Annual Report for Fiscal Year Ending June 30, 2026 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes, and Item 1A - "Risk Factors," appearing elsewhere in this Annual Report on Form 10-K.

SAN FRANCISCO MARKET CONDITIONS

The Hotel's operating results are significantly affected by economic, business travel, convention and tourism conditions in San Francisco. During fiscal 2026, the Hotel experienced improved business travel and convention demand, which contributed to higher occupancy, average daily rate and room revenue compared with fiscal 2025. San Francisco lodging demand remains subject to changes in local economic conditions, convention activity, business and leisure travel and public perceptions of the city. Because the Company's Hotel operations are concentrated in a single property in San Francisco, changes in these conditions may have a significant effect on the Company's future operating results. See Item 1A - Risk Factors.

RESULTS OF OPERATIONS

As of June 30, 2026, the Company owned approximately 75.9% of the common shares of Portsmouth Square, Inc. The Company's principal operating revenues are generated by the Hotel and its multifamily and commercial real estate properties. The Company also generates income and losses from its investment activities.

Portsmouth's primary asset is a hotel property located at 750 Kearny Street, San Francisco, California 94108, known as the "Hilton San Francisco Financial District" (the "Hotel" or the "Property") and related facilities, including a five-level underground parking garage. Effective September 30, 2025, the Hotel's available room inventory increased from 544 to 558 rooms following the conversion of 14 former administrative office spaces into guestrooms. The financial statements of Portsmouth are consolidated with those of the Company.

In addition to the operations of the Hotel, the Company also generates income from the ownership and management of its real estate. Properties include fifteen apartment complexes, one commercial real estate property, and three single-family houses as strategic investments. The properties are located throughout the United States but are concentrated in Texas and Southern California. The Company also has an investment in unimproved real property in Hawaii.

Fiscal Year Ended June 30, 2026, Compared to Fiscal Year Ended June 30, 2025

The Company reported net income of $336,000 for fiscal 2026 compared with a net loss of $7.547 million for fiscal 2025. The improvement primarily reflected a $4.223 million increase in income from operations to $11.866 million, a $3.508 million gain on the sale of a multifamily property, a $2.289 million decrease in the net loss from marketable securities operations to $213,000 and an $890,000 decrease in mortgage interest expense to $12.666 million. These improvements were partially offset by higher income tax expense and the absence of the $1.416 million gain on extinguishment of debt recognized in fiscal 2025.

Hotel Operations

Portsmouth's principal source of revenue is the Hotel, including room, food and beverage, parking and other operating revenue.

Hotel Operations segment income increased to $12.524 million in fiscal 2026 from $8.732 million in fiscal 2025. The improvement primarily reflected higher room revenue resulting from increased average daily rate, higher occupancy, improved business travel and convention demand, and the addition of 14 guestrooms to available inventory effective September 30, 2025. The increase was partially offset by higher Hotel operating expenses and by the absence of the $1.030 million management incentive fee waiver recognized as a reduction of Hotel operating expenses in fiscal 2025.

Hotel Operating Table

For the year ended June 30,		2026				2025
Hotel revenues:
Hotel rooms		$	48,396,000			$	39,648,000
Food and beverage			3,164,000				2,862,000
Garage			3,307,000				3,214,000
Other operating departments			930,000				639,000
Total Hotel revenues			55,797,000				46,363,000
Hotel operating expenses			(43,273,000	)			(37,631,000	)
Hotel operations segment income			12,524,000				8,732,000

The following table sets forth the monthly average occupancy percentage of the Hotel for the fiscal years ended June 30, 2026 and 2025.

Month		Jul				Aug				Sep				Oct				Nov				Dec				Jan				Feb				Mar				Apr				May				Jun				Fiscal Year
Year		2025				2025				2025				2025				2025				2025				2026				2026				2026				2026				2026				2026				2025 - 2026
Average Occupancy %			93	%			95	%			96	%			96	%			92	%			88	%			91	%			96	%			97	%			95	%			97	%			97	%			95	%

Year		2024				2024				2024				2024				2024				2024				2025				2025				2025				2025				2025				2025				2024 - 2025
Average Occupancy %			96	%			96	%			96	%			94	%			83	%			87	%			90	%			86	%			91	%			91	%			93	%			93	%			92	%

Hotel operating expenses increased by $5.642 million, to $43.273 million in fiscal 2026 from $37.631 million in fiscal 2025. The increase primarily reflected higher salaries, wages and employee-related costs, higher Hilton marketing and guest loyalty program fees, increased credit card processing costs, and higher travel agent and group commissions associated with increased business volume. Fiscal 2025 Hotel operating expenses also benefited from the $1.030 million Aimbridge incentive management fee waiver discussed above.

