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 December 31, 2019

[ ]

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 0-6877

SANTA FE FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

NEVADA		95-2452529
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

12121 Wilshire Boulevard, Suite 610, Los Angeles, California 90025

(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 every Interactive Data File required to be submitted 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 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]

			Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):

[ ] Yes [X] No

Securities registered pursuant to section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
NONE		NONE		NONE

The number of shares outstanding of registrant’s Common Stock, as of January 24, 2020 was 1,241,810.

TABLE OF CONTENTS

		Page
	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of December 31, 2019 and June 30, 2019 (Unaudited)	3
	Condensed Consolidated Statements of Operations for the Three Months ended December 31, 2019 and 2018 (Unaudited)	4
	Condensed Consolidated Statements of Operations for the Six Months ended December 31, 2019 and 2018 (Unaudited)	5
	Condensed Consolidated Statements of Shareholders’ Deficit for the Six Months ended December 31, 2019 and 2018 (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Six Months ended December 31, 2019 and 2018 (Unaudited)	7
	Notes to the Condensed Consolidated Financial Statements	8-18

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19-25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25-26

	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6.	Exhibits	26

Signatures		27

-2-

PART I

FINANCIAL INFORMATION

Item 1 - Condensed Consolidated Financial Statements

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

As of	December 31, 2019			June 30, 2019
ASSETS
Investment in hotel, net	$	36,090,000		$	36,336,000
Investment in real estate, net		4,812,000			4,866,000
Investment in marketable securities		1,866,000			2,679,000
Other investments, net		328,000			351,000
Cash and cash equivalents		6,690,000			9,800,000
Restricted cash		12,509,000			11,027,000
Accounts receivable - hotel, net		314,000			848,000
Other assets, net		1,737,000			1,643,000
Deferred tax assets		6,065,000			6,402,000

Total assets	$	70,411,000		$	73,952,000

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Liabilities:
Accounts payable and other liabilities - Justice	$	8,647,000		$	11,298,000
Accounts payable and other liabilities		398,000			362,000
Accounts payable to related party		5,197,000			5,105,000
Due to securities broker		656,000			396,000
Obligations for securities sold		-			625,000
Related party and other notes payable		7,938,000			8,221,000
Finance leases		1,282,000			1,486,000
Mortgage notes payable - real estate		3,311,000			3,315,000
Mortgage notes payable - hotel, net		111,947,000			113,087,000

Total liabilities		139,376,000			143,895,000

Shareholders’ deficit:
Common stock - par value $.10 per share; Authorized - 2,000,000; Issued 1,339,638 and outstanding 1,241,810 as of December 31, 2019 and June 30, 2019		134,000			134,000
Additional paid-in capital		8,808,000			8,808,000
Accumulated deficit		(53,707,000	)		(54,183,000	)
Treasury stock, at cost, 97,828 shares		(951,000	)		(951,000	)
Total Santa Fe shareholders’ deficit		(45,716,000	)		(46,192,000	)
Noncontrolling interest		(23,249,000	)		(23,751,000	)
Total shareholders’ deficit		(68,965,000	)		(69,943,000	)

Total liabilities and shareholders’ deficit	$	70,411,000		$	73,952,000

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

-3-

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

For the three months ended December 31,	2019			2018

Revenues:
Hotel	$	14,901,000		$	13,997,000
Real estate		79,000			84,000
Total revenues		14,980,000			14,081,000

Costs and operating expenses:
Hotel operating expenses		(11,730,000	)		(11,236,000	)
Real estate operating expenses		(48,000	)		(61,000	)
Depreciation and amortization expense		(613,000	)		(645,000	)
General and administrative expense		(286,000	)		(223,000	)

Total costs and operating expenses		(12,677,000	)		(12,165,000	)

Income from operations		2,303,000			1,916,000

Other income (expense):
Interest expense - mortgage		(1,716,000	)		(1,781,000	)
Interest expense - related party		(128,000	)		(131,000	)
Net loss on marketable securities		(31,000	)		(442,000	)
Net loss on marketable securities - Comstock		(48,000	)		(19,000	)
Dividend and interest income		46,000			23,000
Trading and margin interest expense		(64,000	)		(77,000	)

Total other expense, net		(1,941,000	)		(2,427,000	)

Income (loss) before income taxes		362,000			(511,000	)
Income tax (expense) benefit		(95,000	)		141,000

Net income (loss)		267,000			(370,000	)
Less: Net income attributable to the noncontrolling interest		(152,000	)		(156,000	)

Net income (loss) attributable to Santa Fe	$	115,000		$	(526,000	)

Basic and diluted net income (loss) per share attributable to Santa Fe	$	0.09		$	(0.42	)

Weighted average number of common shares outstanding - basic and diluted		1,241,810			1,241,810

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

-4-

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

For the six months ended December 31,	2019			2018

Revenues:
Hotel	$	30,330,000		$	29,807,000
Real estate		158,000			161,000
Total revenues		30,488,000			29,968,000

Costs and operating expenses:
Hotel operating expenses		(23,078,000	)		(22,046,000	)
Real estate operating expenses		(82,000	)		(118,000	)
Depreciation and amortization expense		(1,209,000	)		(1,289,000	)
General and administrative expense		(610,000	)		(479,000	)

Total costs and operating expenses		(24,979,000	)		(23,932,000	)

Income from operations		5,509,000			6,036,000

Other income (expense):
Interest expense - mortgage		(3,534,000	)		(3,724,000	)
Interest expense - related party		(258,000	)		(246,000	)
Net loss on marketable securities		(97,000	)		(397,000	)
Net loss on marketable securities - Comstock		(273,000	)		(341,000	)
Dividend and interest income		106,000			38,000
Trading and margin interest expense		(137,000	)		(180,000	)

