10-K
1
form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
For
the fiscal year ended June 30, 2020
or
For
the transition period from _______ to_________
Commission
File Number 1-10324
THE
INTERGROUP CORPORATION
(Exact
name of registrant as specified in its charter)
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
12121
Wilshire Boulevard, Suite 610, Los Angeles, California 90025
(Address
of principal executive offices) (Zip Code)
(310)
889-2500
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock $.01 par value The NASDAQ Stock Market, LLC
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ]
Yes [X] No
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
[ ]
Yes [X] No
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X]
Yes [ ] No
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
[X]
Yes [ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.
[X]
Yes [ ] No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [ ] Accelerated Filer [ ]
Emerging growth company [ ]
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
[ ]
Yes [X] No
The
aggregate market value of the Common Stock, no par value, held by non-affiliates computed by reference to the average bid and
asked price on December 31, 2019 was $29,720,000.
Securities
registered pursuant to section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock INTG NASDAQ CAPITAL MARKET
The
number of shares outstanding of registrant’s Common Stock, as of September 9, 2020 was 2,287,147.
DOCUMENTS
INCORPORATED BY REFERENCE: None
TABLE
OF CONTENTS
Page
PART I
Item 1. Business. 4
Item 1A. Risk Factors. 9
Item 1B. Unresolved Staff Comments. 13
Item 2. Properties. 14
Item 3. Legal Proceedings. 19
Item 4. Mine Safety Disclosures. 19
PART II
Item 6. Selected Financial Data. 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 26
Item 8. Financial Statements and Supplementary Data. 27
Item 9A. Controls and Procedures. 56
Item 9B. Other Information. 56
PART III
Item 10. Directors, Executive Officers and Corporate Governance. 57
Item 11. Executive Compensation. 59
Item 14. Principal Accounting Fees and Services. 66
PART IV
Item 15. Exhibits, Financial Statement Schedules. 66
Signatures 69
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 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.
Currently,
one of the most significant factors is the potential adverse effect of COVID-19, including possible resurgences, on our financial
condition, results of operations, cash flows and performance, and on the global economy and financial markets. The extent to which
COVID-19 impacts 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, 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. Moreover, 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, 2020 and our Annual Report on Form 10-K for the year ended June 30, 2019 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:
● changes in the competitive environment in the hotel industry;
● economic volatility and potential recessive trends;
● risks related to natural disasters;
● litigation; and
● other risk factors discussed below in this Report.
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, 2020 and our Annual Report on Form 10-K for the
year ended June 30, 2019, 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.
PART
I
Item
1. Business.
GENERAL
The
InterGroup Corporation (“InterGroup” or the “Company” and may also be referred to as “we”
“us” or “our” in this report) is a Delaware corporation formed in 1985, as the successor to Mutual Real
Estate Investment Trust (“M-REIT”), a New York real estate investment trust created in 1965. The Company has been
a publicly held company since M-REIT’s first public offering of shares in 1966.
The
Company was organized to buy, develop, operate, rehabilitate and dispose of real property of various types and descriptions, and
to engage in such other business and investment activities as would benefit the Company and its shareholders. The Company was
founded upon, and remains committed to, social responsibility. Such social responsibility was originally defined as providing
decent and affordable housing to people without regard to race. In 1985, after examining the impact of federal, state and local
equal housing laws, the Company determined to broaden its definition of social responsibility. The Company changed its form from
a REIT to a corporation so that it could pursue a variety of investments beyond real estate and broaden its social impact to engage
in any opportunity which would offer the potential to increase shareholder value within the Company’s underlying commitment
to social responsibility.
As
of June 30, 2020, the Company owned approximately 83.7% of the common shares of Santa Fe Financial Corporation (“Santa Fe”),
a public company (OTC Market Inc.’s Pink: SFEF). As of June 30, 2020, InterGroup also has the power to vote an approximately
3.7% interest in the common stock in Santa Fe owned by InterGroup Chairman and CEO, John V. Winfield, pursuant to a voting trust
agreement entered into on June 30, 1998. Mr. Winfield, Chairman of the Board of both Santa Fe and InterGroup, is a control person
of both entities. Santa Fe’s revenue is primarily generated through its 68.8% owned subsidiary, Portsmouth Square, Inc.
(“Portsmouth”), a public company (OTC Market Inc.’s Pink: PRSI). InterGroup also directly owns approximately
13.7% of Portsmouth. Portsmouth’s primary business is conducted through its general and limited partnership interest in
Justice Investors, a California limited partnership (“Justice” or the “Partnership”). Portsmouth has a
93.3% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated
with those of the Company.
