Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to _____
Commission File Number: 0-6877
SANTA FE FINANCIAL CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 95-2452529
------------------------------ ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10940 Wilshire Blvd., Suite 2150, Los Angeles, CA 90024
-------------------------------------------------------
(Address of principal executive offices)
(310) 889-2500
-----------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 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 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 Exchange Act.) [ ] Yes [x] No
The number of shares outstanding of issuer's Common Stock, as of May 9, 2011,
was 1,241,810.
INDEX
SANTA FE FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION PAGE
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
As of March 31, 2011(Unaudited) and June 30, 2010 3
Condensed Consolidated Statements of Operations(Unaudited)
For the Three Months ended March 31, 2011 and 2010 4
Condensed Consolidated Statements of Operations(Unaudited)
For the Nine Months ended March 31, 2011 and 2010 5
Condensed Consolidated Statements of Cash Flows(Unaudited)
For the Nine Months ended March 31, 2011 and 2010 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 6. Exhibits 27
SIGNATURES 28
-2-
PART I
FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements
SANTA FE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2011 June 30, 2010
(Unaudited)
----------------- -------------
ASSETS:
Investment in hotel, net $ 36,024,000 $ 37,561,000
Investment in real estate, net 5,184,000 5,228,000
Investment in marketable securities 9,036,000 4,332,000
Other investments, net 9,494,000 4,124,000
Cash and cash equivalents 970,000 632,000
Accounts receivable, net 1,279,000 1,573,000
Other assets, net 3,169,000 1,680,000
Deferred tax asset 2,972,000 4,891,000
----------- -----------
Total assets $ 68,128,000 $ 60,021,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY(DEFICIT)
Liabilities:
Accounts payable and other liabilities $ 7,767,000 $ 8,019,000
Due to securities broker 3,762,000 889,000
Obligations for securities sold 63,000 708,000
Other notes payable 3,181,000 3,688,000
Mortgage notes payable - real estate 3,648,000 2,067,000
Mortgage notes payable - hotel 45,386,000 45,990,000
----------- -----------
Total liabilities 63,807,000 61,361,000
----------- -----------
Commitments and contingencies
Shareholders' equity(deficit):
Common stock - par value $.10 per share;
Authorized - 2,000,000;
Issued 1,339,638 and outstanding 1,241,810 134,000 134,000
Additional paid-in capital 8,808,000 8,808,000
Retained earnings(accumulated deficit) 1,931,000 (2,588,000)
Treasury stock, at cost, 97,828 shares (951,000) (951,000)
----------- -----------
Total Santa Fe shareholders' equity 9,922,000 5,403,000
Noncontrolling interest deficit (5,601,000) (6,743,000)
----------- -----------
Total shareholders' equity(deficit) 4,321,000 (1,340,000)
----------- -----------
Total liabilities and shareholders' equity(deficit) $ 68,128,000 $ 60,021,000
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-3-
SANTA FE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended March 31, 2011 2010
---------- -----------
Revenues:
Hotel $ 8,187,000 $ 7,456,000
Real estate 141,000 141,000
---------- -----------
Total revenues 8,328,000 7,597,000
---------- -----------
Costs and operating expenses:
Hotel operating expenses (7,113,000) (6,670,000)
Real estate operating expenses (55,000) (55,000)
Depreciation and amortization expense (542,000) (1,262,000)
General and administrative expense (244,000) (232,000)
---------- -----------
Total costs and operating expenses (7,954,000) (8,219,000)
---------- -----------
Income(loss) from operations 374,000 (622,000)
---------- -----------
Other income(expense):
Interest expense (730,000) (751,000)
Net gain on marketable securities 15,000 278,000
Net unrealized loss on other investments (79,000) (43,000)
Impairment loss on other investments - (143,000)
Dividend and interest income 104,000 76,000
Trading and margin interest expense (163,000) (119,000)
---------- -----------
Total other expense, net (853,000) (702,000)
---------- -----------
Loss before income tax (479,000) (1,324,000)
Income tax benefit 103,000 286,000
---------- ---------
Net loss (376,000) (1,038,000)
Less: Net loss attributable to noncontrolling
interest 123,000 723,000
---------- ----------
Net loss attributable to Santa Fe (253,000) (315,000)
========== ==========
Basic and diluted net loss per share attributable
to Santa Fe $ (0.20) $ (0.25)
========== ==========
Weighted average number of shares outstanding 1,241,810 1,241,810
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
SANTA FE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the nine months ended March 31, 2011 2010
---------- -----------
Revenues:
Hotel $26,855,000 $24,354,000
Real estate 415,000 418,000
---------- -----------
Total revenues 27,270,000 24,772,000
---------- -----------
Costs and operating expenses:
Hotel operating expenses (21,246,000) (20,089,000)
Real estate operating expenses (196,000) (159,000)
Depreciation and amortization expense (3,071,000) (3,674,000)
General and administrative expense (665,000) (662,000)
---------- -----------
Total costs and operating expenses (25,178,000) (24,584,000)
---------- -----------
Income from operations 2,092,000 188,000
---------- -----------
Other income(expense):
Interest expense (2,200,000) (2,253,000)
Net gain(loss) on marketable securities 2,229,000 (447,000)
Net unrealized gain on other investments 5,753,000 99,000
Impairment loss on other investments (336,000) (713,000)
Dividend and interest income 447,000 157,000
Trading and margin interest expense (405,000) (428,000)
---------- -----------
Total other income(expense), net 5,488,000 (3,585,000)
---------- -----------
Income(loss) before income tax 7,580,000 (3,397,000)
Income tax (expense)benefit (1,919,000) 897,000
---------- ---------
Net income(loss) 5,661,000 (2,500,000)
Less: Net (income)loss attributable to
noncontrolling interest (1,142,000) 1,190,000
---------- ----------
Net income(loss) attributable to Santa Fe 4,519,000 (1,310,000)
========== ==========
Basic and diluted income(loss) per share
attributable to Santa Fe $ 3.64 $ (1.06)
========== ==========
Weighted average number of shares outstanding 1,241,810 1,241,810
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
SANTA FE FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended March 31, 2011 2010
---------- ----------
Cash flows from operating activities:
Net income(loss) $ 5,661,000 $(2,500,000)
Adjustments to reconcile net income(loss) to
net cash provided by operating activities:
Net unrealized (gain)loss on marketable securities (2,024,000) 2,913,000
Net unrealized gain on other investments (5,753,000) (99,000)
Impairment loss on other investments 336,000 713,000
Depreciation and amortization 3,071,000 3,674,000
Changes in assets and liabilities:
Investment in marketable securities (2,680,000) (1,322,000)
Accounts receivable 294,000 294,000
Other assets (1,550,000) (219,000)
Accounts payable and other liabilities (249,000) 783,000
Due to securities broker 2,873,000 803,000
Obligations for securities sold (645,000) (485,000)
Deferred tax asset 1,919,000 (897,000)
---------- ----------
Net cash provided by operating activities 1,253,000 3,658,000
---------- ----------
Cash flows from investing activities:
Hotel and real estate investments (1,432,000) (1,255,000)
Proceeds(payments)other investments 47,000 (850,000)
---------- ----------
Net cash used in investing activities (1,385,000) (2,105,000)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit - 689,000
Borrowing from mortgage note payable 1,595,000 -
Payments on mortgage notes payable (618,000) (616,000)
Payments on other notes payable (507,000) (585,000)
---------- ----------
Net cash provided by(used in) financing activities 470,000 (512,000)
---------- ----------
Net increase in cash and cash equivalents 338,000 1,041,000
Cash and cash equivalents at beginning of period 632,000 291,000
---------- ----------
Cash and cash equivalents at end of period $ 970,000 $ 1,332,000
========== ==========
Supplemental information:
Interest paid $ 2,334,000 $ 2,419,000
========== ==========
Assets acquired through capital lease $ - $ 700,000
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-6-
SANTA FE FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared by
Santa Fe Financial Corporation ("Santa Fe" 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 consolidated financial statements prepared in accordance with generally
accepted accounting principles 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 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 Santa Fe and the notes therein included in the Company's Annual
Report on Form 10-K for the year ended June 30, 2010. The June 30, 2010
Condensed Consolidated Balance Sheet was obtained from the Company's Form 10-K
for the year ended June 30, 2010.