Total other expense, net		(4,193,000	)		(4,850,000	)

Income before income taxes		1,316,000			1,186,000
Income tax expense		(338,000	)		(489,000	)

Net income		978,000			697,000
Less: Net income attributable to the noncontrolling interest		(502,000	)		(657,000	)

Net income attributable to Santa Fe Financial Corporation	$	476,000		$	40,000

Basic and diluted net loss per share attributable to Santa Fe Financial Corporation	$	0.38		$	0.03

Weighted average number of common shares outstanding - basic and diluted		1,241,810			1,241,810

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

-5-

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)

													Total
					Additional								Santa Fe						Total
	Common Stock				Paid-in		Accumulated			Treasury			Shareholders’			Noncontrolling			Shareholders’
	Shares		Amount		Capital		Deficit			Stock			Deficit			Interest			Deficit

Balance at July 1, 2019		1,339,638	$	134,000	$	8,808,000	$	(54,183,000	)	$	(951,000	)	$	(46,192,000	)	$	(23,751,000	)	$	(69,943,000	)

Net income		-		-		-		361,000			-			361,000			350,000			711,000

Balance at September 30, 2019		1,339,638	$	134,000	$	8,808,000	$	(53,822,000	)	$	(951,000	)	$	(45,831,000	)	$	(23,401,000	)	$	(69,232,000	)

Net income		-		-		-		115,000			-			115,000			152,000			267,000

Balance at December 31, 2019		1,339,638	$	134,000	$	8,808,000	$	(53,707,000	)	$	(951,000	)	$	(45,716,000	)	$	(23,249,000	)	$	(68,965,000	)

													Total
					Additional								Santa Fe						Total
	Common Stock				Paid-in		Accumulated			Treasury			Shareholders’			Noncontrolling			Shareholders’
	Shares		Amount		Capital		Deficit			Stock			Deficit			Interest			Deficit

Balance at July 1, 2018		1,339,638	$	134,000	$	8,808,000	$	(57,442,000	)	$	(951,000	)	$	(49,451,000	)	$	(24,606,000	)	$	(74,057,000	)

Net income		-		-		-		566,000			-			566,000			501,000			1,067,000

Balance at September 30, 2018		1,339,638	$	134,000	$	8,808,000	$	(56,876,000	)	$	(951,000	)	$	(48,885,000	)	$	(24,105,000	)	$	(72,990,000	)

Net (loss) income		-		-		-		(526,000	)		-			(526,000	)		156,000			(370,000	)

Balance at December 31, 2018		1,339,638	$	134,000	$	8,808,000	$	(57,402,000	)	$	(951,000	)	$	(49,411,000	)	$	(23,949,000	)	$	(73,360,000	)

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

-6-

SANTA FE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the six months ended December 31,	2019			2018
Cash flows from operating activities:
Net income	$	978,000		$	697,000
Adjustments to reconcile net income to net cash provided by operating activities:
Net unrealized loss on marketable securities		416,000			1,028,000
Deferred taxes		337,000			489,000
Depreciation and amortization		1,137,000			1,229,000
Changes in operating assets and liabilities:
Investment in marketable securities		397,000			1,608,000
Accounts receivable		534,000			871,000
Other assets		(94,000	)		(191,000	)
Accounts payable and other liabilities - Justice		(2,651,000	)		(1,145,000	)
Accounts payable and other liabilities		36,000			(146,000	)
Accounts payable related party		92,000			235,000
Due to securities broker		260,000			(925,000	)
Obligations for securities sold		(625,000	)		(919,000	)
Net cash provided by operating activities		817,000			2,831,000

Cash flows from investing activities:
Payments for hotel and real estate investments		(907,000	)		(590,000	)
Payments for real estate		(2,000	)		-
Proceeds from other investments		23,000			50,000
Net cash used in investing activities		(886,000	)		(540,000	)

Cash flows from financing activities:
Net payments of mortgage and other notes payable		(1,559,000	)		(661,000	)
Net cash used in financing activities		(1,559,000	)		(661,000	)

Net (decrease) increase in cash and cash equivalents:		(1,628,000	)		1,630,000
Cash, cash equivalents and restricted cash at the beginning of the period		20,827,000			14,766,000
Cash, cash equivalents and restricted cash at the end of the period	$	19,199,000		$	16,396,000

Supplemental information:
Interest paid	$	3,819,000		$	4,029,000
Taxes paid	$	-		$	1,000

The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.

-7-

SANTA FE FINANCIAL CORPORATION

NOTES TO 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 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 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 Santa Fe and the notes therein included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2019. The December 31, 2019 Condensed Consolidated Balance Sheet was derived from the Consolidated Balance Sheet as included in the Company’s Form 10-K for the year ended June 30, 2019.

The results of operations for the six months ended December 31, 2019 are not necessarily indicative of results to be expected for the full fiscal year ending June 30, 2020.

Santa Fe Financial owns approximately 68.8% of the outstanding common shares of Portsmouth Square, Inc. (“Portsmouth”), a public company (OTC Market Inc.’s Pink: PRSI). Santa Fe is an 86.3%-owned subsidiary of The InterGroup Corporation (“InterGroup”), a public company (NASDAQ Capital Market: INTG). This percentage includes the power to vote an approximately 4% interest in the common stock in Santa Fe owned by InterGroup’s Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998. InterGroup also directly owns approximately 13.4% of the common stock of Portsmouth.