Justice,
through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”)
owns 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. 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 sixteen apartment complexes, one commercial real estate property and three single-family
houses. The properties are located throughout the United States but are concentrated in Texas and Southern California. The Company
also has an investment in unimproved real property. As of June 30, 2020, all of the Company’s operating real estate properties
are managed in-house.
The
Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval
or guidelines of the Board of Directors and its 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. For the fiscal years ended June 30, 2020 and 2019, Interstate management fees were
$341,000 and $1,206,000, respectively, 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, 2020, monthly event space fee is $6,200. The
term of the amended lease expires on October 17, 2023, with an automatic extension for another 10-year term if the property continues
to be operated as a hotel. Subject to certain conditions as set forth in the amended lease, the Foundation is entitled to reserve
for a maximum of 75 days per calendar year for use of the event space. In the event that the Partnership needs the event space
during one of the dates previously reserved by the Foundation, the Partnership shall pay the Foundation $4,000 per day for using
the event space. During the fiscal year ended June 30, 2020, the Partnership did not pay the Foundation any such fees. During
the fiscal year ended June 30, 2019, the Partnership paid the Foundation $13,000 for using the event space on previously reserved
dates by the Foundation.
SALES
AND REFINANCINGS OF REAL ESTATE PROPERTIES
In
July 2015, the Company purchased a residential house in Los Angeles, California as a strategic asset for $1,975,000 in cash. In
August 2016, the Company obtained a $1,000,000 mortgage note payable on this property and received net proceeds of $983,000. The
interest on the note was 5.75% with interest only payments for twenty-three months. In September 2018, the Company refinanced
the mortgage note payable with a new mortgage in the amount of $1,000,000. The interest rate on the mortgage is 4.75% and matures
in October 2048.
In
July 2018, the Company obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”).
The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued
and unpaid 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, 2020 and 2019, outstanding balance of the RLOC was $2,985,000.
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.
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.
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, 2020
and 2019, the Company had other investments of $278,000 and $612,000, 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, 2020 and 2019, the Company had obligations for securities sold (equities short) of $294,000
and $1,225,000, respectively.
In
addition, the Company may utilize margin for its marketable securities purchases through the use of standard margin agreements
with national brokerage firms. The margin used by the Company may fluctuate depending on market conditions. The use of leverage
could be viewed as risky and the market values of the portfolio may be subject to large fluctuations. Margin balances due at June
30, 2020 and 2019 were $1,576,000 and $1,629,000, 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 Santa Fe and oversees the investment activity of those companies. Effective June 2016, Mr. Winfield became the Managing Director
of Justice. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and Santa
Fe may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company
with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources
of the Portsmouth and Santa Fe, at risk in substantially the same manner as the Company in connection with investment decisions
made on behalf of the Company.
Further
information with respect to investment in marketable securities and other investments of the Company is set forth in Management
Discussion and Analysis of Financial Condition and Results of Operations section and Notes 5 and 6 of the Notes to Consolidated
Financial Statements.
SEASONALITY
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.
COMPETITION
The
hotel industry is highly competitive. Competition is based on a number of factors, most notably convenience of location, brand
affiliation, price, range of services and guest amenities or accommodations offered and quality of customer service. Competition
is often specific to the individual market in which properties are located. The San Francisco market is a very competitive market
with a high supply of guest rooms and meeting space in the area. During fiscal year 2019, we implemented advanced state of the
art Internet system which included a rewiring of the entire hotel with the best possible Ethernet cabling and fiber. Specifically,
the complete overhaul of the infrastructure of the Internet in the guest rooms and meeting space will enable the Hotel to compete
in this market. This investment is allowing the Hotel to go to market with measurable statistics that will help win the much-coveted
technology company meetings when those are able to be held again. We installed 55” and 65” 4K smart televisions in
all guest rooms and common areas during fiscal year 2019. During fiscal year 2020, we completed the installation of window washing
equipment, giving us the ability to wash windows periodically. We also replaced mattresses in all guestrooms and upgraded all
computers in our business center and Hotel administrative offices during fiscal year 2020.
Our
highest priority is guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition
and is critical to the Hotel’s objective of building sustainable guest loyalty. In order to make a large impact on guest
experience, the Hotel will continue training team members on Hilton brand standards and guest satisfaction, hiring and retaining
talents in key operations, and enhancing the arrival experience.
