UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to_________
Commission File Number 0-4057
PORTSMOUTH SQUARE, INC .
(Exact name of registrant as specified in its charter)
| CALIFORNIA | 94-1674111 |
| (State or other jurisdiction of | (I.R.S. Employer |
| Incorporation or organization) | Identification No.) |
10940 Wilshire Blvd., Suite 2150, Los Angeles, California 90024
(Address of principal executive offices)(Zip Code)
(310) 889-2500
(Registrant's telephone number, including area code)
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.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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).
x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer ¨ | Accelerated filer ¨ |
| Non-accelerated filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
¨ Yes x No
The number of shares outstanding of registrant's Common Stock, as of October 21, 2016, was 734,183.
TABLE OF CONTENTS
| PART I – FINANCIAL INFORMATION | Page | |
| Item 1. | Financial Statements. | |
| Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and June 30, 2016. | 3 | |
| Condensed Consolidated Statements of Operations (Unaudited) for the Three Months ended September 30, 2016 and 2015. | 4 | |
| Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months ended September 30, 2016 and 2015. | 5 | |
| Item 1. | Legal Proceedings | 11 |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | 11 |
| Item 4. | Controls and Procedures. | 16 |
| PART II – OTHER INFORMATION | ||
| Item 6. | Exhibits. | 16 |
| Signatures | 16 |
| - 2 - |
PART 1
FINANCIAL INFORMATION
Item 1 – Condensed Consolidated Financial Statements
PORTSMOUTH SQUARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| As of | September 30, 2016 | June 30, 2016 | ||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Investment in Hotel, net | $ | 37,310,000 | $ | 37,744,000 | ||||
| Investment in real estate | 973,000 | 973,000 | ||||||
| Investment in marketable securities | 4,889,000 | 4,038,000 | ||||||
| Other investments, net | 354,000 | 359,000 | ||||||
| Cash and cash equivalents | 1,371,000 | 3,378,000 | ||||||
| Restricted cash - mortgage impounds | 1,687,000 | 898,000 | ||||||
| Accounts receivable - Hotel, net | 3,012,000 | 3,218,000 | ||||||
| Other assets, net | 1,017,000 | 1,274,000 | ||||||
| Deferred tax asset | 10,383,000 | 11,088,000 | ||||||
| Total assets | $ | 60,996,000 | $ | 62,970,000 | ||||
| LIABILITIES AND SHAREHOLDERS' DEFICIT | ||||||||
| Liabilities: | ||||||||
| Accounts payable and other liabilities | $ | 14,038,000 | $ | 17,181,000 | ||||
| Due to securities broker | 541,000 | 291,000 | ||||||
| Obligations for securities sold | 368,000 | 29,000 | ||||||
| Related party and other notes payable | 10,726,000 | 11,246,000 | ||||||
| Mortgage notes payable - Hotel, net | 116,188,000 | 116,160,000 | ||||||
| Total liabilities | 141,861,000 | 144,907,000 | ||||||
| Commitments and contingencies | ||||||||
| Shareholders' deficit: | ||||||||
| Common stock, no par value: Authorized shares - 750,000; | ||||||||
| 734,183 shares issued and outstanding shares | 2,092,000 | 2,092,000 | ||||||
| Accumulated deficit | (76,400,000 | ) | (77,365,000 | ) | ||||
| Total Portsmouth shareholders' deficit | (74,308,000 | ) | (75,273,000 | ) | ||||
| Noncontrolling interest | (6,557,000 | ) | (6,664,000 | ) | ||||
| Total shareholders' deficit | (80,865,000 | ) | (81,937,000 | ) | ||||
| Total liabilities and shareholders' deficit | $ | 60,996,000 | $ | 62,970,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| - 3 - |
PORTSMOUTH SQUARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the three months ended September 30, | 2016 | 2015 | ||||||
| Revenue - Hotel | $ | 14,605,000 | $ | 15,138,000 | ||||
| Costs and operating expenses | ||||||||
| Hotel operating expenses | (10,256,000 | ) | (11,193,000 | ) | ||||
| Hotel depreciation and amortization expense | (664,000 | ) | (713,000 | ) | ||||
| General and administrative expense | (154,000 | ) | (203,000 | ) | ||||
| Total costs and operating expenses | (11,074,000 | ) | (12,109,000 | ) | ||||