The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room ("RevPAR") of the Hotel for the years ended June 30, 2026 and 2025.

For the Year Ended June 30,		Average Daily Rate				Average Occupancy %				RevPAR
2026		$	253				95	%		$	239
2025		$	218				92	%		$	200

Total Hotel revenue increased approximately 20% to $55.797 million in fiscal 2026 from $46.363 million in fiscal 2025. Average daily rate increased $35, or approximately 16%, to $253 from $218; average occupancy increased three percentage points to 95% from 92%; and RevPAR increased $39, or approximately 20%, to $239 from $200. The increases reflected improved business travel and convention demand, the benefit of the completed guestrooms renovation, which included the addition of 14 guestrooms to available inventory during fiscal 2026.

Real Estate Operations

Revenues from real estate operations increased to $18,154,000 in fiscal 2026 from $18,015,000 in fiscal 2025, primarily driven by stronger multifamily occupancy and rental rate trends across the portfolio. Real estate operating expenses decreased to $9,301,000 from $9,550,000 primarily due to lower insurance and real estate tax expense, partially offset by increases in other property operating expenses and utilities. As a result, Real Estate Operations segment income increased to $8.853 million in fiscal 2026 from $8.465 million in fiscal 2025.

Investment Transactions

The Company had a net gain on marketable securities of $953,000 for the year ended June 30, 2026 compared with a net loss on marketable securities of $1,347,000 for the year ended June 30, 2025.

The fiscal 2026 securities gain consisted of a realized gain of $167,000 and an unrealized gain of $786,000, compared with a realized loss of $329,000 and an unrealized loss of $1.018 million in fiscal 2025. After dividend and interest income and trading and margin interest expense, the Company recorded a net loss from marketable securities operations of $213,000 in fiscal 2026 compared with a net loss of $2.502 million in fiscal 2025.

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 is not necessarily predictive, and variations from period to period may have limited analytical value. For a more detailed description of the composition of the Company's marketable securities, see the Marketable Securities section below.

During the years ended June 30, 2026 and 2025, the Company evaluated its other investments for impairment and recorded no impairment losses in either period.

MARKETABLE SECURITIES AND OTHER INVESTMENTS

As of June 30, 2026 and 2025, the Company had investments in marketable equity securities of $4,394,000 and $969,000, respectively. The following table shows the composition of the Company's marketable securities portfolio by selected industry groups:

As of June 30, 2026 Industry Group		Fair Value				% of Total Investment Securities
REITs and real estate companies		$	1,853,000				42.2	%
Technology			1,266,000				28.8	%
Financial services			771,000				17.6	%
Healthcare			168,000				3.8	%
Energy			111,000				2.5	%
Other			73,000				1.7	%
Basic materials			72,000				1.6	%
Communication			35,000				0.8	%
Consumer cyclical			28,000				0.6	%
Utilities			17,000				0.4	%
		$	4,394,000				100.0	%

As of June 30, 2025 Industry Group		Fair Value				% of Total Investment Securities
REITs and real estate companies		$	966,000				99.6	%
Technology			3,000				0.4	%
		$	969,000				100.0	%

As of June 30, 2026, the Company's marketable equity securities portfolio included investments in American Realty Investors, Inc. (NASDAQ: ARL) and Snowflake Inc. (NYSE: SNOW), which represented approximately 29.2% and 13.9%, respectively, of the fair value of the Company's marketable equity securities portfolio. American Realty Investors, Inc. is included in the REITs and real estate companies industry group, while Snowflake Inc. is included in the technology industry group.

As of June 30, 2025, American Realty Investors, Inc. represented approximately 99% of the fair value of the Company's marketable equity securities portfolio.

The following table summarizes the results of the Company's marketable securities activities for the respective years.