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 controls 93.3% of the voting interest in Justice and is the sole general partner. The financial statements of Justice are consolidated with those of Portsmouth.

Justice, through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”) owns and operates 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. Mezzanine is a wholly-owned subsidiary 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) through January 31, 2030.

Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. On October 25, 2019, Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.

Due to Securities Broker

Various securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements. These advanced funds are recorded as a liability.

-8-

Obligations for Securities Sold

Obligation for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date and the fair market value of shares underlying the written call options with the obligation to deliver that security when and if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases of that security. Unrealized gains and losses from changes in the obligation are included in the condensed consolidated statements of operations.

Income Tax

The Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the six months ended December 31, 2019 and 2018 represent the income tax effect on the Company’s pretax income which includes its share in the net income of the Hotel.

Financial Condition and Liquidity

The Company’s cash flows are primarily generated from its Hotel operations. The Company may also receive cash generated from its residential properties and the investment of its cash and marketable securities and other investments.

To fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due through January 2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024. Outstanding principal balance on the loan was $92,914,000 and $93,746,000 as of December 31, 2019 and June 30, 2019, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender. The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan has an interest rate of 9.75% per annum and matures on January 1, 2024. As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. On July 31, 2019, Mezzanine refinanced the mezzanine loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan which had a 9.75% per annum interest rate was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly.

Effective as of May 11, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan. Pursuant to the agreement, InterGroup is required to maintain a certain net worth and liquidity. As of December 31, 2019, InterGroup is in compliance with both requirements.

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Intergroup Woodland Village Inc. (“Woodland Village”) and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. Woodland Village holds a three-story apartment complex in Santa Monica, California and is 55.4% and 44.6% owned by the Company and InterGroup, respectively. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, InterGroup obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC and is included in the mortgage notes payable – real estate in the condensed consolidated balance sheets as of December 31, 2019 and June 30, 2019.

The Hotel has continued to generate positive operating income. While the debt service requirements related to 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.

-9-

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.

The following table provides a summary as of December 31, 2019, the Company’s material financial obligations which also includes interest payments:

			6 Months		Year		Year		Year		Year
	Total		2020		2021		2022		2023		2024		Thereafter
Mortgage notes payable	$	116,225,000	$	627,000	$	4,525,000	$	1,642,000	$	1,732,000	$	107,403,000	$	296,000
Related party and other notes payable		9,220,000		3,572,000		1,006,000		1,022,000		744,000		567,000		2,309,000
Interest		25,573,000		3,487,000		6,416,000		6,295,000		6,184,000		3,078,000		113,000
Total	$	151,018,000	$	7,686,000	$	11,947,000	$	8,959,000	$	8,660,000	$	111,048,000	$	2,718,000

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 Santa Monica, California. The Company also owns a two-unit apartment building in West Los Angeles, California.

Recently Issued and Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative periods they present in their financial statements in the year of adoption. Effective July 1, 2019, we adopted ASU 2016-02 using the modified retrospective approach provided by ASU 2018-11. We elected certain practical expedients permitted under the transition guidance, including the election to carryforward historical lease classification. We also elected the short-term lease practical expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets. In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value of the fixed payments without performing an allocation of lease and non-lease components. We did not record any operating lease right-of-use (“ROU”) assets and operating lease liabilities upon adoption of the new standard as the aggregate value of the ROU assets and operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2019. The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 3 and Note 10 for balances of finance lease ROU assets and liabilities, respectively.

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 timelier recognition of losses. ASU No. 2016-13 will be effective for us as of January 1, 2023. The Company is currently reviewing the effect of ASU No. 2016-13.

-10-

NOTE 2 – REVENUE

Our revenue from real estate is primarily rental income from residential property leases which is recorded when due from residents and is recognized monthly as earned. The following table present our Hotel revenue disaggregated by revenue streams.

For the three months ended December 31,	2019		2018
Hotel revenues:
Hotel rooms	$	12,497,000	$	11,565,000
Food and beverage		1,425,000		1,565,000
Garage		776,000		734,000
Other operating departments		203,000		133,000
Total hotel revenue	$	14,901,000	$	13,997,000

For the six months ended December 31,	2019		2018
Hotel revenues:
Hotel rooms	$	25,811,000	$	25,087,000
Food and beverage		2,647,000		3,014,000
Garage		1,512,000		1,508,000
Other operating departments		360,000		198,000
Total hotel revenue	$	30,330,000	$	29,807,000

Performance obligations

We identified the following performance obligations for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:

	●	Cancelable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.

	●	Noncancelable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.

	●	Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.

	●	Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.

Hotel revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component.

We do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel stay occurs or services are rendered.

-11-

Contract assets and liabilities

We do not have any material contract assets as of December 31, 2019 and June 30, 2019 other than trade and other receivables, net on our condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.

We record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented within accounts payable and other liabilities on our condensed consolidated balance sheets. Contract liabilities decreased to $1,027,000 as of December 31, 2019, from $1,215,000 as of June 30, 2019. The decrease for the six months ended December 31, 2019 was primarily driven by $188,000 revenue recognized that was included in the advanced deposits balance as of June 30, 2019.

Contract costs

We consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient, we expense these costs as incurred as our contracts with customers and lease agreements do not extend beyond one year.

