PORTSMOUTH SQUARE, INC. FORWARD-LOOKING STATEMENTS AND PROJECTIONS
This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended
("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended ("Exchange Act"). Forward-looking statements include, but are not
limited to, statements related to our expectations regarding the performance of
our business, our financial results, our liquidity and capital resources, the
impact to our business and financial condition, and measures being taken in
response to the novel strain of coronavirus and the disease it causes
("COVID-19"), the effects of competition and the effects of future legislation
or regulations and other non-historical statements. Forward-looking statements
include all statements that are not historical facts, and in some cases, can be
identified by the use of forward-looking terminology such as the words
"outlook," "believes," "expects," "potential," "continues," "may," "will,"
"should," "could," "seeks," "projects," "predicts," "intends," "plans,"
"estimates," "anticipates" or the negative version of these words or other
comparable words. You should not rely on forward-looking statements since they
involve known and unknown risks, uncertainties and other factors which are, in
some cases, beyond our control and which could materially affect our results of
operations, financial condition, cash flows, performance or future achievements
or events.
Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry; the impact of terrorism and war on the national and international economies, including tourism, securities markets, energy and fuel costs; natural disasters; general economic conditions and competition in the hotel industry in theSan Francisco area; seasonality, labor relations and labor disruptions; actual and threatened pandemics such as swine flu or the outbreak of COVID-19 or similar outbreaks; the ability to obtain financing at favorable interest rates and terms; securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company's Annual Report on Form 10-K for the fiscal year endedJune 30, 2022 . These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. COVID19 UPDATE
The novel strain of coronavirus and the disease it causes ("COVID-19") have
continued to affect the hospitality industry and our business. Beginning in
March 2020 , travel restrictions and mandated closings of non-essential
businesses were imposed, which resulted in temporary suspensions of operations
in many hotels in San Francisco , however, the Company did not suspend operations
and did not close the hotel. As vaccination rates across the country increased
and COVID-19 related restrictions were eased or removed, we saw an increase in
travel and hospitality spending beginning in the second calendar quarter of
2021. During calendar year 2022, we continued to witness robust leisure demand
and an acceleration in group and business transient demand. However, the
potential for an economic slowdown or a recession during calendar year 2023 may
disrupt the positive momentum at the Company's hotel and our industry.
We believe the distribution of the COVID-19 vaccine during 2021 drove the
improvement in traveler sentiment we experienced and resulted in an improvement
in occupancy, Average Daily Rate ("ADR") and Revenue per Available Room
("RevPAR") during 2021 and 2022. If additional virus variants emerge causing
re-imposed widespread travel restrictions, the hospitality industry will be
negatively affected. While there can be no assurances that the Company will not
experience further fluctuations in hotel revenues or earnings due to the
uncertainty of COVID-19 and other macroeconomic factors, such as inflation,
increases in interest rates, potential economic slowdown or a recession and
geopolitical conflicts, we expect to continue to recover through the remainder
of fiscal year 2023 based on current demand trends.
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RESULTS OF OPERATIONS
The Company's principal source of revenue continues to be derived from its ownership inJustice Operating Company, LLC ("Operating") inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. Operating owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Operating have been consolidated with those of the Company.
Three Months Ended
The Company had net loss of$1,320,000 for the three months endedDecember 31, 2022 compared to net loss of$960,000 for the three months endedDecember 31, 2021 .Hotel Operations
The Company had net loss from Hotel operations of$1,553,000 for the three months endedDecember 31, 2022 compared to net loss of$602,000 for the three months endedDecember 31, 2021 . The increased loss is primarily attributable to the$2,000,000 gain on extinguishment of debt recorded during the three months endedDecember 31, 2021 related to the full forgiveness of the PPP loan, offset by improved hotel operations during the three months endedDecember 31, 2022 as the hospitality market continues its recovery.
