Item 1A. Risk Factors. 11
Item 1B. Unresolved Staff Comments. 15
Item 1C. Cybersecurity. 16
Item 2. Properties. 16
Item 3. Legal Proceedings. 22
Item 4. Mine Safety Disclosures. 22
PART II
Item 6. Reserved. 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 32
Item 8. Financial Statements and Supplementary Data. 33
Item 9A. Controls and Procedures. 66
Item 9B. Other Information. 67
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 67
PART III
Item 10. Directors, Executive Officers and Corporate Governance. 68
Item 11. Executive Compensation. 71
Item 14. Principal Accounting Fees and Services. 78
PART IV
Item 15. Exhibits, Financial Statement Schedules. 79
Signatures 82
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, including anticipated repayment of certain of the Company’s indebtedness, the impact
to our business and financial condition, the effects of competition and the effects of future legislation or regulations and other non-historical
statements, the impact from macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a
recession and geopolitical conflicts). 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.
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 these forward-looking statements. You should not place 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. 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.
The
risk factors discussed in Item 1A: “Risk Factors” could cause our results to differ materially from those expressed in forward-looking
statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect
to have a material adverse effect on our business. Any such risks could cause our results to differ materially from those expressed in
forward-looking statements.
Other
factors that may cause actual results to differ materially from current expectations include, but are not limited to:
● increases in interest rates;
● 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.
As
of June 30, 2024, InterGroup owns approximately 75.7% of the outstanding common shares of Portsmouth. As of June 30, 2024, 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 Chief
Operating Officer, 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, 2024, all 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 several 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 January 2030, and provided the Partnership with certain key money cash incentives to be earned through
January 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 (“Basic Fee”)
payable to Aimbridge shall be one and seven-tenths percent (1.70%) of total Hotel revenue. In addition to the Basic Fee, Aimbridge shall
be entitled to an annual incentive fee for each fiscal year equal to ten percent (10%) of the amount by which Gross Operating Profit
in the current fiscal year exceeds the previous fiscal year’s Gross Operating Profit.
For
the fiscal years ended June 30, 2024 and 2023, hotel management fees were $706,000 and $711,000, and incentive fees of $0 and $505,000,
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. However, the Company is currently in discussions with Aimbridge regarding a dispute in connection with the
validity of the incentive fees as they relate directly to the Covid pandemic. As part of the Hotel management agreement, Aimbridge, through
the Company’s wholly owned subsidiary, Kearny Street Parking LLC, manages the parking garage in-house.
CHINESE
CULTURE FOUNDATION LEASE
In
November 1967, Justice entered into a 50-year nominal rent lease (the “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 the right to occupy pursuant to the Lease. Among other requirements, the Lease was a condition imposed by the City of
San Francisco upon Justice, in order to convey the real estate where the Hotel would be built.
On
March 15, 2005, the Hotel and the Foundation entered an amended lease. 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, 2024, the monthly event space fee is $7,000. The term of the amended lease expired 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, 2024 and 2023, the Hotel paid the Foundation $8,000 and $20,000 for such
fees, respectively.
SALES
AND REFINANCING OF REAL ESTATE PROPERTIES
On
May 31, 2023, the Company refinanced its $4,823,000 mortgage note payable on its 264-unit apartment complex in St Louis, Missouri and
obtained a new two-year mortgage for $5,360,000. The Company deposited the existing cash in escrow for Capital Expenditure Reserve of
$616,000 and $244,000 in Additional Reserve for taxes and insurance. The mortgage has a floating monthly rate of 30-day SOFR (capped
at 5.5%) plus SOFR margin of 3.10% interest-only payments are due for the 12 months and $5,500 principal paydowns commencing in June
2024. The mortgage loan matures in May 2025.
On
December 15, 2023, the Company obtained a second mortgage note payable in the amount of $4,573,000 on its 358-unit apartment complex
in Las Colinas, Texas. The term of the loan is approximately 7 years with an interest rate of 7.60%. The mortgage loan matures in November
2031.
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 four 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
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, 2024 and 2023, the Company had obligations for securities sold (equities short) of $188,000 and $1,416,000, 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, 2024 and 2023 were $0 and
$1,601,000, 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. 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 Note 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 first week of January
due to the holiday season. These seasonal patterns can be expected to cause fluctuations in the quarterly revenues of the Hotel. See
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for more information regarding the
effects on our results of operations.