NOTE 3 – INVESTMENT IN HOTEL, NET

Investment in hotel consisted of the following as of:

			Accumulated			Net Book
December 31, 2019	Cost		Depreciation			Value

Land	$	1,896,000	$	-		$	1,896,000
Finance lease ROU assets		1,746,000		(137,000	)		1,609,000
Furniture and equipment		30,268,000		(27,206,000	)		3,062,000
Building and improvements		59,341,000		(29,818,000	)		29,523,000
Investment in Hotel, net	$	93,251,000	$	(57,161,000	)	$	36,090,000

			Accumulated			Net Book
June 30, 2019	Cost		Depreciation			Value

Land	$	1,896,000	$	-		$	1,896,000
Finance lease ROU assets		521,000		(35,000	)		486,000
Furniture and equipment		30,585,000		(26,841,000	)		3,744,000
Building and improvements		59,341,000		(29,131,000	)		30,210,000
Investment in Hotel, net	$	92,343,000	$	(56,007,000	)	$	36,336,000

-12-

NOTE 4 – INVESTMENT IN REAL ESTATE, NET

The Company owns and operates a 2-unit and 27-unit multi-family apartment complexes located in West Los Angeles, California and Santa Monica, California, respectively. The Company also owns land held for development located in Maui, Hawaii. Investment in real estate consisted of the following:

As of	December 31, 2019			June 30, 2019
Land	$	2,430,000		$	2,430,000
Buildings, improvements and equipment		2,922,000			2,922,000
Accumulated depreciation		(1,518,000	)		(1,463,000	)
		3,834,000			3,889,000
Land held for development		978,000			977,000
Investment in real estate, net	$	4,812,000		$	4,866,000

NOTE 5 – 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.

At December 31, 2019 and June 30, 2019, 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:

Investment	Cost		Gross Unrealized Gain		Gross Unrealized Loss			Net Unrealized Loss			Fair Value

As of December 31, 2019
Corporate
Equities	$	4,989,000	$	296,000	$	(3,419,000	)	$	(3,123,000	)	$	1,866,000

As of June 30, 2019
Corporate
Equities	$	10,922,000	$	449,000	$	(8,692,000	)	$	(8,243,000	)	$	2,679,000

As of December 31, 2019, and June 30, 2019, approximately 13% and 19%, respectively, of the investment marketable securities balance above is comprised of the common stock of Comstock Mining, Inc. (“Comstock” – NYSE AMERICAN: LODE).

As of December 31, 2019, and June 30, 2019, the Company had $3,301,000 and $8,617,000 respectively, of unrealized losses related to securities held for over one year. As of December 31, 2019, and June 30, 2019, unrealized losses related to the Company’s investment in Comstock were $3,270,000 and $8,556,000, respectively. For the six months ended December 31, 2019, the decrease in unrealized losses is a result of reclassing $5,560,000 of unrealized gain related to Comstock that was included in the cost basis as of June 30, 2019.

-13-

Net gains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses). Below is the composition of the net gains (losses) on marketable securities for the three and six months ended December 31, 2019 and 2018, respectively.

For the three months ended December 31,	2019			2018
Realized gain on marketable securities, net	$	51,000		$	249,000
Unrealized loss on marketable securities, net		(82,000	)		(691,000	)
Unrealized loss on marketable securities related to Comstock		(48,000	)		(19,000	)
Net loss on marketable securities	$	(79,000	)	$	(461,000	)

For the six months ended December 31,	2019			2018
Realized gain on marketable securities, net	$	47,000		$	290,000
Unrealized loss on marketable securities, net		(144,000	)		(687,000	)
Unrealized loss on marketable securities related to Comstock		(273,000	)		(341,000	)
Net loss on marketable securities	$	(370,000	)	$	(738,000	)

NOTE 6 – 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	December 31, 2019		June 30, 2019
Private equity hedge fund, at cost	$	233,000	$	233,000
Other investments		95,000		118,000
	$	328,000	$	351,000

NOTE 7 – 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:

	12/31/2019		6/30/2019
As of	Total - Level 1		Total - Level 1
Assets:
Investment in marketable securities:
REITs and real estate companies	$	777,000	$	816,000
Energy		464,000		286,000
Basic materials		276,000		537,000
Financial services		119,000		331,000
Consumer cyclical		111,000		636,000
Other		119,000		73,000
	$	1,866,000	$	2,679,000

The fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance sheet date.

-14-

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. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring basis as follows:

Assets	Level 3		December 31, 2019		Net loss for the six months ended December 31, 2019

Other non-marketable investments	$	328,000	$	328,000	$	-

Assets	Level 3		June 30, 2019		Net loss for the six months ended December 31, 2018

Other non-marketable investments	$	351,000	$	351,000	$	-

For the six months ended December 31, 2019 and 2018, we received distribution from other non-marketable investments of $23,000 and $50,000, respectively.

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.

NOTE 8 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows.

As of	12/31/2019		6/30/2019

Cash and cash equivalents	$	6,690,000	$	9,800,000
Restricted cash		12,509,000		11,027,000
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows	$	19,199,000	$	20,827,000

Restricted cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves for the Hotel. It also includes key money received from Interstate that is restricted for capital improvements for the Hotel.

NOTE 9 – 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 six months ended December 31, 2019 and 2018, respectively. Segment income from Hotel operations consists of the operation of the Hotel and operation of the garage. Segment income (loss) from real estate operations consists of the operation of the rental properties. Segment (loss) gain from investments consists of net investment gain (loss), dividend and interest income and investment related expenses.