For the years ended June 30,		2026				2025
Net gain (loss) on marketable securities		$	953,000			$	(1,347,000	)
Dividend and interest income			30,000				161,000
Margin interest expense			(756,000	)			(806,000	)
Trading expenses			(440,000	)			(510,000	)
Net loss from marketable securities operations		$	(213,000	)		$	(2,502,000	)

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of liquidity are cash on hand, cash flows generated from its real estate and Hotel operations, marketable securities and property-level financing. As of June 30, 2026, the Company had cash and cash equivalents of $6.356 million and restricted cash of $10.943 million, for total cash, cash equivalents and restricted cash of $17.299 million, compared with $15.195 million as of June 30, 2025. The Company also held marketable securities with a fair value of $4.394 million as of June 30, 2026, compared with $969,000 as of June 30, 2025. As of June 30, 2026, the Company had $427,000 due to a securities broker and $272,000 of obligations for securities sold, which are presented separately as liabilities in the consolidated balance sheet. Restricted cash primarily consists of amounts maintained in lender-controlled accounts and is not generally available for unrestricted corporate purposes.

Cash Flows

Net cash provided by operating activities was $3.450 million in fiscal 2026, compared with $5.893 million in fiscal 2025. The decrease primarily reflected the cash-flow effect of changes in marketable securities, which used $2.640 million of cash in fiscal 2026 compared with providing $5.467 million in fiscal 2025, partially offset by improved consolidated operating results. Net cash provided by investing activities was $1.762 million in fiscal 2026, compared with $3.917 million used in fiscal 2025. Fiscal 2026 investing activities included $4.472 million of proceeds from the sale of a 12-unit multifamily property and $456,000 of insurance proceeds, partially offset by $2.198 million of Hotel capital expenditures and $968,000 of real estate capital expenditures. . Net cash used in financing activities was $3.108 million in fiscal 2026, compared with $4.525 million provided in fiscal 2025. Fiscal 2026 financing cash flows principally reflected $1.201 million of mortgage payments, the $1.834 million repayment of the mortgage associated with the property sold during the year and $73,000 of common stock repurchases. Fiscal 2025 financing cash flows principally reflected the March 2025 Hotel refinancing.

Material Cash Requirements

The Company's material cash requirements include operating expenses, corporate overhead, interest expense, lender-required reserves, capital expenditures and scheduled debt maturities. During fiscal 2026, Portsmouth incurred approximately $2.198 million of capital expenditures at the Hotel. The Company also incurred approximately $968,000 of capital expenditures related to its non-Hotel real estate properties. The Company expects to fund its ordinary-course requirements primarily through operating cash flows, cash on hand and existing financing arrangements.

Following the removal of the pedestrian bridge in August 2026, Portsmouth expects to incur capital expenditures for the design and construction of permanent improvements to the Hotel's Kearny Street entrance. The City and its contractor are separately performing restoration work associated with the bridge demolition. Portsmouth has not yet established a reliable estimate of the cost of its permanent entrance improvements, which will depend on the final design, governmental and other approvals, permitting requirements and construction conditions.

Hotel Financing

Portsmouth's $67.0 million senior mortgage loan and $36.3 million mezzanine loan mature on April 9, 2027 and provide for three one-year extension options, subject to specified conditions. As of June 30, 2026, Portsmouth was in compliance with all applicable covenants under the loan agreements. The first extension through April 9, 2028 requires, among other conditions, a Debt Service Coverage Ratio ("DSCR") of at least 1.10:1.00, and no Debt Yield requirement applies to the first extension. Based on management's application of the methodology set forth in the senior loan agreement, Portsmouth's calculated DSCR was approximately 1.45:1.00 as of June 30, 2026. Management currently expects to satisfy the applicable conditions and exercise the first extension through April 9, 2028. If Portsmouth is unable to exercise an extension, it would be required to repay or refinance the loans at maturity.

Cash Management

Hotel cash receipts remain subject to a lender-controlled cash-management arrangement and are applied to approved operating expenses, debt service and required reserves. The arrangement restricts the availability of Hotel cash for other corporate purposes. Release from the cash-management arrangement is subject to conditions specified in the senior loan documents and lender determination. The cash-management arrangement remained in effect as of June 30, 2026; its continued operation does not constitute a default or noncompliance with Portsmouth's loan covenants.