| Income from operations | 3,531,000 | 3,029,000 | ||||||
| Other income (expense) | ||||||||
| Interest expense - mortgage | (1,988,000 | ) | (1,941,000 | ) | ||||
| Loss on disposal of assets | - | (30,000 | ) | |||||
| Net gain on marketable securities | 262,000 | 104,000 | ||||||
| Net unrealized loss on other investments | - | (19,000 | ) | |||||
| Impairment loss on other investments | (5,000 | ) | - | |||||
| Dividend and interest income | 10,000 | 2,000 | ||||||
| Trading and margin interest expense | (33,000 | ) | (32,000 | ) | ||||
| Other expense, net | (1,754,000 | ) | (1,916,000 | ) | ||||
| Income before income taxes | 1,777,000 | 1,113,000 | ||||||
| Income tax expense | (705,000 | ) | (443,000 | ) | ||||
| Net Income | 1,072,000 | 670,000 | ||||||
| Less: Net income attributable to the noncontrolling interest | (107,000 | ) | (75,000 | ) | ||||
| Net income attributable to Portsmouth | $ | 965,000 | $ | 595,000 | ||||
| Basic and diluted net income per share attributable to Portsmouth | $ | 1.31 | $ | 0.81 | ||||
| Weighted average number of common shares outstanding - basic and diluted | 734,183 | 734,183 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| - 4 - |
PORTSMOUTH SQUARE, INC.
CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the three months ended September 30, | 2016 | 2015 | ||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 1,072,000 | $ | 670,000 | ||||
| Adjustments to reconcile net income to net cash (used in) provided by | ||||||||
| operating activities: | ||||||||
| Net unrealized gain on marketable securities | (211,000 | ) | (129,000 | ) | ||||
| Unrealized loss on other investments | - | 19,000 | ||||||
| Impairment loss on other investments | 5,000 | - | ||||||
| Loss on disposal of assets | - | 30,000 | ||||||
| Depreciation and amortization | 664,000 | 713,000 | ||||||
| Changes in assets and liabilities: | ||||||||
| Investment in marketable securities | (640,000 | ) | 142,000 | |||||
| Accounts receivable | 206,000 | 4,562,000 | ||||||
| Other assets | 327,000 | 222,000 | ||||||
| Accounts payable and other liabilities | (3,144,000 | ) | (2,263,000 | ) | ||||
| Due to securities broker | 250,000 | - | ||||||
| Obligations for securities sold | 339,000 | - | ||||||
| Deferred tax asset | 705,000 | 443,000 | ||||||
| Net cash (used in) provided by operating activities | (427,000 | ) | 4,409,000 | |||||
| Cash flows from investing activities: | ||||||||
| Payments for hotel furniture, equipment and building improvements | (272,000 | ) | (1,291,000 | ) | ||||
| Net cash used in investing activities | (272,000 | ) | (1,291,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Restricted cash - payments for mortgage impounds, net | (789,000 | ) | (257,000 | ) | ||||
| Net payments of related party and other notes payable | (519,000 | ) | (124,000 | ) | ||||
| Net cash used in financing activities | (1,308,000 | ) | (381,000 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | (2,007,000 | ) | 2,737,000 | |||||
| Cash and cash equivalents at the beginning of the period | 3,378,000 | 1,077,000 | ||||||
| Cash and cash equivalents at the end of the period | $ | 1,371,000 | $ | 3,814,000 | ||||
| Supplemental information: | ||||||||
| Interest paid | $ | 1,997,000 | $ | 1,941,000 | ||||
| Non-cash transaction: | ||||||||
| Conversion of other investments to marketable securities | $ | - | $ | 4,410,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| - 5 - |
PORTSMOUTH SQUARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements included herein have been prepared by Portsmouth Square, Inc. ("Portsmouth" or the "Company"), without audit, according to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in accordance with generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which included only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial statements of Portsmouth and the notes therein included in the Company's Annual Report on Form 10-K for the year ended June 30, 2016. The June 30, 2016 Condensed Consolidated Balance Sheet was derived from the Company's Form 10-K for the year ended June 30, 2016.