-15-

As of and for the three months	Hotel			Real Estate			Investment
ended December 31, 2019	Operations			Operations			Transactions			Corporate			Total
Revenues	$	14,901,000		$	79,000		$	-		$	-		$	14,980,000
Segment operating expenses		(11,730,000	)		(48,000	)		-			(286,000	)		(12,064,000	)
Segment income (loss)		3,171,000			31,000			-			(286,000	)		2,916,000
Interest expense - mortgage		(1,825,000	)		(19,000	)		-			-			(1,844,000	)
Depreciation and amortization expense		(586,000	)		(27,000	)		-			-			(613,000	)
Loss from investments		-			-			(97,000	)		-			(97,000	)
Income tax expense		-			-			-			(95,000	)		(95,000	)
Net income (loss)	$	760,000		$	(15,000	)	$	(97,000	)	$	(381,000	)	$	267,000
Total assets	$	56,531,000		$	4,812,000		$	2,194,000		$	6,874,000		$	70,411,000

For the three months	Hotel			Real Estate			Investment
ended December 31, 2018	Operations			Operations			Transactions			Corporate			Total
Revenues	$	13,997,000		$	84,000		$	-		$	-		$	14,081,000
Segment operating expenses		(11,236,000	)		(61,000	)		-			(223,000	)		(11,520,000	)
Segment income (loss)		2,761,000			23,000			-			(223,000	)		2,561,000
Interest expense - mortgage		(1,887,000	)		(25,000	)		-			-			(1,912,000	)
Depreciation and amortization expense		(618,000	)		(27,000	)		-			-			(645,000	)
Loss from investments		-			-			(515,000	)		-			(515,000	)
Income tax benefit		-			-			-			141,000			141,000
Net income (loss)	$	256,000		$	(29,000	)	$	(515,000	)	$	(82,000	)	$	(370,000	)

As of and for the six months	Hotel			Real Estate			Investment
ended December 31, 2019	Operations			Operations			Transactions			Corporate			Total
Revenues	$	30,330,000		$	158,000		$	-		$	-		$	30,488,000
Segment operating expenses		(23,078,000	)		(82,000	)		-			(610,000	)		(23,770,000	)
Segment income (loss)		7,252,000			76,000			-			(610,000	)		6,718,000
Interest expense - mortgage		(3,748,000	)		(44,000	)		-			-			(3,792,000	)
Depreciation and amortization expense		(1,154,000	)		(55,000	)		-			-			(1,209,000	)
Loss from investments		-			-			(401,000	)		-			(401,000	)
Income tax expense		-			-			-			(338,000	)		(338,000	)
Net income (loss)	$	2,350,000		$	(23,000	)	$	(401,000	)	$	(948,000	)	$	978,000
Total assets	$	56,531,000		$	4,812,000		$	2,194,000		$	6,874,000		$	70,411,000

For the six months	Hotel			Real Estate			Investment
ended December 31, 2018	Operations			Operations			Transactions			Corporate			Total
Revenues	$	29,807,000		$	161,000		$	-		$	-		$	29,968,000
Segment operating expenses		(22,046,000	)		(118,000	)		-			(479,000	)		(22,643,000	)
Segment income (loss)		7,761,000			43,000			-			(479,000	)		7,325,000
Interest expense - mortgage		(3,792,000	)		(178,000	)		-			-			(3,970,000	)
Depreciation and amortization expense		(1,235,000	)		(54,000	)		-			-			(1,289,000	)
Loss from investments		-			-			(880,000	)		-			(880,000	)
Income tax expense		-			-			-			(489,000	)		(489,000	)
Net income (loss)	$	2,734,000		$	(189,000	)	$	(880,000	)	$	(968,000	)	$	697,000

-16-

NOTE 10 – RELATED PARTY AND OTHER FINANCING TRANSACTIONS

The following summarizes the balances of related party and other notes payable as of December 31, 2019 and June 30, 2019, respectively.

As of	12/31/2019		6/30/2019
Note payable - InterGroup	$	3,000,000	$	3,000,000
Note payable - Hilton		3,167,000		3,325,000
Note payable - Interstate		1,771,000		1,896,000
Total related party and other notes payable	$	7,938,000	$	8,221,000

Note payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately $316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.

On February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February 3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts over an eight (8) year period commencing on the second (2^nd) anniversary of the takeover date. As of December 31, 2019, and June 30, 2019, balance of the key money plus accrued interest is $1,004,000 and $2,049,000, respectively, and is included in restricted cash in the condensed consolidated balance sheets. Unamortized portion of the key money is included in the related party notes payable in the condensed consolidated balance sheets.

As of December 31, 2019, the Company had finance lease obligations outstanding of $1,282,000. These finance leases expire in various years through 2023 at rates ranging from 5.77% to 6.25% per annum. Minimum future lease payments for assets under finance leases as of December 31, 2019 are as follows:

For the year ending June 30,
2020	$	246,000
2021		492,000
2022		482,000
2023		182,000
Total minimum lease payments		1,402,000
Less interest on finance lease		(120,000	)
Present value of future minimum lease payments	$	1,282,000

Future minimum principal payments for all related party and other financing transactions are as follows:

For the year ending June 30,
2020	$	3,572,000
2021		1,006,000
2022		1,022,000
2023		744,000
2024		567,000
Thereafter		2,309,000
	$	9,220,000

-17-

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Woodland Village and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, InterGroup obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC and is included in the mortgage notes payable – real estate in the condensed consolidated balance sheets as of December 31, 2019 and June 30, 2019.

As of December 31, 2019, and June 30, 2019, the Company had accounts payable to related party of $5,197,000 and $5,105,000, respectively. These are amounts due to InterGroup and they represent certain shared costs and expenses, primarily general and administrative expenses, rent, insurance and other expenses that are allocated among the Company, Portsmouth and InterGroup.

