UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2021
or
For the transition period from _______ to_________
Commission File Number 1-10324
THE INTERGROUP CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
13-3293645
(I.R.S. Employer
Identification No.)
1516 S. Bundy Drive, Suite 200, 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
Common Stock, $0.01 par value
Trading Symbol
INTG
Name of exchange on which registered
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.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
☐ Yes ☒ No
☐ Yes ☒ 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.
☒ 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
and post such files).
☒ 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.
☒ 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
Non-Accelerated Filer
Emerging growth company
☐
☒
☐
Accelerated Filer
Smaller reporting 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☒ No
As of December 31, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately
$23,035,000 (based upon the closing sale price of the common stock on that date on The NASDAQ Stock Market LLC).
The number of shares outstanding of registrant’s Common Stock, as of September 17, 2021 was 2,222,919.
DOCUMENTS INCORPORATED BY REFERENCE: None
TABLE OF CONTENTS
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.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Item 6.
Selected Financial Data.
Item 7. Management’s 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.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
PART III
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.
Item 15. Exhibits, Financial Statement Schedules.
Signatures
PART IV
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Forward-looking statements
include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity
and capital resources, the impact to our business and financial condition, and measures being taken in response to the novel strain of coronavirus
and the disease it causes (“COVID-19”), the effects of competition and the effects of future legislation or regulations and other non-historical
statements. Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of
forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,”
“seeks,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. You
should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some
cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future
achievements or events.
COVID-19 has had and continues to have a significant negative effect on the hospitality industry and our business. The effects of COVID-19,
including government restrictions such as mandated closings of non-essential businesses and travel restrictions, have severely reduced overall
lodging demand. Since March 2020, we have experienced a significant decline in occupancy and Revenue per Available Room (“RevPar”)
associated with COVID-19, which resulted in a decline in our operating cash flow, our financial condition, results of operations and performance,
and a decline on the global economy and financial markets. The continued extent to which COVID-19 has impacted us and guests at our hotel will
depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of
the pandemic and possible resurgences, the actions taken to contain the pandemic or mitigate its effect, additional closures that may be mandated or
advisable whether due to an increased number of COVID-19 cases or otherwise, and the direct and indirect economic effects of the pandemic and
containment measures, among others. However, the distribution of COVID-19 vaccines that began in December 2020 and the reports of their
effectiveness have resulted in an improvement in traveler and general consumer sentiment. Investors are cautioned to interpret many of the risks
identified in the risk factors discussed in this 10-K and incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2021 and our Annual Report on Form 10-K for the year ended June 30, 2020 as being heightened as a result of the ongoing and
numerous adverse impacts of COVID-19.
Other 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;
● hyperinflation;
● litigation; and
● other risk factors discussed below in this Report.
All such forward-looking statements are based on current expectations of management and therefore involve estimates and assumptions that are
subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results expressed in the statements. You
should not put undue reliance on any forward-looking statements and we urge investors to carefully review the disclosures we make concerning
risks and uncertainties in Item 1A: “Risk Factors” in this Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2021 and our Annual Report on Form 10-K for the year ended June 30, 2020, as such factors may be updated from time to time in our
periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov, as well as risks, uncertainties and other factors discussed
in this Annual Report on Form 10-K. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
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Item 1. Business.
GENERAL
PART I
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.
Effective February 19, 2021, the Company’s 83.7% owned subsidiary, Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB:
SFEF), was liquidated and all of its assets including its 68.8% interest in Portsmouth Square Inc. (“Portsmouth”), a public company (OTCBB:
PRSI) was distributed to its shareholders in exchange for their Santa Fe common stock. InterGroup received cash of $5,013,000 and 422,998 shares
of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. As a former 3.7% shareholder of Santa Fe, the Company’s
President, Chairman of the Board and Chief Executive Officer, John Winfield, received cash of $221,000 and 18,641 shares of Portsmouth common
stock in March 2021 as a result of the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of
Dissolution from the State of Nevada, and Santa Fe is effectively fully dissolved and no longer in legal existence. The liquidation and distribution of
Santa Fe did not have an impact on the condensed consolidated statement of operations but rather on the condensed consolidated balance sheets as a
re-class between non-controlling interests and accumulated deficit. As of June 30, 2021, InterGroup owns approximately 74.9% of the outstanding
common shares of Portsmouth. As of June 30, 2021, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield,
owns approximately 2.5% of the outstanding common shares of Portsmouth. Mr. Winfield also serves as the Chairman of the Board and Chief
Executive Officer of Portsmouth. Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice
Investors Limited Partnership, a California limited partnership (“Justice” or the “Partnership”). As of June 30, 2021, Portsmouth has a 99.3%
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 and
operates 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. 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”) through January 31, 2030.
Justice entered into a ten-year Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the
Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. On October 25, 2019, Interstate merged with
Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly combined
company will be positioned under the Aimbridge Hospitality name in the Americas.
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 seventeen 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 the County of Los Angeles, California. The Company also has an investment
in unimproved real property. As of June 30, 2021, all of the Company’s operating real estate properties are managed in-house.
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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 Executive Strategic Real Estate and Securities 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.
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 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. On October 25, 2019,
Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the
newly combined company will be positioned under the Aimbridge Hospitality name in the Americas. For the fiscal years ended June 30, 2021 and
2020, hotel management fees were $242,000 and $591,000, respectively, offset by key money amortization of $250,000 for both years and are
included in Hotel operating expenses in the consolidated statements of operations. As part of the Hotel management agreement, 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, 2021, monthly event space fee is $6,500. 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, 2021 and 2020, the Partnership did not
pay the Foundation any such fees.
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SALES AND REFINANCING OF REAL ESTATE PROPERTIES
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 interests were 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 Santa Monica,
California. 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. In July 2020, the RLOC was extended to July 2021. As of June 30, 2021 and 2020, outstanding balance of
the RLOC was zero and $2,985,000, respectively. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica,
California for $15,650,000 and realized a gain on the sale of approximately $12,043,000. Santa Fe was able to utilize its entire available federal net
operating losses (“NOL”) and capital loss carryforwards. However, California A.B. 85, signed by Governor Newsom on June 29, 2020, suspended
the use of NOLs for tax years beginning in 2020, 2021, and 2022; therefore, Santa Fe was unable to utilize its NOLs for State income tax purposes.
Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of the RLOC of $2,985,000 as the Company had drawn on its
RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property.
In April 2020, the Company refinanced its $8,453,000 and $2,469,000 mortgage notes payable on its 151-unit apartment complex in Parsippany,
New Jersey and obtained a new mortgage note payable for $18,370,000. The Company received net proceeds of $6,814,000 as a result of the
refinance. Interest rate on the mortgage is fixed at 3.17% for ten years and the mortgage matures in May 2030.
On June 30, 2020, the Company refinanced its $1,274,000 mortgage note payable on its 9-unit apartment complex in Marina del Rey, California and
obtained a new mortgage note payable for $2,600,000. The Company received net proceeds of $1,144,000 as a result of the refinance. Interest rate
on the mortgage is fixed at 3.09% for ten years and the mortgage matures in July 2030.
In October 2020, the Company refinanced its 4.85% existing $4,800,000 mortgage note payable on its 31-unit apartment complex in Santa Monica,
California and generated net proceeds of $3,529,000. The outstanding new mortgage balance was approximately $8,400,000 at June 30, 2021 with a
fixed interest rate of 2.52% per annum and the maturity date of the new mortgage is November 1, 2030. The new mortgage requires interest-only
payments for the first two years and will amortized over 30 years thereafter.
On November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to InterGroup for $1,530,000 in exchange for a
reduction of $1,196,000 of its obligation to InterGroup. Santa Fe acquired the property on February 1, 2002 for $785,000. Outstanding mortgage
note payable on the property for $334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately
$901,000, which was eliminated in consolidation at InterGroup. The sales price of the property represents its current value as of the sale date as
appraised by a licensed independent third-party appraiser. The fairness of the sale terms of the transaction were reviewed and approved by the
independent directors of Santa Fe and InterGroup, and unanimously approved by the entire Board of Directors of both companies.
On November 30, 2020, the Company refinanced its 5.89% existing $1,088,000 mortgage note payable on its 9-unit apartment complex in West Los
Angeles, California and generated net proceeds of $798,000. The outstanding new mortgage balance was approximately $1,975,000 at June 30,
2021 with a fixed interest rate of 3.05% per annum and the maturity date of the new mortgage is December 1, 2030.
In January 2021, the Company refinanced its 5.89% existing $1,597,000 mortgage note payable on its 14-unit apartment complex in West Los
Angeles, California, and generated net proceeds of $1,057,000. The outstanding new mortgage balance was approximately $2,761,000 at June 30,
2021 with a fixed interest rate of 3.05% per annum and the maturity date of the new mortgage is February 1, 2031.
In March 2021, in an effort to make both companies more efficient, InterGroup purchased back the 50% interest of InterGroup Uluniu Inc. from
Portsmouth for $980,000, which represents Portsmouth’s carrying cost of the investment. No gains or losses were realized as a result of the
transaction since it was a related-party transaction. As a related-party transaction, the fairness of the financial terms of the transactions were
reviewed and approved by the independent director of the Company.
On June 30, 2021, the Company refinanced its 3.75% existing $563,000 mortgage note payable on its 4-unit apartment complex in West Los
Angeles, California and generated net proceeds of $619,000. The outstanding new mortgage balance was approximately $1,155,000 at June 30,
2021 with a five-year fixed interest rate of 3.5% per annum and adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual
rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of
9.95%. The maturity date of the new mortgage is August 1, 2051.
On June 30, 2021, the Company refinanced its 3.75% existing $363,000 mortgage note payable on one of its single-family houses and generated net
proceeds of $576,000. The outstanding new mortgage balance was approximately $920,000 at June 30, 2021 with a five-year fixed interest rate of
3.5% per annum adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual
rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity date of the new mortgage
is August 1, 2051.
On June 30, 2021, the Company refinanced its 3.75% existing $388,000 mortgage note payable one a second single-family house and generated net
proceeds of $183,000. The outstanding new mortgage balance was approximately $555,000 at June 30, 2021 with a five-year fixed interest rate of
3.5% per annum adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual
rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity date of the new mortgage
is August 1, 2051.
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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 an Executive Strategic Real Estate and 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 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, 2021 and 2020, the Company had other investments of
$41,000 and $278,000, 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,
2021 and 2020, the Company had obligations for securities sold (equities short) of $6,419,000 and $294,000, respectively.
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, 2021 and 2020 were $7,917,000 and
$1,576,000, respectively.
As Chairman of the Executive Strategic Real Estate and 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 Board of Portsmouth and oversees the investment activity of
Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk
factors, the Chief Executive Officer, and Portsmouth, 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 Portsmouth, 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
Historically, the Hotel’s operation have been seasonal under normal circumstances. Like most hotels in the San Francisco area, the Hotel generally
maintained high occupancy and room rates during the entire year except for the weeks starting from Thanksgiving to 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. However, the
COVID-19 pandemic has altered this seasonal trend in 2020. See Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations for more information regarding the effects of the COVID-19 pandemic on our results of operations.
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COMPETITION
The hotel industry has been devastated by the COVID-19 pandemic that hurt business worse than 9/11 and the Great Recession combined. By the
start of the fiscal year 2021 most of the hotel in the San Francisco market were closed due to lack of business, only one of our primary comp set
remained open at that time. The majority of those hotels stayed close through end of Q1 and by end of Q2 all but one had opened up. The market
has seen slight improvements over the past two quarters but RevPAR in San Francisco was hit the hardest of any major market in the US. The hotel
has navigated this very competitive market nimbly and has consistently been ranked the number one hotel in its Competitive Set (“CompSet”) based
on our ability to drive occupancy. At the end of fiscal year 2021 the hotel had roughly a 233% RevPAR index. Hotel took advantage of the slow
periods to make certain capital improvements including complete refinishing of all guest room furniture, resurfacing half of the hotel bath tubs that
were in need of repair, refreshed meeting space and lobby paint and vinyl, replaced all bed frames and socks, and started the carpet corridor install
that was completed in July 2021. Hotel improvements are ongoing in order to remain competitive.
The Hotel’s location in the San Francisco Financial District historically had provided 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. With business travel
to San Francisco almost non-existent for the time, we are competing with hotels in more tourist attracting locations and amenities for the leisure
traveler. 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; however, that customer along with our group customers has significantly reduced occupancy
beginning in March of 2020 as COVID-19 ravaged the hotel industry. The shift to attracting leisure travel has pushed the hotel to price aggressively
to lure competition from the more tourist locations in San Francisco.
The Hotel is also subject to certain operating risks common to all of the hotel industry, which could adversely impact performance. These risks
include, but are not limited to:
● 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.
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.
8
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, 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, 2021, the Company had a total of 27 full-time employees. Effective August 2014, the Company entered into a client service
agreement with Automatic Data Processing (“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, 2021, approximately 92% of those employees were represented
by one of three labor unions, and their terms of employment were determined under various collective bargaining agreements (“CBAs”) to which
the Partnership was a party. CBA for Local 2 (Hotel and Restaurant Employees) will expire on August 13, 2022. CBA for Local 856 (International
Brotherhood of Teamsters) will expire on December 31, 2022. CBA for Local 39 (Stationary Engineers) will expire on July 31, 2024.
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.
ADDITIONAL INFORMATION
The Company files required 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.
9
Item 1A. Risk Factors.
The responses by federal, state, and local civil authorities to the COVID-19 pandemic has had a material detrimental impact on our business,
financial results and liquidity, and such impact could worsen and last for an unknown period of time.
The global spread of the COVID-19 pandemic is complex and rapidly-evolving, with governments, public institutions and other organizations
imposing or recommending, and businesses and individuals implementing, restrictions on various activities or other actions to combat its spread,
such as restrictions and bans on travel or transportation, limitations on the size of gatherings, closures of work facilities, schools, public buildings
and businesses, cancellation of events, including sporting events, conferences and meetings, and quarantines and lock-downs. The shelter-in-place,
physical distancing, quarantine measures, city closures and their consequences have dramatically reduced travel, conventions and demand for hotel
rooms, which has and will continue to impact our business, operations, and financial results. The pandemic is having a significant impact on the
U.S. economy and on the local markets in which our properties are located. While we did not incur significant disruptions in our real estate
operations during the fiscal year ended June 30, 2021 from the COVID-19 pandemic, we are unable to predict the impact that the COVID-19
pandemic will have on our financial condition, results of operations and cash flows due to many uncertainties. The extent to which the closures
impacts our business, operations, and financial results, including the duration and magnitude of such effects, will depend on numerous evolving
factors that we may not be able to accurately predict or assess, including the duration and scope of the closures; the negative impact it has on global
and regional economies and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer
discretionary spending; its short and longer-term impact on the demand for travel, transient and group business, and levels of consumer confidence;
our ability to successfully navigate the impacts of the closures; governments actions, businesses and individuals take in response to the closures,
including limiting or banning travel; and how quickly economies, travel activity, and demand for lodging recovers after the closures subsides.
The COVID-19 closures have subjected our business, operations and financial condition to a number of risks, including, but not limited to, those
discussed below:
● Risks Related to Revenue: The COVID-19 closures and other imposed restrictions have negatively impacted and will in the future
negatively impact to an extent we are unable to predict, our revenue from the Hotel. Currently, the Hotel is not generating revenue
sufficient to meet its operating expenses, which is adversely affecting our net income.
● Risks Related to Operations: Because of the significant decline in the demand for hotel rooms, the Hotel has taken steps to reduce
operating costs and improve efficiency, including furloughing a substantial number of its personnel and implementing reduced work weeks
for other personnel. Such steps, and further changes we may make in the future to reduce costs, may negatively impact guest loyalty, or our
ability to attract and retain associates, and our reputation and market share may suffer as a result. For example, if our furloughed personnel
do not return to work with us when the COVID-19 closures and imposed restrictions are lifted, including because they find new jobs during
the furlough, we may experience operational challenges that impact guest loyalty and our market share, which could limit our ability to
grow revenue and could reduce our profits. Further, reputational damage from, and the financial impact of, reduced work weeks could lead
associates to depart the company and could make it harder for us to recruit new associates in the future. We may also face demands or
requests from labor unions that represent our associates, whether during our periodic renegotiation of our collective bargaining agreements
or otherwise, for additional compensation, healthcare benefits or other terms as a result of COVID-19 that could increase costs, and we
could experience labor disputes or disruptions as we continue to implement our COVID-19 mitigation plans.
COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, as well as reactions to future pandemics or
resurgences of COVID-19, could also precipitate or aggravate the other risk factors that we identify in this annual report, which in turn could
materially adversely affect our business, financial condition, liquidity, and results of operations (including revenues and profitability). Further,
COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or that we currently do not consider
presenting significant risks to our operations.
Adverse changes in the U.S. and global economies could negatively impact our financial performance.
Due to several 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.
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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, results of operations, and fair market value of the Hotel.
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.
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.
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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.
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.
12
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.
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 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, therefore, 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.
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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 can 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 65% of the
Company’s outstanding common stock. Because of this concentrated stock ownership, Mr. Winfield will be able 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 enough shares to significantly decrease our price per share.
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, 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 (the “CCC”), its administrative office, and a 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 CCC with Portsmouth Square Park in Chinatown. The bridge, built by the Partnership, is included
in the lease to the CCC.
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As required by its senior lender, the Partnership will continue to make minimum payments into its furniture, fixtures, and equipment (“FF&E”)
escrow account held by its senior lender of the greatest of 4% of annual revenues or a minimum of $1,952,000 per annum. In the opinion of
management, the Hotel is adequately covered by insurance.
HOTEL FINANCING
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 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 FF&E reserves. As additional security for the Mortgage Loan, there is a limited guaranty
(“Mortgage Guaranty”) executed by Portsmouth in favor of the 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 had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. Interest only payments were due monthly. 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. As a result of the refinance, Justice has generated $500,000 in annual
interest expense savings. As additional security for the new mezzanine loan, there is a limited guaranty executed by the Partnership and Portsmouth
in favor of Cred Reit Holdco LLC (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, 2021 and 2020, InterGroup is in compliance
with both requirements. Due to the Hotel’s current low occupancy and low rates and their negative impact on the Hotel’s cash flow, Justice
Operating Company, LLC is not meeting certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the
creation of a lock-box and cash sweep by the Lender for all cash collected by the Hotel, and under certain terms, would allow the Lender to request
Operating to replace its hotel management company. The DSCR for Operating has been below 1.00 for the last two quarters during fiscal year 2020
while it is required to maintain a DSCR of at least 1.10 to 1.00 for two consecutive quarters. However, such lockbox has been created and utilized
from the loan inception and will be in place up to loan maturity regardless of the DSCR. Justice has not missed any of its debt service payments and
does not anticipate missing any debt obligations even during these uncertain times for at least the next twelve months and beyond.
