnership commenced an arbitration action against Glaser Weil Fink Howard Avchen & Shapiro, LLP (formerly known as Glaser Weil Fink Jacobs Howard Avchen & Shapiro, LLP), Brett J. Cohen, Gary N. Jacobs, Janet S. McCloud, Paul B. Salvaty, and Joseph K. Fletcher III (collectively, the “Respondents”) in connection with the redemption transaction. The arbitration alleged legal malpractice against the Respondents and also sought declaratory relief regarding provisions of the option agreement in the redemption transaction and regarding the engagement letter with Respondents. Prior to arbitration proceedings, the parties agreed in principle to settle the matter, and entered into a settlement agreement and mutual general release in April 2018. The Respondents agreed to pay $8,300,000, which was received in May of 2018. $5,575,000 was recorded as a recovery of legal settlement cost and $2,725,000 was recorded as a reduction of legal expense for the fiscal year ended June 30, 2018.  

 

The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company defends itself vigorously against any such claims. Management does not believe that the impact of such matters will have a material effect on the financial conditions or result of operations when resolved.

 

NOTE 19 – SUBSEQUENT EVENTS

 

On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.

 

In July 2019, the Company obtained a modification from CIBC Bank USA (“CIBC”) which increased its $5,000,000 revolving line of credit (“RLOC”) by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

  

Item 9A. Controls and Procedures.

 

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

 

The Company’s management, with the participation of the Company’s Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the fiscal period covered by this Annual Report on Form 10-K. Based upon such evaluation, management has concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Management is responsible for establishing and maintaining internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The internal control over financial reporting is a process, under the supervision of our Chief Executive Officer and Principal Financial Officer, designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

The internal control over financial reporting include those policies and procedures that: 

 

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

 

• provide reasonable assurance that our transactions are recorded as necessary to permit preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and

 

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

 

Management, including our Chief Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its evaluation, management concluded that there was a material weakness in our internal control over financial reporting as of June 30, 2018 while it has been remediated as of June 30, 2019. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weakness was related to the Company’s preparation of its tax provision. 

 

During the fourth quarter of fiscal 2017, we identified a material weakness in internal controls over financial reporting related to our accounting for deferred income taxes and income tax expense. Specifically, we did not design and maintain effective controls to identify items within the deferred tax balances that could be materially incorrect. We did not provide appropriate oversight of our third-party tax CPA firm preparer. This material weakness did not have, but could have resulted in various material adjustments to deferred tax accounts for fiscal 2017 and 2016. Since the material weakness was identified, we have undergone evaluation and improvements in our internal control over financial reporting. Management’s remediation activities have included the following:

 

In order to mitigate the material weakness to the fullest extent possible, management hired a new tax CPA specialist to review and do a detailed analysis which was completed for the year ended June 30, 2017. The Company has also assigned to its audit committee oversight responsibilities with regard to this analysis.  The preparation of the Company’s deferred tax assets and liabilities will be reviewed annually by tax experts as well as the Principal Financial Officer and the Chief Executive Officer. 

 

As of June 30, 2018, these controls were not operating effectively as noted by a computational error in estimating the transition impact of the Tax Act on our deferred tax balances. As of June 30, 2019, management concludes that the material weakness has been remediated by its active engagement in the provision preparation process and will continue to enhance its controls over the preparation of its tax provision.

     

This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm, pursuant to provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit us to provide only management’s report in this Annual Report on Form 10-K.

 

This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

As stated in our report on internal control over financial reporting, the material weakness related to tax provision preparation has been remediated in fiscal year 2019.

 

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Item 9B. Other Information.

 

None.

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

The following table sets forth certain information with respect to the Directors and Executive Officers of the Company as of June 30, 2019:

 

Name   Position with the Company   Age   Term to Expire
             
Class A Directors:            
             
John V. Winfield (1)(4)(6)(7)   Chairman of the Board; President   72   Fiscal 2019 Annual Meeting
    and Chief Executive Officer        
             
Jerold R. Babin (2)(3)   Director   85   Fiscal 2019 Annual Meeting
             
Class B Directors:            
             
Yvonne L. Murphy (1)(5)(7)   Director   62   Fiscal 2020 Annual Meeting
             
William J. Nance (1)(2)(3)(4)(6)   Director   75   Fiscal 2020 Annual Meeting
             
Class C Director:            
             
John C. Love (2)(3)(4)(5)(6)(7)   Director   79   Fiscal 2021 Annual Meeting
             
Executive Officers:            
             