Effective May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan, in order to maintain certain minimum net worth and liquidity guarantor covenant requirements that Portsmouth was unable to satisfy independently as of March 31, 2017.

The Company’s Board of Directors is currently comprised of directors John V. Winfield, William J. Nance, and Robert Dika. Messrs. Winfield and Nance also serve as directors of InterGroup and Portsmouth. Four of the Portsmouth directors serve as directors of InterGroup.

As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of the Portsmouth and InterGroup and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, Portsmouth and InterGroup may, at times, invest in the same companies in which the Company invests. Such investments align the interests of the Company with the interests of related parties because it places the personal resources of the Chief Executive Officer and the resources of the Portsmouth and InterGroup, at risk in substantially the same manner as the Company in connection with investment decisions made on behalf of the Company.

NOTE 11 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE

The following summarizes the balances of accounts payable and other liabilities – Justice as of December 31, 2019 and June 30, 2019.

As of	12/31/2019		6/30/2019
Trade payable	$	1,953,000	$	1,792,000
Advance deposits		1,027,000		1,215,000
Property tax payable		1,046,000		1,046,000
Payroll and related accruals		1,826,000		2,584,000
Interest payable		-		412,000
Withholding and other taxes payable		882,000		1,831,000
Security deposit		52,000		52,000
Other payables		1,861,000		2,366,000
Total accounts payable and other liabilities - Justice	$	8,647,000	$	11,298,000

NOTE 12 – SUBSEQUENT EVENTS

Management has evaluated subsequent events through the date these financial statements were available to be issued. Based on our evaluation no material events have occurred that require disclosure.

-18-

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, 2019, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS

The Company’s principal source of revenue continues to be derived from the investment of its 68.8% owned subsidiary, Portsmouth, in the Justice Investors Limited Partnership (“Justice” or the “Partnership”) inclusive of hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. The Company also generates income from its investments in multi-family real estate properties and from investment of its cash and securities assets. Justice owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Justice have been consolidated with those of the Company.

The Hotel is operated by the Partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement (the “License Agreement”) with Hilton. The Partnership entered into the License Agreement 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.

On February 1, 2017, Justice entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”) to manage the Hotel and related facilities with an effective takeover date of February 3, 2017. The term of HMA is for an initial period of ten years commencing on the takeover date and automatically renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and conditions described in a separate key money agreement.

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 Santa Monica, California. The Company also owns a 2-unit apartment building in West Los Angeles, California.

-19-

Three Months Ended December 31, 2019 Compared to Three Months Ended December 31, 2018

The Company had net income of $267,000 for the three months ended December 31, 2019 compared to net loss of $370,000 for the three months ended December 31, 2018. The change is primarily attributable to the increase in Hotel revenue and decrease in loss on marketable securities, offset by the rise of Hotel operating expenses.

Hotel Operations

The Company had net income from Hotel operations of $760,000 for the three months ended December 31, 2019 compared to net income of $256,000 for the three months ended December 31, 2018. The change is primarily attributable to the increase in Hotel revenue, offset by the rise of Hotel operating expenses.

The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 2019 and 2018.

For the three months ended December 31,	2019			2018
Hotel revenues:
Hotel rooms	$	12,497,000		$	11,565,000
Food and beverage		1,425,000			1,565,000
Garage		776,000			734,000
Other operating departments		203,000			133,000
Total hotel revenues		14,901,000			13,997,000
Operating expenses excluding depreciation and amortization		(11,730,000	)		(11,236,000	)
Operating income before interest, depreciation and amortization		3,171,000			2,761,000
Interest expense - mortgage		(1,825,000	)		(1,887,000	)
Depreciation and amortization expense		(586,000	)		(618,000	)
Net income from Hotel operations	$	760,000		$	256,000

For the three months ended December 31, 2019, the Hotel had operating income of $3,171,000 before interest expense, depreciation and amortization on total operating revenues of $14,901,000 compared to operating income of $2,761,000 before interest expense, depreciation and amortization on total operating revenues of $13,997,000 for the three months ended December 31, 2018. Hotel room revenue rose by $932,000 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018. The increase is primarily due to the timing of Dreamforce, one of the largest annual citywide conventions in San Francisco, from September in 2018 to November in 2019. Food and beverage revenue decreased by $140,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Revenue from garage increased by $42,000 as a result of the increase in occupancy and monthly parkers. Other operating departments revenue increased by $70,000 primarily due to increase in group cancellation revenue.

Total operating expenses increased by $494,000 primarily due to annual wage increase per union bargaining agreements.

The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended December 31, 2019 and 2018.

Three Months

Ended December 31,

Average

Daily Rate

Average

Occupancy %

RevPAR

2019

255

250

2018

239

232

The Hotel’s revenues increased by 6.5% this quarter as compared to the previous comparable quarter. Average daily rate increased by $16, average occupancy increased by 1%, and RevPAR increased by $18 for the three months ended December 31, 2019 compared to the three months ended December 31, 2018.

-20-

Real Estate Operations

The Company had net loss from real estate operations of $15,000 for the three months ended December 31, 2019 compared to net loss of $29,000 for the three months ended December 31, 2018. The decrease in net loss is due to the decrease in operating expenses and mortgage interest.

Investment Transactions

The Company had a net loss on marketable securities of $79,000 for the three months ended December 31, 2019 compared to a net loss on marketable securities of $461,000 for the three months ended December 31, 2018. For the three months ended December 31, 2019, the Company had a net realized gain of $51,000 and a net unrealized loss of $130,000. For the three months ended December 31, 2018, the Company had a net realized gain of $249,000 and a net unrealized loss of $710,000.