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.
15
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 July 31, 2022. On December 16, 2020, Justice and InterGroup entered into a
loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000. During the fiscal year ending June
30, 2021, InterGroup has advanced $3,650,000 to Justice per the loan modification agreement. As of June 30, 2021 and 2020, the balance of the
loan was $6,650,000 and $3,000,000, respectively and are eliminated in the consolidated balance sheets.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted Coronavirus Aid, Relief,
and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). Justice received proceeds of
$4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice used proceeds from the SBA Loan for payroll costs
and other qualified expenses. The SBA Loan is scheduled to mature on April 9, 2022 with a 1.00% interest rate and is subject to the terms and
conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. On June 10, 2021, the SBA Loan
was forgiven in full.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice
received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice had used all proceeds from the Second SBA Loan
primarily for payroll costs. The Second SBA Loan is scheduled to mature on February 3, 2026 and has a 1.00% interest rate and is subject to the
terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal
and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to
CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if
the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are
used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. Justice submitted
its application for full loan forgiveness on September 3, 2021.
RENTAL PROPERTIES
As June 30, 2021, the Company’s investment in real estate consisted of twenty properties located throughout the United States, with a concentration
in Texas and Los Angeles County, 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, 2021, all the Company’s operating real estate properties are managed in-
house.
Description of Properties
Las Colinas, Texas. The Las Colinas property is a waterfront 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, 2021
were approximately $1,001,000. The outstanding mortgage balance was approximately $16,065,000 at June 30, 2021 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, 2021 were approximately $257,000. Depreciation is recorded on the straight-line method,
based upon an estimated useful life of 40 years. In April 2020, the Company refinanced its 3.51% and 4.51% existing $8,737,000 and $2,512,000
mortgagees and generated net proceeds of $6,814,000.The outstanding new mortgage balance was approximately $17,975,000 at June 30, 2021 with
a fixed interest rate of 3.17% per annum and the maturity date of the new mortgage is May 1, 2030.
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, 2021, real estate property taxes were approximately $135,000.
Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was
approximately $5,100,000 at June 30, 2021 with a fixed interest rate of 4.05% per annum and the maturity date of the mortgage is May 31, 2023.
16
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, 2021, real estate property taxes were
approximately $58,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding
mortgage balance was approximately $3,076,000 at June 30, 2021 with a fixed interest rate of 3.875% per annum and the maturity date of the
mortgage is April 1, 2025.
Los Angeles, California. The Company owns one commercial property, twelve apartment complexes, and three single-family houses in the general
area of County of Los Angeles, California (“Los Angeles”).
The Company’s Los Angeles commercial property is a 5,503 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. Property taxes for the year ended June 30, 2021 were approximately $33,000. Depreciation is recorded on the
straight-line method, based upon an estimated useful life of 40 years. As of June 30, 2021, this property was not encumbered by a mortgage.
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, 2021, real estate property taxes were approximately $24,000.
Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was
approximately $2,077,000 at June 30, 2021 with a fixed interest rate of 3.59% per annum and the maturity date of the mortgage is June 23, 2026.
The second Los Angeles apartment complex was a 29,000 square foot three-story apartment with 27 units. This complex was held by Intergroup
Woodland Village, Inc., which was 55.4% and 44.6% owned by Santa Fe and the Company, respectively. On February 5, 2020, Santa Fe acquired
the additional 44.6% interest in Woodland Village from InterGroup by issuing 97,500 shares of its common stock to InterGroup. Subsequent to the
transaction, Intergroup Woodland Village, Inc. was converted into Woodland Village LLC (“Woodland Village”) and Woodland Village become a
wholly owned subsidiary of Santa Fe. The transaction was made pursuant to a Contribution Agreement (the “Contribution Agreement”) between the
Santa Fe and InterGroup, dated February 5, 2020. The Contribution Agreement also contains a provision for a potential subsequent earn out to
InterGroup pursuant to terms set forth therein. The property was acquired on September 29, 1999 at an initial cost of approximately $4,075,000. For
the year ended June 30, 2021, real estate property taxes were approximately $70,000 and 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. A new mortgage note payable was established at
Woodland Village due to InterGroup for $2,969,000 and the note was eliminated in consolidation. 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 were due in July 2019. The $2,969,000
mortgage due to InterGroup carries same terms as InterGroup’s RLOC. In July 2019, InterGroup obtained a modification from CIBC which
increased its $5,000,000 revolving line of credit by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000
mortgage due to InterGroup was also extended from July 24, 2019 to July 23, 2020. In July 2020, InterGroup entered into a second modification
agreement with CIBC which extended the maturity date of its $8,000,000 RLOC to July 21, 2021. The $2,969,000 mortgage due to InterGroup was
also extended to July 21, 2021. On August 28, 2020, Santa Fe sold the 27-unit apartment complex for $15,650,000 and realized a gain on the sale of
approximately $12,026,000. Santa Fe managed its federal and state income tax liability, and utilized its available net operating losses and capital
loss carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000 as
InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant to the
Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale.
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, 2021, real estate property taxes were approximately $38,000.
Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In January 2021, the Company refinanced its
5.89% existing $1,597,000 mortgage and generated net proceeds of $1,057,000. The outstanding new mortgage balance was approximately
$2,761,000 at June 30, 2021 with a fixed interest rate of 3.05% per annum and the maturity date of the new mortgage is February 1, 2031.
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, 2021, real estate property taxes were approximately $30,000.
Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In November 2020, the Company refinanced
its 5.89% existing $1,088,000 mortgage and generated net proceeds of $798,000. The outstanding new mortgage balance was approximately
$1,975,000 at June 30, 2021 with a fixed interest rate of 3.05% per annum and the maturity date of the new mortgage is December 1, 2030.
17
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, 2021, real estate property taxes were approximately $123,000.
Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. In October 2020, the Company refinanced its
4.85% existing $4,800,000 mortgage and generated net proceeds of $3,529,000. The outstanding new mortgage balance was approximately
$8,400,000 at June 30, 2021 with a fixed interest rate of 2.52% per annum and the maturity date of the new mortgage is November 1, 2030. The new
mortgage requires interest-only payments for the first two years and will amortized over 30 years thereafter.
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, 2021, real estate property taxes were approximately $78,000.
Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was
approximately $5,453,000 at June 30, 2021 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, 2021, real estate property taxes were approximately $18,000. Depreciation
is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately
$323,000 at June 30, 2021 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, 2021, 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. In June 2021, the Company refinanced its
3.75% existing $563,000 mortgage and generated net proceeds of $619,000. The outstanding new mortgage balance was approximately $1,155,000
at June 30, 2021 with a five-year fixed interest rate of 3.5% per annum and adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with
semi-annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and
ceiling of 9.95%. The maturity date of the new mortgage is August 1, 2051.
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, 2021, real estate property taxes were approximately $23,000. Depreciation
is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately
$798,000 at June 30, 2021 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, 2021, real estate property taxes were approximately $21,000.
Depreciation is recorded on the straight-line method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was
approximately $416,000 at June 30, 2021 with an interest rate of 3.75% and the maturity date of the mortgage is July 1, 2043.
The eleventh Los Angeles apartment complex, which was 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,
2021, real estate property taxes were approximately $9,000. Depreciation is recorded on the straight-line method based upon an estimated useful life
of 40 years. The outstanding mortgage balance was approximately $327,000 at June 30, 2021 with an interest rate of 3.75% and the maturity date of
the mortgage is September 1, 2042. On November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to
InterGroup for $1,530,000 in exchange for a reduction of $1,196,000 of its obligation to InterGroup. The outstanding mortgage on the property for
$334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately $901,000, which was eliminated in
consolidation at InterGroup. The sales price of the property represent the current value as of the sale date as appraised by a licensed independent
third-party appraiser. The fairness of the sale terms of the transaction were reviewed and approved by the independent directors of Santa Fe and
InterGroup, and unanimously approved by the entire Board of Directors of both companies.
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, 2021, real estate property taxes
were approximately $58,000. Depreciation is recorded on the straight-line method, based upon an estimated useful life of 27.5 years. In June 2020,
the Company refinanced its 5.6% existing $1,303,000 mortgage and generated net proceeds of $1,144,000. The outstanding new mortgage balance
was approximately $2,552,000 at June 30, 2021 with a fixed interest rate of 3.09% per annum and the maturity date of the new mortgage is July 1,
2030.
18
The thirteenth Los Angeles apartment complex, is a 4,093 square foot apartment with 4 units. In an all cash transaction, the Company acquired the
property on May 14, 2021 at an initial cost of approximately $2,600,000. Depreciation is recorded on the straight-line method, based upon an
estimated useful life of 40 years. The Company placed a long-term mortgage subsequent to June 30, 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, 2021, 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. In June 2021, the Company refinanced its 3.75% existing $363,000
mortgage and generated net proceeds of $576,000. The outstanding new mortgage balance was approximately $920,000 at June 30, 2021 with a
five-year fixed interest rate of 3.5% per annum adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment
adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity
date of the new mortgage is August 1, 2051.
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, 2021, real estate property taxes were approximately $13,000. Depreciation is recorded on
the straight-line method, based upon an estimated useful life of 40 years. In June 2021, the Company refinanced its 3.75% existing $388,000
mortgage and generated net proceeds of $183,000. The outstanding new mortgage balance was approximately $555,000 at June 30, 2021 with a
five-year fixed interest rate of 3.5% per annum adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment
adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity
date of the new mortgage is August 1, 2051.
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. For the year ended June 30, 2021, real estate property taxes were approximately $26,000. Depreciation is recorded on the straight-line
method, based upon an estimated useful life of 40 years. The outstanding mortgage balance was approximately $957,000 at June 30, 2021 with an
interest rate of 4.75% and the maturity date of the mortgage is October1, 2048.
Maui, Hawaii. In August 2004, the Company purchased an approximately two-acre parcel of unimproved land in Kihei, Maui, Hawaii for
$1,467,000. In March 2021, in an effort to make both companies more efficient, InterGroup purchased back the 50% interest of InterGroup Uluniu
Inc. from Portsmouth for $980,000, which represents Portsmouth’s carrying cost of the investment. No gains or losses were realized as a result of
the transaction since it was a related-party transaction. As a related-party transaction, the fairness of the financial terms of the transactions were
reviewed and approved by the independent director of each company
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, 2021 are provided below.
Property
1. Las Colinas, TX
2. Morris County, NJ
3. St. Louis, MO
4. Florence, KY
5. Los Angeles, CA (1)
6. Los Angeles, CA (2) Sold August 2020
7. Los Angeles, CA (3)
8. Los Angeles, CA (4)
9. Los Angeles, CA (5)
10. Los Angeles, CA (6)
11. Los Angeles, CA (7)
12. Los Angeles, CA (8)
13. Los Angeles, CA (9)
14. Los Angeles, CA (10)
15. Los Angeles, CA (11)
16. Los Angeles, CA (12)
17. Los Angeles, CA (13)
18. Los Angeles, CA (14)
19. Los Angeles, CA (15)
20. Los Angeles, CA (16)
Economic
Occupancy
Physical
Occupancy
87%
88%
77%
89%
68%
29%
86%
97%
77%
75%
80%
100%
66%
100%
100%
94%
100%
100%
100%
74%
19
84%
94%
83%
95%
87%
44%
82%
100%
97%
94%
82%
98%
79%
97%
100%
96%
100%
100%
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. Furthermore, on August 3, 2021, the Center for Disease Control and Prevention (“CDC”) issued a
new order extending the tenant eviction moratorium to October 3, 2021 thereby prohibiting the Company from evicting tenants that have delinquent
balances.
Item 3. Legal Proceedings.
The Company may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company will defend 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.
Item 5. Market for Common Equity and Related Stockholder Matters.
MARKET INFORMATION
PART II
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”. As of June 30, 2021, the approximate number of holders of record of the Company’s Common Stock was 192. 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.
20
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, 2021.
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
Fiscal
2021
Period
Month #1 (April 1- April 30)
Month #2 (May 1- May 31)
Month #3 (June 1- June 30)
TOTAL:
(a) Total
Number of
Shares
Purchased
(b)
Average
Price Paid
Per Share
(c) Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
(d) Maximum Number
of shares that May
Yet be Purchased
Under the Plans
or Programs
6,977
7,821
13,048
27,846
$
$
$
$
37.57
37.41
37.00
37.26
6,977
7,821
13,048
27,846
58,498
50,677
37,629
37,629
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. On September 23, 2019, the Board of Directors authorized the Company to purchase up to an additional 120,000 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.
NEGATIVE EFFECTS OF CIVIL AUTHORITY ACTIONS ON OUR BUSINESS
On February 25, 2020, the City of San Francisco issued the proclamation by the Mayor declaring the existence of a local emergency. The negative
effects of the civil authority actions related to the novel strain of coronavirus (“COVID-19”) on our business have been significant. In March 2020,
the World Health Organization declared COVID-19 a global pandemic. This contagious virus, which has continued to spread, has adversely affected
workforces, customers, economies and financial markets globally. It has also disrupted the normal operations of many businesses, including ours.
To mitigate the harm from the pandemic, on March 16, 2020, the City and County of San Francisco, along with a group of five other Bay Area
counties and the City of Berkeley, issued parallel health officer orders imposing shelter in place limitations across the Bay Area, requiring everyone
to stay safe at home except for certain essential needs. Since February 2020, several unfavorable events and civil authority actions have unfolded
causing demand for our hotel rooms to suffer including cancellations of all citywide conventions, reduction of flights in and out of the Bay Area and
decline in both leisure and business travel.
In December 2020, due to the surge in COVID-19 cases and hospitalizations, the Health Officer of the City and County of San Francisco has
suspended or restricted certain activities. Health Order C19-07q (the “Order”) incorporates suspensions, reductions in capacity limits, and other
restrictions contained in the Regional Stay At Home Order issued by the California Department of Public Health on December 3, 2020. Effective
December 17, 2020, the Bay Area Region, including San Francisco, is required to comply with the State’s December 3, 2020 Regional Stay-at-
Home Order. The Order strongly discourages anyone in the County from travelling for leisure, recreation, business or other purposes that can be
postponed until after the current surge. With limited exceptions, this Order imposed a mandatory quarantine on anyone traveling, moving, or
returning to the County from anywhere outside the Bay Area. Effective January 20, 2021, Health Order C19- 07r revised and replaced the previous
Order; it continues to temporarily prohibit certain businesses and activities from resuming but allows certain other businesses, activities, travel and
governmental functions to occur subject to specified health and safety restrictions, limitations, and conditions to limit the transmission of COVID-
19. Quarantine and isolation requirements and recommendations upon moving to, traveling to, or returning to the County have not changed from the
previous Order.
21
On March 24, 2021, the City and County of San Francisco announced it moved into the orange tier which removed the suggested Shelter in Place
for guests travelling to San Francisco. This was a very positive step for the hotel community. This tier opens up activities in the city including
expanded restaurant capacities, museums and attractions. For the hotel it allows for guests to gather in public spaces and for outlets and amenities to
open up at limited capacities including fitness centers. It does not change the very stringent cleaning and sanitation requirements set forth by the
Health Officer of the City and County of San Francisco which proves to be a costly measure to maintain. Effective May 6, 2021, the City and
County of San Francisco moved into the yellow tier guidelines.
In response to the decrease in demand, we have since furloughed all managers at the Hotel except for members of the executive team and continue
to limit hourly staff to a minimum. By the end of March 2020, we had temporarily closed all of our food and beverage outlets, valet parking,
concierge and bell services, fitness center, as well as the executive lounge facility. We continue to implement social distancing standards and
cleaning processes designed by Interstate and Hilton to keep employees and guests safe. The full impact and duration of the COVID-19 outbreak
continues to evolve as of the date of this Annual Report. The pandemic effectively eliminated our ability to generate any profits, due to the drastic
decline in both leisure and business travel. As a result, management believes the ongoing length and severity of the economic downturn caused by
the pandemic will have a material adverse impact on our future business, financial condition, liquidity and financial results. We are also assessing
the potential impact on the impairment analysis of our long-lived assets and the realization of our deferred tax assets. As of the date of this report,
the effects of the pandemic continue to affect our economy, business and leisure travel, and our needs to continue to curtail certain revenue
generating activities at the Hotel. We expect that the effects will have a material adverse effect on our business until the pandemic ends.
As a result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020, additional avenues
of relief may be available to workers and families through enhanced unemployment insurance provisions and to small businesses through programs
administered by the Small Business Administration (“SBA”). The CARES Act includes, among other things, provisions relating to payroll tax
credits and deferrals, net operating loss carryback periods, alternative minimum tax credits and technical corrections to tax depreciation methods for
qualified improvement property. The CARES Act also established a Paycheck Protection Program (“PPP”), whereby certain small businesses are
eligible for a loan to fund payroll expenses, rent, and related costs. On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”)
with CIBC Bank USA under the CARES Act. Justice received proceeds of $4,719,000 from the SBA Loan - Justice. In accordance with the
requirements of the CARES Act, Justice has used all proceeds from the SBA Loan for payroll costs and other qualified expenses. The SBA Loan -
Justice was scheduled to mature on April 9, 2022 and had a 1.00% interest rate and was subject to the terms and conditions applicable to loans
administered by the U.S. Small Business Administration under the CARES Act. On April 27, 2020, InterGroup entered into a loan agreement
(“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan proceeds in the amount of $453,000. As of June 30,
2021, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on
April 27, 2022 and had a 1.00% interest rate. Both the SBA Loan – Justice and SBA Loan – InterGroup (collectively the “SBA Loans”) were
forgiven in full by the SBA as of June 30, 2021.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice
received proceeds of $2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice had used all proceeds from the Second SBA Loan
primarily for payroll costs. The Second SBA Loan is scheduled to mature on February 3, 2026 and has a 1.00% interest rate and is subject to the
terms and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal
and interest are deferred until either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to
CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if
the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are
used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. Justice submitted
its application for full loan forgiveness on September 3, 2021.