COMPETITION
The
Hotel has successfully completed its full guest-rooms renovation over the last 2 years along with public space, fitness center, corridors,
and meeting space. With newly renovated rooms in its Competitive Set of hotels (“CompSet”) and will allow the hotel to continue
to drive rate and grow RevPAR over the market and its CompSet. The hotel recently received its annual Quality Assurance inspection from
Hilton and received the highest score at least in the hotel’s last decade at 94.45% which is an “Outstanding” ranking
by Hilton. Even during the renovation that took out between 2-4 floors or 50-100 guest rooms of inventory at a time, the Hotel maintained
an index of over 100%. At the end of the renovation in June 2024, the Hotel’s trailing 12-month index was 109.6%. During the fiscal
year ending June 30, 2024, the Hotel’s CompSet achieved a RevPAR of $161.47 while the Hotel had a RevPAR of $176.99. An excellent
achievement for our property while it had roughly 13%-18% of its inventory unavailable over this time period. Since the completion of
the renovation, the Hotel has increased its lead in RevPAR on the CompSet dramatically. In the two months since completing the renovation,
the Hotel has achieved an average RevPAR index of over 150% for both months. While the CompSet has lost over 15% RevPAR; in these two
months, the Hotel has grown over 15% in this metric.
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 slowly returning to San Francisco 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. The shift to attracting leisure travel
has pushed the Hotel to price aggressively to lure competition from the more tourist locations in the city. We are optimistic to see
business travel and self-contained groups trending positively.
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 Justice and 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 apartments 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, 2024, the Company’s corporate office and multifamily operations had 28 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.
The
hotel operations had 187 employees as of June 30, 2024. On February 3, 2017, Aimbridge assumed all labor union agreements as agent for
Hotel and Justice, and Justice provides all funding for all payroll and related costs. As of June 30, 2024, approximately 90% 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 to as agent for Hotel and Justice. CBA for Local 2 (Hotel and Restaurant
Employees) expired on August 13, 2024, and is currently under negotiations. CBA for Local 856 (International Brotherhood of Teamsters)
will expire on December 31, 2024. CBA for Local 39 (Stationary Engineers) will expire in July 2030.
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 Hotel and Aimbridge. The Hotel 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.intergroupcorporation.com. Reference in this document to that website
address does not constitute incorporation by reference of the information contained on the website.
Item
1A. Risk Factors.
Adverse
changes in the U.S. and global economies could negatively impact our financial performance.
Due
to a number of factors affecting consumers, the outlook for the lodging industry remains uncertain. These factors have resulted at times
in the past and could continue to result in the future in fewer customers visiting, or customers spending less, in San Francisco, as
compared to prior periods. The macro-economic situation of a looming US/Global recession has seen business reducing or eliminating typical
travel and group meetings in efforts to be conservative in uncertain financial times. 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 in San Francisco and the hospitality industry has a limited base of operations and substantially all of our revenues are currently
generated by the Hotel in San Francisco, California. 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 the
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.
The
debt agreements that govern our outstanding indebtedness due January 2025 could result in our being required to repay these borrowings
on their due date. If we are forced to refinance these borrowings on less favorable terms or are unable to refinance these borrowings,
the Hotel financial condition and results of operations could be adversely affected.
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 17, Commitments and Contingencies, to our consolidated financial statements, included in Item 8 of this
Annual Report on Form 10-K.
Litigation
is inherently unpredictable and defending these proceedings can result in significant ongoing expenditures and the diversion of our management’s
time and attention from the operation of our business, which could have a negative effect on our business operations. Our failure to
successfully defend or settle any litigation or legal proceedings could result in liabilities that, to the extent not covered by our
insurance, could have a material adverse effect on our financial condition, revenue and profitability.
The
threat of terrorism could adversely affect the number of customer visits to the Hotel.
