Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND PROJECTIONS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Forward-looking statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, including anticipated repayment of certain of the Company's indebtedness, the impact on our business and financial condition, the effects of competition, the effects of future legislation or regulations and other non-historical statements, as well as the impact of macroeconomic factors (including inflation, increases in interest rates, potential economic slowdown or a recession and geopolitical conflicts). Forward-looking statements include all statements that are not historical facts, and in some cases, can be identified by the use of forward-looking terminology such as the words "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "projects," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our results of operations, financial condition, cash flows, performance or future achievements or events.

Such statements are subject to certain risks and uncertainties. These risks and uncertainties include, but are not limited to, the following: national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry; the impact of terrorism and war on the national and international economies, including tourism, securities markets, energy and fuel costs; natural disasters; general economic conditions and competition in the hotel industry in the San Francisco area; seasonality, labor relations and labor disruptions; actual and threatened pandemics and other public health events; 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, 2025, including under "Risk Factors.". These risks and uncertainties could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events, except as required by law.

RESULTS OF OPERATIONS

The Company's principal source of revenue continues to be derived from its ownership in Operating, inclusive of Hotel room revenue, food and beverage revenue, garage revenue, and revenue from other operating departments. Operating owns the Hotel and related facilities, including a five-level underground parking garage. The financial statements of Operating have been consolidated with those of the Company.

Three Months Ended September 30, 2025 Compared to Three Months Ended September 30, 2024

The Company had a net loss of $2,585,000 for the three months ended September 30, 2025 compared to a net loss of $1,872,000 for the three months ended September 30, 2024. The increase in loss is primarily attributable to the absence of an management incentive fee waiver that reduced expenses in the prior-year quarter and to higher related-party accrued interest expense due to a higher outstanding balance with InterGroup. See Note 9 - Related-Party and Other Financing Transactions.

Hotel Operations

The Company had a net loss from Hotel operations of $2,302,000 for the three months ended September 30, 2025 compared to a net loss of $1,523,000 for the three months ended September 30, 2024. The increase in loss is primarily attributable to the absence of a management incentive fee waiver that reduced expenses in the prior-year quarter and to higher compensation costs under new labor union agreements.

The following table sets forth a more detailed presentation of Hotel operations for the three months ended September 30, 2025 and 2024:

For the three months ended September 30,		2025				2024
Hotel revenues:
Hotel rooms		$	10,428,000			$	10,110,000
Food and beverage			912,000				733,000
Garage			900,000				875,000
Other operating departments			178,000				102,000
Total Hotel revenues			12,418,000				11,820,000
Operating expenses excluding depreciation and amortization			(10,481,000	)			(8,792,000	)
Operating income before interest, depreciation and amortization			1,937,000				3,028,000
Interest expense - mortgage			(2,493,000	)			(2,824,000	)
Interest expense - related party			(872,000	)			(824,000	)
Depreciation and amortization expense			(874,000	)			(903,000	)
Net loss from Hotel operations		$	(2,302,000	)		$	(1,523,000	)

For the three months ended September 30, 2025, the Hotel had operating income of $1,937,000 before interest expense, depreciation, and amortization on total operating revenues of $12,418,000. For the three months ended September 30, 2024, the Hotel had operating income of $3,028,000 before interest expense, depreciation, and amortization on total operating revenues of $11,820,000.

The following table sets forth the average daily room rate, average occupancy percentage and RevPAR of the Hotel for the three months ended September 30, 2025 and 2024.

Three Months Ended September 30,		Average Daily Rate				Average Occupancy %				RevPAR
2025		$	218				95	%		$	207
2024		$	210				96	%		$	202

The Hotel's revenues increased by 5.1% this quarter compared to the prior-year period (from $11,820,000 to $12,418,000). Average daily rate increased by $8, average occupancy decreased by 1.0%, and RevPAR increased by $5 for the three months ended September 30, 2025 compared to the three months ended September 30, 2024.