The following table sets forth a more detailed presentation of Hotel operations
for the three months ended
For the three months endedDecember 31, 2022
2021 Hotel revenues: Hotel rooms$ 8,250,000 $ 5,218,000 Food and beverage 625,000 296,000 Garage 717,000 768,000 Other operating departments 300,000 66,000 Total hotel revenues 9,892,000 6,348,000 Operating expenses excluding depreciation and amortization (8,726,000 ) (6,479,000 ) Operating income (loss) before interest, depreciation and amortization 1,166,000 (131,000 ) Gain on extinguishment of debt -
2,000,000
Interest expense - mortgages (1,655,000 ) (1,654,000 ) Interest expense - related party (429,000 ) (303,000 ) Depreciation and amortization expense (635,000 ) (514,000 ) Net loss from Hotel operations$ (1,553,000 ) $
(602,000 ) For the three months endedDecember 31, 2022 , the Hotel had operating income of$1,166,000 before interest expense, depreciation, and amortization on total operating revenues of$9,892,000 compared to operating loss of$131,000 before interest expense, depreciation, and amortization on total operating revenues of$6,348,000 for the three months endedDecember 31, 2021 . - 18 - For the three months endedDecember 31, 2022 , room revenues increased by$3,032,000 , food and beverage revenue increased by$329,000 and garage decreased by$51,000 compared to the three months endedDecember 31, 2021 . The year over year increase in all the revenue sources, except for garage revenues which remained stable, are as a result of the recovery from the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak sinceMarch 2020 . Total operating expenses increased by$2,247,000 due to increase in salaries and wages, commission, credit card fees, management fees, and franchise fees. The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months endedDecember 31 ,
2022
and 2021:
Three Months Ended
December 31, Average Daily Rate Average Occupancy % RevPAR
2022 $ 199 82 % $ 164
2021 $ 138 75 % $ 104
The Hotel's revenues increased by 56% this quarter as compared to the previous
comparable quarter. Average daily rate increased by $61 , average occupancy
increased by 7%, and RevPAR increased by $60 for the three months ended December
31, 2022 compared to the three months ended December 31, 2021 .
Investment Transactions
The Company had a net gain on marketable securities of $107,000 for the three
months ended December 31, 2022 compared to a net loss on marketable securities
of $412,000 for the three months ended December 31, 2021 . For the three months
ended December 31, 2022 , the Company had a net realized loss of $37,000 and a
net unrealized gain of $144,000 . For the three months ended December 31, 2021 ,
the Company had a net realized loss of $2,095,000 and a net unrealized gain of
$1,683,000 . Gains and losses on marketable securities may fluctuate
significantly from period to period in the future and could have a significant
impact on the Company's results of operations. However, the amount of gain or
loss on marketable securities for any given period may have no predictive value
and variations in amount from period to period may have no analytical value. For
a more detailed description of the composition of the Company's marketable
securities see the Marketable Securities section below.
The Company consolidated Justice ("Hotel") for financial reporting purposes and
was not taxed on its non-controlling interest in the Hotel. However, effective
July 15, 2021 , the Company become the owner of 100% of Justice and will include
all the Hotel's income and expense accounts into its income taxes calculations
going forward. The income tax benefit during the three months ended December 31,
2022 and 2021 represent the income tax effect on the Company's pretax loss which
includes the operations of the Hotel.
Six Months Ended
The Company had net loss of$1,329,000 for the six months endedDecember 31, 2022 compared to net loss of$2,935,000 for the six months endedDecember 31, 2021 . The change is primarily attributable to the increase in Hotel revenue.Hotel Operations The Company had net loss from Hotel operations of$1,238,000 for the six months endedDecember 31, 2022 compared to net loss of$2,557,000 for the six months endedDecember 31, 2021 . The decrease in loss is primarily attributed to the increased revenues as the hospitality market continues to recover, offset by the gain on extinguishment of debt regarding the full forgiveness of the PPP loan recorded during the period endedDecember 31, 2021 . - 19 -
The following table sets forth a more detailed presentation of Hotel operations for the six months ended
December 31, 2022 and 2021: For the six months endedDecember 31, 2022
2021 Hotel revenues: Hotel rooms$ 19,053,000 $ 10,780,000 Food and beverage 1,160,000 562,000 Garage 1,539,000 1,675,000 Other operating departments 450,000 136,000 Total hotel revenues 22,202,000 13,153,000 Operating expenses excluding depreciation and amortization (18,032,000 ) (12,812,000 ) Operating income before interest, depreciation and amortization 4,170,000
341,000
Gain on extinguishment of debt -
2,000,000
Interest expense - mortgages (3,287,000 ) (3,315,000 ) Interest expense - related party (859,000 ) (540,000 ) Depreciation and amortization expense (1,262,000 ) (1,043,000 ) Net loss from Hotel operations$ (1,238,000 ) $ (2,557,000 )
For the six months endedDecember 31, 2022 , the Hotel had operating income of$4,170,000 before interest expense, depreciation, and amortization on total operating revenues of$22,202,000 compared to operating income of$341,000 before interest expense, gain on extinguishment of debt, depreciation, and amortization on total operating revenues of$13,153,000 for the six months endedDecember 31, 2021 . For the six months endedDecember 31, 2022 , room revenues increased by$8,273,000 , food and beverage revenue increased by$598,000 , and garage revenue decreased by$136,000 , compared to the six months endedDecember 31, 2021 . The year over year increase in all the revenue sources, except for garage revenue, are as a result of the recovery from the business interruption attributable to a variety of responses by federal, state, and local civil authority to the COVID-19 outbreak sinceMarch 2020 . Total operating expenses increased by$5,220,000 due to increase in salaries and wages, rooms commission, credit card fees, management fees, and franchise fees. The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the six months endedDecember 31, 2022 and 2021. Six Months Ended December 31, Average Daily Rate Average Occupancy % RevPAR 2022 $ 215 88 %$ 190 2021 $ 139 77 %$ 107