RESULTS OF OPERATIONS
As of June 30, 2021, the Company owned approximately 74.9% of the common shares of Portsmouth Square, Inc. Historically, the Company’s
principal sources of revenue continues 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.
However, the impact of the COVID-19 pandemic is highly uncertain and management expects that the ongoing length and severity of the economic
downturn will have a material adverse impact on our business, financial condition, liquidity and financial results.
22
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 fee of
$4,750,000 was received on July 1, 2015. As of June 30, 2021 and 2020, the balance of the note was $3,008,000 and $3,325,000, 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 management agreement is for an initial period of 10 years
commencing on the takeover date and automatically renews for an additional year not to exceed five years in the aggregate subject to certain
conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of
$2,000,000 under certain terms and conditions described in a separate key money agreement. As of June 30, 2020, balance of the key money
including accrued interest was $1,009,000 and is included in restricted cash in the consolidated balance sheets. As of June 30, 2021, the key money
balance was zero as the Hotel obtained approval from Interstate to use the funds for hotel operations during the first quarter of fiscal year 2021. As
of June 30, 2021 and 2020, balance of the unamortized portion of the key money are $1,396,000 and $1,646,000, respectively, and are included in
the related party notes payable in the consolidated balance sheets. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North
America’s largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under
the Aimbridge Hospitality name in the Americas.
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, 2021 Compared to Fiscal Year Ended June 30, 2020
The Company had a net income of $10,545,000 for the year ended June 30, 2021 compared to a net loss of $5,089,000 for the year ended June 30,
2020. Income from operations decreased by $9,761,000 while the company recorded $12,043,000 in gains from the sale of real estate in fiscal year
ended June 30, 2021 and gains from marketable securities increased by $13,551,000 year over year.
Hotel Operations
The Company had net loss from Hotel operations of $7,450,000 for the year ended June 30, 2021 compared to net loss of $3,768,000 for the year
ended June 30, 2020. The change was primarily attributable to the $28,171,000 decrease in Hotel revenue, offset by the $19,422,000 decrease in
operating expenses and the gain on forgiveness of debt of $4,719,000.
23
The following table sets forth a more detailed presentation of Hotel operations for the years ended June 30, 2021 and 2020.
For the year ended June 30,
Hotel revenues:
Hotel rooms
Food and beverage
Garage
Other operating departments
Total hotel revenues
Operating expenses excluding depreciation and amortization
Operating (loss) income before interest, depreciation and amortization
Gain on disposal of assets
Gain on forgiveness of debt
Interest expense - mortgage
Depreciation and amortization expense
Net loss from Hotel operations
2021
2020
12,138,000
293,000
2,117,000
120,000
14,668,000
(17,911,000)
(3,243,000)
12,000
4,719,000
(6,710,000)
(2,228,000)
(7,450,000)
$
$
36,465,000
3,529,000
2,368,000
477,000
42,839,000
(37,333,000)
5,506,000
-
-
(6,885,000)
(2,389,000)
(3,768,000)
$
$
For the year ended June 30, 2021, the Hotel generated operating loss of $3,243,000 before non-recurring charges, interest, depreciation, and
amortization on total operating revenues of $14,668,000 compared to operating income of $5,506,000 before non-recurring charges, interest,
depreciation, and amortization on total operating revenues of $42,839,000 for the year ended June 30, 2020. Room revenues decreased by
$24,327,000 for the year ended June 30, 2021 compared to the year ended June 30, 2020, food and beverage revenue decreased by $3,236,000, and
revenue from garage and other decreased by $608,000. The year over year decline in all areas are result of the business interruption attributable to a
variety of responses by federal, state, and local civil authority to the COVID-19 outbreak in March 2020 which continues to affect us. Revenue from
other operating departments increased year over year mainly due to increase in cancellation revenue. The following table sets forth the monthly
average occupancy percentage of the Hotel for the fiscal years ended June 30, 2021 and 2020.
Month
July August September October November December
January February March April May
June
2020
2020
2020
2020
2020
2020
2021
2021
2021
2021
2021
2021
Year
Average
Occupancy
%
Year
Average
Occupancy
%
44%
55%
62%
64%
52%
30%
29%
45%
67% 66% 71% 78%
55%
Month
July August September October November December
January February March April May
June
2019
2019
2019
2019
2019
2019
2020
2020
2020
2020
2020
2020
98%
99%
98%
97%
99%
98%
96%
96%
35% 10% 27% 34%
74%
Fiscal
Year
2020
-
2021
Fiscal
Year
2019
-
2020
Operating expenses decreased by $19,422,000 for the year ended June 30, 2021 to $17,911,000 compared to the year ended June 30, 2020 of
$37,333,000 primarily due to decrease in salaries and wages, rooms commission, legal fees, food and beverage expenses, advertising and sales
expenses, credit card fees, management fees, and franchise fees.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room (“RevPAR”) of the
Hotel for the year ended June 30, 2021 and 2020.
For the Year
Ended June 30,
Average
Daily Rate
Average
Occupancy %
2021
2020
$
$
111
248
55% $
74% $
RevPAR
61
183
The Hotel’s revenues decreased by 65% year over year. Average daily rate decreased by $137, average occupancy dropped 19%, and RevPAR
decreased by $122 for the twelve months ended June 30, 2021 compared to the twelve months ended June 30, 2020.
In order to provide our guests with best-in-class technology experience, we completed the upgrade of our new internet system from Cisco including
a complete hotel re-cabling with the latest Ethernet and fiber and installed new 55” smart 4K televisions and Hilton’s stay connected internet
streaming products, including Netflix streaming. We also replaced mattresses and pillows in all guestrooms during the fiscal year ended June 30,
2020. Replacement of all corridor floor coverings was completed in July 2021 and a guestroom carpet replacement program commenced in June
2021 and is scheduled to be completed prior to fiscal year ending June 30, 2022. The COVID-19 pandemic and design delays have pushed back the
plans for the conversion of the Justice offices, Fitness Center, SPA and Executive Lounge; projects that would add 19 guest rooms to our inventory.
The long-term value of these rooms is in utilizing them as income producing guest rooms, and we will work to implement a new timeline as
business returns. Part of this renovation will be funded by the Hotel’s furniture, fixture and equipment reserve account with our lender. Lastly, the
Hotel completed the installation of a complete exterior building maintenance system which will enable periodic window washing, replaced and
upgraded all computers in the business center and administrative offices.
24
Real Estate Operations
Revenue from real estate operations decreased to $13,990,000 for the year ended June 30, 2021 from $15,178,000 for the year ended June 30, 2020
primarily as a result of allowance for doubtful accounts from delinquent rents and increased vacancy loss as a result of the COVID-19 pandemic.
Management continues to work with its tenants as well as respective governmental entities to realize the collection of its current delinquency. Real
estate operating expenses decreased to $7,869,000 from $8,051,000 primarily as a result of $189,000 insurance reimbursement proceeds received
due to fire damage at our property in Kentucky. 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 gain on marketable securities of $11,638,000 for the year ended June 30, 2021 compared to a net loss on marketable
securities of $1,913,000 for the year ended June 30, 2020. For the year ended June 30, 2021 and 2020, the Company had a net unrealized gain of
$1,520,000 and zero, respectively, related to the Company’s investment in the common stock of Comstock Mining Inc. (“Comstock” - NYSE MKT:
LODE).
As of June 30, 2021 and 2020, investments in Comstock represent approximately 4% and 11% of the Company’s investment portfolio, respectively.
For the year ended June 30, 2021, the Company had a net realized gain of $876,000 and a net unrealized gain of $10,762,000. For the year ended
June 30, 2020, the Company had a net realized loss of $641,000 and a net unrealized loss of $1,272,000.
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, 2021 and 2020, 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 $119,000 and $219,000, respectively.
The Company and its subsidiary Portsmouth, compute and file income tax returns and prepare discrete income tax provisions for financial reporting.
The income tax benefit during the years ended June 30, 2021 and 2020 represents primarily the combined income tax effect of Portsmouth’s pretax
loss which includes its share in net loss from the Hotel and the pre-tax income from InterGroup (standalone).
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As of June 30, 2021 and 2020, the Company had investments in marketable equity securities of $35,792,000 and $6,178,000, respectively. The
following table shows the composition of the Company’s marketable securities portfolio by selected industry groups:
As of June 30, 2021
Industry Group
Fair Value
% of Total
Investment
Securities
REITs and real estate companies
Energy
Communications Services
Financial services
Industrials
Basic materials
Consumer goods
Healthcare
Technology
Other
$
$
11,624,000
6,374,000
4,872,000
3,873,000
3,746,000
1,797,000
1,702,000
981,000
442,000
381,000
35,792,000
32.5%
17.8%
13.6%
10.8%
10.5%
5.0%
4.8%
2.7%
1.2%
1.1%
100.0%
25
As of June 30, 2020
Industry Group
Fair Value
% of Total
Investment
Securities
REITs and real estate companies
Basic materials
Energy
Industrials
Corporate bonds
Other
$
$
2,365,000
1,209,000
767,000
484,000
417,000
936,000
6,178,000
38.3%
19.6%
12.4%
7.8%
6.7%
15.2%
100.0%
As of June 30, 2021, the Company’s investment portfolio is diversified with 83 different equity positions. The Company holds two equity securities
that comprised more than 10% of the equity value of the portfolio. The two largest security positions represent 12% and 11% of the portfolio and
consists of the common stock of DigitalBridge Group, Inc. (NASDAQ: DBRG) and ViacomCBS, Inc. (NASDAQ: VIACP), which are included in
the REITs and real estate companies and Communications industry group, respectively.
The following table shows the net gain (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,
Net gain (loss) on marketable securities
Impairment loss on other investments
Dividend and interest income
Margin interest expense
Trading expenses
FINANCIAL CONDITION AND LIQUIDITY
2021
2020
$
$
11,638,000
(119,000)
519,000
(810,000)
(523,000)
10,705,000
$
$
(1,913,000)
(219,000)
363,000
(452,000)
(545,000)
(2,766,000)
Historically, our cash flows have been primarily generated from our Hotel and real estate operations. However, the responses by federal, state, and
local civil authorities to the COVID-19 pandemic has had a material detrimental impact on our liquidity. Our net cash flow used in operations was
$20,259,000 and $3,454,000 for fiscal years ended June 30, 2021 and June 30, 2020, respectively. We have taken decisive actions to preserve
capital and increase liquidity at our Hotel, including implementing strict cost management measures to eliminate non-essential expenses, postponing
capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets. For further discussion,
see “Item 7 - Negative Effects of Civil Authority Actions on Our Business” included in this Annual Report.
The Company had cash and cash equivalents of $6,808,000 and $14,163,000 as of June 30, 2021 and June 30, 2020, respectively. The Company had
net funds available from its investments in marketable securities of $21,456,000 as of June 30, 2021 after $7,917,000 due to securities broker and
$6,419,000 obligations for securities sold. As of June 30, 2020, the Company had net funds available from investments in marketable securities of
$4,308,000 after $1,576,000 due to securities broker and $294,000 obligations for securities sold. In addition, the Hotel had $8,591,000 and
$5,785,000 of restricted cash held by its senior lender Wells Fargo Bank, N.A. (“Lender”) as of June 30, 2021 and June 30, 2020, respectively. Of
the $10,666,000 restricted cash held as of June 30, 2020, $2,432,000 was for a possible future property improvement plan (“PIP”) requested by our
franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i)
January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. On August 19,
2020, Lender released PIP deposits in the amount of $2,379,000 to the Hotel. The funds were utilized to fund operating expenses, including
franchise and management fees and other expenses.
26
We may also receive cash generated from the investment of our cash and marketable securities, other investments, and other sources. In order to
increase our liquidity position and to take advantage of the favorable interest rate environment, during fiscal year ended June 30, 2021, the
Company refinanced six of its California properties with various interest rates ranging from 2.52% to 3.50% and generated net proceeds of
approximately $6,762,000. The Company refinanced its 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net
proceeds of $6,814,000. In June 2020, the Company refinanced one of its California properties and generated net proceeds of $1,144,000. We are
currently evaluating other refinancing opportunities.
The Company has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) and the entire $8,000,000 is available to
be drawn down as of June 30, 2021.
As of June 30, 2021, we had cash, cash equivalents, and restricted cash of $15,392,000 which included $6,222,000 of restricted cash held by our
Hotel senior lender Wells Fargo Bank, N.A. (“Lender”). During fiscal year ended June 30, 2021, Hilton confirmed that it will not require a property
improvement plan (“PIP”)for our Hotel until relicensing which shall occur at the earlier of (i) January 2030, which is six years after the maturity
date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel; therefore, on August 19, 2020, Operating received PIP deposits in
the amount of $2,379,000 held by Lender and was no longer required to make PIP installments with its debt service. The funds were utilized to fund
operating expenses, including franchise and management fees and other expenses.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act
administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In
accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of June 30, 2021,
Justice had used $3,568,000 in qualified expenses such as payroll expenses, mortgage interests, utilities, etc., and had a balance of $1,151,000
available for future qualified expenses. The SBA Loan - Justice was scheduled to mature on April 9, 2022 and had a 1.00% interest rate. On April
27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the CARES Act and received loan
proceeds in the amount of $453,000. As of June 30, 2021, InterGroup had used all of the $453,000 loan proceeds in qualified payroll expenses. The
SBA Loan – InterGroup was scheduled to mature on April 27, 2022 and has a 1.00% interest rate. Both the SBA Loan – Justice and SBA Loan –
InterGroup (collectively the “SBA Loans”) were forgiven in full on by the SBA on June 10, 2021.
We cannot presently estimate the full financial impact of the unprecedented COVID-19 pandemic on our business or predict the related federal,
state and local civil authority actions, which are highly dependent on the severity and duration of the pandemic, and we expect that the COVID-19
closures and other imposed restrictions will continue to have a significant adverse impact on our results of operations, at least through the first and
second quarters of fiscal year 2021, if not longer. Due to the uncertainties associated with the COVID-19 pandemic and the indeterminate length of
time it will affect the hospitality industry, we have taken proactive measures to secure our liquidity position to be able to meet our obligations for
the foreseeable future, including implementing strict cost management measures to eliminate non-essential expenses, postponing capital
expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including
management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding
indebtedness, and repairs and maintenance of the Hotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the
Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities
described above, and cash generated from our operations. Additionally, the Partnership may make capital calls to its limited partners from time to
time to cover its cash needs, according to its partnership agreement and amendments thereto. After considering our approach to liquidity and
accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to
meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and
compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of
low occupancy were to persist. On August 28, 2020, the Board of InterGroup passed resolutions to provide funding to Portsmouth if necessary. The
objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational
costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will
be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond.
However, there can be no guarantee that management will be successful with its plan.
27
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company’s material financial obligations which also includes interest.
Mortgage notes payable
PPP and other notes payable
Related party and other notes payable
Interest
Total
Year
2022
Year
2023
Year
2024
Year
2025
Year
2026
Total
Thereafter
$181,631,000 $ 3,209,000 $28,480,000 $108,418,000 $3,808,000 $1,006,000 $36,710,000
-
1,253,000
5,800,000
$218,290,000 $13,078,000 $37,255,000 $113,787,000 $5,662,000 $4,745,000 $43,763,000
2,664,000 $
4,088,000
29,907,000
183,000 $
567,000
8,025,000
481,000 $
567,000
8,821,000
567,000
1,287,000
567,000
4,802,000
567,000
1,172,000
- $2,000,000 $
- $
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 on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals,
asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities. The actual results may differ from these estimates, or our estimates may be affected by different
assumptions or conditions.
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
Consolidated Balance Sheets - June 30, 2021 and 2020
Consolidated Statements of Operations - For years ended June 30, 2021 and 2020
Consolidated Statements of Shareholders’ Deficit - For years ended June 30, 2021 and 2020
Consolidated Statements of Cash Flows - For years ended June 30, 2021 and 2020
Notes to the Consolidated Financial Statements
28
29
31
32
33
34
35
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
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,
2021 and 2020, 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, 2021 and 2020, 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.
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.
29
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the
consolidated financial statements, and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating
the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Liquidity and Capital Resources
As discussed in Note 2 to the consolidated financial statements, the Company has historically generated cash flows primarily from their Hotel
operations. However, the responses by federal, state, and local civil authorities to the COVID-19 pandemic have had a material detrimental impact
on the Company’s Hotel operations and liquidity. During the year ended June 30, 2021, the Company took several steps to preserve capital and
increase liquidity, including implementing strict cost management measures to eliminate non-essential expenses, postponing capital expenditures,
renegotiating certain reoccurring expenses, and temporarily closing certain hotel services and outlets. At June 30, 2021, the Company believes its
current available liquidity, borrowing capacity, and cash generated by operations will be sufficient to fund the Company’s operations for at least a
year beyond the date of the issuance of the consolidated financial statements.
We identified liquidity and capital resources as a critical audit matter due to the subjectivity and judgments required by management to conclude the
Company would have sufficient liquidity to sustain itself for at least a year beyond the date of the issuance of the consolidated financial statements.
This in turn led to a high degree of auditor subjectivity and judgment to evaluate the audit evidence supporting management’s liquidity and going
concern conclusions.
The primary procedures we performed to address this critical audit matter included:
● Evaluating the amount and timing of management’s forecasted revenues and expenses along with the respective cash receipts and
payments, including scheduled debt payments, over the next twelve-months. This includes a consideration of current market information
available at the time of preparation of the forecast. In addition, evaluating audit evidence in connection with management’s liquidity
assessment.
● Retrospectively evaluating management’s prior forecasted timing of cash receipts and payments and comparing to actual results from the
most recent twelve-month period in order to consider management’s potential bias in preparing estimates.
● Finally, evaluating the clarity and adequacy of the Company’s disclosure of the circumstances which led to initial doubt regarding the
entity’s ability to continue as a going concern and the factors that alleviated the initial doubt included in the consolidated financial
statements.
/s/ Moss Adams LLP
Irvine, California
September 16, 2021
We have served as the Company’s auditor since 2017.