David C. Gonzalez   Vice President Real Estate   52   N/A
             
Danfeng Xu   Treasurer, Controller (Principal Financial Officer), and Secretary   32   N/A

  

(1) Member of the Executive Committee

(2) Member of the Administrative and Compensation Committee

(3) Member of the Audit Committee

(4) Member of the Real Estate Investment Committee

(5) Member of the Nominating Committee

(6) Member of the Securities Investment Committee

(7) Member of the Special Strategic Options Committee

 

Business Experience:

 

The principal occupation and business experience during the last five years for each of the Directors and Executive Officers of the Company are as follows:

 

John V. Winfield — Mr. Winfield was first appointed to the Board in 1982. He currently serves as the Company's Chairman of the Board, President and Chief Executive Officer, having first been appointed as such in 1987. Mr. Winfield also serves as President, Chairman and Chief Executive Officer of the Company’s subsidiaries, Santa Fe and Portsmouth, both public companies. Mr. Winfield’s extensive experience as an entrepreneur and investor, as well as his managerial and leadership experience from serving as a chief executive officer and director of public companies, led to the Board’s conclusion that he should serve as a director of the Company.

  

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Jerold R. Babin — Mr. Babin was first appointed as a Director of the Portsmouth, a subsidiary of the Company, in February 1996. Mr. Babin was elected to the Board of InterGroup in February 2014. Mr. Babin is a retail securities broker. From 1974 to 1989, he worked at Drexel Burnham and from 1989 to June 30, 2010, he worked for Prudential Securities (later Wachovia Securities and now Wells Fargo Advisors) where he held the title of First Vice-President. Mr. Babin retired from his position at Wells Fargo advisors in June 2010. For the past 20 years, until present, Mr. Babin has also served as an arbitrator for FINRA (formerly NASD). Mr. Babin’s extensive experience in the securities and financial markets as well has his experience in the securities and public company regulatory industry led to the Board’s conclusion that he should serve as a director of the Company.

 

Yvonne L. Murphy — Mrs. Murphy was elected to the Board of InterGroup in February 2014 and to the Board of Portsmouth, a subsidiary of the Company, in February 2019. She was a member of Governor Kenny C. Guinn’s executive staff in Nevada, and was employed for years by the prestigious Jones Vargas law firm in Reno, Nevada.  She served in nine legislative sessions during the most challenging years in Nevada’s history.  Prior to starting her own lobbying firm, Ms. Murphy worked for RR Partners in its corporate office in Las Vegas, Nevada and in the Government Affairs Division in Reno. She has a Doctorate and a Master’s in Business Administration from the California Pacific University. Mrs. Murphy’s impressive experience in corporate management, legal research and legislative lobbying led to the Board’s conclusion that she should serve as a director of the Company.

 

William J. Nance — Mr. Nance is a Certified Public Accountant and private consultant to the real estate and banking industries. He is also President of Century Plaza Printers Inc. Mr. Nance was first elected to the Board in 1984. He served as the Company’s Chief Financial Officer from 1987 to 1990 and as Treasurer from 1987 to June 2002. Mr. Nance is also a Director of Santa Fe and Portsmouth. Mr. Nance also serves as a director of Comstock Mining, Inc. Mr. Nance’s extensive experience as a CPA and in numerous phases of the real estate industry, his business and management experience gained in running his own businesses, his service as a director and audit committee member for other public companies and his knowledge and understanding of finance and financial reporting, led to the Board’s conclusion that he should serve as a director of the Company.

 

John C. Love — Mr. Love was appointed to the Board in 1998. Mr. Love is an international hospitality and tourism consultant. He is a retired partner in the national CPA and consulting firm of Pannell Kerr Forster and, for the last 30 years, a lecturer in hospitality industry management control systems and competition & strategy at Golden Gate University and San Francisco State University. He is Chairman Emeritus of the Board of Trustees of Golden Gate University and the Executive Secretary of the Hotel and Restaurant Foundation. Mr. Love is also a Director of Santa Fe and Portsmouth. Mr. Love’s extensive experience as a CPA and in the hospitality industry, including teaching at the university level for the last 30 years in management control systems, and his knowledge and understanding of finance and financial reporting, led to the Board’s conclusion that he should serve as a director of the Company.

 

David C. Gonzalez — Mr. Gonzalez was appointed Vice President Real Estate of the Company on January 31, 2001. Over the past 30 years, Mr. Gonzalez has served in numerous capacities with the Company, including Controller and Director of Real Estate.

 

Danfeng Xu – Ms. Xu was appointed as Treasurer and Control