UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
For
the fiscal year ended June 30, 2025
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
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
As
of December 31, 2024, the last day of the registrant’s second fiscal quarter, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was approximately $8,730,000 (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 29, 2025 was 2,154,405.
DOCUMENTS
INCORPORATED BY REFERENCE: None
TABLE
OF CONTENTS
Page
PART I
Item 1. Business. 4
Item 1A. Risk Factors. 9
Item 1B. Unresolved Staff Comments. 14
Item 1C. Cybersecurity. 14
Item 2. Properties. 14
Item 3. Legal Proceedings. 20
Item 4. Mine Safety Disclosures. 20
PART II
Item 6. Reserved. 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 31
Item 8. Financial Statements and Supplementary Data. 32
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. 89
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, including anticipated repayment of certain of the Company’s indebtedness, our expected
future business condition, the effects of competition and the potential changes in laws, regulations, or government policy applicable
to our operations, and other non-historical statements, including the impact of macroeconomic factors (including inflation, increases
in interest rates, slowing economic growth or potential recessionary conditions 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 because 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. Statements regarding “intrinsic value,” potential market
values, or capital recycling reflect management’s current beliefs and estimates, are not appraisals or guarantees of value, and
are subject to risks and uncertainties.
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 those projected, forecasted,
or implied in these 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, and in Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as such
factors may be updated from time to time in our periodic filings with the Securities and Exchange Commission, which are accessible at
www.sec.gov. 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. Additional risks and uncertainties, including those not currently known to us or that we presently consider immaterial, may
also cause actual results to differ materially from those expressed or implied in forward-looking statements.
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 significant or prolonged economic slowdowns;
● inflationary or hyperinflationary pressures;
● litigation, regulatory proceedings, or governmental investigations; and
● other risk factors discussed below in this Report.
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, affordable housing
for individuals 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 by pursuing opportunities with the potential to increase
shareholder value, consistent with the Company’s underlying commitment to social responsibility.
As
of June 30, 2025, InterGroup owns approximately 75.9% of the outstanding common shares of Portsmouth. As of June 30, 2025, the Company’s
President, Chairman of the Board, and Chief Executive Officer, John V. 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 has historically been 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. The franchise agreement requires the hotel to meet certain brand standards and capital improvement requirements,
noncompliance with which could have an adverse impact on operations, as discussed in Item 1A – Risk Factors.
In
connection with the refinancing of the Hotel on March 28, 2025, the Company formed Justice Pledgor, LLC, a Delaware limited liability
company (“Pledgor”), which became the sole member of Operating. Mezzanine is the sole member of Pledgor. The refinancing
transaction resulted in an increase in Portsmouth’s leverage of approximately $1 million and subjects us to additional covenants
and payment obligations, which are described in Item 7 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations. The Hotel’s senior mortgage and amended mezzanine loans are obligations of Portsmouth’s subsidiaries
and are secured at the Hotel-subsidiary level; they are not primary obligations of InterGroup. As part of the March 28, 2025 closing,
prior guaranties tied to the 2013/2017 facilities were terminated and replaced by limited “carve-out/springing recourse”
guaranties executed by Portsmouth and InterGroup as described in Note 10.
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, 2025, 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 and 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 HLT 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 it 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 31, 2030,
and provided the Partnership with certain key money cash incentives to be earned through January 2030. The License Agreement requires
the hotel to maintain specific brand standards and periodic renovations, noncompliance with which could result in penalties, termination
of the agreement, or loss of the Hilton brand, as discussed in Item 1A – Risk Factors.
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 February 3, 2017 and automatically renews for successive one (1) year periods, not to exceed five
years in the aggregate, subject to certain conditions. Under the terms of 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, 2025 and 2024, hotel management fees were $783,000 and $706,000, respectively, and incentive fees were
$0 in both periods, offset by key money amortization of $250,000 for both years, and such amounts are included in Hotel operating expenses
in the consolidated statements of operations. However, following discussions with Aimbridge regarding the impact of the COVID-19 pandemic
on incentive fee eligibility, the parties agreed that no incentive fees were payable for fiscal years 2019 through 2023. Specifically,
Aimbridge agreed to waive $1,030,134 in previously recorded incentive fees, and both parties established a performance threshold for
future incentive fee eligibility of $15,257,301 in earnings before interest, taxes, depreciation, and amortization (“EBITDA”),
equal to, the EBITDA in 2017 when Aimbridge began managing the Hotel. As a result, the Company recorded a reduction in Hotel operating
expenses of $1,030,134 for the year ended June 30, 2025. 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. The loss or replacement of the hotel management
company, or a failure by Aimbridge to meet performance benchmarks, could have a material adverse impact on hotel operations, as discussed
in Item 1A – Risk Factors.