30
THE INTERGROUP CORPORATION
CONSOLIDATED BALANCE SHEETS
As of June 30,
ASSETS
Investment in Hotel, net
Investment in real estate, net
Investment in marketable securities
Other investments, net
Cash and cash equivalents
Restricted cash
Other assets, net
Deferred tax asset
Total assets
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Liabilities:
Accounts payable and other liabilities
Accounts payable and other liabilities - Hotel
Due to securities broker
Obligations for securities sold
Related party and other notes payable
Other notes payable – SBA Loans
Finance leases
Line of credit payable
Mortgage notes payable - Hotel
Mortgage notes payable - real estate
Total liabilities
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 issued; 2,222,919
and 2,288,809 outstanding as of June 30, 2021 and 2020
Additional paid-in capital
Accumulated deficit
Treasury stock, at cost, 1,116,173 and 1,095,020 shares as of June 30, 2021 and 2020
Total Intergroup shareholders’ deficit
Non-controlling interest
Total shareholders’ deficit
Total liabilities and shareholders’ deficit
The accompanying notes are an integral part of these consolidated financial statements.
31
2021
2020
$
$
$
37,651,000
47,709,000
35,792,000
41,000
6,808,000
8,584,000
1,621,000
2,140,000
140,346,000
3,357,000
6,744,000
7,917,000
6,419,000
4,088,000
2,000,000
664,000
-
110,134,000
70,259,000
211,582,000
38,769,000
50,338,000
6,178,000
278,000
14,163,000
14,123,000
1,985,000
4,383,000
130,217,000
4,213,000
7,414,000
1,576,000
294,000
4,654,000
5,172,000
1,098,000
2,985,000
111,446,000
65,612,000
204,464,000
-
-
33,000
2,172,000
(36,394,000)
(17,370,000)
(51,559,000)
(19,677,000)
(71,236,000)
140,346,000
$
33,000
6,626,000
(43,541,000)
(14,995,000)
(51,877,000)
(22,370,000)
(74,247,000)
130,217,000
$
$
$
$
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 30,
Revenues:
Hotel
Real estate
Total revenues
Costs and operating expenses:
Hotel operating expenses
Real estate operating expenses
Depreciation and amortization expense
General and administrative expense
Total costs and operating expenses
(Loss) income from operations
Other income (expense):
Interest expense - mortgage
Gain from sale of real estate
Gain on disposal of assets
Net gain (loss) on marketable securities
Net gain on marketable securities - Comstock
Gain on debt forgiveness
Loss on debt extinguishment
Impairment loss on other investments
Dividend and interest income
Trading and margin interest expense
Net other income (expense)
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Less: Net (income) loss attributable to the non-controlling interest
Net income (loss) attributable to InterGroup
Net income (loss) per share
Basic
Diluted
Net income (loss) per share attributable to InterGroup
Basic
Diluted
Weighted average number of common shares outstanding
Weighted average number of diluted shares outstanding
The accompanying notes are an integral part of these consolidated financial statements.
32
2021
2020
$
$
14,668,000
13,990,000
28,658,000
(17,911,000)
(7,869,000)
(4,639,000)
(3,109,000)
42,839,000
15,178,000
58,017,000
(37,333,000)
(8,051,000)
(4,872,000)
(2,870,000)
(33,528,000)
(53,126,000)
(4,870,000)
4,891,000
(8,914,000)
12,043,000
12,000
8,248,000
3,390,000
5,172,000
-
(119,000)
519,000
(1,333,000)
19,018,000
14,148,000
(3,603,000)
10,545,000
(136,000)
10,409,000
4.74
4.12
4.68
4.06
$
$
$
$
$
(9,321,000)
-
-
(1,913,000)
-
-
(687,000)
(219,000)
363,000
(997,000)
(12,774,000)
(7,883,000)
2,794,000
(5,089,000)
1,308,000
(3,781,000)
(2.21)
(2.21)
(1.64)
(1.64)
2,222,919
2,560,514
2,300,059
2,623,254
$
$
$
$
$
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
Additional
InterGroup
Total
Common Stock
Shares
Amount
Paid-in
Capital
Accumulated
Treasury
Shareholders’
Deficit
Stock
Deficit
Non-
controlling
Interest
Shareholders’
Deficit
Balance at July 1, 2019
3,404,982
$ 33,000
$10,342,000
$ (39,760,000)
$(14,347,000)
$ (43,732,000)
$(24,697,000)
$ (68,429,000)
Net Loss
Stock options expense
Investment in Santa Fe
Investment in Portsmouth
Investment in Woodland
Purchase of treasury stock
-
-
-
-
-
-
-
-
-
-
-
-
-
(3,781,000)
142,000
(4,505,000)
(266,000)
913,000
-
-
-
-
-
-
(3,781,000)
(1,308,000)
(5,089,000)
142,000
-
142,000
(4,505,000)
3,468,000
(1,037,000)
(266,000)
167,000
(99,000)
-
-
-
-
-
913,000
(648,000)
(648,000)
-
-
913,000
(648,000)
Balance at June 30, 2020
3,404,982
$ 33,000
$ 6,626,000
$ (43,541,000)
$(14,995,000)
$ (51,877,000)
$(22,370,000)
$ (74,247,000)
Net Income
Stock options expense
Reclassify non-controlling interest to InterGroup
Investment in Portsmouth
Investment in Justice
Distribution to NCI
Purchase of treasury stock
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
10,409,000
14,000
-
-
(3,262,000)
(4,468,000)
-
-
-
-
-
-
-
-
-
-
-
-
-
10,409,000
136,000
10,545,000
14,000
-
14,000
(3,262,000)
1,207,000
(2,055,000)
(4,468,000)
3,025,000
(1,443,000)
-
-
(696,000)
(696,000)
(979,000)
(979,000)
(2,375,000)
(2,375,000)
-
(2,375,000)
Balance at June 30, 2021
3,404,982
$ 33,000
$ 2,172,000
$ (36,394,000)
$(17,370,000)
$ (51,559,000)
$(19,677,000)
$ (71,236,000)
The accompanying notes are an integral part of these consolidated financial statements.
33
THE INTERGROUP CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 30,
Cash flows from operating activities:
2021
2020
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
$
10,545,000
$
(5,089,000)
Net unrealized (gain) loss on marketable securities
Deferred taxes
Gain on disposal of assets
Gain from sale of real estate
Gain from debt forgiveness
Impairment loss on other investments
Depreciation and amortization
Stock compensation expense
Reclassifying non-controlling interest
Changes in assets and liabilities:
Investment in marketable securities
Other assets, net
Accounts payable and other liabilities – Justice
Accounts payable and other liabilities
Due to securities broker
Obligations for securities sold
Net cash used in operating activities
Cash flows from investing activities:
Investment in Hotel, net
Investment in real estate, net
Proceeds from other investments
Investment in Santa Fe
Investment in Portsmouth
Investment in Woodland
Investment in Justice
Proceeds from sale of real estate
Distribution to non-controlling interest
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from other notes payable – SBA Loans
Payments of mortgage and other notes payable
Proceeds from mortgage and other notes payable
Issuance cost from refinance of long-term debt
Issuance cost from renewing line of credit
Payments of line of credit
Purchase of treasury stock
Net cash (used in) provided by financing activities
Net (decrease) increase in cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash at the beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Supplemental information:
Income taxes paid
Interests paid
Non-cash transactions:
Additions to Hotel equipment through finance leases
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
34
(10,761,000)
2,243,000
(12,000)
(12,043,000)
(5,172,000)
119,000
4,412,000
14,000
(2,055,000)
(18,853,000)
364,000
(670,000)
(856,000)
6,341,000
6,125,000
(20,259,000)
(1,068,000)
(2,917,000)
118,000
-
(1,443,000)
-
(696,000)
15,178,000
(979,000)
8,193,000
2,000,000
(3,946,000)
6,762,000
(279,000)
(5,000)
(2,985,000)
(2,375,000)
(828,000)
(12,894,000)
28,286,000
15,392,000
3,076,000
8,677,000
30,000
$
$
$
$
1,272,000
(2,915,000)
-
-
-
219,000
4,715,000
142,000
-
2,246,000
377,000
(3,831,000)
394,000
(53,000)
(931,000)
(3,454,000)
(1,292,000)
(1,048,000)
115,000
(1,037,000
(99,000)
913,000
-
-
-
(2,448,000)
5,172,000
(2,655,000)
7,958,000
(771,000)
-
-
(648,000)
9,056,000
3,154,000
25,132,000
28,286,000
41,000
9,440,000
30,000
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.
Effective February 19, 2021, the Company’s 83.7% owned subsidiary, Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB:
SFEF), was liquidated and all of its assets, including its 68.8% interest in Portsmouth Square Inc. (“Portsmouth”), a public company (OTCBB:
PRSI) were distributed to its shareholders in exchange for their Santa Fe common stock. InterGroup received cash of $5,013,000 and 422,998 shares
of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. As a former 3.7% shareholder of Santa Fe, the Company’s
President, Chairman of the Board and Chief Executive Officer, John Winfield, received cash of $221,000 and 18,641 shares of Portsmouth common
stock in March 2021 as a result of the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of
Dissolution from the State of Nevada, and Santa Fe is effectively fully dissolved and no longer in legal existence. The liquidation and distribution of
Santa Fe did not have an impact on the consolidated statement of operations but rather on the consolidated balance sheets as a re-class between non-
controlling interests and accumulated deficit. As of June 30, 2021, InterGroup owns approximately 74.9% of the outstanding common shares of
Portsmouth. As of June 30, 2021, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield, owns
approximately 2.5% of the outstanding common shares of Portsmouth. Mr. Winfield also serves as the Chairman of the Board and Chief Executive
Officer of Portsmouth.
Portsmouth’s primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California
limited partnership (“Justice” or the “Partnership”). As of June 30, 2021, Portsmouth had a 99.3% 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 and
operates 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. 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”) through January 31, 2030.
Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel, along
with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial
period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, to not exceed five years in the
aggregate, subject to certain conditions. Under the terms of the HMA, base management fee payable to Interstate shall be one and seven-tenths
percent (1.70%) of total Hotel revenue. 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. As of
June 30, 2020, balance of the key money including accrued interest was $1,009,000 and is included in restricted cash in the consolidated balance
sheets. As of June 30, 2021, the key money balance was zero as the Hotel obtained approval from Interstate to use the funds for hotel operations
during the first quarter of fiscal year 2021. As of June 30, 2021 and 2020, balance of the unamortized portion of the key money are $1,396,000 and
$1,646,000, respectively, and are included in the related party notes payable in the consolidated balance sheets. On October 25, 2019, Interstate
merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly
combined company will be positioned under the Aimbridge Hospitality name in the Americas.
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.
35
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, Portsmouth 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.
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 the asset’s 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, 2021 and 2020.
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, 2021 and 2020.
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, 2021 and 2020, the Company recorded impairment losses related to other
investments of $119,0000 and $219,000, respectively. As of June 30, 2021 and 2020, the allowance for impairment losses was $4,595,000 and
$6,270,000, respectively.
36
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, 2021 and 2020, 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).
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. As of June 30, 2021, and 2020, the allowance for doubtful accounts was
$531,000 and $79,000, respectively. The Company extends unsecured credit to its customers but mitigates the associated credit risk by performing
ongoing credit evaluations of its customers. The $531,000 allowance for doubtful accounts at June 30, 2021 includes $514,000 allowance related to
the Company’s rental properties. The temporary eviction moratorium imposed by the federal and state governmental authorities has delayed
evictions.
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, 2021 and 2020, the Company
purchased 65,890 and 21,153 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.
37
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 3 – 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 $110,000 and $176,000 for the years ended June 30, 2021 and 2020, respectively.
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.
We have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and Economic
Security (CARES) Act enacted on March 27, 2020, and the American Rescue Plan Act enacted on March 11, 2021. The effect of tax law changes is
required to be recognized either in the interim period in which the legislation is enacted or reflected in the computation of the annual effective tax
rate, depending on the nature of the change. As of June 30, 2020, we evaluated the income tax provisions of the CARES Act and the American
Rescue Plan Act and have determined there to be no material effect on the fiscal year tax provision. We will continue to evaluate the income tax
provisions of both acts and monitor the tax law changes that could have income tax accounting and disclosure implications.
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 (loss) per share is computed by dividing net income (loss) 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. As of June 30, 2021, the Company’s potentially dilutive common shares are 323,195 shares
that Mr. Winfield has a right to acquire pursuant to vested stock options and 14,400 shares that Mr. Gonzalez has a right to acquire pursuant to
vested stock options. The basic and diluted earnings per share are the same for the fiscal year ended June 30, 2020 because the Company had a net
loss.
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.
38
Recent Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to
recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is
effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2018, with early
adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities
another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in
the year of adoption. Effective July 1, 2019, we adopted ASU 2016-02 using the modified retrospective approach provided by ASU 2018-11. We
elected certain practical expedients permitted under the transition guidance, including the election to carryforward historical lease classification. We
also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our
consolidated balance sheets. In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the
present value of the fixed payments without performing an allocation of lease and non-lease components. We did not record any operating lease
right-of-use (“ROU”) assets and operating lease liabilities upon adoption of the new standard as the aggregate value of the ROU assets and
operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2021and 2020. The standard did not have an impact
on our other finance leases, statements of operations or cash flows. See Note 4 and Note 11 for balances of finance lease ROU assets and liabilities,
respectively.
In August 2018, the FASB issued Accounting Standard Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements
(Topic 820) (ASU 2018-13), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements.
The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the
most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all
periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any
removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The
Company has adopted the new standard effective July 1, 2020 and the adoption of this guidance does not have a material impact on its condensed
consolidated financial statements.
NOTE 2 – LIQUIDITY
Historically, our cash flows have been primarily generated from our Hotel and real estate operations. However, the responses by federal, state, and
local civil authorities to the COVID-19 pandemic has had a material detrimental impact on our liquidity. For the fiscal year ended June 30, 2021,
our net cash flow used in operations was $20,259,000. For the fiscal year ended June 30, 2020, our net cash used in operations was $3,454,000. We
have taken several steps to preserve capital and increase liquidity at our Hotel, including implementing strict cost management measures to
eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring expenses, and temporarily closing certain hotel
services and outlets.
As of June 30, 2021, we had cash, cash equivalents, and restricted cash of $15,392,000 which included $6,222,000 of restricted cash held by our
Hotel senior lender Wells Fargo Bank, N.A. (“Lender”). As of June 30, 2020, the Lender held $10,666,000 restricted cash, $7,486,000 was held for
furniture, fixtures and equipment (“FF&E”) reserves and $2,432,000 was held for a possible future property improvement plan (“PIP”) requested by
our franchisor, Hilton. However, Hilton has confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of
(i) January 2030, which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. On August
19, 2020, Operating received PIP deposits in the amount of $2,379,000 held by Lender. The funds were utilized to fund operating expenses,
including franchise and management fees and other expenses.
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act
administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In
accordance with the requirements of the CARES Act, Justice used proceeds from the loan primarily for payroll costs. As of June 30, 2021, Justice
had used all proceeds of the SBA Loan – Justice in qualified expenses. The SBA Loan - Justice was scheduled to mature on April 9, 2022 and had a
1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA under the
CARES Act and received loan proceeds in the amount of $453,000. As of June 30, 2021, InterGroup had used all of the $453,000 loan proceeds in
qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on April 27, 2022 and has a 1.00% interest rate. As of June 30,
2021, both the SBA Loan – Justice and SBA Loan – InterGroup (collectively the “SBA Loans”) were forgiven by the SBA.
39
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice
received proceeds of $2,000,000 from the Second SBA Loan. Justice will use proceeds from the Second SBA Loan primarily for payroll costs. The
Second SBA Loan is scheduled to mature on February 3, 2026, and has a 1.00% interest rate and is subject to the terms and conditions applicable to
loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until
either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not
apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not
approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other
qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. As of June 30, 2021, all proceeds from the
Second SBA Loan had been used in qualified expenses. On August 6, 2021, the SBA issued its new forgiveness forms and guidelines, and CIBC is
currently working on the tools and platform that will allow Justice to file for full loan forgiveness.
In order to increase its liquidity position and to take advantage of the favorable interest rate environment, InterGroup refinanced its 151-unit
apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020, InterGroup refinanced one
of its California properties and generated net proceeds of $1,144,000. During the fiscal year ended June 30, 2021, InterGroup completed refinancing
on six of its California properties and generated net proceeds of $6,762,000. InterGroup is currently evaluating other refinancing opportunities and it
could refinance additional multifamily properties should the need arise, or should management consider the interest rate environment favorable.
InterGroup has an uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA (“CIBC”) and the entire $8,000,000 is available to be
drawn down as of June 30, 2021, should additional liquidity be necessary.
On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from InterGroup as
needed up to $10,000,000. During the fiscal year ending June 30, 2021, InterGroup advanced $3,650,000 to Justice per the aforementioned loan
modification agreement, bringing the total amount due InterGroup to $6,650,000 on June 30, 2021. The Partnership is also allowed to seek
additional loans and sell partnership interests. Upon the consent of the general partner and a super majority in interest, the Partnership may sell
additional classes or series of units of the Partnership under certain conditions in order to raise additional capital. On August 28, 2020, the Board of
InterGroup passed resolutions to provide funding to Portsmouth if necessary.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including
management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding
indebtedness, and repairs and maintenance of the Hotel.
Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the
Hotel and our real estate properties. We will continue to finance our business activities primarily with existing cash, including from the activities
described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash,
we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for
operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for
at least twelve months from the date of issuance of these financial statements, even if current levels of low occupancy were to persist. The
objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational
costs. We believe that our cash on hand, along with other potential aforementioned sources of liquidity that management may be able to obtain, will
be sufficient to fund our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond.
However, there can be no guarantee that management will be successful with its plan.
NOTE 3 – 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,
Hotel revenues:
Hotel rooms
Food and beverage
Garage
Other operating departments
Total Hotel revenue
2021
2020
$
$
12,138,000
293,000
2,117,000
120,000
14,668,000
$
$
36,465,000
3,529,000
2,368,000
477,000
42,839,000
40
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.
● Non-cancelable 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.