The results of operations for the three months ended September 30, 2016 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2017.
Portsmouth's primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a California limited partnership ("Justice" or the "Partnership"). Portsmouth has a 93% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated with those of the Company.
As of September 30, 2016, Santa Fe Financial Corporation ("Santa Fe"), a public company, owns approximately 68.8% of the outstanding common shares of Portsmouth Square, Inc. ("Portsmouth" or the "Company"). Santa Fe is an 81.7%-owned subsidiary of The InterGroup Corporation ("InterGroup"), a public company. InterGroup also directly owns approximately 13.3% of the common stock of Portsmouth.
Justice, through its subsidiaries Justice Holdings Company, LLC ("Holdings"), a Delaware Limited Liability Company, Justice Operating Company, LLC ("Operating") and Justice Mezzanine Company, LLC ("Mezzanine"), owns a 543-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. Holdings and Mezzanine are both wholly-owned subsidiaries of the Partnership; Operating is a wholly-owned subsidiary 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 operated by the partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement with HLT Franchise Holding LLC (Hilton). Justice has a management agreement with Prism Hospitality L.P. ("Prism") to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years, subject to the Partnership's right to terminate at any time with or without cause. Effective January 2014, the management agreement with Prism was amended by the Partnership to change the nature of the services provided by Prism and the compensation payable to Prism, among other things. Effective December 1, 2013, GMP Management, Inc. ("GMP"), a company owned by a Justice limited partner and a related party, also provided management services for the Partnership pursuant to a management services agreement, with a three year term, subject to the Partnership's right to terminate earlier for cause. In June 2016, GMP resigned and the Company is currently interviewing several national third party hotel management companies to replace GMP.
The parking garage that is part of the Hotel property was managed by Ace Parking pursuant to a contract with the Partnership. The contract was terminated with an effective termination date of October 4, 2016. The Company began managing the parking garage in-house after the termination of Ace Parking.
| - 6 - |
Recently Issued Accounting Pronouncements
On June 16, 2016, the FASB issued ASU 2016-13, " Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ." This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2020. The Company is currently reviewing the effect of ASU No. 2016-13.
On August 26, 2016, the FASB issued ASU 2016-15, " Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic230) ." This ASU is intended to reduce the diversity in practice around how certain transactions are classified within the statement of cash flows. The Company adopted ASU No. 2016-15 in the first quarter of 2017 with no material impact to our financial statements.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs , which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual and interim periods within these annual periods beginning after December 15, 2015 and early application is permitted. This standard did not have material impact on the Company's consolidated financial statements. The Company adopted this standard during the quarter and reclassified the debt issuance costs on the June 30, 2016 consolidated balance sheet.
NOTE 2 – INVESTMENT IN HOTEL, NET
Investment in hotel consisted of the following as of:
| Accumulated | Net Book | |||||||||||
| September 30, 2016 | Cost | Depreciation | Value | |||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||
| Furniture and equipment | 29,070,000 | (23,445,000 | ) | 5,625,000 | ||||||||
| Building and improvements | 54,535,000 | (23,974,000 | ) | 30,561,000 | ||||||||
| $ | 84,729,000 | $ | (47,419,000 | ) | $ | 37,310,000 | ||||||
| Accumulated | Net Book | |||||||||||
| June 30, 2016 | Cost | Depreciation | Value | |||||||||
| Land | $ | 1,124,000 | $ | - | $ | 1,124,000 | ||||||
| Furniture and equipment | 28,857,000 | (23,097,000 | ) | 5,760,000 | ||||||||
| Building and improvements | 54,517,000 | (23,657,000 | ) | 30,860,000 | ||||||||
| $ | 84,498,000 | $ | (46,754,000 | ) | $ | 37,744,000 | ||||||
NOTE 3 - INVESTMENT IN MARKETABLE SECURITIES
The Company's investment in marketable securities consists primarily of corporate equities. The Company has also periodically invested in corporate bonds and income producing securities, which may include interests in real estate based companies and REITs, where financial benefit could transfer to its shareholders through income and/or capital gain.