Intercompany Credit Facility

Portsmouth also has a $40.0 million revolving credit facility with InterGroup, of which $38.108 million was outstanding as of June 30, 2026. In August 2026, the facility's maturity was extended from July 31, 2027 to July 31, 2029. The related balances and transactions are eliminated in consolidation. Accordingly, the facility provides liquidity to Portsmouth within the consolidated group but does not constitute an external source of liquidity to the Company on a consolidated basis.

Liquidity Outlook

Management believes the Company's existing liquidity sources and financing arrangements are sufficient to meet its obligations for at least 12 months following issuance of the consolidated financial statements. The Company's liquidity remains subject to Hotel and real estate operating performance, interest rates, capital requirements, debt-extension conditions and the availability of refinancing. See Item 1A, "Risk Factors," and Notes 2, 10 and 16 to the Consolidated Financial Statements.

IMPACT OF INFLATION

Inflation may affect the Company's operating results through increases in labor and employee benefit costs, utilities, food and beverage costs, insurance, repairs and maintenance, supplies, real estate taxes and other Hotel and real estate operating expenses. Because Hotel room rates are generally established for relatively short periods, room rates can be adjusted in response to changes in market conditions and operating costs; however, the Company's ability to increase room rates is subject to demand, competition and other market conditions.

The Company's residential rental properties generally have leases of one year or less, which may provide opportunities to adjust rental rates as leases expire or renew. However, the Company's ability to increase rents at certain properties is limited by applicable state and local rent stabilization and tenant-protection laws. Continued inflationary pressure could increase the Company's operating and capital costs and, to the extent those increases cannot be offset by higher room rates, rental rates, occupancy or other revenue growth, could adversely affect operating margins and cash flows.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the Company's consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Critical accounting estimates involve a significant level of estimation uncertainty and have had, or are reasonably likely to have, a material impact on the Company's financial condition or results of operations. Management believes the estimates discussed below involve the most significant judgments and estimation uncertainty affecting the consolidated financial statements.

DEFERRED INCOME TAXES - VALUATION ALLOWANCE

We assess the realizability of our deferred tax assets quarterly and recognize a valuation allowance when, based on all available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. This assessment requires significant judgment, including consideration of recent operating results and cumulative pre-tax income or losses, expected future taxable income, the timing of reversals of temporary differences and other available evidence. Objective evidence, including recent cumulative pre-tax results, is generally given greater weight than subjective forecasts of future taxable income. Changes in operating results, objectively verifiable evidence of sustained future profitability, the timing of reversals of temporary differences, changes in tax laws or other relevant evidence could cause management to change its assessment in future periods, which could have a material effect on income tax expense or benefit.

IMPAIRMENT OF HOTEL ASSETS

We review our Hotel property and equipment for impairment whenever events or circumstances indicate the carrying amount of an asset or asset group may not be recoverable. When such indicators are present, we evaluate recoverability by comparing the carrying amount of the applicable asset or asset group to the estimated undiscounted future cash flows expected to result from its use and eventual disposition. If the carrying amount is not recoverable, an impairment loss is recognized for the amount by which the carrying amount exceeds the estimated fair value of the asset or asset group.

We use significant judgment to determine whether indicators of impairment exist and consider the Hotel's operating performance and prospects, hospitality industry and San Francisco market conditions, the Hotel's location, and property-specific information available at the time of the assessment. When an impairment indicator exists, significant judgment is also required in developing the assumptions and estimates used in the recoverability analysis and, if necessary, in estimating fair value. These assumptions may include, as applicable, projected occupancy, average daily room rates, Hotel revenues and operating expenses, capital expenditures, market conditions and other factors affecting expected future cash flows. Fair value may be estimated using discounted cash flow, replacement cost or market comparison analyses, as appropriate.

As of June 30, 2026, the carrying amount of the Company's Investment in Hotel, net was approximately $38.0 million. Changes in economic or operating conditions or in the assumptions and estimates used in our analysis could result in impairments charge in future periods. Because these estimates are based on assumptions about future operating performance and market conditions, actual results could differ materially from those assumptions. There were no indicators of impairment of the Hotel assets, and no impairment losses were recorded for the years ended June 30, 2026 and 2025.