The
Hotel’s location in the San Francisco Financial District lends itself to greater opportunities over its competitors when
it comes to developing relationships with the Financial District entities and the customers who regularly do business in the downtown
area. The ability to capitalize on the strong midweek demand of the individual business traveler to the Financial District has
been the focus during the timeframe of strong growth in the market; however, that customer along with our group customers has
significantly reduced occupancy beginning in February 2020 as COVID-19 ravaged the hotel industry. The Hotel has remained open
during the pandemic as many of our competitors have closed their doors and remained closed. The key to growing share during this
time will be focusing on service and cleanliness standards to gain customer confidence to return.
The
Hotel is also subject to certain operating risks common to all of the hotel industry, which could adversely impact performance.
These risks include:
● labor strikes, disruptions or lock outs;
● natural disasters; and
ENVIRONMENTAL
MATTERS
In
connection with the ownership of the Hotel, the Company is subject to various federal, state and local laws, ordinances and regulations
relating to environmental protection. Under these laws, a current or previous owner or operator of real estate may be liable for
the costs of removal or remediation of certain hazardous or toxic substances on, under or in such property. Such laws often impose
liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic
substances.
Environmental
consultants retained by the Partnership or its lenders conducted updated Phase I environmental site assessments in fiscal year
ended June 30, 2014 on the Hotel property. These Phase I assessments relied, in part, on Phase I environmental assessments prepared
in connection with the Partnership’s first mortgage loan obtained in December 2013. Phase I assessments are designed to
evaluate the potential for environmental contamination on properties based generally upon site inspections, facility personnel
interviews, historical information and certain publicly available databases; however, Phase I assessments will not necessarily
reveal the existence or extent of all environmental conditions, liabilities or compliance concerns at the properties.
Although
the Phase I assessments and other environmental reports we have reviewed disclose certain conditions on our property and the use
of hazardous substances in operation and maintenance activities that could pose a risk of environmental contamination or liability,
we are not aware of any environmental liability that we believe would have a material adverse effect on our business, financial
position, results of operations or cash flows.
The
Company believes that the Hotel is in compliance, in all material respects, with all federal, state and local environmental ordinances
and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which could have a material
adverse effect on the Company. The Company has not received written notice from any governmental authority of any material noncompliance,
liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present
properties.
Competition
– Rental Properties
The
ownership, operation and leasing of multifamily rental properties are highly competitive. The Company competes with domestic and
foreign financial institutions, 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, 2020, the Company had a total of 30 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, 2020, approximately 87% 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. During the fiscal year ended June 30, 2020, the Partnership
renewed the CBA for Local 2 (Hotel and Restaurant Employees). 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.
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, 2020 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:
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 a number of factors affecting consumers, the outlook for the lodging industry remains uncertain. These factors have resulted
at times in the past and could continue to result in the future in fewer customers visiting, or customers spending less, in San
Francisco, as compared to prior periods. Leisure travel and other leisure activities represent discretionary expenditures, and
participation in such activities tends to decline during economic downturns, during which consumers generally have less disposable
income. As a result, in those times customer demand for the luxury amenities and leisure activities that we offer may decline.
Furthermore, during periods of economic contraction, revenues may decrease while some of our costs remain fixed or even increase,
resulting in decreased earnings.
Weakened
global economic conditions may adversely affect our industry, business and results of operations.
Our
overall performance depends in part on worldwide economic conditions which could adversely affect the tourism industry. According
to current economic news reports, the United States and other key international economies may be subject to a recession, characterized
by falling demand for a variety of goods and services, restricted credit, going concern threats to financial institutions, major
multinational companies and medium and small businesses, poor liquidity, declining asset values, reduced corporate profitability,
and volatility in credit, equity and foreign exchange markets. These conditions affect discretionary and leisure spending and
could adversely affect our customers’ ability or willingness to travel to destinations for leisure and cutback on discretionary
business travel, which could adversely affect our operating results. In addition, in a weakened economy, companies that have competing
properties may reduce room rates and other prices which could also reduce our average revenues and harm our operating results.
We
operate a single property located in San Francisco and rely on the San Francisco market. Changes adversely impacting this market
could have a material effect on our business, financial condition and results of operations.
Our
business has a limited base of operations and substantially all of our revenues are currently generated by the Hotel. Accordingly,
we are subject to greater risks than a more diversified hotel or resort operator and the profitability of our operations is linked
to local economic conditions in San Francisco. The combination of a decline in the local economy of San Francisco, reliance on
a single location and the significant investment associated with it may cause our operating results to fluctuate significantly
and may adversely affect us and materially affect our total profitability.
We
face intense local and increasingly national competition which could impact our operations and adversely affect our business and
results of operations.