| - 7 - |
At September 30, 2016 and June 30, 2016, all of the Company's marketable securities are classified as trading securities. The change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as follows:
| Gross | Gross | Net | Fair | |||||||||||||||||
| Investment | Cost | Unrealized Gain | Unrealized Loss | Unrealized Loss | Value | |||||||||||||||
| As of September 30, 2016 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 7,504,000 | $ | 292,000 | $ | (2,907,000 | ) | $ | (2,615,000 | ) | $ | 4,889,000 | ||||||||
| As of June 30, 2016 | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Equities | $ | 6,877,000 | $ | 272,000 | $ | (3,111,000 | ) | $ | (2,839,000 | ) | $ | 4,038,000 | ||||||||
As of September 30, 2016 and June 30, 2016, approximately 67% and 77%, respectively, of the investment marketable securities balance above is comprised of the common stock of Comstock Mining, Inc.
As of September 30, 2016 and June 30, 2016, the Company had $1,206,000 and $1,138,000, respectively, of unrealized losses related to securities held for over one year.
Net gain on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the two components for the three months September 30, 2016 and 2015, respectively.
| For the three months ended September 30, | 2016 | 2015 | ||||||
| Realized gain (loss) on marketable securities | $ | 51,000 | $ | (25,000 | ) | |||
| Unrealized gain on marketable securities | 211,000 | 129,000 | ||||||
| Net gain on marketable securities | $ | 262,000 | $ | 104,000 | ||||
NOTE 4 – OTHER INVESTMENTS, NET
The Company may also invest, with the approval of the Securities Investment Committee and other Company guidelines, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non-marketable securities are carried at cost on the Company's balance sheet as part of other investments, net of other than temporary impairment losses.
Other investments, net consist of the following:
| Type | September 30, 2016 | June 30, 2016 | ||||||
| Private equity hedge fund, at cost | $ | 333,000 | $ | 333,000 | ||||
| Other preferred stock | 21,000 | 26,000 | ||||||
| $ | 354,000 | $ | 359,000 | |||||
| - 8 - |
NOTE 5 - FAIR VALUE MEASUREMENTS
The carrying values of the Company's financial instruments not required to be carried at fair value on a recurring basis approximate fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities) or the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
The assets measured at fair value on a recurring basis are as follows:
| As of September 30, 2016 | Total | |||
| Assets: | Level 1 | |||
| Investment in marketable securities: | ||||
| Basic materials | $ | 3,286,000 | ||
| Energy | 412,000 | |||
| Financial services | 328,000 | |||
| Other | 863,000 | |||
| $ | 4,889,000 | |||
| As of June 30, 2016 | Total | |||
| Assets: | Level 1 | |||
| Investment in marketable securities: | ||||
| Basic materials | $ | 3,102,000 | ||
| Energy | 388,000 | |||
| Financial services | 198,000 | |||
| Other | 350,000 | |||
| $ | 4,038,000 | |||
The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.