The
threat of terrorism has caused, and may in the future cause, a significant decrease in customer visits to San Francisco due to disruptions
in commercial and leisure travel patterns and concerns about travel safety. We cannot predict the extent to which disruptions in air
or other forms of travel as a result of any further terrorist act, outbreak of hostilities or escalation of war would adversely affect
our financial condition, results of operations or cash flows. The possibility of future attacks may hamper business and leisure travel
patterns and, accordingly, the performance of our business and our operations.
We
depend in part, on third party management companies for the future success of our business and the loss of one or more of their key personnel
could have an adverse effect on our ability to manage our business and operate successfully and competitively or could be negatively
perceived in the capital markets.
The
Hotel is managed by Aimbridge. Their ability to manage the Hotel and to operate successfully and competitively is dependent, in part,
upon the efforts and continued service of their managers. The departure of key personnel of current or future management companies could
have an adverse effect on our business and our ability to operate successfully and competitively, and it could be difficult to find replacements
for these key personnel, as competition for such personnel is intense.
Seasonality
and other related factors such as weather can be expected to cause quarterly fluctuations in revenue at the Hotel.
The
hotel and resort industry are seasonal in nature. This seasonality can tend to cause quarterly fluctuations in revenues at the Hotel.
Our quarterly earnings may also be adversely affected by other related factors outside our control, including weather conditions and
poor economic conditions. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these quarterly
fluctuations in our revenues.
The
hotel industry is heavily regulated and failure to comply with extensive regulatory requirements may result in an adverse effect on our
business.
The
hotel industry is subject to extensive regulation and the Hotel must maintain its licenses and pay taxes and fees to continue operations.
Our property is subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol.
We are also subject to laws governing our relationship with our employees in such areas as minimum wage and maximum working hours, overtime,
working conditions, hiring and firing employees and work permits. Also, our ability to remodel, refurbish or add to our property may
be dependent upon our obtaining necessary building permits from local authorities. The failure to obtain any of these permits could adversely
affect our ability to increase revenues and net income through capital improvements of our property. In addition, we are subject to the
numerous rules and regulations relating to state and federal taxation. Compliance with these rules and regulations requires significant
management attention. Furthermore, compliance costs associated with such laws, regulations and licenses are significant. Any change in
the laws, regulations or licenses applicable to our business or a violation of any current or future laws or regulations applicable to
our business or gaming license could require us to make substantial expenditures or could otherwise negatively affect our gaming operations.
Any failure to comply with all such rules and regulations could subject us to fines or audits by the applicable taxation authority.
Violations
of laws could result in, among other things, disciplinary action. If we fail to comply with regulatory requirements, this may result
in an adverse effect on our business.
Uninsured
and underinsured losses could adversely affect our financial condition and results of operations.
There
are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable
or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. We will
use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring,
with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. Uninsured and
underinsured losses could harm our financial condition and results of operations. We could incur liabilities resulting from loss or injury
to the Hotel or to persons at the Hotel. Claims, whether or not they have merit, could harm the reputation of the Hotel or cause us to
incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.
In
the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement
cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of
the capital we have invested in the Hotel, as well as the anticipated future revenue from the property. In that event, we might nevertheless
remain obligated for any mortgage debt or other financial obligations related to the Hotel. In the event of a significant loss, our deductible
may be high, and we may be required to pay for all such repairs and, therefore, it could materially adversely affect our financial condition.
Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance
proceeds to replace or renovate the Hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we
receive might be inadequate to restore our economic position on the damaged or destroyed property.
It
has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our
current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our property
at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (for example,
earthquake, flood and terrorism) may not be generally available at current levels. Even if we can renew our policies or to obtain new
policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance
at premium rates that are commercially reasonable. If we were unable to obtain adequate insurance on the Hotel for certain risks, it
could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments that require
us to maintain adequate insurance on the Hotel to protect against the risk of loss. If this were to occur, or if we were unable to obtain
adequate insurance and the Hotel experienced damage which would otherwise have been covered by insurance, it could materially adversely
affect our financial condition and the operations of the Hotel.
In
addition, insurance coverage for the Hotel and for casualty losses does not customarily cover damages that are characterized as punitive
or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in
damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial,
our financial resources may be adversely affected.
You
may lose all or part of your investment.
There
is no assurance that the Company’s initiatives to improve its profitability or liquidity and financial position will be successful.