Investment Transactions

The Company recorded a net gain on marketable securities of $23,000 for the three months ended September 30, 2025 compared to a net gain of $41,000 for the three months ended September 30, 2024 (unrealized gain of $23,000 in 2025; unrealized gain of $51,000 and realized loss of $10,000 in 2024). Given the modest size of the portfolio ($151,000 at September 30, 2025 and $127,000 at June 30, 2025, each net of margin balances), period-to-period activity in marketable securities is not expected to be material to the Company's consolidated results of operations or liquidity. See Note 5 - Investment in Marketable Securities, Net.

Tax Estimates

We record a tax benefit for a position only if we think it's more likely than not to hold up under audit, and we measure that benefit conservatively. Audits or changes in tax laws can change our conclusions and, in turn, our results. The Company recognized income tax expense of $1,000 for each of the three months ended September 30, 2025 and 2024. These amounts represent the income tax effect on the Company's pretax loss, which includes the operations of the Hotel.

MARKETABLE SECURITIES

The following table shows the composition of the Company's marketable securities portfolio as of September 30, 2025 and June 30, 2025 by selected industry groups.

						% of Total
As of September 30, 2025						Investment
Industry Group		Fair Value				Securities
REITs and real estate companies		$	151,000				100.0	%

						% of Total
As of June 30, 2025						Investment
Industry Group		Fair Value				Securities
REITs and real estate companies		$	127,000				100.0	%

The following table shows the net loss on the Company's marketable securities and the associated margin interest and trading expenses for the respective periods:

For the three months ended September 30,		2025				2024
Net gain on marketable securities		$	23,000			$	41,000
Dividend and interest income			-				4,000
Trading and management expenses			(39,000	)			(38,000	)
		$	(16,000	)		$	7,000

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL SOURCES

The Company had cash, cash equivalents and restricted cash of $10,131,000 and $11,722,000 as of September 30, 2025 and June 30, 2025, respectively. The Company had marketable securities, net of margin due to securities broker, of $151,000 and $127,000 as of September 30, 2025, and June 30, 2025, respectively. These marketable securities are short-term investments and readily convertible to cash and are not material to the Company's overall liquidity. See Note 7 (restricted cash lockbox) and Note 5 (marketable securities).

Related Party Credit Facility - InterGroup

The Company maintains an unsecured related-party revolving credit facility with its majority shareholder, The InterGroup Corporation ("InterGroup"), originally established in 2014 and amended multiple times. While the facility remains available, management is not currently relying on it to fund ongoing Hotel operations, which - following the March 28, 2025 refinancing - have been self-funding from operating cash flows.

Key modifications include:

	●	December 2021: Portsmouth assumed $11.35 million in outstanding debt upon the dissolution of Justice Investors L.P.
	●	July 2023: Increased available borrowings to $20,000,000 and extended maturity to July 31, 2025 with a 0.5% loan modification fee.
	●	March 2024: Increased available borrowings to $30,000,000 with additional 0.5% modification fee on the incremental $10,000,000.
	●	March 2025: Further increased available borrowing capacity to $40,000,000 and extended the maturity to July 31, 2027.
	●	May 2025: Reduced the interest rate from 12% to 9%.

The facility now bears 9% annual interest, is interest-only, and may be prepaid at any time without penalty. During the fiscal year ended June 30, 2025, the Company borrowed an additional $11,615,000. As of September 30, 2025, the outstanding balance was $38,108,000. The facility is maintained as a contingency source of liquidity; management currently expects to satisfy near-term working capital needs from operating cash flows and cash on hand. See Note 9 - Related-Party and Other Financing Transactions.

The Company may also consider amending its by-laws to increase authorized shares and pursue public capital market offerings if deemed necessary to support liquidity.

Refinancing Accounting Effects (FY2025)

In connection with the March 28, 2025 refinancing, the Company recognized a gain of approximately $1.416 million for the quarter ended March 31, 2025, primarily related to the mezzanine lender's forgiveness of accrued default interest and the forbearance fee; the senior facility's accrued default interest and forbearance fee were paid at refinancing, and that credit facility was retired. See Note 10.

Liquidity Requirements

The Company's short-term liquidity needs include:

	●	Hotel operating costs, including payroll, utilities, franchise and management fees,
	●	Corporate overhead and tax obligations,
	●	Interest payments and required loan maintenance under both senior and mezzanine debt agreements, and
	●	Routine repair and maintenance capital expenditures at the Hotel.