Financial assets that are measured at fair value on a non-recurring basis and are not included in the tables above include "Other investments, net (non-marketable securities)," that were initially measured at cost and have been written down to fair value as a result of impairment or adjusted to record the fair value of new instruments received (i.e., preferred shares) in exchange for old instruments (i.e., debt instruments). The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:
| Net loss for the three months | ||||||||||||
| Assets | Level 3 | September 30, 2016 | ended September 30, 2016 | |||||||||
| Other non-marketable investments | $ | 354,000 | $ | 354,000 | $ | (5,000 | ) | |||||
| Net loss for the three months | ||||||||||||
| Assets | Level 3 | June 30, 2016 | ended September 30, 2015 | |||||||||
| Other non-marketable investments | $ | 359,000 | $ | 359,000 | $ | - | ||||||
Other investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence or control over the entities that issue these investments and holds less than 20% ownership in each of the investments. These investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near term prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.
| - 9 - |
NOTE 6 - SEGMENT INFORMATION
The Company operates in two reportable segments, the operation of the hotel ("Hotel Operations") and the investment of its cash in marketable securities and other investments ("Investment Transactions"). These two operating segments, as presented in the consolidated financial statements, reflect how management internally reviews each segment's performance. Management also makes operational and strategic decisions based on this same information.
Information below represents reporting segments for the three months September 30, 2016 and 2015, respectively. Operating income from Hotel operations consists of the operation of the hotel and operation of the garage. Income (loss) from investment transactions consist of net investment gain (loss), impairment loss on other investments, net unrealized gain (loss) on other investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general and administrative expenses and the income tax expense for the entire Company.
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended September 30, 2016 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 14,605,000 | $ | - | $ | - | $ | 14,605,000 | ||||||||
| Segment operating expenses | (10,256,000 | ) | - | (154,000 | ) | (10,410,000 | ) | |||||||||
| Segment income (loss) | 4,349,000 | - | (154,000 | ) | 4,195,000 | |||||||||||
| Interest expense - mortgage | (1,988,000 | ) | - | - | (1,988,000 | ) | ||||||||||
| Depreciation and amortization expense | (664,000 | ) | - | - | (664,000 | ) | ||||||||||
| Income from investments | - | 234,000 | - | 234,000 | ||||||||||||
| Income tax expense | - | - | (705,000 | ) | (705,000 | ) | ||||||||||
| Net income (loss) | $ | 1,697,000 | $ | 234,000 | $ | (859,000 | ) | $ | 1,072,000 | |||||||
| Total assets | $ | 43,958,000 | $ | 5,243,000 | $ | 11,795,000 | $ | 60,996,000 | ||||||||
| As of and for the three months | Hotel | Investment | ||||||||||||||
| ended September 30, 2015 | Operations | Transactions | Other | Total | ||||||||||||
| Revenues | $ | 15,138,000 | $ | - | $ | - | $ | 15,138,000 | ||||||||
| Segment operating expenses | (11,193,000 | ) | - | (203,000 | ) | (11,396,000 | ) | |||||||||
| Segment income (loss) | 3,945,000 | - | (203,000 | ) | 3,742,000 | |||||||||||
| Interest expense - mortgage | (1,941,000 | ) | - | - | (1,941,000 | ) | ||||||||||
| Loss on disposal of assets | (30,000 | ) | - | - | (30,000 | ) | ||||||||||
| Depreciation and amortization expense | (713,000 | ) | - | - | (713,000 | ) | ||||||||||
| Income from investments | - | 55,000 | - | 55,000 | ||||||||||||
| Incomt tax expense | - | - | (443,000 | ) | (443,000 | ) | ||||||||||
| Net income (loss) | $ | 1,261,000 | $ | 55,000 | $ | (646,000 | ) | $ | 670,000 | |||||||
| Total assets | $ | 46,672,000 | $ | 6,272,000 | $ | 9,388,000 | $ | 62,332,000 | ||||||||
NOTE 7 - RELATED PARTY TRANSACTIONS
On July 2, 2014, the Partnership obtained from InterGroup (a related party) 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 proceeds of the loan were applied to the July 2014 payments to Holdings as described in Note 2 of the Company's June 30, 2016 10-K Report. The loan was extended to November 30, 2016. InterGroup is currently working on amending the loan agreement to extend the loan for a longer period.
Four of the Portsmouth directors serve as directors of InterGroup. Three of those directors also serve as directors of Santa Fe. The three Santa Fe directors also serve as directors of InterGroup.