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 (benefit) during the three months ended December 31, 2019 and 2018 represent the income tax effect on the Company’s pretax income (loss) which includes its share in the net income of the Hotel.

Six Months Ended December 31, 2019 Compared to Six Months Ended December 31, 2018

The Company had net income of $978,000 for the six months ended December 31, 2019 compared to net income of $697,000 for the six months ended December 31, 2018. The increase in net income is primarily attributable to the rise in Hotel revenue, a decrease in loss on marketable securities, interest expense, and income taxes, offset by the increase of Hotel operating expenses.

Hotel Operations

The Company had net income from Hotel operations of $2,350,000 for the six months ended December 31, 2019 compared to net income of $2,734,000 for the six months ended December 31, 2018. The change is primarily attributable to the rise in Hotel operating expenses, offset by the increase in Hotel revenue.

The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 2019 and 2018.

For the six months ended December 31,	2019			2018
Hotel revenues:
Hotel rooms	$	25,811,000		$	25,087,000
Food and beverage		2,647,000			3,014,000
Garage		1,512,000			1,508,000
Other operating departments		360,000			198,000
Total hotel revenues		30,330,000			29,807,000
Operating expenses excluding depreciation and amortization		(23,078,000	)		(22,046,000	)
Operating income before interest, depreciation and amortization		7,252,000			7,761,000
Interest expense - mortgage		(3,748,000	)		(3,792,000	)
Depreciation and amortization expense		(1,154,000	)		(1,235,000	)
Net income from Hotel operations	$	2,350,000		$	2,734,000

-21-

For the six months ended December 31, 2019, the Hotel had operating income of $7,252,000 before interest expense, depreciation and amortization on total operating revenues of $30,330,000 compared to operating income of $7,761,000 before interest expense, depreciation and amortization on total operating revenues of $29,807,000 for the six months ended December 31, 2018. Hotel room revenue rose by $724,000 for the six months ended December 31, 2019 compared to the six months ended December 31, 2018. The increase is primarily due to replacing guaranteed room revenue at low rates with room revenue at higher market rates driven by citywide conventions. Food and beverage revenue decreased by $367,000 primarily due to decrease in banquet and catering revenue as room revenue shifted towards the transient segment from groups with banquet and catering spending. Garage revenue remained consistent year over year. Revenue from other operating departments increased by $162,000 primarily due to increase in group cancellation revenue.

Total operating expenses increased by $1,032,000 primarily due to annual wage increase per union bargaining agreements.

The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the six months ended December 31, 2019 and 2018.

Six months Ended December 31,	Average Daily Rate		Average Occupancy %			RevPAR

2019	$	263		98	%	$	258
2018	$	258		97	%	$	250

The Hotel’s revenues increased by 1.8% for the six months ended December 31, 2019, as compared to the six months ended December 31, 2018. Average daily rate increased by $5, average occupancy increased by 1%, and RevPAR increased by $8 for the six months ended December 31, 2019, compared to the six months ended December 31, 2018.

Real Estate Operations

The Company had net loss from real estate operations of $23,000 for the three months ended December 31, 2019 compared to net loss of $189,000 for the three months ended December 31, 2018. The decrease in net loss is due to the decrease in operating expenses and mortgage interest.

Investment Transactions

The Company had a net loss on marketable securities of $370,000 for the six months ended December 31, 2019 compared to a net loss on marketable securities of $738,000 for the six months ended December 31, 2018. For the six months ended December 31, 2019, the Company had a net realized gain of $47,000 and a net unrealized loss of $417,000. For the six months ended December 31, 2018, the Company had a net realized gain of $290,000 and a net unrealized loss of $1,028,000.

The Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest in the Hotel. The income tax expense during the six months ended December 31, 2019 and 2018 represents the income tax effect on the Company’s pretax income which includes its share in the net income of the Hotel.

-22-

MARKETABLE SECURITIES

The following table shows the composition of the Company’s marketable securities portfolio as of December 31, 2019 and June 30, 2019 by selected industry groups:

			% of Total
As of December 31, 2019			Investment
Industry Group	Fair Value		Securities

REITs and real estate companies	$	777,000		41.6	%
Energy		464,000		24.9	%
Basic materials		276,000		14.8	%
Financial Services		119,000		6.4	%
Consumer cyclical		111,000		5.9	%
Other		119,000		6.4	%
	$	1,866,000		100.0	%

			% of Total
As of June 30, 2019			Investment
Industry Group	Fair Value		Securities

REITs and real estate companies	$	816,000		30.5	%
Consumer cyclical		636,000		23.7	%
Basic materials		537,000		20.0	%
Financial		331,000		12.4	%
Energy		286,000		10.7	%
Other		73,000		2.7	%
	$	2,679,000		100.0	%

As of December 31, 2019, the Company’s investment portfolio includes approximately 11 equity positions. The Company holds four equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 26% of the portfolio and consists of the common stock of American Realty Investors, Inc. (NYSE: ARL), which is included in the REITs and real estate companies’ industry group.

As of June 30, 2019, the Company’s investment portfolio includes approximately 13 equity positions. The Company holds five equity securities that comprised more than 10% of the equity value of the portfolio. The largest security position represents 19% of the portfolio and consists of the common stock of Comstock, which is included in the basic materials industry group.