The results of operations for the three and nine months ended March 31, 2011
are not necessarily indicative of results to be expected for the full fiscal
year ending June 30, 2011.
As of March 31, 2011, Santa Fe Financial Corporation ("Santa Fe"), a public
company, owns approximately 68.8% of the outstanding common shares of
Portsmouth Square, Inc. ("Portsmouth"), a public company. Santa Fe is a 76.3%-
owned subsidiary of The InterGroup Corporation ("InterGroup"), a public
company. InterGroup also directly owns approximately 11.7% of the common stock
of Portsmouth.
The Company's primary business is conducted through Portsmouth's general and
limited partnership interest in Justice Investors, a California limited
partnership ("Justice" or the "Partnership"). Portsmouth has a 50.0% limited
partnership interest in Justice and serves as one of the two general partners.
The other general partner, Evon Corporation ("Evon"), served as the managing
general partner until December 1, 2008 at which time Portsmouth assumed the
role of managing general partner.
Justice owns a 544-room hotel property located at 750 Kearny Street, San
Francisco California, known as the Hilton San Francisco Financial District (the
"Hotel") and related facilities including a five level underground parking
garage. The Hotel is operated by the partnership as a full service Hilton brand
hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation.
Justice also has a Management Agreement with Prism Hospitality L.P. ("Prism")
to perform the day-to-day management functions of the Hotel.
Justice leased the parking garage to Evon through September 30, 2008.
Effective October 1, 2008, Justice and Evon entered into an Installment Sale
Agreement whereby Justice purchased all of Evon's right, title, and interest in
the remaining term of its lease of the parking garage, which was to expire on
November 30, 2010, and other related assets. Justice also agreed to assume
Evon's contract with Ace Parking Management, Inc. ("Ace Parking") for the
-7-
management of the garage and any other liabilities related to the operation of
the garage commencing October 1, 2008. The management agreement with Ace
Parking was extended for another 62 months, effective November 1, 2010. The
Partnership also leases a day spa on the lobby level to Tru Spa. Portsmouth
also receives management fees as a general partner of Justice for its services
in overseeing and managing the Partnership's assets. Those fees are eliminated
in consolidation.
Due to the temporary closing of the Hotel to undergo major renovations from May
2005 until January 2006 to transition and reposition the Hotel from a Holiday
Inn to a Hilton, and the substantial depreciation and amortization expenses
resulting from the renovations and operating losses incurred as the Hotel
ramped up operations after reopening, Justice has recorded net losses. These
losses were anticipated and planned for as part of the Partnership's renovation
and repositioning plan for Hotel and management considers those net losses to
be temporary. The Hotel has been generating positive cash flows from operations
since June 2006 and net income is expected to improve in the future, especially
since depreciation and amortization expenses attributable to the renovation
will decrease substantially. Despite the significant downturn in the economy,
management believes that the revenues expected to be generated from the Hotel,
garage and the Partnership's leases will be sufficient to meet all of the
Partnership's current and future obligations and financial requirements.
Management also believes that there is significant equity in the Hotel to
support additional borrowings, if necessary.
In addition to the operations of the Hotel, the Company also generates income
from the ownership of real estate. On December 31, 1997, the Company acquired
a controlling 55.4% interest in Intergroup Woodland Village, Inc. ("Woodland
Village") from InterGroup. Woodland Village's major asset is a 27-unit
apartment complex located in Los Angeles, California. The Company also owns a
two-unit apartment building in Los Angeles, California.
Basic income (loss) per share is calculated based upon the weighted average
number of common shares outstanding during each fiscal year. During the three
and nine months ended March 31, 2011 and 2010, the Company did not have any
potentially dilutive securities outstanding.
In January 2010, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2010-06, "Improving Disclosures About Fair
Value Measurements." Effective January 1, 2010, ASU 2010-06 requires the
separate disclosure of significant transfers into and out of the Level 1 and
Level 2 categories and the reasons for such transfers, and also requires fair
value measurement disclosures for each class of assets and liabilities as well
as disclosures about valuation techniques and inputs used for recurring and
nonrecurring Level 2 and Level 3 fair value measurements. Effective in fiscal
years beginning after December 31, 2010, ASU 2010-06 also requires Level 3
disclosure of purchases, sales, issuances and settlements activity on a gross
rather than a net basis. These amendments resulted in additional disclosures in
the Company's condensed consolidated financial statements.
The Consolidation Topic of the FASB ASC 810 provides a new accounting provision
regarding the consolidation of variable interest entities ("VIEs"). The new
accounting provision modifies the existing quantitative guidance used in
determining the primary beneficiary of a VIE by requiring entities to
qualitatively assess whether an enterprise is a primary beneficiary, based on
whether the entity has (i) power over the significant activities of the VIE,
and (ii) an obligation to absorb losses or the right to receive benefits that
-8-
could be potentially significant to the VIE. Additionally, the accounting
provision requires an ongoing reconsideration of the primary beneficiary and
provides a framework for the events that triggers a reassessment of whether an
entity is a VIE. The new accounting update became effective for the Company on
July 1, 2010. The adoption of this guidance did not have a material effect on
the Company's condensed consolidated financial statements.
The Company has evaluated subsequent events through the date the condensed
consolidated financial statements were issued.