John V. Winfield serves as Chief Executive Officer and Chairman of the Company, Santa Fe, and InterGroup. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Santa Fe and InterGroup may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and the resources of Santa Fe and InterGroup, at risk in connection with investment decisions made on behalf of the Company.
| - 10 - |
Item 1 – LEGAL PROCEEDINGS
We are involved from time to time in legal proceedings of types regarded as common in our business, including administrative or judicial proceedings, such as employment or labor disputes, breach of contract liability and premises liability litigation. Where appropriate, we may establish financial reserves for such proceedings. We also maintain insurance to mitigate certain of such risks.
Item 2 – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the San 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 ended June 30, 2016, 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 business is conducted through its general and limited partnership interest in the Justice Investors Limited Partnership ("Justice" or the "Partnership"). Justice owns a 543 room hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the "Hilton San Francisco Financial District" (the "Hotel" or the "Property") and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company.
The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement (the "License Agreement") with HLT Franchise Holding LLC (Hilton). The Partnership entered into the License Agreement on December 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. On June 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 on July 1, 2015.
Justice has a management agreement with Prism Hospitality L.P. ("Prism") to perform certain management functions for the Hotel. The management agreement with Prism had an original term of ten years and can be terminated at any time with or without cause by the Partnership. Effective January 2014, the management agreement with Prism was amended by the Partnership to change the nature of the services provided by Prism and the compensation payable to Prism, among other things. Effective December 1, 2013, GMP Management, Inc. ("GMP"), a company owned by a Justice limited partner and a related party, began to provide management services for the Partnership pursuant to a management services agreement with a term of three years, subject to the Partnership's right to terminate earlier, for cause. In June 2016, GMP resigned and the Company is currently interviewing several national third party hotel management companies to replace GMP.
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The parking garage that is part of the Hotel property was managed by Ace Parking pursuant to a contract with the Partnership. The contract was terminated with an effective termination date of October 4, 2016. The Company began managing the parking garage in-house after the termination of Ace Parking.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015
The Company had net income of $1,072,000 for the three months ended September 30, 2016 compared to net income of $670,000 for the three months ended September 30, 2015. The increase in net income is primarily attributable to the higher income from the Hotel operations.
Net income from Hotel operations increased to $1,697,000 for the three months ended September 30, 2016 from net income of $1,261,000 for the three months ended September 30, 2015. The increase is primarily due to the reduction of expenses as the result of the resignation of GMP management in June 2016 and the decrease in legal expenses as the result of the legal settlement that was reached in May 2016. Please see Note 17 of the Company's June 30, 2016 10-K report for further information. The decrease in operating expenses was partially offset by the decrease in total Hotel revenues.
The following table sets forth a more detailed presentation of Hotel operations for the three months ended September 30, 2016 and 2015.
| For the three months ended September 30, | 2016 | 2015 | ||||||
| Hotel revenues: | ||||||||
| Hotel rooms | $ | 12,298,000 | $ | 12,607,000 | ||||
| Food and beverage | 1,449,000 | 1,650,000 | ||||||
| Garage | 681,000 | 685,000 | ||||||
| Other operating departments | 177,000 | 196,000 | ||||||
| Total hotel revenues | 14,605,000 | 15,138,000 | ||||||
| Operating expenses excluding depreciation and amortization | (10,256,000 | ) | (11,193,000 | ) | ||||
| Operating income before loss on disposal of assets, interest, depreciation and amortization | 4,349,000 | 3,945,000 | ||||||
| Loss on disposal of assets | - | (30,000 | ) | |||||
| Interest expense - mortgage | (1,988,000 | ) | (1,941,000 | ) | ||||
| Depreciation and amortization expense | (664,000 | ) | (713,000 | ) | ||||
| Net income from Hotel operations | $ | 1,697,000 | $ | 1,261,000 | ||||
For the three months ended September 30, 2016, the Hotel had operating income of $4,349,000 before disposal of assets, interest, depreciation and amortization on total operating revenues of $14,605,000 compared to operating income of $3,945,000 before disposal of assets, interest, depreciation and amortization on total operating revenues of $15,138,000 for the three months ended September 30, 2015. Room revenues decreased by $309,000 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 primarily as the result of the decrease in group business and the decrease in the average daily rate. Food and beverage revenue decreased by $201,000 as the result of the reduction in the catering and banquet services from the decrease in the group business.