The following table shows the net gains (losses) on the Company’s marketable securities and the associated margin interest and trading expenses for the respective periods:

For the three months ended December 31,	2019			2018
Net loss on marketable securities	$	(79,000	)	$	(461,000	)
Dividend and interest income		46,000			23,000
Margin interest expense		(27,000	)		(32,000	)
Trading and management expenses		(37,000	)		(45,000	)
	$	(97,000	)	$	(515,000	)

For the six months ended December 31,	2019			2018
Net loss on marketable securities	$	(370,000	)	$	(738,000	)
Dividend and interest income		106,000			38,000
Margin interest expense		(55,000	)		(79,000	)
Trading and management expenses		(82,000	)		(101,000	)
	$	(401,000	)	$	(880,000	)

-23-

FINANCIAL CONDITION AND LIQUIDITY

The Company’s cash flows are primarily generated from its Hotel operations. The Company may also receives cash generated from the investment of its cash and marketable securities and other investments.

To fund the redemption of limited partnership interests and to repay the prior mortgage, Justice obtained a $97,000,000 mortgage loan and a $20,000,000 mezzanine loan in December of 2013. The mortgage loan is secured by the Partnership’s principal asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum and matures in January 2024. Outstanding principal balance on the loan was $92,914,000 and $93,746,000 as of December 31, 2019 and June 30, 2019, respectively. As additional security for the mortgage loan, there is a limited guaranty executed by the Portsmouth in favor of the mortgage lender. The mezzanine loan is a secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan. The mezzanine interest only loan has an interest rate of 9.75% per annum and matures on January 1, 2024. On July 31, 2019, Mezzanine refinanced the Mezzanine Loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”) with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan was paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are due monthly. As additional security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. Effective as of May 12, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine loan.

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 loan was extended to June 30, 2020. The balance of this loan was $3,000,000 as of December 31, 2019 and June 30, 2019, and are included in the related party and other note payable in the condensed consolidated balance sheets.

In July 2018, InterGroup obtained a revolving $5,000,000 line of credit (“RLOC”) from CIBC Bank USA (“CIBC”). On July 31, 2018, $2,969,000 was drawn from the RLOC to pay off the mortgage note payable at Woodland Village and a new mortgage note payable was established at Woodland Village due to InterGroup for the amount drawn. The RLOC carries a variable interest rate of 30-day LIBOR plus 3%. Interest is paid on a monthly basis. The RLOC and all accrued and unpaid interest were due in July 2019. In July 2019, InterGroup obtained a modification from CIBC which increased the RLOC by $3,000,000 and extended the maturity date from July 24, 2019 to July 23, 2020. The $2,969,000 mortgage due to InterGroup carries same terms as InterGroup’s RLOC and is included in the mortgage notes payable – real estate in the condensed consolidated balance sheets as of December 31, 2019 and June 30, 2019.

The Hotel has continued to generate strong revenue growth. While the debt service requirements related to the loans may create some additional risks for the Company and its ability to generate cash flows in the future, management believes that cash flows from the operations of the Hotel and the garage will continue to be sufficient to meet all of the Partnership’s current and future obligations and financial requirements.

-24-

MATERIAL CONTRACTUAL OBLIGATIONS

The following table provides a summary as of December 31, 2019, the Company’s material financial obligations which also including interest payments:

			6 Months		Year		Year		Year		Year
	Total		2020		2021		2022		2023		2024		Thereafter
Mortgage notes payable	$	116,225,000	$	627,000	$	4,525,000	$	1,642,000	$	1,732,000	$	107,403,000	$	296,000
Related party and other notes payable		9,220,000		3,572,000		1,006,000		1,022,000		744,000		567,000		2,309,000
Interest		25,573,000		3,487,000		6,416,000		6,295,000		6,184,000		3,078,000		113,000
Total	$	151,018,000	$	7,686,000	$	11,947,000	$	8,959,000	$	8,660,000	$	111,048,000	$	2,718,000

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 Interstate has the power and ability to adjust hotel room rates on an ongoing basis, there should be minimal impact on partnership revenues due to inflation. Partnership revenues are also subject to interest rate risks, which may be influenced by inflation. For the two most recent fiscal years, the impact of inflation on the Company’s income is not viewed by management as material.

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 AND USE OF ESTIMATES

Critical accounting policies are those that are most significant to the presentation of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these condensed financial statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to the consolidation of our subsidiaries, to our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company’s critical accounting policies during the six months ended December 31, 2019 except for the adoption of ASU 2016-02. Please refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 2019 for a summary of the critical accounting policies.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company and therefore, we are not required to provide information required by this Item of Form 10-Q.

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.

-25-

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 1. LEGAL PROCEEDINGS

During the period ending December 31, 2019, there were no pending or threatened legal actions.

Item 1A. RISK FACTORS

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There have been no events that are required to be reported under this Item.

Item 3. DEFAULTS UPON SENIOR SECURITIES

There have been no events that are required to be reported under this Item.

Item 4. MINE SAFETY DISCLOSURES

There have been no events that are required to be reported under this Item.

Item 5. OTHER INFORMATION

There have been no events that are required to be reported under this Item.

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

-26-

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.

	SANTA FE FINANCIAL CORPORATION
		(Registrant)

Date: January 24, 2020	by	/s/ John V. Winfield
		John V. Winfield
		President, Chairman of the Board and
		Chief Executive Officer
		(Principal Executive Officer)

Date: January 24, 2020	by	/s/ Danfeng Xu
		Danfeng Xu
		Treasurer and Controller
		(Principal Financial Officer)

-27-

SANTA FE FINANCIAL CORP 10-Q