Long-term liquidity requirements include:

	●	Scheduled debt maturities, including those disclosed in Note 9 and 10, and
	●	Capital improvements to maintain the competitiveness and operational standards of the Hotel under its Hilton franchise agreement.

The Company intends to meet these obligations using a combination of:

	●	Available cash on hand,
	●	Operating cash flows,
	●	Availability under the InterGroup related-party revolving credit facility, if needed; and
	●	Other potential financing or equity alternatives.

Management's Liquidity Assessment

The Company has taken proactive steps to stabilize its liquidity profile, including:

	●	Completion of a refinancing of its senior and mezzanine debt in March 2025,
	●	Continuing cost controls and selective capital expenditure deferrals,

	●	Maintenance of access to related-party financing capacity; and
	●	Maintenance of a lender-controlled lockbox cash management system (see Note 10 - Mortgage Notes Payable and Mezzanine Financing).

While management believes that current liquidity sources and available borrowing capacity will be sufficient to support near-term working capital needs-even in the event of continued pressure on hotel performance indicators such as occupancy and RevPAR-there can be no assurance that unforeseen market or operational conditions will not adversely affect the Company's liquidity position.

The Company continues to evaluate strategic alternatives and operational adjustments in response to ongoing macroeconomic and market-specific challenges in San Francisco's hospitality sector.

Capital Expenditures

During the three months ended September 30, 2025, the Company incurred approximately $974,000 of capital expenditures, primarily related to guest-room renovations and returning 14 rooms previously used as administrative offices and other uses, to available inventory. The Company expects to continue selective investments intended to maintain brand standards and Hotel's competitive positioning, subject to liquidity and covenant considerations. See Note 4 - Investment in Hotel, net.

Going Concern

As previously disclosed in the Company's Annual Report on Form 10-K for the year ended June 30, 2025, management concluded that conditions giving rise to substantial doubt were alleviated as of March 28, 2025 following the refinancing of the senior mortgage and restated mezzanine loan. Management has reevaluated conditions as of the issuance date of these interim financial statements and concluded that no conditions or events exist that raise substantial doubt under ASC 205-40. See Note 1 - Basis of Presentation (Going Concern).

MATERIAL CONTRACTUAL OBLIGATIONS

The following table provides a summary of September 30, 2025, of the Company's material financial obligations which also includes interest:

		Total				9 Months 2026				Year 2027				Year 2028				Year 2029				Year 2030				Thereafter
Mortgage notes payable		$	103,300,000			$	-			$	103,300,000			$	-			$	-			$	-			$	-
Hilton/Aimbridge other notes payable			1,838,000				425,000				463,000				317,000				317,000				316,000				-
Related party notes payable			38,108,000				-				-				38,108,000				-				-				-
Interest mortgage notes payable			18,107,000				6,657,000				11,450,000				-				-				-				-
Interest related party notes payable			16,775,000				3,430,000				4,573,000				8,772,000				-				-				-
Total		$	178,128,000			$	10,512,000			$	119,786,000			$	47,197,000			$	317,000			$	316,000			$	-

Mortgage Notes Payable

Operating entered into a $67,000,000 Mortgage Loan Agreement with Prime Finance. The loan bears interest at Term SOFR + 4.75%, with a SOFR cap of 4.50%, and is interest-only through maturity. The loan initially matures on April 9, 2027, with three one-year extension options, subject to satisfaction of financial and operational covenants. The interest-rate cap caps Term SOFR at 4.50% and has a notional amount equal to or greater than the outstanding principal balance of the loan. The Company paid a premium of approximately $136,000 for the cap at inception. The loan is secured by the Hotel. Mezzanine executed a restated and amended Mezzanine Loan Agreement with CRED REIT Holdco LLC for a principal amount of $36,300,000. The loan accrues interest at a fixed rate of 7.25% per annum, with matching maturity and extension terms to the senior loan. The loan is secured by Mezzanine's membership interest in Operating. See Note 10 - Mortgage Notes Payable and Mezzanine Financing.

Related-Party Notes Payable

Principal and accrued interest are due in full at maturity; no monthly principal or interest payments are required prior to maturity. See Note 9 - Related-Party and Other Financing Transactions.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2025, the Company had no material off-balance sheet arrangements.

