PORTSMOUTH SQUARE, INC. FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "may," "could," "might" and similar expressions, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, such as 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 and 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, partnership distributions, 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, 2019 , that 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. RESULTS OF OPERATIONS
The Company's principal source of revenue continues to be derived from its general and limited partnership interest in theJustice Investors Limited Partnership ("Justice" or the "Partnership") inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. Justice owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company. -19- The Hotel is operated by the Partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement (the "License Agreement") with Hilton. The Partnership entered into the License Agreement onDecember 10, 2004 . The term of the License Agreement was for an initial period of 15 years commencing on the opening date, with an option to extend the License Agreement for another five years, subject to certain conditions. OnJune 26, 2015 , the Partnership and Hilton entered into an amended franchise agreement which extended the License Agreement through 2030, modified the monthly royalty rate, extended geographic protection to the Partnership and also provided the Partnership certain key money cash incentives to be earned through 2030. The key money cash incentives were received onJuly 1, 2015 . OnFebruary 1, 2017 , Justice entered into a Hotel management agreement ("HMA") withInterstate Management Company, LLC ("Interstate") to manage the Hotel and related facilities with an effective takeover date ofFebruary 3, 2017 . The term of HMA is for an initial period of ten years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of$2,000,000 under certain terms and conditions described in a separate key money agreement.
Three Months Ended
The Company had net income of$426,000 for the three months endedDecember 31, 2019 compared to net loss of$39,000 for the three months endedDecember 31, 2018 . The change is primarily attributable to the increase in Hotel revenue and reduced loss in marketable securities, offset by the rise of Hotel operating expenses.Hotel Operations
The Company had net income from Hotel operations of
The following table sets forth a more detailed presentation of Hotel operations
for the three months ended
For the three months endedDecember 31, 2019
2018 Hotel revenues: Hotel rooms$ 12,497,000 $ 11,565,000 Food and beverage 1,425,000 1,565,000 Garage 776,000 734,000 Other operating departments 203,000 133,000 Total hotel revenues 14,901,000 13,997,000 Operating expenses excluding depreciation and amortization (11,730,000 ) (11,236,000 ) Operating income before interest, depreciation and amortization 3,171,000
2,761,000
Interest expense - mortgage (1,825,000 ) (1,887,000 ) Depreciation and amortization expense (562,000 ) (594,000 ) Net income from Hotel operations$ 784,000 $
280,000 For the three months endedDecember 31, 2019 , the Hotel had operating income of$3,171,000 before interest expense, depreciation and amortization on total operating revenues of$14,901,000 compared to operating income of$2,761,000 before interest expense, depreciation and amortization on total operating revenues of$13,997,000 for the three months endedDecember 31, 2018 . Hotel room revenue rose by$932,000 for the three months endedDecember 31, 2019 compared to the three months endedDecember 31, 2018 . The increase is primarily due to the timing of Dreamforce, one of the largest annual citywide conventions inSan Francisco , from September in 2018 to November in 2019. Food and beverage revenue decreased by$140,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Revenue from garage increased by$42,000 as a result of the increase in occupancy and monthly parkers. Other operating departments revenue increased by$70,000 primarily due to increase in group cancellation revenue. -20-
Total operating expenses increased by
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months endedDecember 31, 2019 and 2018. Three Months Average Average Ended December 31, Daily Rate Occupancy % RevPAR 2019$ 255 98 %$ 250 2018$ 239 97 %$ 232 The Hotel's revenues increased by 6.5% this quarter as compared to the previous comparable quarter. Average daily rate increased by$16 , average occupancy increased by 1%, and RevPAR increased by$18 for the three months endedDecember 31, 2019 compared to the three months endedDecember 31, 2018 . Investment Transactions The Company had a net loss on marketable securities of$40,000 for the three months endedDecember 31, 2019 compared to a net loss on marketable securities of$273,000 for the three months endedDecember 31, 2018 . For the three months endedDecember 31, 2019 , the Company had a net realized gain of$20,000 and a net unrealized loss of$60,000 . For the three months endedDecember 31, 2018 , the Company had a net realized gain of$124,000 and a net unrealized loss of$397,000 .
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
The Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense (benefit) during the three months endedDecember 31, 2019 and 2018 represents the income tax effect on the Company's pretax income (loss) which includes its share in the net income of the Hotel.