NOTE 2 - INVESTMENT IN HOTEL, NET
Property and equipment consisted of the following:
As of March 31, 2011
Accumulated Net Book
Cost Depreciation Value
------------ ------------ ------------
Land $ 1,896,000 $ - $ 1,896,000
Furniture and equipment 19,469,000 (16,810,000) 2,659,000
Building and improvements 50,603,000 (19,134,000) 31,469,000
------------ ------------ ------------
$ 71,968,000 $(35,944,000) $ 36,024,000
============ ============ ============
June 30, 2010 Accumulated Net Book
Cost Depreciation Value
------------ ------------ ------------
Land $ 1,896,000 $ - $ 1,896,000
Furniture and equipment 18,392,000 (14,711,000) 3,681,000
Building and improvements 50,253,000 (18,269,000) 31,984,000
------------ ------------ ------------
$ 70,541,000 $(32,980,000) $ 37,561,000
============ ============ ============
NOTE 3 - INVESTMENT IN REAL ESTATE, NET
The Company owns and operates a 27-unit and 2-unit multi-family apartment
complex located in Los Angeles, California and owns land held for development
located in Maui, Hawaii. Investment in real estate included the following:
March 31, 2011 June 30, 2010
-------------- -------------
Land $ 2,430,000 $ 2,430,000
Buildings, improvements and equipment 2,580,000 2,575,000
Accumulated depreciation (799,000) (750,000)
--------- ---------
4,211,000 4,255,000
Land held for development 973,000 973,000
--------- ---------
Investment in real estate, net $ 5,184,000 $ 5,228,000
========= =========
In November 2010, the Woodland Village refinanced its $1,641,000 adjustable
rate mortgage note payable on its 27-unit apartment building for a new 10-year
fixed rate mortgage in the amount of $3,260,000. The interest rate on the new
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loan is fixed at 4.85% per annum, with monthly principal and interest payments
based on a 30-year amortization schedule. The note matures in December 2020.
With the proceeds, Woodland Village loaned $831,000 to Santa Fe and $669,000 to
InterGroup, respectively, under the same terms. The intercompany loan of
$831,000 to Santa Fe was eliminated in consolidation. The $669,000 loan to
Intergroup is included in other assets in the condensed consolidated balance
sheet.
NOTE 4 - INVESTMENT IN MARKETABLE SECURITIES
The Company's investment in marketable securities consists primarily of
corporate equities. The Company has also invested in corporate bonds and in
income producing securities, which may include interests in real estate based
companies and REITs, where financial benefit could insure to its shareholders
through income and/or capital gain.
At March 31, 2011 and June 30, 2010, 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:
As of March 31, 2011
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- ------------
Corporate
Equities $ 6,498,000 $ 3,308,000 ($770,000) $ 2,538,000 $9,036,000
As of June 30, 2010
Gross Gross Net Market
Investment Cost Unrealized Gain Unrealized Loss Unrealized Gain Value
---------- ----------- --------------- --------------- --------------- ------------
Corporate
Equities $ 3,791,000 $ 1,108,000 ($567,000) $541,000 $4,332,000
As of March 31, 2011 and June 30, 2010, the Company had unrealized losses of
$574,000 and $436,000, respectively, related to securities held for over one
year.
Net gain(loss) on marketable securities on the statement of operations are
comprised of realized and unrealized gains(losses). Below is the composition
of the two components for the three and nine months ended March 31, 2011 and
2010, respectively.
For the three months ended March 31, 2011 2010
----------- -----------
Realized gain(loss) on marketable securities $ 64,000 $ (355,000)
Unrealized (loss)gain on marketable securities (49,000) 633,000
----------- -----------
Net gain on marketable securities $ 15,000 $ 278,000
=========== ===========
For the nine months ended March 31, 2011 2010
----------- -----------
Realized gain on marketable securities $ 205,000 $ 2,466,000
Unrealized gain(loss) on marketable securities 2,024,000 (2,913,000)
----------- -----------
Net gain(loss) on marketable securities $ 2,229,000 $ (447,000)
=========== ===========
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NOTE 5 - OTHER INVESTMENTS
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.
As of March 31, 2011 and June 30, 2010, the Company's other investments, net,
is comprised of the following:
Type March 31, 2011 June 30, 2010
--------------------------- ------------------ ----------------
Preferred stock - Comstock $ 6,659,000 $ -
Private equity hedge fund 1,970,000 2,306,000
Corporate debt & equity instruments 368,000 1,433,000
Warrants - at fair value 497,000 385,000
----------------- ----------------
$ 9,494,000 $ 4,124,000
================= ================
On October 20, 2010, as part of a debt restructuring of one of its investments,
the Company exchanged approximately $6,659,000 in notes, convertible notes and
debt instruments that it held in Comstock Mining, Inc. ("Comstock" - OTCBB:
LODE)) for 6,659 shares ($1,000 stated value) of newly created 7 1/2% Series A-
1 Convertible Preferred Stock (the "A-1 Preferred") of Comstock. Prior to the
exchange, those notes and convertible debt instruments had a carrying value of
$1,085,000, net of impairment adjustments. The Company accounted for the
transaction as an exchange of its debt securities and recorded the new
instruments (A-1 Preferred) received based on their fair value. The Company
estimated the fair value of the A-1 Preferred at $1,000 per share, which was
the stated value of the instrument, for a total of $6,659,000. The fair value
of the A-1 Preferred had a similar value to the Series B preferred stock
financing (stated value of $1,000 per share) by which Comstock concurrently
raised $35.7 million in new capital from other investors in October 2010. The
Company recorded an unrealized gain of $5,574,000 related to the preferred
stock received as part of the debt restructuring. This unrealized gain is
included in the net unrealized gain on other investments in the Company's
condensed consolidated statements of operations for the nine months ended March
31, 2011.
As part of that transaction, the Company's parent company, The InterGroup
Corporation, also exchanged approximately $6,572,000 in notes, convertible
notes and debt instruments for 6,572 shares of A-1 Preferred, respectively. The
Company's Chairman and President also exchanged approximately $7,681,000 in
notes and convertible notes held personally by him for 7,681 shares of A-1
Preferred. Together, the Company, Santa Fe, InterGroup and Mr. Winfield will
constitute all of the holders of the A-1 Preferred.