Contract assets and liabilities
We do not have any material contract assets as of June 30, 2021 and 2020, 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 decreased to $161,000 as of June 30, 2021 from $375,000 as of
June 30, 2020. The decrease for the twelve months ended June 30, 2021 was primarily driven by $214,000 revenue recognized that was included in
the advanced deposits balance as of June 30, 2020.
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.
41
NOTE 4 – INVESTMENT IN HOTEL, NET
Investment in Hotel consisted of the following as of:
June 30, 2021
Land
Finance lease ROU assets
Furniture and equipment
Building and improvements
Investment in Hotel, net
June 30, 2020
Land
Finance lease ROU assets
Furniture and equipment
Building and improvements
Investment in Hotel, net
Cost
2,738,000
1,805,000
31,014,000
64,585,000
100,142,000
Cost
2,738,000
1,775,000
30,528,000
64,005,000
99,046,000
Accumulated
Depreciation
Net Book
Value
$
$
$
$
-
(606,000)
(27,957,000)
(33,928,000)
(62,491,000)
Accumulated
Depreciation
-
(291,000)
(27,498,000)
(32,488,000)
(60,277,000)
$
$
$
$
2,738,000
1,199,000
3,057,000
30,657,000
37,651,000
Net Book
Value
2,738,000
1,484,000
3,030,000
31,517,000
38,769,000
$
$
$
$
NOTE 5 - INVESTMENT IN REAL ESTATE, NET
At June 30, 2021, 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,
Land
Buildings, improvements and equipment
Accumulated depreciation
Land held for development
Investment in real estate, net
NOTE 6 - INVESTMENT IN MARKETABLE SECURITIES
2021
22,998,000
68,173,000
(44,930,000)
46,241,000
1,468,000
47,709,000
$
$
2020
23,565,000
69,417,000
(44,112,000)
48,870,000
1,468,000
50,338,000
$
$
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.
42
At June 30, 2021 and 2020, 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:
Investment
As of June 30, 2021
Corporate Equities
As of June 30, 2020
Corporate Equities
Cost
$ 29,816,000
$ 11,459,000
$
$
Gross
Unrealized Gain
Gross
Unrealized Loss
Net
Unrealized Loss
Fair
Value
8,834,000
902,000
$
$
(2,658,000)
(6,186,000)
$
$
(5,976,000)
$ 35,792,000
(5,281,000)
$ 6 ,178,000
As of June 30, 2021 and 2020, approximately 4% and 11% of the investment marketable securities balance above is comprised of the common stock
of Comstock Mining Inc. (“Comstock” – NYSE AMERICAN: LODE), respectively.
As of June 30, 2021 and 2020, the Company had $2,176,000 and $5,734,000, respectively, of unrealized losses related to securities held for over
one year; of which $1,933,000 and $5,427,000 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, 2021 and 2020, respectively.
For the year ended June 30,
Realized gain (loss) on marketable securities
Realized loss on marketable securities related to Comstock
Unrealized gain (loss) on marketable securities
Unrealized gain on marketable securities related to Comstock
Net gain (loss) on marketable securities
NOTE 7 – OTHER INVESTMENTS, NET
2021
2,746,000
(1,870,000)
7,372,000
3,390,000
11,638,000
$
$
2020
(641,000)
-
(1,272,000)
-
(1,193,000)
$
$
The Company may also invest, with the approval of the Executive Strategic Real Estate and 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.
Other investments, net consist of the following:
Private equity hedge fund, at cost
Other investments
Type
June 30, 2021
June 30, 2020
41,000
-
41,000
$
$
157,000
121,000
278,000
$
$
43
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, 2021
Assets:
Investment in marketable securities:
REITs and real estate companies
Energy
Communication services
Financial services
Industrial
Consumer cyclical
Healthcare
Technology
Other
As of June 30, 2020
Assets:
Investment in marketable securities:
REITs and real estate companies
Basic material
Energy
Industrial
Corporate bonds
Other
Level 1
11,624,000
6,374,000
4,872,000
3,873,000
3,746,000
1,702,000
981,000
442,000
381,000
35,792,000
Level 1
2,365,000
1,209,000
767,000
484,000
417,000
936,000
6,178,000
$
$
$
$
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:
Assets
Level 3
June 30, 2021
Net loss for the year
ended June 30, 2021
Other non-marketable investments
Assets
Other non-marketable investments
$
$
41,000
$
41,000
$
(119,000)
Level 3
June 30, 2020
Net loss for the year
ended June 30, 2020
278,000
$
278,000
$
(219,000)
For fiscal years ended June 30, 2021 and 2020, we received distribution from other non-marketable investments of $119,000 and $115,000,
respectively.
44
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:
Accounts receivable, net
Prepaid expenses
Miscellaneous assets, net
Total other assets
2021
340,000
552,000
729,000
1,621,000
$
$
2020
504,000
673,000
808,000
1,985,000
$
$
NOTE 10 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The following summarizes the balances of related party and other notes payable as of June 30, 2021 and 2020, respectively.
As of June 30,
Note payable - Hilton
Note payable - Interstate
Other notes payable - SBA Loans
Total related party and other notes payable
2021
2020
$
$
2,692,000
1,396,000
2,000,000
6,088,000
$
$
3,008,000
1,646,000
5,172,000
9,826,000
Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000
annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.
On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February 3, 2017. The
term of the 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 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. As of June 30, 2021 balance of the key money was zero as the Hotel obtained approval from Interstate to use the funds for
hotel operations during the first quarter of fiscal year 2021. As of June 30, 2020, the balance of the key money plus accrued interest was $1,009,,000
and was included in restricted cash in the consolidated balance sheets. Unamortized portion of the key money is included in the related party notes
payable in the consolidated balance sheets.
In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000
was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage
note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment
complex in Santa Monica, California and is a subsidiary of Santa Fe and the Company. 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 interests were due in July 2019. 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.
The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC. In July 2020, the $2,969,000 mortgage due to InterGroup
and the RLOC was extended to July 2021.
45
On April 9, 2020, Justice entered into a loan agreement (“SBA Loan - Justice”) with CIBC Bank USA under the recently enacted CARES Act
administered by the U.S. Small Business Administration. The Partnership received proceeds of $4,719,000 from the SBA Loan - Justice. In
accordance with the requirements of the CARES Act, Justice has used proceeds from the loan primarily for payroll costs. As of June 30, 2021,
Justice had used all proceeds of the SBA Loan – Justice in qualified expenses. The SBA Loan - Justice was scheduled to mature on April 9, 2022
and had a 1.00% interest rate. On April 27, 2020, InterGroup entered into a loan agreement (“SBA Loan - InterGroup”) with CIBC Bank USA
under the CARES Act and received loan proceeds in the amount of $453,000. As of June 30, 2021, InterGroup had used all of the $453,000 loan
proceeds in qualified payroll expenses. The SBA Loan – InterGroup was scheduled to mature on April 27, 2022 and has a 1.00% interest rate. Both
the SBA Loan – Justice and SBA Loan – InterGroup (collectively the “SBA Loans”) were forgiven by the SBA in full as of June 30, 2021.
On February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the SBA. Justice
received proceeds of $2,000,000 from the Second SBA Loan. Justice will use proceeds from the Second SBA Loan primarily for payroll costs. The
Second SBA Loan is scheduled to mature on February 3, 2026 and has a 1.00% interest rate and is subject to the terms and conditions applicable to
loans administered by the U.S. Small Business Administration under the CARES Act. All payments of principal and interest are deferred until
either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by the SBA to CIBC; or (b) if Justice does not
apply for forgiveness within 10 months after the last day of the covered period specified in the loan agreement or if the forgiveness amount is not
approved, the date that is 10 months after the last day of the covered period. The loan may be forgiven if the funds are used for payroll and other
qualified expenses. All unforgiven portion of the principal and accrued interest will be due at maturity. As of June 30, 2021, all proceeds from the
Second SBA Loan had been used in qualified expenses. On August 6, 2021, the SBA issued its new forgiveness forms and guidelines, and CIBC is
currently working on the tools and platform that will allow Justice to file for full loan forgiveness.
As of June 30, 2021, the Company had finance lease obligations outstanding of $664,000. These finance leases expire in various years through 2023
at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of June 30, 2022 are as follows:
For the year ending June 30,
2022
2023
$
Total minimum lease payments
Less interest on finance lease
Present value of future minimum lease payments $
508,000
188,000
696,000
(32,000)
664,000
Future minimum principal payments for all related party and other financing transactions are as follows:
For the year ending June 30,
2022
2023
2024
2025
2026
Thereafter
$
$
1,048,000
750,000
567,000
567,000
2,567,000
1,253,000
6,752,000
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 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty.
The loan was extended to July 31, 2022. As of June 30, 2021 and 2020, the balance of the loan was $6,650,000 and $3,000,000, respectively, and is
eliminated in the consolidated balance sheets.
On February 5, 2020, Santa Fe acquired additional 44.6% interest in Woodland Village from InterGroup by issuing 97,500 shares of its common
stock to InterGroup. As a result of the transaction, Woodland Village became a wholly owned subsidiary of Santa Fe. The transaction is being made
pursuant to a Contribution Agreement (the “Contribution Agreement”) between Santa Fe and InterGroup, dated February 5, 2020. The Contribution
Agreement also contains a provision for a potential subsequent earn out to InterGroup pursuant to terms set forth therein.
46
In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000
was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village, Inc. (“Woodland Village”) and a new mortgage
note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village held a three-story apartment complex
in Santa Monica, California and was a subsidiary of Santa Fe and the Company. The RLOC carries a variable interest rate of 30-day LIBOR plus
3%. Interest was paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. 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.
The $2,969,000 mortgage due to InterGroup carried same terms as InterGroup’s RLOC. In July 2020, InterGroup entered into a second modification
agreement with CIBC which extended the maturity date of its RLOC to July 21, 2021. The $2,969,000 mortgage due to InterGroup was also
extended to July 1, 2021. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in Santa Monica, California for $15,650,000 and
received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000. Furthermore, pursuant to the
Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale.
On November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to InterGroup for $1,530,000 in exchange for a
reduction of $1,196,000 of its obligation to InterGroup. Santa Fe acquired the property on February 1, 2002 for $785,000. Outstanding mortgage on
the property for $334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately $901,000, which was
eliminated in consolidation at InterGroup. The sales price of the property represents its current value as of the sale date as appraised by a licensed
independent third-party appraiser. The fairness of the sale terms of the transaction were reviewed and approved by the independent directors of
Santa Fe and InterGroup, and unanimously approved by the entire Board of Directors of both companies.
As disclosed in its Definitive Information Statement on Schedule 14C, filed with the SEC on January 25, 2021, Santa Fe received shareholder
approval to distribute its assets, as described and subsequently dissolve, all as set forth in the Information Statement. As InterGroup formerly owned
83.7% of the outstanding common stock of Santa Fe, the Company received cash of $5,013,000 and 422,998 shares of Portsmouth common stock in
March 2021 as a result of the liquidation of Santa Fe. As a former 3.7% shareholder of Santa Fe, the Company’s President, Chairman of the Board
and Chief Executive Officer, John Winfield, received cash of $221,000 and 18,641 shares of Portsmouth common stock in March 2021 as a result of
the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of Dissolution from the State of Nevada, and
Santa Fe is effectively fully dissolved and no longer in legal existence.
Four of the Portsmouth directors serve as directors of InterGroup. The Company’s Vice President Real Estate and Advisor of Executive Strategic
Real Estate and Securities Investment Committee was elected President of Portsmouth on May 24, 2021, by the Board of Directors of Portsmouth.
As Chairman of the Executive Strategic Real Estate and 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 Board of Portsmouth and oversees the investment activity of
Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk
factors, the Chief Executive Officer and Portsmouth 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 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 Portsmouth in favor of the Mortgage Lender.
47
The Mezzanine Loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The
Mezzanine Loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. Interest only payments were due monthly. 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. As additional security for the new mezzanine loan, there is a limited
guaranty executed by the Partnership and Portsmouth in favor of Cred Reit Holdco LLC (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, 2021 and 2020, InterGroup is in compliance
with both requirements. However, due to the Hotel’s current low occupancy and its negative impact on the Hotel’s cash flow, Justice Operating
Company, LLC is not meeting certain of its loan covenants such as the Debt Service Coverage Ratio (“DSCR”) which would trigger the creation of
a lockbox and cash sweep by the Lender for all cash collected by the Hotel, and under certain terms, would allow the Lender to request Operating to
replace its hotel management company. The DSCR for Operating has been below 1.00 for the last two quarters during fiscal year 2021 while it is
required to maintain a DSCR of at least 1.10 to 1.00 for two consecutive quarters. However, such lockbox and cash sweep was already in place and
will remain in place up to loan maturity regardless of the DSCR. Justice has not missed any of its debt service payments and does not anticipate
missing any debt obligations even during these uncertain times for at least the next twelve months and beyond.
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 2020, the Company refinanced its $8,453,000 and $2,469,000 mortgage notes payable on its 151-unit apartment complex in Parsippany,
New Jersey and obtained a new mortgage note payable for $18,370,000. The Company received net proceeds of $6,814,000 as a result of the
refinance. Interest rate on the mortgage is fixed at 3.17% for ten years and the mortgage matures in May 2030. The Company recorded loss on debt
extinguishment of approximately $687,000 as a result of the refinance which represent prepayment premium on prior mortgage notes payables.
In June 2020, the Company refinanced its $1,274,000 mortgage note payable on its 9-unit apartment complex in Marina del Rey, California and
obtained a new mortgage note payable for $2,600,000. The Company received net proceeds of $1,144,000 as a result of the refinance. Interest rate
on the mortgage is fixed at 3.09% for ten years and the mortgage matures in July 2030.
In October 2020, the Company refinanced its $4,800,000 mortgage note payable on its 31-unit apartment complex in Santa Monica, California and
obtained a new mortgage note payable for $8,400,000. The Company received net proceeds of $3,529,000 as a result of the refinance. Interest rate
on the mortgage is fixed at 2.52% for ten years and the mortgage matures in November 2030.
In November 2020, the Company refinanced its $1,088,000 mortgage note payable on its 9-unit apartment complex in West Los Angeles, California
and obtained a new mortgage note payable for $1,995,000. The Company received net proceeds of $798,000 as a result of the refinance. Interest rate
on the mortgage is fixed at 3.05% for ten years and the mortgage matures in December 2030.
In January 2021, the Company refinanced its $1,597,000 mortgage note payable on its 14-unit apartment complex in West Los Angeles, California
and obtained a new mortgage note payable for $2,780,000. The Company received net proceeds of $1,057,000 as a result of the refinance. Interest
rate on the mortgage is fixed at 3.05% for ten years and the mortgage matures in February 2031.
48
In June 2021, the Company refinanced its $563,000 mortgage note payable on its 4-unit apartment complex in West Los Angeles, California and
obtained a new mortgage note payable for $1,155,000. The Company received net proceeds of $619,000 as a result of the refinance. Interest rate on
the mortgage has a five-year fixed interest rate of 3.5% per annum and adjustable rate thereafter at 2.5% over the 6-month LIBOR Index with semi-
annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the initial interest rate change with a floor equal to the start rate and
ceiling of 9.95%. The maturity date of the new mortgage is August 1, 2051.
In June 2021, the Company refinanced two of its single-family houses in West Los Angeles, California with two existing mortgages totaling
$563,000 and obtained two new mortgage notes payable for a combined $1,475,000. The Company received combined net proceeds of $759,000 as
a result of the refinancing of these two mortgages. Interest rate on the mortgages is at five-year fixed interest rate of 3.5% per annum and adjustable
rate thereafter at 2.5% over the 6-month LIBOR Index with semi-annual rate and payment adjustments. Semi-annual rate cap is 1.25% after the
initial interest rate change with a floor equal to the start rate and ceiling of 9.95%. The maturity date of the new mortgage is August 1, 2051.
Each mortgage notes payable is secured by real estate or the Hotel. As of June 30, 2021 and 2020, the mortgage notes payables are summarized as
follows:
Property
SF Hotel
SF Hotel
Florence
Las Colinas
Morris County
St. Louis
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
As of June 30, 2021
Number
of Units
Note
Origination Date
544 rooms December
544 rooms
2013
2019
July
Mortgage notes payable - Hotel
Debt issuance costs
Total mortgage notes payable - Hotel
Note
Maturity Date
January
January
2024
2024
157
358
151
264
4
2
1
31
30
14
12
9
9
8
7
4
1
1
2015
2012
2020
2013
2012
2012
2021
2020
2007
2021
2016
2020
2020
2013
2012
2021
2021
2018
March
November
April
May
September
September
June
October
August
January
June
June
November
July
August
June
June
September
Mortgage notes payable - real estate
Debt issuance costs
Total mortgage notes payable - real estate
April
December
May
May
September
September
August
November
September
February
June
July
December
July
September
August
August
October
49
2025
2022
2030
2023
2042
2042
2051
2030
2022
2031
2026
2030
2030
2043
2042
2051
2051
2048
Mortgage Balance
Interest Rate
$
$
$
$
90,745,000
20,000,000
110,745,000
(611,000)
110,134,000
3,076,000
16,065,000
17,975,000
5,100,000
323,000
327,000
920,000
8,400,000
5,453,000
2,761,000
2,077,000
2,552,000
1,975,000
416,000
798,000
1,155,000
555,000
957,000
70,885,000
(626,000)
70,259,000
5.28%
7.25%
3.87%
3.73%
3.17%
4.05%
3.75%
3.75%
3.50%
2.52%
5.97%
3.05%
3.59%
3.09%
3.05%
3.75%
3.75%
3.50%
3.50%
4.75%
As of June 30, 2020
Number
of Units
Note
Origination Date
Note
Maturity Date
Mortgage Balance
Interest Rate
Property
SF Hotel
SF Hotel
Florence
Las Colinas
Morris County
St. Louis
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
Los Angeles
544 rooms December
544 rooms
2013 January
2019 January
July
Mortgage notes payable - Hotel
Debt issuance costs
Total mortgage notes payable - Hotel
157 March
358 November
151 April
264 May
4 September
2 September
1 August
31 November
30 August
14 April
12 June
9 June
9 April
8 July
7 August
4 August
1 September
1 September
Office April
2015 April
2012 December
2020 May
2013 May
2012 September
2012 September
2012 September
2010 December
2007 September
2011 March
2016 June
2020 July
2011 March
2013 July
2012 September
2012 September
2012 September
2018 October
2016 January
Mortgage notes payable - real estate
Debt issuance costs
Total mortgage notes payable - real estate
Future minimum payments for all mortgage notes payable are as follows:
For the year ending June 30,
2022
2023
2024
2025
2026
Thereafter
50
5.28%
7.25%
3.87%
3.73%
3.17%
4.05%
3.75%
3.75%
3.75%
4.85%
5.97%
5.89%
3.59%
3.09%
5.89%
3.75%
3.75%
3.75%
3.75%
4.75%
2.67%
2024 $
2024
$
2025 $
2022
2030
2023
2042
2042
2042
2020
2022
2021
2026
2030
2021
2043
2042
2042
2042
2048
2021
$
$
$
92,292,000
20,000,000
112,292,000
(896,000)
111,396,000
3,150,000
16,529,000
18,341,000
5,236,000
333,000
337,000
363,000
4,800,000
5,614,000
1,597,000
2,125,000
2,600,000
1,088,000
428,000
823,000
563,000
388,000
974,000
770,000
66,059,000
(447,000)
65,612,000
3,209,000
28,480,000
108,418,000
3,808,000
1,006,000
36,710,000
181,631,000
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. As of June 30, 2020, balance of the key money
including accrued interest was $1,009,000 and is included in restricted cash in the consolidated balance sheets. As of June 30, 2021, the key money
balance was zero as the Hotel obtained approval from Interstate to use the funds for hotel operations during the first quarter of fiscal year 2021. As
of June 30, 2021 and 2020, balance of the unamortized portion of the key money are $1,396,000 and $1,646,000, respectively, and are included in
the related party notes payable in the consolidated balance sheets. For the fiscal years ended June 30, 2021 and 2020, hotel management fees were
$242,000 and $591,000, respectively, offset by key money amortization of $250,000 for both years and are included in Hotel operating expenses in
the consolidated statements of operations. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent
hotel management firm. With the completion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name
in the Americas.