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 connection with the conveyance of the real estate on which 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, 2025, the monthly event space fee was $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
use of the event space. During the fiscal years ended June 30, 2025 and 2024, the Hotel paid the Foundation $15,000 and $8,000 for such
fees, respectively. The terms of this lease, including the reserved use provisions, could limit flexibility for certain hotel functions
or events.
SALES
AND REFINANCING OF REAL ESTATE PROPERTIES
In
December 2024, the Company refinanced the mortgage on its 157-unit apartment located in Florence, Kentucky in the amount of $9,800,000.
The new 10-year interest-only loan has an interest rate of 5.40%. The loan matures in January 2035.
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 were due for the first12 months, and $5,500 principal payments commencing
in June 2024. The mortgage loan matured in May 2025. In May 2025 the Company amended the agreement for a new loan maturity of June 5,
2028.
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, Chief Executive Officer and President, John V. Winfield. The Committee has delegated authority to manage the portfolio
to the Company’s Chairman, CEO and President, together with such assistants and management committees as he may designate. 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 American, NYSE Arca, or the Nasdaq
Stock Market, LLC (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, that initially meet these guidelines but subsequently
fail to meet one or more of the investment criteria. The Committee has in the past approved nonconforming investments and may in the
future approve nonconforming investments. The Committee may modify these guidelines from time to time. Changes in market conditions,
interest rates, or liquidity could negatively impact the value or performance of these investments, as discussed in Item 1A – Risk
Factors.
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, 2025 and 2024, the Company had obligations for securities sold short (equities short) of $0 and $188,000, 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, 2025 and 2024 were $0 for
both years. The use of margin or other forms of leverage increases exposure to market volatility and could magnify losses.
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, may 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. Transactions
or investments involving related parties are subject to the Company’s related-party transaction policies and applicable Securities
and Exchange Commission disclosure requirements, including Regulation S-K Item 404.
Further
information with respect to investment in marketable securities and other investments of the Company is set forth in Management’s
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 Bay Area, the Hotel generally
maintained high occupancy and room rates during the entire year except for the weeks starting from Thanksgiving to the 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. Climate variability or extreme weather events could alter historical seasonal trends and impact
occupancy and room rates, as discussed in Item 1A – Risk Factors.
COMPETITION
The
Hotel has successfully completed its full guest rooms renovation over the last two years, along with renovations to public space, the
fitness center, corridors, and meeting space. With newly renovated rooms, the Hotel expects to drive rate and grow RevPar relative to
the market and its competitive set (“CompSet”). The Hotel recently received its annual Quality Assurance inspection from
Hilton and received the highest score in at least the last decade at 96.7%, which is an “Outstanding” ranking by Hilton.
During
the fiscal year ended June 30, 2025, the Hotel’s CompSet achieved a RevPAR of $172.84 while the Hotel had a RevPAR of $214.66.
Since the completion of the renovation in June 2024, the Hotel has increased its lead in RevPAR on the CompSet dramatically, growing
RevPAR 23% while the CompSet declined by 8.3% over the same time.
The
Hotel’s location in the San Francisco Financial District historically has 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 post-pandemic, 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 this period of strong growth in the market. The city is seeing the return of a stronger
convention calendar along with business travel trending positively.
The
Hotel is also subject to certain operating risks common to all of the hotel industry, which could adversely impact performance, including
those set forth in Item 1A- Risk Factors.
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. Future changes in environmental laws, or the discovery of previously unknown contamination, could result in significant
costs or liabilities.
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, 2025, the Company’s corporate office and multifamily operations had 30 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, 2025. 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, 2025, 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 as agent for Hotel and Justice. CBA for Local 2 (Hotel and Restaurant
Employees) will expire on August 13, 2028, and is subject to future negotiations. CBA for Local 856 (International Brotherhood of Teamsters)
will expire on December 31, 2028. 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 and
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. Changes in labor laws, union negotiations, or
work stoppages could materially impact hotel operations and cost structures, as discussed in Item 1A – Risk Factors.
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 SEC no longer operates a public reference
room. The Commission also maintains an Internet site at https://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. We make our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available free of charge on our website as soon as
reasonably practicable after such materials are filed with or furnished to the SEC.
Item
1A. Risk Factors.