Six Months Ended
The Company had net income of$1,351,000 for the six months endedDecember 31, 2019 compared to net income of$1,443,000 for the six months endedDecember 31, 2018 . The change is primarily attributable to the rise in Hotel operating expenses, offset by the increase in Hotel revenue.Hotel Operations
The Company had net income from Hotel operations of$2,398,000 for the six months endedDecember 31, 2019 compared to net income of$2,782,000 for the six months endedDecember 31, 2018 . The change is primarily attributable to the rise in Hotel operating expenses, offset by the increase in Hotel revenue. -21-
The following table sets forth a more detailed presentation of Hotel operations
for the six months ended
For the six months endedDecember 31, 2019
2018 Hotel revenues: Hotel rooms$ 25,811,000 $ 25,087,000 Food and beverage 2,647,000 3,014,000 Garage 1,512,000 1,508,000 Other operating departments 360,000 198,000 Total hotel revenues 30,330,000 29,807,000 Operating expenses excluding depreciation and amortization (23,078,000 ) (22,046,000 ) Operating income before interest, depreciation and amortization 7,252,000
7,761,000
Interest expense - mortgage (3,748,000 ) (3,792,000 ) Depreciation and amortization expense (1,106,000 ) (1,187,000 ) Net income from Hotel operations$ 2,398,000 $
2,782,000
For the six months endedDecember 31, 2019 , the Hotel had operating income of$7,252,000 before interest expense, depreciation and amortization on total operating revenues of$30,330,000 compared to operating income of$7,761,000 before interest expense, depreciation and amortization on total operating revenues of$29,807,000 for the six months endedDecember 31, 2018 . Hotel room revenue rose by$724,000 for the six months endedDecember 31, 2019 compared to the six months endedDecember 31, 2018 . The increase is primarily due to replacing guaranteed room revenue at low rates with room revenue at higher market rates driven by citywide conventions. Food and beverage revenue decreased by$367,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Garage revenue remained consistent year over year. Revenue from other operating departments increased by$162,000 primarily due to increase in group cancellation revenue.
Total operating expenses increased by
The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the six months endedDecember 31, 2019 and 2018. Six months Average Average Ended December 31, Daily Rate Occupancy % RevPAR 2019$ 263 98 %$ 258 2018$ 258 97 %$ 250 The Hotel's revenues increased by 1.8% for the six months endedDecember 31, 2019 , as compared to the six months endedDecember 31, 2018 . Average daily rate increased by$5 , average occupancy increased by 1%, and RevPAR increased by$8 for the six months endedDecember 31, 2019 , compared to the six months endedDecember 31, 2018 . Investment Transactions
The Company had a net loss on marketable securities of$214,000 for the six months endedDecember 31, 2019 compared to a net loss on marketable securities of$453,000 for the six months endedDecember 31, 2018 . For the six months endedDecember 31, 2019 , the Company had a net realized gain of$17,000 and a net unrealized loss of$231,000 . For the six months endedDecember 31, 2018 , the Company had a net realized gain of$148,000 and a net unrealized loss of$601,000 .