Total operating expenses decreased by $937,000 this quarter as compared to the previous comparable quarter primarily due decrease in operating expenses related to the resignation of GMP management and the reduction in legal expenses as discussed above.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room ("RevPAR") of the Hotel for the three months ended September 30, 2016 and 2015.
Three Months Ended September 30, | Average Daily Rate | Average Occupancy % |
RevPAR | |||||||||
| 2016 | $ | 255 | 97 | % | $ | 246 | ||||||
| 2015 | $ | 265 | 95 | % | $ | 252 | ||||||
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The Hotel's revenues decreased by 3.5% this quarter as compared to the previous comparable quarter. Average daily rate decreased by $10 and RevPAR decreased by $6 for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. The decrease in the average daily rate was partially offset by an increase in occupancy to 97% from 95%.
Our highest priority is guest satisfaction. We believe that enhancing the guest experience differentiates the Hotel from our competition and is critical to the Hotel's objective of building sustainable guest loyalty. In order to make a large impact on guest experience, the Hotel will continue training team members on Hilton brand standards and guest satisfaction, hiring and retaining talents in key operations and enhancing the arrival experience. In addition, the Hotel replaced the carpet flooring in the lobby and the fourth floor with oak wood, creating an open and welcoming environment; modernized the furniture in the lobby, the porte cochere, and the second floor; and replaced the third floor carpets and doors. The Wellness Center on the fifth floor features a new spa with two treatment rooms and a room for manicures and pedicures. During the fiscal year ended June 30, 2016, the Hotel partially remodeled 14 floors of guest rooms by updating the tables and the night stands with granite tops for a sleek and modern look. As the Hotel continues to further develop its ties with the financial district community and the City of San Francisco, the Hotel is also committed to promoting innovative business ideas and good corporate citizenship.
With the high demand in guest rooms, the Hotel can focus more attention on length and patterns of stay that benefit the Hotel. The Hotel is also focusing on high end clients with more banquet and meeting room requirements. Moving forward, the Hotel will continue to focus on cultivating international business and capturing a greater percentage of the higher rated business, leisure and group travel. The Hotel will continue to explore new and innovative ways to differentiate the Hotel from its competition, as well as focusing on returning our food and beverage operations to profitability. However, like all hotels, it will remain subject to the uncertain domestic and global economic environment and other risk factors beyond our control, such as the effect of natural disasters and adverse business conditions.
The Company had a gain on marketable securities of $262,000 for the three months ended September 30, 2016 compared to a net gain on marketable securities of $104,000 for the three months ended September 30, 2015. As of September 30, 2016 and 2015, approximately 67% and 95%, respectively, of the investment in marketable securities balance above is comprised of the common stock of Comstock Mining, Inc. (Comstock). As the result, the change in the market price of the common stock of Comstock will have a significant impact on the gain (loss) on marketable securities. For the three months ended September 30, 2016, the Company had a net realized gain of $51,000 and a net unrealized gain of $211,000. For the three months ended September 30, 2015, the Company had a net realized loss of $25,000 and a net unrealized gain of $129,000. 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 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 three months ended September 30, 2016 and 2015 represents the income tax effect on the Company ' s pretax income which includes its share in the net income of the Hotel.