NOTE 13 – CONCENTRATION OF CREDIT RISK
As of June 30, 2021 and 2020, receivables related to Hotel customers were $194,000 and $239,000, respectively.. Usually, credit extended to the
Company’s tenants at its rental properties is of low risk as leases do not extend beyond one year and if tenants become delinquent, local eviction
laws are used to evict tenants. However, as of June 30, 2021 accounts receivable from the Company’s rental properties was $660,000 and allowance
for doubtful accounts was $514,000, for a net receivable of $146,000. This unusual large gross receivable amount from our rental properties is as a
result of the temporary eviction moratorium imposed by the federal and state governmental authorities since the beginning of the COVID19
pandemic and is now scheduled to be lifted on October 3, 2021, but no assurances can be given that such a moratorium won’t be once again
extended. Under the eviction moratorium, the Company is not allowed to evict tenants for non-payment of rent. The Company continues to work
with its delinquent tenants and some tenants have requested governmental assistance to pay for their delinquent balances. The Company is
monitoring the eviction moratorium closely in order to reduce its potential losses.
The Company 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) benefit is comprised of the following:
For the years ended June 30,
Federal
Current tax expense
Deferred tax (expense) benefit
State
Current tax expense
Deferred tax (expense) benefit
2021
2020
$
$
(755,000)
(1,848,000)
(2,603,000)
(605,000)
(395,000)
(1,000,000)
(57,000)
1,828,000
1,771,000
(64,000)
1,087,000
1,023,000
Income Tax (Expense) Benefit
$
(3,603,000)
$
2,794,000
51
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,
2021
2020
Statutory federal tax rate
State income taxes, net of federal tax benefit
Dividend received deduction
Disallowed interest
Net operating loss
Valuation allowance
Basis difference in investments
Carryback claim refundable
Other
$
$
(3,169,000)
(834,000)
51,000
214,000
105,000
(319,000)
-
304,000
45,000
(3,603,000)
$
$
1,593,000
812,000
18,000
504,000
-
49,000
39,000
-
(221,000)
2,794,000
The components of the deferred tax asset and liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards
Capital loss carryforwards
Investment impairment reserve
Accruals and reserves
Interest expense
Tax credits
Unrealized loss on marketable securities
Other
Valuation allowance
Deferred tax liabilities:
Equity earnings
Deferred gains on real estate sale and depreciation
Unrealized gain on marketable securities
State taxes
Net deferred tax asset
June 30, 2021
June 30, 2020
$
$
9,801,000
614,000
671,000
893,000
2,684,000
554,000
-
225,000
(951,000)
14,491,000
(5,626,000)
(5,027,000)
(1,531,000)
(167,000)
(12,351,000)
2,140,000
$
$
8,713,000
1,074,000
1,156,000
871,000
1,498,000
563,000
1,591,000
221,000
(497,000)
15,190,000
(4,306,000)
(6,249,000)
-
(252,000)
(10,807,000)
4,383,000
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, 2021, 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, only $951,000 valuation allowance is placed on
tax credits and capital losses that may expire prior to utilization.
As of June 30, 2021, the Company had estimated net operating losses (NOLs) of $31,495,000 and $36,050,000 for federal and state purposes,
respectively. Due to the California’s suspension of net operating losses, approximately $15.1M of the state net operating losses cannot be utilized in
taxable years 2020, 2021 and 2022 if the company’s taxable income in each of those years is $1M or more.
52
Below is the break-down of the NOLs for InterGroup and Portsmouth. The carryforward expires in varying amounts through the year 2039.
Federal
State
InterGroup
Portsmouth
$
- $
-
36,050,000
31,495,000
$31,495,000 $36,050,000
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, 2021, it has been determined
there are no uncertain tax positions likely to impact the Company.
The Company 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, where applicable.
As of June 30, 2021, tax years beginning in fiscal years 2016 and 2017 remain open to examination by the major tax jurisdictions and are subject to
the statute of limitations.
The Company’s income tax expense for the fiscal year ended June 30, 2021 includes $3,382,000 of Santa Fe’s tax expense up to its liquidation on
February 19, 2021.
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, 2021 and 2020. 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 ended
June 30, 2021
Revenues
Segment operating expenses
Segment income (loss) from
operations
Interest expense - mortgage
Gain on disposal of assets
Gain on debt forgiveness
Gain on sale of real estate
Depreciation and amortization
expense
Gain from investments
Income tax expense
Net income (loss)
Total assets
Hotel
Operations
$
14,668,000
(17,911,000)
(3,243,000)
(6,710,000)
12,000
4,719,000
(2,228,000)
-
-
(7,450,000)
46,505,000
$
$
Real Estate
Operations
Investment
Transactions
13,990,000
(7,869,000)
6,121,000
(2,204,000)
-
-
12,043,000
(2,411,000)
-
-
13,549,000
47,709,000
53
-
-
-
-
-
-
-
-
10,705,000
10,705,000
35,833,000
Other
-
(3,109,000)
(3,109,000)
-
-
453,000
-
-
-
(3,603,000)
(6,259,000)
10,299,000
Total
28,658,000
(28,889,000)
(231,000)
(8,914,000)
12,000
5,172,000
12,043,000
(4,639,000)
10,705,000
(3,603,000)
10,545,000
140,346,000
As of and for the year ended
June 30, 2020
Revenues
Segment operating expenses
Segment income (loss) from
operations
Interest expense - mortgage
Loss on debt extinguishment
Depreciation and amortization
expense
Loss from investments
Income tax benefit
Net income (loss)
Total assets
$
$
$
Hotel
Operations
Real Estate
Operations
Investment
Transactions
42,839,000
(37,333,000)
$
15,178,000
(8,051,000)
$
5,506,000
(6,885,000)
-
(2,389,000)
-
-
(3,768,000)
56,004,000
$
$
7,127,000
(2,436,000)
(687,000)
(2,483,000)
-
-
1,521,000
50,338,000
Other
$
-
(2,870,000)
Total
$ 58,017,000
(48,254,000)
(2,870,000)
-
-
9,763,000
(9,321,000)
(687,000)
-
-
-
-
-
-
(2,766,000)
-
(2,766,000)
6,456,000
-
-
2,794,000
(76,000)
$
$ 17,419,000
(4,872,000)
(2,766,000)
2,794,000
(5,089,000)
$
$ 130,217,000
$
$
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.
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, 2021, there were no RSUs outstanding.
54
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 had an original expiration date of
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 had an
original expiration date 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,
2021, all the market vesting requirements have been met.
On December 28, 2019, the Compensation Committee of the Board of Directors recommended to the Board amendments to the 2010 Incentive Plan
which would amend Section 1.3 to extend the term from ten years to sixteen years, and Section 6.4 to change “tenth (10th) anniversary date” to
“twentieth (20th) anniversary date”. This would increase the term of the 2010 Incentive Plan to twenty years (expiring in February 2030 instead of
February 2020) and also permit the existence of options with a term longer than ten years. The purpose of the amendment to the term is to extend its
existence as our only incentive plan. The purpose of amendment of the allowable term of options is so that the Board may extend the term of the
100,000 options granted to John Winfield on March 16, 2010 from ten years to sixteen years so that these options will terminate on March 16, 2026
instead of on March 16, 2020, in recognition of Mr. Winfield’s contributions to and leadership of our Company. The recommended amendments
were approved by shareholders on February 25, 2020. During the fiscal year ended June 30, 2021, the Company recorded additional stock option
compensation expense in the amount of $116,000 as a result of the aforementioned amendments.
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, 2021, 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.
55
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 Capital Market 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, 2021 and 2020, the Company recorded stock option compensation expense of $14,000 and $142,000, respectively,
related to stock options previously issued and amending the 2010 Incentive Plan. As of June 30, 2021, there was an estimated total of $360
unamortized compensation related to stock options which is expected to be recognized over the weighted average of 0.67 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.
The following table summarizes the stock options activity from July 1, 2019 through June 30, 2021:
Number of
Shares
Weighted Average
Exercise Price
Weighted Average
Remaining Life
Aggregate
Intrinsic Value
Outstanding at
Granted
Exercised
Forfeited
Exchanged
Outstanding at
Exercisable at
Vested and expected to
vest at
Outstanding at
Granted
Exercised
Forfeited
Exchanged
Outstanding at
Exercisable at
Vested and expected to
vest at
July 1, 2019
June 30, 2020
June 30, 2020
June 30, 2020
July 1, 2020
June 30, 2021
June 30, 2021
June 30, 2021
341,195
-
-
-
341,195
323,195
341,195
341,195
-
-
-
-
341,195
337,595
341,195
$
$
$
$
$
$
$
$
16.95
-
-
-
16.95
16.38
16.95
16.95
-
-
-
-
16.95
16.84
16.95
3.07 years
-
-
-
-
3.83 years
3.67 years
3.83 years
3.83 years
-
-
-
-
2.83 years
2.80 years
2.83 years
$
$
$
$
$
$
$
$
4,680,000
-
-
-
-
3,271,000
3,271,000
3,271,000
3,271,000
-
-
-
-
8,890,000
8,833,000
8,890,000
NOTE 17 – RELATED PARTY TRANSACTIONS
As discussed in Note 10 – Related Party and Other Financing Transactions, 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 July 31,
2022. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which increased Justice’s borrowing from
InterGroup as needed up to $10,000,000. During the fiscal year ending June 30, 2021, InterGroup advanced $3,650,000 to Justice per the
aforementioned loan modification agreement, bringing the total amount due InterGroup to $6,650,000 at June 30, 2021 and $3,000,000 at June 30,
2020. The loan balances are eliminated n the consolidated financial statements. The Partnership is also allowed to seek additional loans and sell
partnership interests. On August 28, 2020, the Board of InterGroup passed resolutions to provide funding to Portsmouth if necessary.
56
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
were paid off as of June 30, 2020.
On February 5, 2020, the Company entered into a Contribution Agreement (the “Contribution Agreement”) with Santa Fe pursuant to which the
Company received 97,500 shares of common stock, par value $0.10 per share, of Santa Fe, in exchange for its contribution to Santa Fe of 4,460
shares of common stock (the “Common Stock”) of Intergroup Woodland Village, Inc., an Ohio corporation (“Transaction”). As a result of the
contribution, Woodland Village became a wholly owned subsidiary of Santa Fe. Before the issuance of the stock referenced in the preceding
sentence, the Company had the power to vote 86.3% of the voting shares of Santa Fe, which includes the power to vote 3.7% interest in the common
stock in Santa Fe owned by the Company’s Chairman and CEO, John V. Winfield, pursuant to a voting trust agreement entered into on June 30,
1998. Subsequent to this issuance, the Company had the power to vote 87.4% of the issued and outstanding common stock of Santa Fe, which
included the power to vote an approximately 3.7% interest in the common stock in Santa Fe under the aforementioned voting trust agreement. Mr.
Winfield, Chairman of the Board of both the Company and Santa Fe, is a control person of both entities.
On February 5, 2020, after review by independent directors of the Company, and by the unanimous vote of all directors of the Company (with Mr.
Winfield abstaining), the Board approved the entry into the Contribution Agreement and the consummation of the Transaction. The Company’s
Board approved the Transaction after the receipt of a fairness opinion from a third-party independent firm. The Board was first made aware of the
Transaction in early January 2020, received information to review on or about January 17, 2020 and was given multiple opportunities to discuss the
materials with management before the February 5, 2020 Board meeting. The Contribution Agreement also contains a provision for a potential
subsequent earn out to InterGroup pursuant to terms set forth therein.
On November 23, 2020, Santa Fe sold its 2-unit apartment complex in West Los Angeles, California to InterGroup for $1,530,000 in exchange for a
reduction of $1,196,000 of its obligation to InterGroup. Santa Fe acquired the property on February 1, 2002 for $785,000. Outstanding mortgage
note payable on the property for $334,000 was simultaneously transferred to InterGroup. Santa Fe realized a gain on the sale of approximately
$901,000, which was eliminated in consolidation at InterGroup. The sales price of the property represents its current value as of the sale date as
appraised by a licensed independent third-party appraiser. The fairness of the sale terms of the transaction were reviewed and approved by the
independent directors of Santa Fe and InterGroup, and unanimously approved by the entire Board of Directors of both companies.
Effective February 19, 2021, the Company’s 83.7% owned subsidiary, Santa Fe Financial Corporation (“Santa Fe”), a public company (OTCBB:
SFEF), was liquidated and all of its assets including its 68.8% interest in Portsmouth Square Inc. (“Portsmouth”), a public company (OTCBB:
PRSI) was distributed to its shareholders in exchange for their Santa Fe common stock. InterGroup received cash of $5,013,000 and 422,998 shares
of Portsmouth common stock in March 2021 as a result of the liquidation of Santa Fe. As a former 3.7% shareholder of Santa Fe, the Company’s
President, Chairman of the Board and Chief Executive Officer, John Winfield, received cash of $221,000 and 18,641 shares of Portsmouth common
stock in March 2021 as a result of the liquidation of Santa Fe. On April 12, 2021, Santa Fe received a filed stamped copy of its Articles of
Dissolution from the State of Nevada, and Santa Fe is effectively fully dissolved and no longer in legal existence. The liquidation and distribution of
Santa Fe did not have an impact on the condensed consolidated statement of operations but rather on the condensed consolidated balance sheets as a
re-class between non-controlling interests and accumulated deficit. As of June 30, 2021, InterGroup owns approximately 74.9% of the outstanding
common shares of Portsmouth. As of June 30, 2021, the Company’s President, Chairman of the Board and Chief Executive Officer, John Winfield,
owns approximately 2.5% of the outstanding common shares of Portsmouth. Mr. Winfield also serves as the Chairman of the Board and Chief
Executive Officer of Portsmouth.
In August 2004, the Company purchased an approximately two-acre parcel of unimproved land in Kihei, Maui, Hawaii for $1,467,000. In March
2021, in an effort to make both companies more efficient, InterGroup purchased back the 50% interest of InterGroup Uluniu Inc. from Portsmouth
for $980,000, which represents Portsmouth’s carrying cost of the investment. No gains or losses were realized as a result of the transaction since it
was a related-party transaction. As a related-party transaction, the fairness of the financial terms of the transactions were reviewed and approved by
the independent director of each company
57
As Chairman of the Executive Strategic Real Estate and 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 Board of Portsmouth and oversees the investment activity of
Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk
factors, the Chief Executive Officer and Portsmouth 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 Portsmouth, 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
Cash Management Agreement
As part of the Hotel refinancing effective December 18, 2013, Operating entered into a Cash Management Agreement with Bank of America, N.A.
(“Lender”) and Wells Fargo Bank, N.A. (“Cash Management Bank”) whereby all cash received by Operating is to be deposited into a business
checking account controlled by the Cash Management Bank up to the loan maturity date. Additionally, other terms of the Cash Management
Agreement provide that effective February 2019 or upon a Property Improvement Plan (“PIP”) requirement by Hilton (“Franchisor”) deemed the
“Cash Sweep Period” during which all excess cash generated by Operating beyond the monthly budgeted expenses and debt services including
principal and interest, insurance reserves, real estate taxes reserve, FF&E reserves, for the senior and mezzanine loans, will be held by the Cash
Management Bank for future hotel improvements as required by the date or a PIP. Currently, any and all funds are being controlled by the Cash
Management Bank according to the Cash Management Agreement.
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.
Since the opening of the Hotel as a full brand Hilton 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 2021 and 2020
totaled approximately $703,000 million and $3,000,000 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, 2021, approximately 92% of those employees were represented
by one of three labor unions, and their terms of employment were determined under various collective bargaining agreements (“CBAs”) to which
the Partnership was a party. CBA for Local 2 (Hotel and Restaurant Employees) will expire on August 13, 2022. CBA for Local 856 (International
Brotherhood of Teamsters) will expire on December 31, 2022. CBA for Local 39 (Stationary Engineers) will expire on July 31, 2024.
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
The Company may be subject to legal proceedings, claims, and litigation arising in the ordinary course of business. The Company will defend 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.
58
NOTE 19 – SUBSEQUENT EVENTS
Effective July 15, 2021, Portsmouth completed the purchase of 100% of the limited partnership interest of Justice and is in the process of dissolving
the Partnership at which time Portsmouth will take the place as the sole Member of Justice Mezzanine Company, LLC.