Gains and losses on marketable securities may fluctuate significantly from
period to period in the future and could have a significant impact on the
Company's results of operations. However, the amount of gain or loss on
marketable securities for any given period may have no predictive value and
variations in amount from period to period may have no analytical value. For a
more detailed description of the composition of the Company's marketable
securities see the
-22- The Company consolidates Justice (Hotel) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the six months endedDecember 31, 2019 and 2018 represents the income tax effect on the Company's pretax income which includes its share in the net income of the Hotel. MARKETABLE SECURITIES The following table shows the composition of the Company's marketable securities portfolio as ofDecember 31, 2019 andJune 30, 2019 by selected industry groups. % of Total As of December 31, 2019 Investment Industry Group Fair Value Securities REITs and real estate companies$ 464,000 40.8 % Energy 269,000 23.6 % Basic materials 176,000 15.5 % Financial services 80,000 7.0 % Consumer cyclical 55,000 4.8 % Other 94,000 8.3 %$ 1,138,000 100.0 % % of Total As of June 30, 2019 Investment Industry Group Fair Value Securities REITs and real estate companies$ 451,000 31.7 % Basic materials 351,000 24.6 % Consumer cyclical 318,000 22.3 % Financial Services 165,000 11.6 % Energy 98,000 6.9 % Healthcare 42,000 2.9 %$ 1,425,000 100.0 % As ofDecember 31, 2019 , the Company's investment portfolio includes approximately 10 equity positions. The Company holds four equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 26% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL), which is included in the REITs and real estate companies' industry group. As ofJune 30, 2019 , the Company's investment portfolio includes approximately 11 equity positions. The Company holds five equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 24% of the portfolio and consists of the common stock of Comstock, which is included in the basic materials industry group. -23-
The following table shows the net 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, 2019 2018
Net loss on marketable securities
41,000 12,000
Margin interest expense (5,000 ) (11,000 )
Trading and management expenses (26,000 ) (30,000 )
$ (30,000 ) $ (302,000 )
For the six months ended December 31, 2019 2018
Net loss on marketable securities
88,000 20,000
Margin interest expense (14,000 ) (29,000 )
Trading and management expenses (56,000 ) (66,000 )
$ (196,000 ) $ (528,000 ) FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated from its Hotel operations and general partner management fees. The Company may also receive cash generated from the investment of its cash and marketable securities and other investments. To fund the redemption of limited partnership interests and to repay the prior mortgage, Justice obtained a$97,000,000 mortgage loan and a$20,000,000 mezzanine loan in December of 2013. The mortgage loan is secured by the Partnership's principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum and matures inJanuary 2024 . Outstanding principal balance on the loan was$92,914,000 and$93,746,000 as ofDecember 31, 2019 andJune 30, 2019 , respectively. As additional security for the mortgage loan, there is a limited guaranty executed by the Portsmouth in favor of the mortgage lender. The mezzanine loan is a secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan had an interest rate of 9.75% per annum and a maturity date ofJanuary 1, 2024 . As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. OnJuly 31, 2019 , Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement ("New Mezzanine Loan Agreement") withCred Reit Holdco LLC in the amount of$20,000,000 . The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures onJanuary 1, 2024 . Interest only payments are due monthly. Effective as ofMay 12, 2017 , InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity forJustice Investors limited partnership's$97,000,000 mortgage loan and the$20,000,000 mezzanine loan.
OnJuly 2, 2014 , the Partnership obtained from InterGroup an unsecured loan in the principal amount of$4,250,000 at 12% per year fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid at any time without penalty. The loan was extended toJune 30, 2020 . The balance of this loan was$3,000,000 as ofDecember 31, 2019 andJune 30, 2019 , and are included in the related party and other note payable in the condensed consolidated balance sheets. The Hotel has continued to generate strong revenue growth. While the debt service requirements related to the loans may create some additional risks for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership's current and future obligations and financial requirements. The Company has invested in short-term, income-producing instruments and in equity and debt securities when deemed appropriate. The Company's marketable securities are classified as trading with unrealized gains and losses recorded through the consolidated statements of operations. Management believes that its cash, marketable securities, and the cash flows generated from the partnership management fees, will be adequate to meet the Company's current and future obligations. Additionally, management believes there is significant appreciated value in the Hotel property to support additional borrowings, if necessary. -24-
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of
6 Months Year Year Year Year
Total 2020 2021 2022 2023 2024 Thereafter
Mortgage notes payable $ 112,914,000 $ 622,000 $ 1,547,000 $ 1,632,000 $ 1,721,000 $ 107,392,000 $ -
Related party and other
notes payable 9,220,000 3,572,000 1,006,000 1,022,000 744,000 567,000 2,309,000
Interest 25,328,000 3,411,000 6,395,000 6,283,000 6,172,000 3,067,000 -
Total $ 147,462,000 $ 7,605,000 $ 8,948,000 $ 8,937,000 $ 8,637,000 $ 111,026,000 $ 2,309,000 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 Interstate has the power and ability to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by 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 POLICIES AND USE OF ESTIMATES
Critical accounting policies are those that are most significant to the presentation 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 condensed 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 on-going 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 during the six months endedDecember 31, 2019 except for the adoption of ASU 2016-02. Please refer to the Company's Annual Report on Form 10-K for the year endedJune 30, 2019 for a summary of the critical accounting policies.
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