IMPACT OF INFLATION

Hotel room rates are typically impacted by supply and demand factors, not inflation, since rental of a hotel room is usually for a limited number of nights. Room rates can be, and usually are, adjusted to account for inflationary cost increases. Since Aimbridge has the power and ability under the terms of its management agreement to adjust Hotel room rates on an ongoing basis, there should be minimal impact on the Company's revenues due to inflation. For the two most recent fiscal years, the impact of inflation on the Company's income has not been viewed by management as material.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Critical accounting policies are those that are most significant to the portrayal of our financial position and results of operations and require judgments by management in order to make estimates about the effect of matters that are inherently uncertain. The preparation of these Condensed Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts in our consolidated financial statements. We evaluate our estimates on an ongoing basis, including those related to the consolidation of our subsidiaries, recognition of our revenues, allowances for bad debts, accruals, asset impairments, other investments, income taxes and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. There have been no material changes to the Company's critical accounting policies during the three months ended September 30, 2025.

INCOME TAXES

We apply ASC 740 to account for income taxes. Significant judgment is required to estimate the future tax consequences of events recognized in our condensed consolidated financial statements and tax returns, including the realizability of deferred tax assets and the effects of changes in tax laws or their interpretation. Our income tax returns are subject to examination by the IRS and other taxing authorities; changes in our assessment of these matters could materially affect our consolidated financial statements. We evaluate tax positions taken or expected to be taken on a tax return and recognize benefits only when it is more-likely-than-not that the position will be sustained upon examination, based on the technical merits and assuming full knowledge by the taxing authority. For positions that meet this threshold, the recognized benefit is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. Positions that do not meet the recognition threshold are not recognized. Estimates, assumptions, and judgments are inherent in these evaluations, and changes in our assessments could materially affect our consolidated financial statements. We recognize interest and penalties related to uncertain tax positions in income tax expense.

DEFERRED INCOME TAXES - VALUATION ALLOWANCE

We assess the realizability of deferred tax assets ("DTA") each reporting period on a jurisdiction-by-jurisdiction basis. A valuation allowance is recorded when it is more-likely-than not that some or all DTAs will not be realized. In forming this conclusion, we weigh all available positive and negative evidence, placing significant weight on objectively verifiable evidence, including recent financial results.

Cumulative pre-tax losses over the preceding three years constitute significant negative evidence that DTAs may not be realizable, while cumulative pre-tax income provides objective positive evidence of our ability to generate taxable income. Consistent with GAAP, when there is a recent history of pre-tax losses, limited or no weight is placed on forecasts in assessing DTA realizability. When relevant, we use systematic and logical scheduling to estimate the timing of reversal of temporary differences (i.e., when deferred tax liabilities will generate taxable income and when DTAs will generate deductions). These assessments require assumptions and judgements and are inherently complex and subjective. Significant judgment will also be required to determine the timing and amount of any future release of the valuation allowance should our evidence change.

HOTEL ASSETS AND DEFINITE-LIVED INTANGIBLE ASSETS

We review hotel property and equipment and definite-lived intangible assets (together, "long-lived assets") each quarter and whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. We generally assess recoverability at the property (asset-group) level - the lowest level for which identifiable cash flows are largely independent.

When indicators of impairment exist, we compare the carrying amount to the sum of the asset group's undiscounted cash flows expected from use and eventual disposition. If not recoverable we measure an impairment loss as the excess of carrying amount over fair value. Fair value is estimated using market and/or income approaches, which require significant judgment, including assumptions about occupancy, ADR/RevPAR, operating margins, required capital expenditures, terminal values, and market discount and capitalization rates. Our indicators of impairment assessment considers industry conditions, property location, market dynamics, historical performance, and property-specific facts available at the time; conclusions may vary period to period as facts change.

Changes in economic or operating conditions could result in future impairment charges. Historically, changes in estimates used in our process have not resulted in material subsequent-period impairment charges.

There were no indicators of impairment for our hotel investments or definite-lived intangible assets, and no impairment losses were recorded for the three months ended September 30, 2025 and 2024, respectively.