UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
For
the fiscal year ended June 30, 2022
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.)
1516
S. Bundy Drive, Suite 200, Los Angeles, California90025
(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 Trading Symbol Name of exchange on which registered
Common Stock, $0.01 par value INTG 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 ☒ 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 ☒ 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 ☐ Accelerated Filer ☐
Non-Accelerated Filer ☒ Smaller reporting company ☒
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 ☒ No
As
of December 31, 2021, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
approximately $35,111,000 (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 28, 2022 was 2,227,541.
DOCUMENTS
INCORPORATED BY REFERENCE: None
TABLE
OF CONTENTS
Page
PART I
Item 1. Business. 4
Item 1A. Risk Factors. 11
Item 1B. Unresolved Staff Comments. 16
Item 2. Properties. 16
Item 3. Legal Proceedings. 23
Item 4. Mine Safety Disclosures. 23
PART II
Item 6. Selected Financial Data. 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 31
Item 8. Financial Statements and Supplementary Data. 32
Item 9A. Controls and Procedures. 65
Item 9B. Other Information. 66
PART III
Item 10. Directors, Executive Officers and Corporate Governance. 66
Item 11. Executive Compensation. 69
Item 14. Principal Accounting Fees and Services. 76
PART IV
Item 15. Exhibits, Financial Statement Schedules. 77
Signatures 80
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 herein.
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;
● 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, 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.
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 consolidated statement of
operations but rather on the consolidated balance sheets as a reclass between non-controlling interests and accumulated deficit.
As
of June 30, 2022, InterGroup owns approximately 75.0% of the outstanding common shares of Portsmouth. As of June 30, 2022, 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. The Company’s Vice
President Real Estate, David Gonzalez was elected President of Portsmouth in May 2021.
Portsmouth’s
primary business was conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California
limited partnership (“Justice” or the “Partnership”). Portsmouth received management fees as a general partner
of Justice for its services in overseeing and managing the Partnership’s assets. Those fees were eliminated in consolidation. Effective
July 15, 2021, Portsmouth completed the purchase of 100% of the limited partnership interest of Justice through the acquisition of the
remaining 0.7% non-controlling interest.
Effective
December 23, 2021, the partnership was dissolved. The financial statements of Justice were consolidated with those of the Company.
Prior
to its dissolution effective December 23, 2021, Justice owned and operated 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 through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice
Mezzanine Company, LLC (“Mezzanine”). Mezzanine was a wholly owned subsidiary of the Partnership; Operating is a wholly owned
subsidiary of Mezzanine. Effective December 23, 2021, Portsmouth replaced Justice as the single member 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 a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (“Hilton”)
through January 31, 2030.
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 the County of Los Angeles, California. The Company
also has an investment in unimproved real property. As of June 30, 2022, 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
Operating
entered into a hotel management agreement (“HMA”) with Aimbridge Hospitality (“Aimbridge”) to manage the Hotel,
along with its five-level parking garage, with an effective date of February 3, 2017. The term of the management agreement is for an
initial period of ten years commencing on the February 3, 2017 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 Aimbridge
shall be one and seven-tenths percent (1.70%) of total Hotel revenue.
For
the fiscal years ended June 30, 2022 and 2021, hotel management fees were $1,055,000 and $242,000, 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, Aimbridge, through Portsmouth’s wholly owned subsidiary, Kearny Street Parking LLC, manages
the parking garage in-house.
CHINESE
CULTURE FOUNDATION LEASE
On
March 15, 2005, the Hotel 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 Hotel 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, 2022, monthly event space fee is $6,800. 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. If the Hotel needs the event space during one of the dates previously reserved by the Foundation, the
Hotel shall pay the Foundation $4,000 per day for using the event space. During the fiscal years ended June 30, 2022 and 2021, the Hotel
paid the Foundation $12,000 and $0 for such fees, respectively.
SALES
AND REFINANCING OF REAL ESTATE PROPERTIES
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
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.
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
$751,000 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.
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
which exceeded the new loan amount by $6,000 due to advanced deposits made by the Company prior to closing. Interest rate on the
mortgage is fixed at 3.50% for five years and the mortgage note payable matures in August 2051.
On
October 14, 2021, the Company refinanced its $15,900,000 mortgage note payable on its 358-unit apartment complex in Irving, Texas and
obtained a new mortgage note payable for $28,800,000. The Company received net proceeds of $12,938,000 as a result of the refinance.
The annual interest rate on the mortgage is fixed at 2.95% for ten years with interest-only payments for the first five years and 30-year
amortization thereafter. The mortgage loan matures in November 2031.
On
June 30, 2022, the Company refinanced its $5,283,000 mortgage note payable on its 30-unit apartment complex in West Los Angeles, California
and obtained a new mortgage note payable for $5,850,000. The Company received net proceeds of $584,000 as a result of the refinance.
The annual interest rate on the mortgage is fixed at 4.4% for the first five years and 5.44% thereafter. The mortgage loan matures in
July 2052.
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
consolidated balance sheets as part of Other Assets, net and reviewed for impairment on a periodic basis. As of June 30, 2022 and 2021,
the Company had other investments of zero and $41,000, 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, 2022 and 2021, the Company had obligations for securities sold (equities short) of $449,000 and $6,419,000, 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 as of June 30, 2022 and 2021 were $490,000
and $7,917,000, 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 and served in that position
until the dissolution of Justice in December 2021. 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 has 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.
The COVID-19 pandemic altered the typical seasonality by significantly reducing operations and revenues through the first calendar quarter
of 2022. The hotel has since returned to normal seasonality of being mostly impacted from Thanksgiving through the first week of January.
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 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 hotels in the San Francisco market were closed due to lack of business, only one hotel in our
primary competitive set remained open at that time. Most of those hotels stayed closed through end of Q1 fiscal year 2021. By the end
of Q2 fiscal year 2021, all but one had reopened. The market has seen slight improvements over the last two quarters of fiscal year 2021
but RevPAR in San Francisco was hit the hardest of any major market in the US. Our 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. We 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 needed 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 to remain competitive.
As
of the date of this report, the competition for business is stronger than ever as there still hasn’t been a rebound close to 2019
for the overall market. For the six months ending June 30, 2022, the Hotel’s CompSet was still only running 51% occupancy and average
daily rate of $244 for a RevPAR of $125. The Hotel has fared drastically better than its CompSet by aggressively pursuing all segments
and opening all channels on off peak days and limiting access over peak demand dates. Conversely, for the six months ending June 30,
2022, the Hotel is running occupancy of 82% at $195 average daily rate for a RevPAR of $160, giving the Hotel a RevPAR index of 128%.
As group demands rebound some of the larger hotels in our CompSet, we could see significant gains in their occupancy as they sell large
blocks to fill their empty meeting spaces which will gradually chip away at the Hotel’s phenomenal RevPAR index for the last six
months.
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:
● 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, 2022, the Company had a total of 28 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.
On
February 3, 2017, Aimbridge assumed all labor union agreements and retained employees of their choice to continue providing services
to the Hotel. As of June 30, 2022, approximately 86% 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 Aimbridge was a party. CBA
for Local 2 (Hotel and Restaurant Employees) expired on August 13, 2022 and is currently under review. 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 Aimbridge. 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, 2022 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 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.
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.
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