In July 2021, the Company refinanced three of its California properties’ existing mortgages totaling $1,065,000 with three new mortgages totaling
$3,450,000. The Company generated net proceeds totaling $2,325,000 as a result of the refinancing. Interest rate on the three new mortgages is
fixed at 3.50% for five years and the mortgages mature in July 2051. In July 2021, the Company obtained a mortgage note payable on one of its
California properties for $830,000. The Company received net proceeds of $836,000. Interest rate on the mortgage is fixed at 3.50% for five years
and the mortgage note payable matures in July 2051.
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.
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 includes 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 under that framework, management concluded that the Company’s internal control
over financial reporting was effective as of June 30, 2021.
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.
59
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company’s internal control over financial reporting during the fiscal year covered by this Annual Report on
Form 10-K that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information.
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The following table sets forth certain information with respect to the Directors and Executive Officers of the Company as of June 30, 2021:
Name
Class A Directors:
John V. Winfield (4)
Jerold R. Babin (3)
Class B Directors:
Yvonne L. Murphy (1) (2) (4)
William J. Nance (2) (3) (4)
Class C Director:
John C. Love (1) (2) (3)
Executive Officers:
David C. Gonzalez
Position with the Company
Age
Term to Expire
Chairman of the Board; President
and Chief Executive Officer
Director
Director
Director
Director
74
Fiscal 2021 Annual Meeting
88
Fiscal 2021 Annual Meeting
64
77
Fiscal 2022 Annual Meeting
Fiscal 2022 Annual Meeting
81
Fiscal 2023 Annual Meeting
Vice President Real Estate, Advisor of Executive
Strategic Real Estate and Securities Investment
Committee and President of Portsmouth
54
N/A
Danfeng Xu
Treasurer, Controller (Principal Financial Officer),
and Secretary
34
N/A
(1) Member of the Nominating Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
(4) Member of the Executive Strategic Real Estate and Securities Investment Committee
60
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 Chairman and Chief Executive
Officer of the Company’s subsidiary Portsmouth, a public company. Effective June 2016, Mr. Winfield became the Managing Director of Justice.
On May 24, 2021, Mr. Winfield resigned effective immediately as President of Portsmouth. 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.
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 resigned from the Board of Portsmouth in December 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 Portsmouth
and served on the Board of Santa Fe from March 1998 to December 2019. 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. Since 1989, Mr. Gonzalez has
served in numerous capacities with the Company, including Controller and Director of Real Estate. Mr. Gonzalez was appointed advisor of the
Executive Strategic Real Estate and Securities Investment Committee of the Company and Portsmouth in February 2020. The Board of Directors of
Portsmouth Square, Inc. elected Mr. Gonzalez as President of Portsmouth Square Inc. effective May 24, 2021.
Danfeng Xu – Ms. Xu was appointed as Treasurer and Controller of the Company on October 16, 2017. Ms. Xu also serves as Treasurer and
Controller of Portsmouth and Santa Fe, having been appointed to those positions on October 16, 2017. On June 1, 2018, she was appointed
Secretary of the Company, Portsmouth and Santa Fe. Prior to joining the Company, she had served as Controller and worked in other positions at
the Hotel from July 2010 to February 2017. She obtained her Bachelor of Science degree in Business Administration, Accounting and Finance from
The Ohio State University and her Master of Professional Accounting, with a concentration in Audit and Assurance from University of Washington.
Family Relationships: There are no family relationships among directors, executive officers, or persons nominated or chosen by the Company to
become directors or executive officers.
Involvement in Certain Legal Proceedings: No director or executive officer, or person nominated or chosen to become a director or executive
officer, was involved in any legal proceeding requiring disclosure.
61
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s officers and directors, and each beneficial owner of more than ten
percent of the Common Stock of the Company, to file reports of ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of Forms 3 and 4 and amendments thereto furnished to the Company during its most recent fiscal year and
Forms 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, or written representations from certain
reporting persons that no Forms 5 were required for those persons, the Company believes that during fiscal 2021 all filing requirements applicable
to its officers, directors, and greater than ten-percent beneficial owners were complied with.
Code of Ethics.
The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions, including its Board of Directors. A copy of the Code of Ethics is posted on the Company’s
website at www.intgla.com. The Company will provide to any person without charge, upon request, a copy of its Code of Ethics by sending such
request to: The InterGroup Corporation, Attn: Treasurer, 1516 S. Bundy Drive, Suite 200, Los Angeles, California 90025. The Company will
promptly disclose any amendments or waivers to its Code of Ethics on Form 8-K and will post such information on its website.
BOARD AND COMMITTEE INFORMATION
InterGroup’s common stock is listed on the NASDAQ Capital Market tier of the NASDAQ Stock Market, LLC (“NASDAQ”). InterGroup is a
Smaller Reporting Company under the rules and regulations of the Securities and Exchange Commission (“SEC”). With the exception of the
Company’s President and CEO, John V. Winfield, all of InterGroup’s Board of Directors consists of “independent” directors as independence is
defined by the applicable rules of the SEC and NASDAQ.
Nominating Committee
The Company’s Nominating Committee is comprised of two “independent” directors as independence is defined by the applicable rules of the SEC
and NASDAQ. Directors Love and Murphy serve as the current members of the Nominating Committee. The Company has not established a charter
for the Nominating Committee, and the Committee has no policy with regard to consideration of any director candidates recommended by security
holders. As a smaller reporting company whose directors own in excess of sixty percent of the voting shares of the Company, InterGroup has not
deemed it appropriate to institute such a policy. There have not been any material changes to the procedures by which security holders may
recommend nominees to the Company’s board of directors.
Audit Committee and Audit Committee Financial Expert
The Company is a Smaller Reporting Company under SEC rules and regulations. The Company’s Audit Committee is currently comprised of three
members: Directors Nance (Chairperson), Babin and Love, each of whom meets the independence requirements of the SEC and NASDAQ as
modified or supplemented from time to time. The Company’s Board of Directors has determined that Directors Nance and Love also meet the Audit
Committee Financial Expert requirement as defined by the SEC and NASDAQ based on their qualifications and business experience discussed
above in this Item 10.
Compensation Committee
The Company’s Compensation Committee (the “Compensation Committee”) is comprised of three “independent” members of the Board of
Directors as independence is defined by the applicable rules of the SEC and NASDAQ. Mr. Nance serves as Chairman of the Compensation
Committee. The Company has not established a charter for the Compensation Committee. The Compensation Committee reviews and recommends
to the Board of Directors the compensation for the Company’s Chief Executive Officer and other executive officers, including equity or
performance-based compensation and plans. The Compensation Committee seeks to design and set compensation to attract and retain highly
qualified executive officers and to align their interests with those of long-term owners of the Company. The Compensation Committee may also
make recommendations to the Board of Directors as to the amount and form of director compensation. The Compensation Committee has not
engaged any compensation consultants in determining the amount or form of executive of director compensation but does review and monitor
published compensation surveys and studies. The Compensation Committee may delegate to the Company’s Chief Executive Officer the authority
to determine the compensation of certain executive officers. The Compensation Committee also oversees the Company’s 2010 Incentive Plan.
62
Item 11. Executive Compensation
The following table provides certain summary information concerning compensation awarded to, earned by, or paid to the Company’s principal
executive officer and other named executive officers of the Company whose total compensation exceeded $100,000 for all services rendered to the
Company and its subsidiaries for each of the Company’s last two completed fiscal years ended June 30, 2021 and 2020. There was no non-equity
incentive plan compensation or nonqualified deferred compensation earnings. There are currently no employment contracts with the executive
officers.
SUMMARY COMPENSATION TABLE
Name and Position
Fiscal Year
Salary
Bonus
John V. Winfield
Chairman, President and
Chief Executive Officer
David C. Gonzalez
Vice President Real Estate
Danfeng Xu
Treasurer and Controller
(Principal Financial Officer)
2021
2020
2021
2020
2021
2020
$
$
$
$
$
$
843,000(1)
844,000(1)
324,000
324,000
170,000
154,000
$
$
$
$
$
$
270,000
-
360,000
-
9,000
9,000
$
$
$
$
$
$
Other
Compensation
56,000(2)
56,000(2)
-
-
-
-
Total
1,169,000
900,000
684,000
324,000
179,000(3)
163,000(3)
$
$
$
$
$
$
(1) Mr. Winfield served as President and Chairman of the Board of the Company’s subsidiary, Santa Fe. Mr. Winfield also serves as Chairman of the
Board of Portsmouth. Mr. Winfield received a salary from Santa Fe and Portsmouth in the aggregate amount of $438,000 and $440,000 from those
entities for the fiscal years 2021 and 2020, respectively. The amounts include director’s fees totaling $11,000 and $12,000 for the fiscal years 2021
and 2020, respectively.
(2) Compensation for a portion of the salary of an assistant to Mr. Winfield.
(3) Compensation is allocated approximately 50% to the Company and 50% to Santa Fe and Portsmouth. However, upon the liquidation of Santa Fe
in March 2021, Mr. Winfield’s salary is allocated approximately 50% to the Company and 50% to Portsmouth.
Outstanding Equity Awards at Fiscal Year Ended June 30, 2021
The following table sets forth information concerning option awards and stock awards for each named executive officer that were outstanding as of
the end of the Company’s last completed fiscal year ended June 30, 2021. There were no other equity incentive plan awards that were outstanding.
Number of
securities
underlying
unexercised
options (#)
exercisable
Option Awards
Number of
securities
underlying
unexercised
options (#)
Un-
exercisable
Option
exercise
Option
expiration
price $
date
100,000(1)
90,000(2)
133,195(3)
14,400(4)
-
-
-
3,600
$
$
$
$
10.30
19.77
18.65
27.30
3/16/26
2/28/22
12/26/23
3/2/27
Name
John V. Winfield
John V. Winfield
John V. Winfield
David C. Gonzalez
(1) Stock options issued to Mr. Winfield pursuant to the Company’s 2010 Incentive Plan are subject to both time and performance-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 20,000 options vesting upon each one-year anniversary of the date of grant, March
16, 2010. Pursuant to the performance 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, 2021, the performance vesting
requirements of the options were satisfied.
63
(2) Stock options issued to Mr. Winfield pursuant to the Company’s 2010 Incentive Plan are subject to both time and performance-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, February
28, 2012. Pursuant to the performance 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, 2021, all of these options have met
the market vesting requirements.
(3) 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.
(4) Mr. Gonzalez’s stock options vest over a period of five years, with 3,600 options vesting upon each one-year anniversary of the date of grant,
March 2, 2017.
Internal Revenue Code Limitations
Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), provides that, in the case of a publicly held corporation, the
corporation is not generally allowed to deduct remuneration paid to its chief executive officer and certain other highly compensated officers to the
extent that such remuneration exceeds $1,000,000 for the taxable year. Certain remuneration, however, is not subject to disallowance, including
compensation paid on a commission basis and, if certain requirements prescribed by the Code are satisfied, other performance-based compensation.
Since InterGroup, Santa Fe and Portsmouth are all public companies, the $1,000,000 limitation applies separately to the compensation paid by each
entity. Stock option expenses are also amortized over a several years. For fiscal years 2020 and 2020, no compensation paid by the Company to its
CEO or other executive officers was subject the deduction disallowance prescribed by Section 162(m) of the Code.
EQUITY COMPENSATION PLANS
The Company currently has one equity compensation plan, which has been approved by the Company’s stockholders. However, any outstanding
stock options issued under the Company’s prior equity compensation plans remain effective in accordance with their terms.
The purpose of the Company’s equity compensation plans is to provide a means whereby officers, directors and key employees of the Company
develop a sense of proprietorship and personal involvement in the development and financial success of the Company, and to encourage them to
devote their best efforts to the business of the Company, thereby advancing the interests of the Company and its shareholders. A further purpose of
these plans is to provide a means through which the Company may attract able individuals to become employees or serve as directors of the
Company and to provide a means for such individuals to acquire and maintain stock ownership in the Company, thereby strengthening their concern
for the welfare of the Company.
The 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 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
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 had an original expiration date of February 23, 2020, if not
terminated sooner by the Board of Directors upon recommendation of the Compensation Committee. Any awards issued under the Plan will expire
under the terms of the grant agreement.
64
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 earlier terminated 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, 2021, all the market vesting requirements
have been met.
On December 28, 2019, the Compensation Committee of the Board of Directors recommended to the Board amendments to the 2010 Incentive Plan
which would amend Section 1.3 to extend the term from ten years to sixteen years, and Section 6.4 to change “tenth (10th) anniversary date” to
“twentieth (20th) anniversary date”. This would increase the term of the 2010 Incentive Plan to twenty years (expiring in February 2030 instead of
February 2020) and also permit the existence of options with a term longer than ten years. The purpose of the amendment to the term is to extend its
existence as our only incentive plan. The purpose of amendment of the allowable term of options is so that the Board may extend the term of the
100,000 options granted to John Winfield on March 16, 2010 from ten years to sixteen years so that these options will terminate on March 16, 2026
instead of on March 16, 2020, in recognition of Mr. Winfield’s contributions to and leadership of our Company. The recommended amendments
were approved by shareholders on February 25, 2020. During the fiscal year ended June 30, 2021, the Company recorded additional stock option
compensation expense in the amount of $116,000 as a result of the aforementioned amendments.
On February 28, 2012, the Compensation Committee authorized the grant of 90,000 stock options to the Company’s Chairman, President and Chief
Executive, John V. Winfield to purchase up to 90,000 shares of the Company’s common stock pursuant to the 2010 Incentive Plan. The exercise
price of the options is $19.77, which equals 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 February 28, 2012 the date of grant. The options
expire ten years from the date of grant, unless earlier terminated in accordance with the terms of the 2010 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 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, 2021, 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.
65
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 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.
Compensation of Directors
Effective as of fiscal year ended June 30, 2011, annual cash compensation payable to non-employee directors has been $12,000. With the exception
of members of the Audit Committee, non-employee directors do not receive any additional fees for attending Board or Committee meetings but are
entitled to reimbursement of their reasonable expenses to attend such meetings. Members of the Audit Committee are paid a fee of $1,000 per
quarter, with the Chair of that Committee to receive $1,500 per quarter. As an executive officer, the Company’s Chairman has elected to forego his
annual board fees.
The following table sets forth the compensation paid to directors during the fiscal year ended June 30, 2021:
Name
John C. Love
William J. Nance
Jerold R. Babin
Yvonne L. Murphy
John V. Winfield (4)
DIRECTOR COMPENSATION
Fees Earned or
Paid in Cash*
Stock Awards
All Other
Compensation
Total
$
$
$
$
46,000(1)
54,000(2)
44,000(3)
34,000
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
46,000
54,000
44,000
34,000
*Amounts shown include board retainer fees, committee fees and meeting fees.
(1) Mr. Love also serves as director of the Company’s subsidiary, Portsmouth and served on the Board of Santa Fe from March 1998 to December
2019. Amounts shown include $8,000 in regular board and audit committee fees paid by Portsmouth.
(2) Mr. Nance also serves as a director of the Company’s subsidiaries, Santa Fe and Portsmouth. Amounts shown include $6,000 in regular board and
audit committee fees paid by Santa Fe up to its liquidation in February 2021 and and $8,000 in regular board and audit committee fees paid by
Portsmouth.
(3) Mr. Babin also serves as a director of the Company’s subsidiary, Portsmouth. Amounts shown include $6,000 in regular board fees paid by
Portsmouth.
(4) As Chief Executive Officer, the Company’s Chairman, John V. Winfield, was not paid any board, committee or meetings fees. Mr. Winfield did
receive a total of $11,000 in regular board fees from the Company’s subsidiaries, which is reported on the Summary Compensation Table.
Santa Fe Financial Corporation was liquidated in February 2021 and all board of directors fees ended with the liquidation.
Change in Control or Other Arrangements
Except for the foregoing, there are no other arrangements for compensation of Directors and there are no employment contracts between the
Company and its Directors or any change in control arrangements.
66
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners.
The following table sets forth, as of September 17, 2021, certain information with respect to the beneficial ownership of Common Stock of the
Company owned by those persons or groups known by the Company to own more than five percent of the outstanding shares of Common Stock.
Name and Address of Beneficial Owner
Amount and Nature of
Beneficial Ownership (1)
Percent
of Class (2)
John V. Winfield
1516 S. Bundy Drive, Suite 200, Los Angeles, California 90025
Los Angeles, CA 90025
1,721,468(3)
67.2%
(1) Unless otherwise indicated and subject to applicable community property laws, each person has sole voting and investment power with respect to
the shares beneficially owned.
(2) Percentages are calculated on the basis of 2,222,919 shares of Common Stock outstanding at September 17, 2021, plus any securities that person
has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.
(3) Includes 323,195 shares that Mr. Winfield has a right to acquire pursuant to vested stock options.
Security Ownership of Management.
The following table sets forth, as of September 17, 2021, certain information with respect to the beneficial ownership of Common Stock of the
Company owned by (i) each Director and each of the named Executive Officers, and (ii) all Directors and Executive Officers as a group.
Name of Beneficial Owner
John V. Winfield
William J. Nance
John C. Love
David C. Gonzalez
Yvonne L. Murphy
Amount and Nature of
Beneficial Ownership (1)
Percent
of Class (2)
1,721,468(3)
67.2%
47,946
19,161
41,169(4)
2,282
1.9%
0.7%
1.6%
*
71.4%
All Directors and Executive Officers as a Group (5 persons)
1,832,026
* Ownership does not exceed 1%.
(1) Unless otherwise indicated and subject to applicable community property laws, each person has sole voting and investment power with respect to
the shares beneficially owned.
(2) Percentages are calculated on the basis of 2,222,919 shares of Common Stock outstanding at September 17, 2021, plus any securities that person
has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.
(3) Includes 323,195 shares that Mr. Winfield has a right to acquire pursuant to vested stock options.
(4) Includes 14,400 shares that Mr. Gonzalez has a right to acquire pursuant to vested stock options.
Changes in Control.
There are no arrangements that may result in a change in control of the Company.
67
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following table sets forth information as of June 30, 2021 with respect to compensation plans (including individual compensation
arrangements) under which equity securities of the Company are authorized for issuance, aggregated as follows:
Plan category
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Total
Number of securities
to be issued upon
exercise of outstanding
options, warrants and
rights
(a)
Weighted-average
exercise price of
outstanding options
warrants and
rights
(b)
Remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(c)
341,195
$
None
341,195
$
16.95
N/A
16.95
None
None
None
(a) There were 341,195 stock options outstanding as of June 30, 2021.