Each share of A-1 Preferred has a stated value of $1,000 per share and a
liquidation and change of control preference equal to the stated value plus
accrued and unpaid dividends. Commencing January 1, 2011, the holders are
entitled to semi-annual dividends at a rate of 7.5% per annum, payable in cash,
common stock, preferred stock or any combination of the foregoing, at the
election of Comstock. At the holder's election, each share of A-1 Preferred is
convertible at a fixed conversion rate (subject to anti-dilution) into 1,536
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shares of common stock of Comstock, therefore converting into common stock at a
conversion price of $0.6510. Each share of A-1 Preferred will entitle the
holder to vote with the holders of common stock as a single class on all
matters submitted to the vote of the common stock (on an as converted basis)
and, for purposes of voting only, each share of A-1 Preferred shall be entitled
to five times the number of votes per common share to which it would otherwise
be entitled. Each share of A-1 Preferred shall entitle its holder to one (1)
vote in any matter submitted to vote of holders of Preferred Stock, voting as a
separate class. The A-1 Preferred, in conjunction with the other series of
newly created Preferred Stock of Comstock, also has certain rights requiring
consent of the Preferred Stock holders for Comstock to take certain corporate
and business actions. The holders will have registration rights with respect to
the shares of common stock underlying the A-1 Preferred and also preemptive
rights. The foregoing description of the A-1 Preferred and the specific terms
of the A-1 Preferred is qualified in its entirety by reference to the
provisions of the Series A Securities Purchase Agreement, the Certificate of
Designation of Preferences and Rights and Limitations of 7 1/2% Series A-1
Convertible Preferred Stock and the Registration Rights Agreement for the
Series A Preferred Stock, which were filed as exhibits to the Company's Current
Report on Form 8-K, dated October 20, 2010.
As of March 31, 2011, the Company had investments in corporate debt and equity
instruments which had attached warrants that were considered derivative
instruments. These warrants have an allocated cost basis of $257,000 and a
fair market value of $497,000. During the three and nine months ended March
31, 2011, the Company had an unrealized loss of $79,000 and an unrealized gain
of $179,000, respectively, related to these warrants.
NOTE 6 - FAIR VALUE MEASUREMENTS
The carrying values of the Company's non-financial instruments approximate fair
value due to their short maturities(i.e., accounts receivable, other assets,
accounts payable and other liabilities, due to securities broker and
obligations for securities sold) or the nature and terms of the
obligation(i.e., other notes payable and mortgage note payable).
The assets measured at fair value on a recurring basis as of March 31, 2011 are
as follows:
Assets: Level 1 Level 2 Level 3 March 31, 2011
----------- --------- --------- --------- --------------
Cash $ 970,000 $ - $ - $ 970,000
--------- ---------
Other investments - warrants - 497,000 - 497,000
------- ---------
Investment in marketable securities
Basic materials 2,614,000 2,614,000
Investment funds 2,006,000 2,006,000
REITs 1,602,000 1,602,000
Services 1,493,000 1,493,000
Financial services 573,000 573,000
Other 748,000 748,000
---------- ----------
9,036,000 9,036,000
---------- -------- -------- ----------
$10,006,000 $ 497,000 $ - $10,503,000
========== ======== ======== ==========
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The assets measured at fair value on a recurring basis as of June 30, 2010 are
as follows:
Assets: Level 1 Level 2 Level 3 June 30, 2010
----------- --------- --------- --------- --------------
Cash $ 632,000 $ - $ - $ 632,000
--------- ---------
Other investments - warrants - 385,000 - 385,000
------- ---------
Investment in marketable securities
Investment funds 1,876,000 1,876,000
REITs 880,000 880,000
Healthcare 668,000 668,000
Services 296,000 296,000
Financial services 214,000 214,000
Other 398,000 398,000
--------- ---------
4,332,000 4,332,000
--------- -------- -------- ---------
$4,964,000 $ 385,000 $ - $5,349,000
========= ======== ======== =========
The fair values of investments in marketable securities are determined by the
most recently traded price of each security at the balance sheet date. The fair
value of the warrants was determined based upon a Black-Scholes option
valuation model.
Financial assets that are measured at fair value on a non-recurring basis and
are not included in the tables above include "Other investments in 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 gain for the
nine months ended
Assets: Level 1 Level 2 Level 3 March 31, 2011 March 31, 2011
----------- --------- --------- ---------- ------------------ ------------------
Other non-marketable investments - - $8,997,000 $8,997,000 $5,238,000
Loss for the
nine months ended
Assets: Level 1 Level 2 Level 3 June 30, 2010 March 31, 2010
----------- --------- --------- ---------- ------------------ ------------------
Other non-marketable investments - - $3,739,000 $3,739,000 $(713,000)
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. 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.
-13-
NOTE 7 - SEGMENT INFORMATION
The Company operates in three reportable segments, the operation of the hotel
("Hotel Operations"), its multi-family residential properties ("Real Estate
Operations) and the investment of its cash in marketable securities and other
investments ("Investment Transactions"). These three operating segments, as
presented in the 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 and nine months
ended March 31, 2011 and 2010, respectively. Operating income (loss) for rental
properties consist of rental income. Operating income from hotel operations
consists of the operation of the hotel and operation of the garage. Operating
income from investment transactions consist of net investment gain(loss) and
dividend and interest income.
As of and for the
three months ended Hotel Real Estate Investment
March 31, 2011 Operations Operations Transactions Other Total
----------- ----------- ------------ ----------- ------------
Revenues $ 8,187,000 $ 141,000 $ - $ - $ 8,328,000
Operating expenses (7,639,000) (71,000) - (244,000) (7,954,000)
----------- ----------- ----------- ----------- ------------
Income(loss) from operations 548,000 70,000 - (244,000) 374,000
Interest expense (701,000) (29,000) - - (730,000)
Income from investments - - (123,000) - (123,000)
Income tax benefit - - - 103,000 103,000
----------- ----------- ----------- ----------- ------------
Net income (loss) $ (153,000) $ 41,000 $ (123,000) $ (141,000) $ (376,000)
=========== =========== =========== =========== ============
Total assets $36,024,000 $ 5,184,000 $18,530,000 $ 8,390,000 $ 68,128,000
=========== =========== =========== =========== ============
As of and for the
three months ended Hotel Real Estate Investment
March 31, 2010 Operations Operations Transactions Other Total
----------- ----------- ------------ ----------- ------------
Revenues $ 7,456,000 $ 141,000 $ - $ - $ 7,597,000
Operating expenses (7,915,000) (72,000) - (232,000) (8,219,000)
----------- ----------- ----------- ----------- ------------
Income(loss) from operations (459,000) 69,000 - (232,000) (622,000)
Interest expense (732,000) (19,000) - - (751,000)
Income from investments - - 49,000 - 49,000
Income tax benefit - - - 286,000 286,000
----------- ----------- ----------- ----------- ------------
Net income (loss) $(1,191,000) $ 50,000 $ 49,000 $ 54,000 $ (1,038,000)
=========== =========== =========== =========== ============
Total Assets $38,675,000 $ 5,245,000 $11,428,000 $ 8,947,000 $ 64,295,000