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MARKETABLE SECURITIES
The following table shows the composition of the Company's marketable securities portfolio as of September 30, 2016 and June 30, 2016 by selected industry groups.
| % of Total | ||||||||
| As of September 30, 2016 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 3,286,000 | 67.2 | % | ||||
| Energy | 412,000 | 8.4 | % | |||||
| Financial services | 328,000 | 6.7 | % | |||||
| Other | 863,000 | 17.7 | % | |||||
| $ | 4,889,000 | 100.0 | % | |||||
| % of Total | ||||||||
| As of June 30, 2016 | Investment | |||||||
| Industry Group | Fair Value | Securities | ||||||
| Basic materials | $ | 3,102,000 | 76.8 | % | ||||
| Energy | 388,000 | 9.6 | % | |||||
| Financial services | 198,000 | 4.9 | % | |||||
| Other | 350,000 | 8.7 | % | |||||
| $ | 4,038,000 | 100.0 | % | |||||
As of September 30, 2016, the Company's investment in marketable securities portfolio consists primarily of (67%) of the common stock of Comstock Mining, Inc. ("Comstock" - NYSE MKT: LODE) which is included in the basic materials industry group.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash flows are primarily generated from its Hotel operations. The Company also receives cash generated from the investment of its cash and marketable securities and other investments.
On December 18, 2013, the Partnership completed an Offer to Redeem any and all limited partnership interests not held by Portsmouth. As a result, Portsmouth, which prior to the Offer to Redeem owned 50% of the then outstanding limited partnership interests now controls approximately 93% of the voting interest in Justice and is now its sole General Partner.
To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000. Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan. 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 with interest only payments due thru January 2017. Beginning in February 2017, the loan will begin to amortize over a thirty year period thru its maturity date of January 2024. As additional security for the mortgage loan, there is a limited guaranty executed by the Company in favor of 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 bears interest at 9.75% per annum and matures in January 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by the Company in favor of mezzanine lender.
On July 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 proceeds of the loan were applied to the July 2014 payments to Holdings as described in Note 2 of the Company's June 30, 2016 10-K Report. The loan was extended to November 30, 2016. InterGroup is currently working on amending the loan agreement to extend the loan for a longer period.
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Despite an uncertain economy, the Hotel has continued to generate positive operating income growth. While the debt service requirements related the loans may create some additional risk 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 those assets and 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.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary as of September 30, 2016, the Company's material financial obligations which also including interest payments:
| 9 Months | Year | Year | Year | Year | ||||||||||||||||||||||||
| Total | 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | ||||||||||||||||||||||
| Mortgage notes payable | $ | 117,000,000 | $ | 672,000 | $ | 1,398,000 | $ | 1,473,000 | $ | 1,553,000 | $ | 1,637,000 | $ | 110,267,000 | ||||||||||||||
| Related party and other notes payable | 10,726,000 | 7,085,000 | 317,000 | 317,000 | 317,000 | 317,000 | 2,373,000 | |||||||||||||||||||||
| Interest | 49,789,000 | 5,378,000 | 6,998,000 | 6,922,000 | 6,843,000 | 6,759,000 | 16,889,000 | |||||||||||||||||||||
| Total | $ | 177,515,000 | $ | 13,135,000 | $ | 8,713,000 | $ | 8,712,000 | $ | 8,713,000 | $ | 8,713,000 | $ | 129,529,000 | ||||||||||||||
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 the Company 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 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 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 three months September 30, 2016. Please refer to the Company's Annual Report on Form 10-K for the year ended June 30, 2016 for a summary of the critical accounting policies.
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Item 4. Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in ensuring that information required to be disclosed in this filing is accumulated and communicated to management and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over financial reporting during the last quarterly period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II.
OTHER INFORMATION
Item 6. Exhibits.
31.1 Certification of Principal Executive Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2 Certification of Principal Financial Officer of Periodic Report Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PORTSMOUTH SQUARE, INC. | ||
| (Registrant) | ||
| Date: November 4, 2016 | by | /s/ John V. Winfield |
| John V. Winfield, President, | ||
| Chairman of the Board and | ||
| Chief Executive Officer | ||
| Date: November 4, 2016 | by | /s/ David Nguyen |
| David Nguyen, Treasurer | ||
| and Controller | ||
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