(b) Reflects the weighted average exercise price of all outstanding options.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
On June 30, 1998, the Company’s Chairman and President entered into a voting trust agreement with the Company giving the Company the power
to vote his 4.0% interest in the outstanding shares of the Santa Fe common stock. The voting trust agreement was terminated in March 2021 upon
the liquidation of Santa Fe liquidation. Mr. Winfield received 2.5% of Portsmouth stock in exchange for his 4.0% interest in Santa Fe.
In connection with the redemption of limited partnership interests of Justice Investors, Limited Partnership, 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 Investors. This agreement was superseded by a letter dated
December 11, 2013 from Justice Investors, Limited Partnership, in which Justice Investors Limited Partnership assumed the payment obligations of
Justice Operating Company, LLC. The first payment under this agreement was made concurrently with the closing of the loan agreements, with the
remaining payments due upon Justice Investor’s having adequate available cash as described in the letter. As of June 30, 2018, $200,000 of these
fees remained payable and were paid off as of June 30, 2020.
Two general partners provided services to the Partnership through December 17, 2013. On December 18, 2013, the Partnership redeemed Evon’s
partnership interest and Portsmouth Square became the sole general partner. The Partnership’s obligation to pay Evon, Justice’s former general
partner, terminated as of December 18, 2013. Under the terms of the Justice Partnership Agreement, its current general partner, Portsmouth,
receives annual compensation of one percent of Hotel Revenue. During each of the years ended June 30, 2021 and 2020, total compensation paid to
Portsmouth under the new and previous agreements was $146,000 and $428,000, respectively. Amounts paid to Portsmouth are eliminated in
consolidation.
As Chairman of the Executive Strategic Real Estate and 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 oversees the investment activity of
Portsmouth. Effective June 2016, Mr. Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk
factors, the Chief Executive Officer and Portsmouth 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 Portsmouth, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the
Company.
68
Director Independence
InterGroup’s common stock is listed on the NASDAQ Capital Market tier of the NASDAQ Stock Market LLC (“NASDAQ”). InterGroup is a
Smaller Reporting Company under the rules and regulations of the SEC. The Board of Directors of InterGroup currently consists of five members.
With the exception of the Company’s President and CEO, John V. Winfield, all of InterGroup’s Board of Directors consists of “independent”
directors as independence is defined by the applicable rules of the SEC and NASDAQ. There are no members of the Company’s compensation,
nominating or audit committees that do not meet those independence standards.
Item 14. Principal Accounting Fees and Services
On November 16, 2017, the Audit Committee appointed Moss Adams LLP (“Moss Adams”) as the Company’s independent registered public
accounting firm. The aggregate fees billed for each of the last two fiscal years ended June 30, 2021 and 2020 for professional services rendered by
Moss Adams are set forth in the tables below. These fees were billed for audit of the Company’s annual financial statements, review of financial
statements included in the Company’s Form 10-Q reports, and services provided in connection with statutory and regulatory filings and
engagements for those fiscal years.
Audit fees
Tax fees
TOTAL:
Audit Committee Pre-Approval Policies
Fiscal Year
2021
2020
$
$
247,000
60,000
307,000
$
$
265,000
147,000
412,000
The Audit Committee shall pre-approve all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed
for the Company by its independent registered public accounting firm, subject to any de minimis exceptions that may be set for non-audit services
described in Section 10A(i)(1)(B) of the Exchange Act which are approved by the Committee prior to the completion of the audit. The Committee
may form and delegate authority to subcommittees consisting of one or more members when appropriate, including the authority to grant pre-
approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the
full Committee at its next scheduled meeting. All of the services described herein were approved by the Audit Committee pursuant to its pre-
approval policies.
None of the hours expended on the independent registered public accounting firms’ engagement to audit the Company’s financial statements for the
most recent fiscal year were attributed to work performed by persons other than the independent registered public accounting firm’s full-time
permanent employees.
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
PART IV
The following financial statements of the Company are included in Part II, Item 8 of this Report at pages 28 through 56:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - June 30, 2021 and 2020
Consolidated Statements of Operations for Years Ended June 30, 2021 and 2020
Consolidated Statements of Shareholders’ Deficit for Years Ended June 30, 2021 and 2020
Consolidated Statements of Cash Flows for Years Ended June 30, 2021 and 2020
Notes to the Consolidated Financial Statements
69
(a)(2) Financial Statement Schedules
All other schedules for which provision is made in Regulation S-X have been omitted because they are not required or are not applicable or
the required information is shown in the consolidated financial statements or notes to the consolidated financial statements.
(a)(3) Exhibits
Set forth below is an index of applicable exhibits filed with this report according to exhibit table number.
Exhibit Number
Description
3.(i)
3.1
3.2
3.3
3.4
3.(ii)
4.
9.
10.
10.1
10.2
10.3
10.4
Articles of Incorporation:
Certificate of Incorporation, dated September 11, 1985, incorporated by reference to Exhibit 3.1 of the Company’s Registration
Statement on Form S-4, filed on September 6, 1985 (Registration No. 33-00126) and Amendment 1 to that Registration
Statement filed on October 23, 1985.
Restated Certificate of Incorporation, dated March 9, 1998, incorporated by reference to Exhibit 3 of the Company’s Amended
Quarterly Report on Form 10-QSB/A for the period ended March 31, 1998, as filed on May 19, 1998.
Certificate of Amendment to Certificate of Incorporation, dated October 2, 1998, incorporated by reference to Exhibit 3 of the
Company’s Quarterly report on Form 10-QSB for the period ended September 30, 1998, as filed on November 13, 1998.
Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on August 6, 2007,
incorporated by reference to Exhibit 3.4 of the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2007 as
filed on September 28, 2007.
Amended and Restated By-Laws of The InterGroup Corporation, effective as of December 10, 2007, incorporated by reference
to Exhibit 3.1 to the Company’s Current Report on Form 8-K as filed on December 12, 2007.
Instruments defining the rights of security holders including indentures*
Voting Trust Agreement: Voting Trust Agreement dated June 30, 1998 between John V. Winfield and The InterGroup
Corporation is incorporated by reference to the Company’s Annual Report on Form 10-KSB filed with the Commission on
September 28, 1998.
Material Contracts:
1998 Stock Option Plan for Non-Employee Directors approved by the Board of Directors on December 8, 1998 and ratified by
the shareholders on January 27, 1999 (incorporated by reference to the Company’s Proxy Statement on Schedule 14A filed with
the Commission on December 21, 1998).
1998 Stock Option Plan for Selected Key Officers, Employees and Consultants approved by the Board of Directors on
December 8, 1998 and ratified by the shareholders on January 27, 1999 (incorporated by reference to the Company’s Proxy
Statement on Schedule 14A filed with the Commission on December 21, 1998).
The InterGroup Corporation 2007 Stock Compensation Plan for Non-Employee Directors (incorporated by reference to the
Company’s Proxy Statement on Schedule 14A filed with the Commission on January 26, 2007).
Amended and Restated Agreement of Limited Partnership of Justice Investors, effective November 30, 2010 (incorporated by
reference to Exhibit 10.1 to the Company’s Form 10-Q Report for the quarterly period ended December 31, 2010, filed with the
Commission on February 11, 2011).
70
10.5
10.6
10.7
10.8
10.9
10.10
10.13
10.16
14.
21.
31.1
31.2
32.1
32.2
General Partner Compensation Agreement, dated December 1, 2008 (incorporated by reference to Exhibit 10.2 to Company’s
Form 10-Q Report for the quarterly period ended December 31, 2008, filed with the Commission on February 13, 2009).
The InterGroup Corporation 2008 Restricted Stock Unit Plan, adopted by the Board of Directors on December 3, 2008, and
ratified by the shareholders on February 18, 2009 (incorporated by reference to the Company’s Proxy Statement on Schedule
14A, filed with the Commission on January 21, 2009).
Restricted Stock Unit Agreement, dated February 18, 2009, between The InterGroup Corporation and John V. Winfield
(incorporated by reference to Exhibit 10.7 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30,
2009, as filed with the Commission on October 13, 2009).
The InterGroup Corporation 2010 Omnibus Employee Incentive Plan, approved by the shareholders and adopted by the Board
of Directors on February 24, 2010 (incorporated by reference to the Company’s Proxy Statement on Schedule 14A, filed with
the Commission on January 27, 2010).
Employee Stock Option Agreement, dated March 16, 2010, between The InterGroup Corporation and John V. Winfield
(incorporated by reference to Exhibit 10.9 of the Company’s report on Form 10-K for the fiscal year ended June 30, 2010, as
filed with the Commission on September 27, 2010).
Franchise License Agreement, dated December 10, 2004, between Justice Investors and Hilton Hotels (incorporated by
reference to Exhibit 10.10 of the Company’s amended report on Form 10-K/A for the fiscal year ended June 30, 2011, as filed
with the Commission on August 24, 2012).
Employee Stock Option Agreement, dated February 28, 2012, between The InterGroup Corporation and John V. Winfield
(incorporated by reference to Exhibit 10.13 of the Company’s annual report on Form 10-K for the fiscal year ended June 30,
2014, as filed with the Commission on September 20, 2012).
Management Agreement, dated February 1, 2017, between Justice Operating Company, LLC and Interstate Management
Company, LLC. (incorporated by reference to Exhibit 10.5 of the Company’s Form 10-K Report for the fiscal year ended June
30, 2017, as filed with the Commission on October 13, 2017). *
Code of Ethics (filed herewith).
Subsidiaries (filed herewith).
Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a) (filed herewith).
Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a) (filed herewith).
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith).
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith).
* All Exhibits marked by one asterisk are incorporated herein by reference to the Trust’s Registration Statement on Form S-4 as filed with the
Securities and Exchange Commission on September 6, 1985, Amendment No. 1 to Form S-4 as filed with the Securities and Exchange Commission
on October 23, 1985, Exhibit 14 to Form 8 Amendment No. 1 to Form 8 filed with the Securities & Exchange Commission November 1987 and
Form 8 Amendment No. 1 Item 4 filed with the Securities & Exchange Commission October 1988.
71
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: September 17, 2021
Date: September 17, 2021
THE INTERGROUP CORPORATION
(Registrant)
by /s/ John V. Winfield
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
by /s/ Danfeng Xu
Danfeng Xu, Treasurer
and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures
Title and Position
Date
/s/ John V Winfield
John V. Winfield
President, Chief Executive Officer and
Chairman of the Board (Principal Executive Officer)
/s/ Danfeng Xu
Danfeng Xu
/s/ Jerold R. Babin
Jerold R. Babin
/s/ John C. Love
John C. Love
/s/ Yvonne L. Murphy
Yvonne L. Murphy
/s/ William J. Nance
William J. Nance
Treasurer and Controller (Principal Financial
Officer)
Director
Director
Director
Director
72
September 17, 2021
September 17, 2021
September 17, 2021
September 17, 2021
September 17, 2021
September 17, 2021
THE INTERGROUP CORPORATION
CODE OF ETHICS
FOR
SENIOR FINANCIAL OFFICERS
EXHIBIT 14
This Code of Ethics applies to The InterGroup Corporation (“InterGroup” or the “Company”) Senior Financial Officers. “Senior Financial Officers”
shall include the principal executive officer, the principal accounting officer or controller, or persons performing similar functions, including
InterGroup’s President and Chief Executive Officer, Chief Financial Officer, Treasurer, Controller, Vice President, the Company’s Board of
Directors and such other individuals as determined from time to time by the Audit Committee of the Company for purposes of this Code of Ethics.
The Company expects all employees, in carrying out their job responsibilities, to act in accordance with the highest standards of personal and
professional integrity, to comply with all applicable laws, and to abide by InterGroup’s other corporate policies and procedures adopted from time to
time by the Company. This Code of Ethics supplements the foregoing with respect to all Senior Financial Officers.
InterGroup’s Senior Financial Officers will:
1. Engage in and promote honest and ethical conduct, acting with integrity and exercising at all times their best independent judgment;
2. Avoid actual or apparent conflicts of interest between personal and professional relationships and disclose to the Company’s Audit
Committee and counsel any material transaction or relationship that reasonably could be expected to give rise to such a conflict;
3. Produce full, fair, accurate, timely and understandable disclosure in reports and documents that InterGroup files with, or submits to, the
Securities and Exchange Commission and in other public communications made by InterGroup;
4. Comply with applicable governmental laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations of
which InterGroup is a member;
5. Maintain the confidentiality of Company information, except when authorized or otherwise required to make any disclosure, and avoid
the use of any Company information for personal advantage;
6. Promote ethical and honest behavior among employees under your supervision; and
7. Promptly report any possible violation of this Code of Ethics to the Audit Committee and the Company’s counsel.
All Senior Financial Officers are prohibited from directly or indirectly taking any action to coerce, manipulate, mislead or fraudulently influence
InterGroup’s independent public accountant engaged in the performance of an audit or review of the financial statements of the Company for the
purpose of rendering the financial statements of InterGroup misleading.
The Audit Committee of the Board of Directors shall approve any waiver or amendment of this Code of Ethics, and any such waiver or amendment
shall be disclosed promptly as required by law and SEC regulations.
All Senior Financial Officers will be held accountable for their adherence to this Code of Ethics. Failure to observe the terms of this Code of Ethics
may result in disciplinary action, up to and including termination of employment. Violations of this Code of Ethics may also constitute violations of
law, and may result in civil and criminal penalties for the individual, his or her supervisor and/or InterGroup.
If a Senior Financial Officer has any questions regarding the best course of action in a particular situation, he or she should promptly contact the
Chairman of the Audit Committee or the Company’s counsel. An individual may choose to remain anonymous in reporting any possible violation of
this Code of Ethics.
SUBSIDAIRIES OF THE INTERGROUP CORPORATION
EXHIBIT 21
Intergroup Meadowbrook Gardens, Inc. (incorporated on June 23, 1994 in NJ)
Intergroup Pine Lake, Inc. (incorporated on February 9, 1996 in KY)
Intergroup Summit Hills, Inc. (incorporated on August 12, 1993 in TX)
Intergroup Mariposa, Inc. (incorporated on June 23, 1994 in TX)
Intergroup Cross Keys, Inc. (incorporated on April 1, 1994 in MO)
Intergroup Bridgeton, Inc. (incorporated on May 12, 1994 in MO)
Intergroup Whisperwood, Inc. (incorporated on June 20, 1994 in PA)
(1)
(2)
(3)
(4)
(5)
(6) Mutual Real Estate Corp. (incorporated on March 10, 1994 in TX)
(7) Golden West Entertainment, Inc. (incorporated February 15, 1990 in CA)
(8) Golden West Television Productions, Inc. (incorporated September 17, 1991 in CA)
(9) Golden West Television Productions, Inc. (incorporated March 17, 1986 in NY)
(10)
(11)
(12) Healthy Planet Communications, Inc. (incorporated July 3, 1997 in CA)
(13) Portsmouth Square, Inc. (incorporated July 6, 1967 in CA)*
(14) 2301 Bel-Air Equity, Inc. (incorporated May 25, 2000 in CA)
(15) 11371 Ovada Properties, Inc. (incorporated May 25, 2000 in CA)
(16) 11361 Ovada Properties, Inc. (incorporated June 1, 2000 in CA)
(17) 11680 Bellagio Properties, Inc. (incorporated May 25, 2000 in CA)
(18) 11650 Bellagio Properties, Inc. (incorporated August 17, 2000 in CA)
(19) 636 Acanto Properties, Inc. (incorporated February 15, 2001 in CA)
(20) 614 Acanto Properties, LLC. (converted from 614 Acanto Properties Inc. November 16, 2020 in CA)
(21)
Intergroup Uluniu, Inc. (incorporated August 12, 2004 in HI)
(22) 850 Moraga Properties LLC (formed on October 19, 2010 in CA)
(23) 855 Moraga Properties LLC (formed on October 19, 2010 in CA)
(24) 11666 Bellagio Properties LLC (formed on July 8, 2015 in CA)
(25) 801 26th Street Properties LLC (formed on June 23, 2016 in CA)
(26) 11678 Bellagio Properties LLC (formed on July 3, 2003 in CA)
(27) 606 Acanto Properties LLC (formed on April 19, 2021 in CA)
Unless otherwise indicated, all subsidiaries are 100%-owned.
* The InterGroup Corporation owns approximately 74.9% of Portsmouth Square, Inc.
CERTIFICATION
EXHIBIT 31.1
I, John V. Winfield, certify that:
1. I have reviewed this annual report on Form 10-K of The InterGroup Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)
-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):
(a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: September 17, 2021
/s/ John V. Winfield
John V. Winfield
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
I, Danfeng Xu, certify that:
1. I have reviewed this annual report on Form 10-K of The InterGroup Corporation;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)
-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing equivalent functions):
(a) All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: September 17, 2021
/s/ Danfeng Xu
Danfeng Xu
Treasurer and Controller
(Principal Financial Officer)
Certification of Principal Executive Officer Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act Of 2002
EXHIBIT 32.1
In connection with the Annual Report of The InterGroup Corporation (the “Company”) on Form 10-K for the fiscal year ended June 30, 2021, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John V. Winfield, President and Chief Executive Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge, that:
● The Report fully complies with the requirements of Section 13(a) or 5(d) of the Securities Exchange Act of 1934; and
● The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ John V. Winfield
John V. Winfield
President and Chief Executive Officer
(Principal Executive Officer)
Date: September 17, 2021
A signed original of this written statement required by Section 906 has been provided to The InterGroup Corporation and will be retained by The
InterGroup Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Certification of Principal Financial Officer Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of The Sarbanes-Oxley Act Of 2002
EXHIBIT 32.2
In connection with the Annual Report of The InterGroup Corporation (the “Company”) on Form 10-K for the fiscal year ended June 30, 2021, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Danfeng Xu, Treasurer and Controller of the Company,
serving as its Principal Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, to the best of my knowledge, that:
● The Report fully complies with the requirements of Section 13(a) or 5(d) of the Securities Exchange Act of 1934; and
● The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Danfeng Xu
Danfeng Xu
Treasurer and Controller
(Principal Financial Officer)
Date: September 17, 2021
A signed original of this written statement required by Section 906 has been provided to The InterGroup Corporation and will be retained by The
InterGroup Corporation and furnished to the Securities and Exchange Commission or its staff upon request.