=========== =========== =========== =========== ============
-14-
As of and for the
nine months ended Hotel Real Estate Investment
March 31, 2011 Operations Operations Transactions Other Total
----------- ----------- ------------ ----------- ------------
Revenues $26,855,000 $ 415,000 $ - $ - $ 27,270,000
Operating expenses (24,268,000) (245,000) - (665,000) (25,178,000)
----------- ----------- ----------- ----------- ------------
Income(loss) from operations 2,587,000 170,000 - (665,000) 2,092,000
Interest expense (2,117,000) (83,000) - - (2,200,000)
Income from investments - - 7,688,000 - 7,688,000
Income tax expense - - - (1,919,000) (1,919,000)
----------- ----------- ----------- ----------- ------------
Net income (loss) $ 470,000 $ 87,000 $ 7,688,000 $ (2,584,000) $ 5,661,000
=========== =========== =========== =========== ============
Total assets $36,024,000 $ 5,184,000 $18,530,000 $ 8,390,000 $ 68,128,000
=========== =========== =========== =========== ============
As of and for the
nine months ended Hotel Real Estate Investment
March 31, 2010 Operations Operations Transactions Other Total
----------- ----------- ------------ ----------- ------------
Revenues $ 24,354,000 $ 418,000 $ - $ - $ 24,772,000
Operating expenses (23,713,000) (209,000) - (662,000) (24,584,000)
----------- ----------- ----------- ----------- ------------
Income(loss) from operations 641,000 209,000 - (662,000) 188,000
Interest expense (2,174,000) (79,000) - - (2,253,000)
Loss from investments - - (1,332,000) - (1,332,000)
Income tax benefit - - - 897,000 897,000
----------- ----------- ----------- ----------- ------------
Net income (loss) $ (1,533,000) $ 130,000 $(1,332,000) $ 235,000 $ (2,500,000)
=========== =========== =========== =========== ============
Total Assets $38,675,000 $ 5,245,000 $11,428,000 $ 8,947,000 $ 64,295,000
=========== =========== =========== =========== ============
NOTE 8 - RELATED PARTY TRANSACTIONS
Certain shared costs and expenses primarily administrative expenses including
rent and insurance, are allocated among the Company and its subsidiary,
Portsmouth, and the Company's parent, InterGroup, based on management's
estimate of the pro rata utilization of resources. For the three months ended
March 31, 2011 and 2010, the Company and Portsmouth made payments to InterGroup
of $36,000 for each respective period. For the nine months ended March 31, 2011
and 2010, the Company and Portsmouth made payments to InterGroup of $108,000
for each respective period.
During the three and nine months ended March 31, 2011, the Company received
management fees from Justice Investors totaling $71,000 and $243,000,
respectively. These amounts were eliminated in consolidation.
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,
Portsmouth, and InterGroup. Depending on certain market conditions and various
risk factors, the Chief Executive Officer, his family, Portsmouth 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 his family members, and the
resources of Portsmouth and InterGroup, at risk in connection with investment
decisions made on behalf of the Company.
-15-
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, 2010, 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 sources of revenue continue to be derived from the
investment of its 68.8% owned subsidiary, Portsmouth, in the Justice Investors
limited partnership ("Justice" or the "Partnership"), rental income from its
investments in multi-family real estate properties and income received from
investment of its cash and securities assets. Portsmouth has a 50.0% limited
partnership interest in Justice and serves as the managing general partner of
Justice. Evon Corporation ("Evon") serves as the other general partner. Justice
owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco,
California, known as the Hilton San Francisco Financial District (the "Hotel").
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 with Hilton Hotels Corporation. The
term of the Agreement is for a period of 15 years commencing on January 12,
2006, with an option to extend the license term for another five years, subject
to certain conditions. Justice also has a Management Agreement with Prism
Hospitality L.P. ("Prism") to perform the day-to-day management functions of
the Hotel.
Until September 30, 2008, the Partnership also derived income from the lease of
the parking garage to Evon. Effective October 1, 2008, Justice entered into an
installment sale agreement with Evon to purchase the remaining term of the
garage lease and related garage assets, and assumed the contract with Ace
Parking for the operations of the garage. Justice also leases a portion of the
lobby level of the Hotel to a day spa operator. Portsmouth also receives
management fees as a general partner of Justice for its services in overseeing
and managing the Partnership's assets. Those fees are eliminated in
consolidation.
-16-
In addition to the operations of the Hotel, the Company also generates income
from the ownership and management of real estate. On December 31, 1997, the
Company acquired a controlling 55.4% interest in Intergroup Woodland Village,
Inc. ("Woodland Village") from InterGroup. Woodland Village's major asset is a
27-unit apartment complex located in Los Angeles, California. The Company also
owns a two-unit apartment building in Los Angeles, California.
Three Months Ended March 31, 2011 Compared to Three Months
Ended March 31, 2010
The Company had a net loss of $376,000 for the three months ended March 31,
2011 compared to a net loss of $1,038,000 for the three months ended March 31,
2010. The reduction in the net loss is primarily attributable to significant
improvement in the hotel operations during the current period.
The Company had a loss from hotel operations of $153,000 for the three months
ended March 31, 2011, compared to a loss of $1,191,000 for the three months
ended March 31, 2010. The significant reduction in the loss is primarily
attributable to a $719,000 decrease in depreciation and amortization expense as
many of the furniture and fixture improvements from the renovation of the Hotel
reached full deprecation during the current period. The Hotel also had a
significant increase in room revenues compared to the prior period. The
following table sets forth a more detailed presentation of Hotel operations for
the three months ended March 31, 2011 and 2010.
For the three months ended March 31, 2011 2010
--------------------------------------- ---------- ----------
Hotel revenues:
Hotel rooms $ 6,306,000 $ 5,392,000
Food and beverage 1,088,000 1,329,000
Garage 634,000 603,000
Other 159,000 132,000
---------- ----------
Total hotel revenues 8,187,000 7,456,000
Operating expenses, excluding interest, depreciation and
amortization (7,113,000) (6,670,000)
---------- ----------
Operating income before interest, depreciation and
amortization 1,074,000 786,000
Interest expense (701,000) (732,000)
Depreciation and amortization expense (526,000) (1,245,000)
---------- ----------
Loss from hotel operations $ (153,000) $(1,191,000)
========== ==========
For the three months ended March 31, 2011, the Hotel generated operating income
of $1,074,000 before interest, depreciation and amortization, on operating
revenues of $8,187,000 compared to operating income of $786,000, before
interest, depreciation and amortization, on operating revenues of $7,456,000
for the three months ended March 31, 2010. The increase in income from Hotel
operations is primarily attributable to a significant increase in room revenues
in the current period, partially offset by a decrease in food and beverage
revenues and an increase in operating expenses due to higher labor costs and
increased staffing to improve guest satisfaction as well as greater franchise
and management fees which are based on a percentage of revenues.