The Hotel's revenues increased by 69% for the six months endedDecember 31, 2022 as compared to the six months endedDecember 31, 2021 . Average daily rate increased by$76 , average occupancy increased by 11%, and RevPAR increased by$83 for the six months endedDecember 31, 2022 compared to the six months endedDecember 31, 2021 . Investment Transactions
The Company had a net gain on marketable securities of$97,000 for the six months endedDecember 31, 2022 compared to a net loss on marketable securities of$857,000 for the six months endedDecember 31, 2021 . For the six months endedDecember 31, 2022 , the Company had a net realized loss of$137,000 and a net unrealized gain of$234,000 . For the six months endedDecember 31, 2021 , the Company had a net realized loss of$2,140,000 and a net unrealized gain of$1,283,000 . Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities see theMarketable Securities section below. - 20 -
The Company consolidated Justice ("Hotel") for financial reporting purposes and
was not taxed on its non-controlling interest in the Hotel. However, effective
July 15, 2021 , the Company become the owner of 100% of Justice and will include
all the Hotel's income and expense accounts into its income taxes calculations
going forward. The income tax benefit during the six months ended December 31,
2022 and 2021 represent the income tax effect on the Company's pretax loss which
includes the operations of the Hotel.
MARKETABLE SECURITIES
The following table shows the composition of the Company's marketable securities
portfolio as of December 31, 2022 and June 30, 2022 by selected industry groups.
% of Total
As of December 31, 2022 Investment
Industry Group Fair Value Securities
REITs and real estate companies $ 293,000 97.0 %
Basic materials 9,000 3.0 %
$ 302,000 100.0 %
% of Total
As of June 30, 2022 Investment
Industry Group Fair Value Securities
Communication services $ 355,000 65.6 %
REITs and real estate companies 162,000 29.9 %
Basic materials 18,000 3.3 %
Utilities 5,000 0.9 %
Technology 1,000 0.3 %
$ 541,000 100.0 %
As ofDecember 31, 2022 , the Company's investment portfolio includes three equity positions. The Company holds one equity security that is more than 10% of the equity value of the portfolio. The largest security position represents 96.8% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL) and is included in REITS and real estate companies industry group. As ofJune 30, 2022 , the Company held five different equity positions in its investment portfolio. The Company held two equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 66% of the portfolio and consists of the common stock of Paramount Global - Preferred Stock (NASDAQ: PARAP), which is included in the communication services industry group.
The following table shows the net gain (loss) on the Company's marketable securities and the associated margin interest and trading expenses for the respective periods:
For the three months ended December 31, 2022 2021
Net gain (loss) on marketable securities
- (20,000 )
Dividend and interest income 6,000 30,000
Margin interest expense (1,000 ) (12,000 )
Trading and management expenses (80,000 ) (40,000 )
$ 32,000 $ (454,000 )
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For the six months ended December 31, 2022 2021
Net gain (loss) on marketable securities
- (20,000 )
Dividend and interest income 32,000 64,000
Margin interest expense (1,000 ) (28,000 )
Trading and management expenses (114,000 ) (80,000 )
$ 14,000 $ (921,000 ) FINANCIAL CONDITION AND LIQUIDITY
The Company had cash, cash equivalents and restricted cash of$6,020,000 and$8,888,000 as ofDecember 31, 2022 andJune 30, 2022 , respectively. The Company had marketable securities, net of margin due to securities brokers, of$302,000 and$411,000 as ofDecember 31, 2022 andJune 30, 2022 , respectively. These marketable securities are short-term investments and liquid in nature. OnDecember 16, 2020 , Justice and InterGroup entered into a loan modification agreement which increased Justice's borrowing from InterGroup as needed up to$10,000,000 and extended the maturity date of the loan toJuly 31, 2021 . As of the date of this report, the maturity date was extended toJuly 31, 2023 . OnSeptember 7, 2021 , theBoard of InterGroup passed resolution to provide funding to Portsmouth for the working capital of the Hotel up to$16,000,000 if necessary. Upon the dissolution of Justice inDecember 2021 , Portsmouth assumed Justice's note payable to InterGroup in the amount of$11,350,000 . OnDecember 31, 2021 , Portsmouth and InterGroup entered into a loan modification agreement which memorialized the increase to$16,000,000 and the substitution of Portsmouth for Justice. During the fiscal year endingJune 30, 2022 , InterGroup advanced$7,550,000 to the Hotel, bringing the total amount due to InterGroup to$14,200,000 as of June30, 2022 andDecember 31, 2022 . Currently, the Company does not anticipate any need for additional funding from InterGroup. As ofDecember 31, 2022 , the Company has not made any pay-downs to its note payable to InterGroup. The Company could amend its by-laws and increase the number of authorized shares to issue additional shares to raise capital in the public markets if needed. Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding indebtedness, and repairs and maintenance of the Hotel. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements of the Hotel. We will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements, even if current levels of occupancy and revenue per occupied room ("RevPAR", calculated by multiplying the hotel's average daily room rate by its occupancy percentage) were to persist. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. However, there can be no guarantee that management will be successful with
its plan.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of
6 Months Year Year Year Year
Total 2023 2024 2025 2026 2027 Thereafter
Mortgage notes payable $ 108,135,000 $ 895,000 $ 107,240,000 $ - $ - $ - $ -
Related party notes payable 17,438,000 283,000 14,767,000 567,000 567,000 463,000 791,000
Interest 7,114,000 3,905,000 3,209,000 - - - -
Total $ 132,687,000 $ 5,083,000 $ 125,216,000 $ 567,000 $ 567,000 $ 463,000 $ 791,000
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OFF-BALANCE SHEET ARRANGEMENTS
The Company has no material off balance sheet arrangements.