The
price of the Company’s common stock may fluctuate significantly, which could negatively affect the Company and holders of its common
stock.
The
market price of the Company’s common stock may fluctuate significantly from time to time as a result of many factors, including:
investors’ perceptions of the Company and its prospects; investors’ perceptions of the Company’s and/or the industry’s
risk and return characteristics relative to other investment alternatives; difficulties between actual financial and operating results
and those expected by investors and analysts; changes in our capital structure; trading volume fluctuations; actual or anticipated fluctuations
in quarterly financial and operational results; volatility in the equity securities market; and sales, or anticipated sales, of large
blocks of the Company’s common stock.
The
concentrated beneficial ownership of our common stock and the ability it affords to control our business may limit or eliminate other
shareholders’ ability to influence corporate affairs.
The
Company’s President, Chief Executive Officer, and Chairman of the Board of Directors, John V. Winfield is a 69.4% beneficial shareholder
of the Company. Because of this concentrated stock ownership, Mr. Winfield will be able to significantly influence the election of the
Company’s board of directors and all other decisions on all matters requiring shareholder approval. As a result, the ability of
other shareholders to determine the management and policies of the Company is significantly limited. The interests of the Company’s
largest shareholder may differ from the interests of other shareholders with respect to the issuance of shares, business transactions
with or sales to other companies, selection of officers and directors and other business decisions. This level of control may also have
an adverse impact on the market value of our shares because our largest shareholder may institute or undertake transactions, policies
or programs that may result in losses, may not take any steps to increase our visibility in the financial community and/or may sell enough
shares to significantly decrease our price per share.
Item
1B. Unresolved Staff Comments.
None.
Item
1C. Cybersecurity.
The
Company maintains cyber risk management designed to preserve the security of data and technology infrastructure. On annual basis we conduct
assessments to identify cyber risks and have developed plans on how to address any such risks for remediation of vulnerabilities.
Risk
management and strategy
We
engage and implement risk management strategies for identification and management of material risks rising from cybersecurity threats
and alerts. Our method involves a systematic evaluation of all potential threats reported and discovered, vulnerabilities, and their
possible impacts on the Company’s operations, data, and systems health. Our cybersecurity risk management strategy includes:
● Identify the risk to our environment;
● IT to identify and resolve the threat;
● monthly cybersecurity training to our staff; and
● cybersecurity incident response plan.
Management
and Board Oversight
Management
team is responsible for the oversight and administration of cyber security protocols. Our management team relies on our third-party providers
on administrating cybersecurity assessments to identify, manage, mitigate, and respond to cybersecurity threats. Management updates the
Board as necessary, regarding any significant cybersecurity occurrences.
Item
2. Properties.
SAN
FRANCISCO HOTEL PROPERTY
The
Hotel is owned by Portsmouth through its wholly owned subsidiary, Operating. The Hotel is centrally located in the Financial District
in San Francisco, one block from the Transamerica Pyramid. The Embarcadero Center is within walking distance and North Beach is two blocks
away. Chinatown is directly across the bridge that runs from the Hotel to Portsmouth Square Park. The Hotel is a 31-story (including
parking garage), steel and concrete, A-frame building, built in 1970. The Hotel has 544 well-appointed guest rooms and luxury suites
situated on 22 floors. The Hotel has a restaurant, a lounge, and a private dining room on 3,700 square feet; additionally, there are
two kitchens to service the restaurant and banquets and a fully equipped gym. The third floor houses the Chinese Culture Center (the
“CCC”), its administrative office, and a grand ballroom. The Hotel has approximately 22,000 square feet of meeting room space,
including the grand ballroom. Other features of the Hotel include a 5-level underground parking garage and pedestrian bridge across Kearny
Street connecting the Hotel and the CCC with Portsmouth Square Park in Chinatown.
As
required by its senior lender, Operating will continue to make minimum payments into its furniture, fixtures, and equipment (“FF&E”)
escrow account held by its senior lender of the greatest of 4% of annual revenues or a minimum of $1,952,000 per annum. In the opinion
of management, the Hotel is adequately covered by insurance.
HOTEL
FINANCING
On
December 18, 2013: (i) Justice Operating Company, LLC, a Delaware limited liability company (“Operating”), entered into a