-17-
Room revenues increased by $914,000 for the three months ended March 31, 2011
compared to the three months ended December 31, 2010 and food and beverage
revenues decreased by $241,000 for the same period. The increase in room
revenues was primarily attributable to a significant increase in average daily
room rates during the three months ended March 31, 2011 as the Hotel continued
to see an increase in higher rated transient, corporate and business travel.
The decrease in food and beverage revenues was primarily attributable to less
group and meeting business with food components during the current period.
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 March 31, 2011 and 2010.
Three Months Ended Average Average
March 31, Daily Rate Occupancy% RevPar
----------------- ---------- --------- --------
2011 $157 82% $129
2010 $134 82% $110
The operations of the Hotel continued to experience an increase in the higher
rated business and group travel segments as the hospitality industry began to
see some recovery. That allowed the Hotel to reduce the amount of discounted
Internet business that it was forced to take in the prior period to maintain
occupancy in a very competitive market. As a result, the Hotel's average daily
rate increased by $23 for the three months ended March 31, 2011 compared to the
three months ended March 31, 2010, while occupancy remained at 82% for both
periods. As a result, the Hotel was able to achieve a RevPar number that was
$19 higher than the prior period.
During the past year we have seen our management team guide our Hotel through a
difficult economic period by taking bold steps to reduce expenses and implement
innovative strategies in order to improve operations and enhance our
competitiveness in the market. As a result, we believe that the Hotel is now
well positioned to take advantage of a recovery in the hotel industry. We will
continue in our efforts to upgrade our guest rooms and facilities and explore
new and innovative ways to differentiate the Hotel from its competition. Moving
forward, we will also focus on cultivating more international business,
especially from China, and capturing a higher percentage of corporate and group
travel. During the last quarter, we saw continued improvement in business
travel compared to the prior year. If that trend in the hotel industry
continues, it should translate into an increase in room revenues and
profitability.
The Company had a net gain on marketable securities of $15,000 for the three
months ended March 31, 2011 compared to a net gain on marketable securities of
$278,000 for the three months ended March 31, 2010. For the three months ended
March 31, 2011, the Company had a net realized gain of $64,000 and a net
unrealized loss of $49,000. For the three months ended March 31, 2010, the
Company had a net realized loss of $355,000 and a net unrealized gain of
$633,000. 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.
-18-
Dividend and interest income increased to $104,000 for the quarter ended March
31, 2011 from $76,000 for the quarter ended March 31, 2010 primarily as the
result of the increased investment in dividend yielding securities.
Trading and margin interest increased to $163,000 for the quarter ended March
31, 2011 from $119,000 for the quarter ended March 31, 2010 primarily as the
result of the increase in the margin interest expense related to the increase
in the use of margin.
The provision for income tax benefit as a percentage of the loss before income
taxes was relatively consistent for the three months ended March 31, 2011 as
compared to the three months ended March 31, 2010.
Nine Months Ended March 31, 2011 Compared to Nine Months
Ended March 31, 2010
The Company had net income of $5,661,000 for the nine months ended March 31,
2011 compared to a net loss of $2,500,000 for the nine months ended March 31,
2010. The change is primarily attributable to the significant income generated
from investing activities and to a lesser extent, the increase in income from
hotel operations.
The Company had income from hotel operations of $470,000 for the nine months
ended March 31, 2011, compared to a loss of $1,533,000 for the nine months
ended March 31, 2010. The change to income from hotel operations from a loss is
primarily attributable to a $602,000 decrease in depreciation and amortization
expense as many of the furniture and fixture improvements from the renovation
of the Hotel reached full deprecation during the nine months ended March 31,
2011. The Hotel also had a significant increase in room revenues compared to
the prior period. The following table sets forth a more detailed presentation
of Hotel operations for the nine months ended March 31, 2011 and 2010.
For the nine months ended March 31, 2011 2010
----------------------------------- ---------- ----------
Hotel revenues:
Hotel rooms $ 20,522,000 $ 18,598,000
Food and beverage 3,771,000 3,398,000
Garage 1,915,000 1,869,000
Other 647,000 489,000
----------- -----------
Total hotel revenues 26,855,000 24,354,000
Operating expenses, excluding interest, depreciation and
amortization (21,246,000) (20,089,000)
----------- -----------
Operating income before interest, depreciation and
amortization 5,609,000 4,265,000
Interest expense (2,117,000) (2,174,000)
Depreciation and amortization expense (3,022,000) (3,624,000)
----------- -----------
Income (loss) from hotel operations $ 470,000 $ (1,533,000)
=========== ===========
For the nine months ended March 31, 2011, the Hotel generated operating income
of $5,609,000 before interest, depreciation and amortization, on operating
revenues of $26,855,000 compared to operating income of $4,265,000 before
interest, depreciation and amortization, on operating revenues of $24,354,000
-19-
for the nine months ended March 31, 2010. The increase in income from Hotel
operations is primarily attributable to increases in room, food and beverage,
and other revenues in the current period, partially offset by an increase in
operating expenses due to higher labor costs and increased staffing to improve
guest satisfaction as well as greater franchise and management fees which are
based on a percentage of revenues.
Room revenues increased by $1,924,000 for the nine months ended March 31, 2011
compared to the nine months ended March 31, 2010 and food and beverage revenues
increased by $373,000 for the same period. The increase in room revenues was
primarily attributable to a significant increase in average daily room rates
during the nine months ended March 31, 2011 as the Hotel began to see an
increase in higher rated corporate and group business travel, which also
resulted in higher in food and beverage revenues. The increase in other
revenues was primarily attributable group business that either canceled or was
less than guaranteed during the first nine months of the current year.
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
nine months ended March 31, 2011 and 2010.
Nine Months Ended Average Average
March 31, Daily Rate Occupancy% RevPar
----------------- ---------- --------- --------
2011 $161 85% $138
2010 $143 87% $125
The operations of the Hotel continued to experience an increase in the higher
rated business and group travel segments as the hospitality industry began to
see some recovery. As a result, the Hotel's average daily rate increased
significantly by $18 for the nine months ended March 31, 2011 compared to the
nine months ended March 31, 2010. The modest decrease in occupancy of 2% was
due to the Hotel being able to reduce the amount of discounted Internet
business that it was forced to take in the prior period to maintain occupancy
in a very competitive market. As a result, the Hotel was able to achieve a
RevPar number that was $13 higher than the prior nine month period.
During the past year we have seen our management team guide our Hotel through a
difficult economic period by taking bold steps to reduce expenses and implement
innovative strategies in order to improve operations and enhance our
competitiveness in the market. As a result, we believe that the Hotel is now
well positioned to take advantage of a recovery in the hotel industry. We will
continue in our efforts to upgrade our guest rooms and facilities and explore
new and innovative ways to differentiate the Hotel from its competition. Moving
forward, we will also focus on cultivating more international business,
especially from China, and capturing a higher percentage of corporate and group
travel. During the last nine months, we have seen continued improvement in
business travel. If that trend in the hotel industry continues, it should
translate into an increase in room revenues and profitability.