Adverse
changes in the U.S. and global economies could adversely affect our financial performance.
Due
to a number of factors affecting consumers, the outlook for the lodging industry remains uncertain. These factors have, at times, resulted
in fewer customers visiting San Francisco or in reduced customer spending as compared to prior periods, and may do so again. The current
macroeconomic environment, including risks of a U.S. or global recession, has resulted in many businesses reducing or eliminating typical
travel and group meetings as a conservative measure in times of financial uncertainty. 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, customer demand for the amenities and leisure activities that we offer may decline during such
periods. 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 enter into a recession or experience prolonged
periods of slow growth, 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 cut back 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.
Exposure
to the San Francisco market through our majority-owned subsidiary could adversely affect our consolidated results, cash flows and financial
condition.
Through
our majority-owned subsidiary, Portsmouth Square, Inc. (“Portsmouth”), we own a single hotel property in San Francisco, California
(the Hilton San Francisco Financial District). While InterGroup is not a single-asset company—we also own and operate a diversified
portfolio of multifamily and commercial real estate and hold investment securities—the Hotel represents a significant component
of our consolidated revenues and cash flows. As a result, adverse conditions in the San Francisco Bay Area—including local economic
trends, business-travel and convention activity, competitive dynamics, public safety or municipal issues, natural disasters (including
earthquakes), climate-related impacts, and public health events—could materially reduce Hotel operating results and, in turn, negatively
impact our consolidated results of operations, liquidity, and cash flows.
Prolonged
weakness in the San Francisco market could also limit cash available at Portsmouth for debt service, required reserves, or capital expenditures,
which may restrict upstream distributions to InterGroup and constrain our corporate capital allocation. Although our other real estate
investments and securities provide diversification, they do not eliminate the concentration risk inherent in our Hotel segment’s
reliance on a single urban market. See also “Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and Note 10 – Mortgage Notes Payable.
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 fail to respond effectively to changes in market conditions, customer preferences, or
competitor strategies – including pricing actions, loyalty programs, and digital marketing initiatives, we could lose market share,
which could adversely affect our business, revenues, 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. In addition, labor
shortages, supply chain disruptions, inflationary pressures on materials and services, and increased regulatory requirements related
to environmental sustainability or climate-resilient construction could further escalate costs or extend project timelines.
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. Significant delays or
cost overruns could also impact our ability to maintain competitive standards and customer satisfaction, potentially reducing revenues.
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. In addition, increases in interest rates, changes in credit market conditions, or a downgrade of our creditworthiness
could increase our borrowing costs or limit our access to additional financing. If we are unable to refinance existing debt on acceptable
terms or at all, we may need to reduce or delay capital expenditures, asset improvements, or strategic initiatives, which could negatively
affect our competitive position and financial performance.
Limited
guaranties and “springing recourse” events under the Hotel financing could expose InterGroup or Portsmouth to liability.
The
Hotel’s senior mortgage and amended mezzanine loans are generally non-recourse to the borrower subsidiaries, except for customary
non-recourse carve-outs (e.g., fraud, willful misconduct, misapplication of funds, certain prohibited transfers, and environmental indemnities)
and specified “springing recourse” events. Portsmouth and InterGroup have provided limited guaranties of these recourse obligations.
While no such events have occurred as of June 30, 2025, the occurrence of a defined recourse event could increase our exposure and have
a material adverse effect on liquidity or financial condition.
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. Further, factors such as climate change, extreme weather events, and increased litigation risk
have contributed to rising insurance premiums and reduced coverage availability in certain markets, including California. Limited insurance
options or higher costs could pressure our operating margins and cash flows.
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. Factors such as interest rate fluctuations, geopolitical events, changes in credit ratings,
and overall capital market volatility could also lead to unrealized or realized losses in our investment portfolio. In addition, a prolonged
decline in market values could reduce our liquidity or our ability to meet certain financial covenants, and changes in fair value of
equity securities are recognized in earnings, which can increase the volatility of our reported results.
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 a longer period of time
and may be unable to liquidate the investment without incurring a substantial loss if cash is needed on short notice. This lack of liquidity
could adversely affect our ability to respond to changing market conditions or to reallocate capital to other strategic opportunities.
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. In addition, regulatory investigations
or enforcement actions could result in fines, penalties, or other sanctions, some of which may not be covered by insurance. Any adverse
publicity resulting from litigation or regulatory matters could also harm our brand reputation and customer relationships, further impacting
revenues.
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. Moreover, other security-related risks – including