We
operate in the highly competitive San Francisco hotel industry. The Hotel competes with other high-quality Northern California
hotels and resorts. Many of these competitors seek to attract customers to their properties by providing, food and beverage outlets,
retail stores and other related amenities, in addition to recently renovated hotel accommodations. To the extent that we seek
to enhance our revenue base by offering our own various amenities, we compete with the service offerings provided by these competitors.
Many
of the competing properties have themes and attractions which draw a significant number of visitors and directly compete with
our operations. Some of these properties are operated by subsidiaries or divisions of large public companies that may have greater
name recognition and financial and marketing resources than we do and market to the same target demographic group as we do. Various
competitors are expanding and renovating their existing facilities. We believe that competition in the San Francisco hotel and
resort industry is based on certain property-specific factors, including overall atmosphere, range of amenities, price, location,
technology infrastructure, entertainment attractions, theme and size. Any market perception that we do not excel with respect
to such property-specific factors could adversely affect our ability to compete effectively. If we are unable to compete effectively,
we could lose market share, which could adversely affect our business and results of operations.
The
San Francisco hotel and resort industry is capital intensive; financing our renovations and future capital improvements could
reduce our cash flow and adversely affect our financial performance.
The
Hotel has an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time
to time, of furniture, fixtures and equipment. We will also need to make capital expenditures to comply with applicable laws and
regulations.
Renovations
and other capital improvements of hotels require significant capital expenditures. In addition, renovations and capital improvements
of hotels usually generate little or no cash flow until the project’s completion. We may not be able to fund such projects
solely from cash provided from our operating activities. Consequently, we will rely upon the availability of debt or equity capital
and reserve funds to fund renovations and capital improvements and our ability to carry them out will be limited if we cannot
obtain satisfactory debt or equity financing, which will depend on, among other things, market conditions. No assurances can be
made that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable
terms.
Renovations
and other capital improvements may give rise to the following additional risks, among others: construction cost overruns and delays;
increased prices of materials due to tariffs; temporary closures of all or a portion of the Hotel to customers; disruption in
service and room availability causing reduced demand, occupancy and rates; and possible environmental issues.
As
a result, renovations and any other future capital improvement projects may increase our expenses, reduce our cash flows and our
revenues. If capital expenditures exceed our expectations, this excess would have an adverse effect on our available cash.
We
have substantial debt, and we may incur additional indebtedness, which may negatively affect our business and financial results.
We
have substantial debt service obligations. Our substantial debt may negatively affect our business and operations in several ways,
including: requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest,
which will reduce funds available for operations and capital expenditures, future business opportunities and other purposes; making
us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic
conditions; limiting our flexibility in planning for, or reacting to, changes in the business and the industry in which we operate;
placing us at a competitive disadvantage compared to our competitors that have less debt; limiting our ability to borrow more
money for operations, capital or to finance acquisitions in the future; and requiring us to dispose of assets, if needed, in order
to make required payments of interest and principal.
Our
business model involves high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a
timely manner in response to a reduction in our revenues.
The
costs associated with owning and operating the Hotel are significant. Some of these costs (such as property taxes and insurance
costs) are fixed, meaning that such costs may not be altered in a timely manner in response to changes in demand for services.
Failure to adjust our expenses may adversely affect our business and results of operations. Our real property taxes may increase
as property tax rates change and as the values of properties are assessed and reassessed by tax authorities. Our real estate taxes
do not depend on our revenues, and generally we could not reduce them other than by disposing of our real estate assets.
Insurance
premiums have increased significantly in recent years, and continued escalation may result in our inability to obtain adequate
insurance at acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of the Hotel.
If we do not obtain adequate insurance, to the extent that any of the events not covered by an insurance policy materialize, our
financial condition may be materially adversely affected.
In
the future, our property may be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance
costs, repairs and maintenance and administrative expenses, which could reduce our cash flow and adversely affect our financial
performance. If our revenues decline and we are unable to reduce our expenses in a timely manner, our business and results of
operations could be adversely affected.
Risk
of declining market values in marketable securities.
The
Company invests from time to time in marketable securities. As a result, the Company is exposed to market volatility in connection
with these investments. The Company’s financial position and financial performance could be adversely affected by worsening
market conditions or sluggish performance of such investments.
Illiquidity
risk in nonmarketable securities
Nonmarketable
securities are, by definition, instruments that are not readily salable in the capital markets, and when sold are usually at a
substantial discount. Thus, the holder is limited to return on investment from any income producing feature of the instrument,
as any sale of such an instrument would be subject to a substantial discount. Thus, a holder may need to hold such instruments
for long period of time and not be able to realize a return of their cash investment should there be a need to liquidate to obtain
cash at any given time.
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