The Company had a net gain on marketable securities of $2,229,000 for the nine
months ended March 31, 2011 compared to a net loss on marketable securities of
$447,000 for the nine months ended March 31, 2010. For the nine months
ended March 31, 2011, the Company had a net realized gain of $205,000 and a net
unrealized gain of $2,024,000. For the nine months ended March 31, 2010, the
Company had a net realized gain of $2,466,000 and a net unrealized loss of
$2,913,000. Gains and losses on marketable securities may fluctuate
-20-
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 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. As of March 31, 2011, the Company had net other
investments of $9,494,000. On October 20, 2010, as part of a debt
restructuring of one of its investments, the Company exchanged approximately
$6,659,000 in notes, convertible notes and debt instruments that it held in
Comstock Mining, Inc. ("Comstock" - OTCBB: LODE)) for 6,659 shares ($1,000
stated value) of newly created 7 1/2% Series A-1 Convertible Preferred Stock
(the "A-1 Preferred") of Comstock. Prior to the exchange, those notes and
convertible debt instruments had a carrying value of $1,085,000, net of
impairment adjustments. The Company accounted for the transaction as an
exchange of its debt securities and recorded the new instruments (A-1
Preferred) received based on their fair value. The Company estimated the fair
value of the A-1 Preferred at $1,000 per share, which was the stated value of
the instrument, for a total of $6,659,000. The fair value of the A-1 Preferred
had a similar value to the Series B preferred stock financing (stated value of
$1,000 per share) by which Comstock concurrently raised $35.7 million in new
capital from other investors in October 2010. The Company recorded an
unrealized gain of $5,574,000 related to the preferred stock received as part
of the debt restructuring. During the nine months ended March 31, 2011 and
2010, the Company performed an impairment analysis of its other investments and
determined that one of its investments had other than temporary impairment and
recorded impairment losses of $336,000 and $713,000, for each respective
period.
Dividend and interest income increased to $447,000 for the nine months ended
March 31, 2011 from $157,000 for the nine months ended March 31, 2010 primarily
as the result of receiving a dividend of $175,000 from Comstock and the
increased investment in dividend yielding securities during the nine months
ended March 31, 2011.
The provision for income tax (expense)benefit as a percentage of the
income(loss) before income taxes was relatively consistent for the nine months
ended March 31, 2011 as compared to the nine months ended March 31, 2010.
MARKETABLE SECURITIES AND OTHER INVESTMENTS
As of March 31, 2011 and June 30, 2010, the Company had investments in
marketable equity securities of $9,036,000 and $4,332,000, respectively. The
following tables show the composition of the Company's marketable securities
portfolio by selected industry groups as of March 31, 2011 and June 30, 2010.
-21-
As of March 31, 2011:
% of Total
Investment
Industry Group Fair Value Securities
-------------- ------------ ----------
Basic materials $ 2,614,000 28.9%
Investment funds 2,006,000 22.2%
REITs 1,602,000 17.7%
Services 1,493,000 16.5%
Financial services 573,000 6.3%
Other 748,000 8.4%
------------ ----------
$ 9,036,000 100.0%
============ ==========
June 30, 2010 % of Total
Investment
Industry Group Fair Value Securities
-------------- ------------ ----------
Investment funds $ 1,876,000 43.3%
REITs 880,000 20.3%
Healthcare 668,000 15.4%
Services 296,000 6.8%
Financial services 214,000 4.9%
Other 398,000 9.3%
---------- ------
$ 4,332,000 100.0%
========== ======
The Company's investment portfolio is diversified with 45 different equity
positions. The portfolio contains three equity securities that are more than
5% of the equity value of the portfolio, with the largest being 26% of the
value of the portfolio. The amount of the Company's investment in any
particular issuer may increase or decrease, and additions or deletions to its
securities portfolio may occur, at any time. While it is the internal policy
of the Company to limit its initial investment in any single equity to less
than 5% of its total portfolio value, that investment could eventually exceed
5% as a result of equity appreciation or reduction of other positions.
Marketable securities are stated at market value as determined by the most
recently traded price of each security at the balance sheet date.
The following table shows the net gain or loss on the Company's marketable
securities and the associated margin interest and trading expenses for the
respective period.
For the three months ended March 31, 2011 2010
---------- -----------
Net gain on marketable securities $ 15,000 $ 278,000
Net loss on other investments (79,000) (43,000)
Impairment loss on other investments - (143,000)
Dividend and interest income 104,000 76,000
Margin interest expense (66,000) (28,000)
Trading and management expenses (97,000) (91,000)
---------- ----------
$ (123,000) $ 49,000
========== ==========
-22-
For the nine months ended March 31, 2011 2010
---------- -----------
Net gain(loss) on marketable securities $ 2,229,000 $ (447,000)
Net gain on other investments 5,753,000 99,000
Impairment loss on other investments (336,000) (713,000)
Dividend and interest income 447,000 157,000
Margin interest expense (134,000) (166,000)
Trading and management expenses (271,000) (262,000)
---------- ----------
$ 7,688,000 $ (1,332,000)
========== ==========
LIQUIDITY AND SOURCES OF CAPITAL
The Company's cash flows are primarily generated from its Hotel operations and
general partner fees from Justice. The Company also receives revenues generated
from the investment of its cash and marketable securities, other investments
and the ownership of real estate.
Following the temporary suspension of operations in May 2005 for major
renovations, the Hotel started, and continues, to generate cash flows from its
operations. As a result, Justice was able to pay some limited partnership
distributions in fiscal years 2008 and 2009. However, due to the significant
downturn in the San Francisco hotel market beginning in September 2008 and the
continued weakness in domestic and international economies, no Partnership
distributions were paid in fiscal 2010. Since only a modest improvement in
economic conditions is expected in the lodging industry in calendar 2011, no
limited partnership distributions are anticipated in fiscal 2011. During such
periods, the Company has to depend more on the revenues generated from the
investment of its cash and marketable securities and from its general partner
management fees. The general partners will continue to monitor and review the
operations and financial results of the Hotel and to set the amount of any
future distributions that may be appropriate based on operating results, cash
flows and other factors, including establishment of reasonable reserves for
debt payments and operating contingencies.
The new Justice Compensation Agreement that became effective on December 1,
2008, when Portsmouth assumed the role of managing general partner of Justice,
has provided additional cash flows to the Company. Under the new Compensation
Agreement, Portsmouth is now entitled to 80% of the minimum base fee to be paid
to the general partners of $285,000, while under the prior agreement,
Portsmouth was entitled to receive only 20% of the minimum base fee. During
the nine months ended March 31, 2011 and 2010, the Company received management
fees from Justice Investors totaling $243,000 and $214,000, respectively.