IMPACT OF INFLATION Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Aimbridge has the power and ability under the terms of its management agreement to adjust Hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. For the two most recent fiscal years, the impact of inflation on the Company's income is not viewed by management as material.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting estimates are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an ongoing basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company's critical accounting policies or methods or assumptions during the six months endedDecember 31, 2022 . INCOME TAXES Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws, or interpretations thereof). In addition, we are subject to examination of our income tax returns by theIRS and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements. We evaluate tax positions taken or expected to be taken on a tax return to determine whether they are more likely than not of being sustained, assuming that the tax reporting positions will be examined by taxing authorities with full knowledge of all relevant information, prior to recording the related tax benefit in our consolidated financial statements. If a position does not meet the more likely than not standard, the benefit cannot be recognized. Assumptions, judgment, and the use of estimates are required in determining if the "more likely than not" standard has been met when developing the provision for income taxes. A change in the assessment of the "more likely than not" standard with respect to a position could materially impact our consolidated financial statements. See Part II, Item 8, "Financial Statements and Supplementary Data - Note 13 to our Consolidated Financial Statements" on Form 10K for the year endedJune 30, 2022 .
DEFERRED INCOME TAXES - VALUATION ALLOWANCE
We assess the realizability of our deferred tax assets quarterly and recognize a valuation allowance when it is more likely than not that some or all of our deferred tax assets are not realizable. This assessment is completed by tax jurisdiction and relies on the weight of both positive and negative evidence available, with significant weight placed on recent financial results. Cumulative pre-tax losses for the three-year period are considered significant objective negative evidence that some or all of our deferred tax assets may not be realizable. Cumulative reported pre-tax income is considered objectively verifiable positive evidence of our ability to generate positive pre-tax income in the future. In accordance with GAAP, when there is a recent history of pre-tax losses, there is little or no weight placed on forecasts for purposes of assessing the recoverability of our deferred tax assets. When necessary, we use systematic and logical methods to estimate when deferred tax liabilities will reverse and generate taxable income and when deferred tax assets will reverse and generate tax deductions. Assumptions, judgment, and the use of estimates are required when scheduling the reversal of deferred tax assets and liabilities, and the exercise is inherently complex and subjective. However, significant judgment will be required to determine the timing and amount of any reversal of the valuation allowance in future periods. See Part II, Item 8, "Financial Statements and Supplementary Data - Note 13 to our Consolidated Financial Statements" on Form 10K for the year endedJune 30, 2022 .
PROPERTY AND EQUIPMENT AND DEFINITE-LIVED INTANGIBLE ASSETS
We evaluate property and equipment, and definite-lived intangible assets for impairment quarterly, and when events or circumstances indicate the carrying value may not be recoverable, we evaluate the net book value of the assets by comparing to the projected undiscounted cash flows of the assets. We use judgment to determine whether indications of impairment exist and consider our knowledge of the hospitality industry, historical experience, location of the property, market conditions, and property-specific information available at the time of the assessment. The results of our analysis could vary from period to period depending on how our judgment is applied and the facts and circumstances available at the time of the analysis. When an indicator of impairment exists, judgment is also required in determining the assumptions and estimates to use within the recoverability analysis and when calculating the fair value of the asset or asset group, if applicable. Changes in economic and operating conditions impacting the judgments used could result in impairments to our long-lived assets in future periods. Historically, changes in estimates used in the property and equipment and definite-lived intangible assets impairment assessment process have not resulted in material impairment charges in subsequent periods as a result of changes made to those estimates. There were no impairment losses recorded during the six months endedDecember 31, 2022 .
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