To meet its substantial financial commitments for the renovation and transition
of the Hotel to a Hilton, Justice had to rely on borrowings to meet its
obligations. On July 27, 2005, Justice entered into a first mortgage loan with
The Prudential Insurance Company of America in a principal amount of
$30,000,000 (the "Prudential Loan"). The term of the Prudential Loan is for
120 months at a fixed interest rate of 5.22% per annum. The Prudential Loan
calls for monthly installments of principal and interest in the amount of
approximately $165,000, calculated on a 30-year amortization schedule. The Loan
is collateralized by a first deed of trust on the Partnership's Hotel property,
including all improvements and personal property thereon and an assignment of
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all present and future leases and rents. The Prudential Loan is without
recourse to the limited and general partners of Justice. The principal balance
of the Prudential Loan was $27,315,000 as of March 31, 2011.
On March 27, 2007, Justice entered into a second mortgage loan with Prudential
(the "Second Prudential Loan") in a principal amount of $19,000,000. The term
of the Second Prudential Loan is for 100 months and matures on August 5, 2015,
the same date as the first Prudential Loan. The Second Prudential Loan is at a
fixed interest rate of 6.42% per annum and calls for monthly installments of
principal and interest in the amount of $119,000, calculated on a 30-year
amortization schedule. The Second Prudential Loan is collateralized by a second
deed of trust on the Partnership's Hotel property, including all improvements
and personal property thereon and an assignment of all present and future
leases and rents. The Second Prudential Loan is also without recourse to the
limited and general partners of Justice. The principal balance of the Second
Prudential Loan was $18,071,000 as of March 31, 2011.
Effective April 29, 2010, the Partnership obtained a modification of its
$2,500,000 unsecured revolving line of credit facility with East West Bank
(formerly United Commercial Bank) that was to mature on April 30, 2010, and
converted that line of credit facility to an unsecured term loan. The
modification provides that Justice will pay the $2,500,000 balance on its line
of credit facility over a period of four years, to mature on April 30, 2014.
This term loan calls for monthly principal and interest payments of $41,000,
calculated on a nine-year amortization schedule, with interest only from May 1,
2010 to August 31, 2010. Pursuant to the modification, the annual floating
interest rate was reduced by 0.5% to the Wall Street Journal Prime Rate plus
2.5% (with a minimum floor rate of 5.0% per annum). The modification includes
financial covenants written to reflect financial conditions that all hotels are
facing. The covenants include specific financial ratios and a return to minimum
profitability by June 2011. Management believes that the Partnership has the
ability to meet the specific covenants and the Partnership was in compliance
with the covenants as of March 31, 2011. As of March 31, 2011 the outstanding
balance was $2,292,000.
Despite the downturns in the economy, the Hotel has continued to generate
positive cash flows. While the debt service requirements related to the two
Prudential loans, as well as the new term loan to pay off the line of credit,
may create some additional risk for the Company and its ability to generate
cash flows in the future since the Partnership's assets had been virtually debt
free for a number of years, 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. Management also believes that there is sufficient equity in the
Hotel assets to support future borrowings, if necessary, to fund any new
capital improvements and other requirements.
In November 2010, the Woodland Village refinanced its $1,641,000 adjustable
rate mortgage note payable on its 27-unit apartment building for a new 10-year
fixed rate mortgage in the amount of $3,260,000. The interest rate on the new
loan is fixed at 4.85% per annum, with monthly principal and interest payments
based on a 30-year amortization schedule. The note matures in December 2020.
With the proceeds, Woodland Village loaned $831,000 to Santa Fe and $669,000 to
Intergroup, respectively, under the same terms. The intercompany loan of
$831,000 to Santa Fe was eliminated in consolidation.
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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, other investments,
real estate operations and the cash flows generated from those assets and from
partnership distributions and management fees, will be adequate to meet the
Company's current and future obligations.
MATERIAL CONTRACTUAL OBLIGATIONS
The following table provides a summary of the Company's material financial
obligations and related interest.
Total Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter
----------- ---------- ---------- ---------- ---------- ---------- -----------
Mortgage notes payable $49,034,000 $ 221,000 $ 919,000 $ 970,000 $1,027,000 $1,086,000 $44,811,000
Other notes payable 3,181,000 384,000 641,000 569,000 1,557,000 30,000 -
Interest 13,089,000 758,000 2,902,000 2,806,000 2,697,000 2,567,000 1,359,000
---------- --------- --------- --------- --------- --------- ----------
Total $65,304,000 $1,363,000 $4,462,000 $4,345,000 $5,281,000 $3,683,000 $46,170,000
---------- --------- --------- --------- --------- --------- ----------
OFF BALANCE SHEET ARRANGEMENTS
The Company has no 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 Prism 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.
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.
The Company's residential rental properties provide income from short-term
operating leases and no lease extends beyond one year. Rental increases are
expected to offset anticipated increased property operating expenses.
CRITICAL ACCOUNTING POLICIES
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.
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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.
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None.
(b) Not applicable.
(c) Purchases of equity securities by the small business issuer and
affiliated purchasers.
Santa Fe did not repurchase any of its own securities during the third quarter
of its fiscal year ending June 30, 2011 and does not have any publicly
announced repurchase program. The following table reflects purchases of Santa
Fe's common stock made by its parent company, The InterGroup Corporation, for
its own account, during the third quarter of fiscal 2011. InterGroup can be
considered an affiliated purchaser.
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SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(c)Total Number (d)Maximum Number
(a)Total (b) of Shares Purchased of Shares that May
Fiscal Number of Average as Part of Publicly Yet Be Purchased
2011 Shares Price Paid Announced Plans Under the Plans
Period Purchased Per Share or Programs or Programs
--------------------------------------------------------------------------------------
Month #1
(Jan. 1- - - - N/A
Jan. 31)
--------------------------------------------------------------------------------------
Month #2
(Feb. 1- 2,000 $13.75 - N/A
Feb. 28)
--------------------------------------------------------------------------------------
Month #3
(Mar. 1- 1,200 $14.92 - N/A
Mar. 31)
--------------------------------------------------------------------------------------
Total 3,200 $14.20 - N/A
--------------------------------------------------------------------------------------
Item 6. Exhibits.
31.1 Certification of Chief 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 Chief 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.
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SIGNATURES
Pursuant to the requirements 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.
SANTA FE FINANCIAL CORPORATION
(Registrant)
Date: May 12, 2011 by /s/ John V. Winfield
---------------------------
John V. Winfield, President,
Chairman of the Board and
Chief Executive Officer
Date: May 12, 2011 by /s/ Michael G. Zybala
---------------------------
Michael G. Zybala, Vice
President, and Secretary
Date: May 12, 2011 by /s/ David Nguyen
--------------------------
David Nguyen, Treasurer and
Controller (Principal
Financial Officer)
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