PORTSMOUTH SQUARE INC (PRSI) stock intrinsic value fair value estimate & owner earnings analysis

Portsmouth Square owns one asset: the Hilton San Francisco Financial District, a 558-room full-service hotel at 750 Kearny Street with about 22,000 square feet of meeting space and a five-level underground garage. Aimbridge Hospitality manages the hotel. Its initial contract term ends in February 2027, with renewal options. The Hilton franchise runs through January 31, 2030. The InterGroup Corporation is the majority shareholder and a major lender, and John V. Winfield beneficially owns 78.4% of the shares. The stock is quoted on the OTC Pink market. What changed since our last review: we previously stopped short of valuing the company. Its hotel loans had matured on January 1, 2024, and the senior lender had issued a default notice, so the auditor flagged substantial doubt about the company's survival. In March 2025 the company refinanced with a new $67.0 million senior mortgage and a restated $36.3 million mezzanine loan. The fiscal 2025 and 2026 audit opinions carry no such warning, so we have now valued the business. The business: fiscal 2026 (year to June 30, 2026) was the hotel's best year since the pandemic. Revenue rose 20% to $55.8 million. Occupancy averaged 95% and the average room rate rose from $218 to $253. That revenue is close to the $57 to $60 million the hotel earned in fiscal 2018 and 2019, but costs are higher now. Hotel operating expenses were $43.3 million, against $44.5 million on $59.9 million of revenue in fiscal 2019. Because occupancy is already 95%, there is little room left to fill. How we measured earnings: we started from operating cash flow and removed the year-to-year swings in working capital. The company has no stock compensation. We deducted the maintenance part of capital spending. Interest and shared costs that the company owes InterGroup but has not paid in cash ($4.7 million added to the balance in fiscal 2026) are treated as real costs. On that basis, owner earnings after interest were negative in every year from fiscal 2020 through 2026, including -$3.1 million (-$4.20 a share) in fiscal 2026. Fiscal 2018 includes a one-time $5.8 million legal recovery, which we excluded from our earnings window. To value the hotel before its lenders, we added back interest as it was charged. That was $12.1 million in fiscal 2026: $8.7 million on the bank loans and $3.4 million on the InterGroup loan. One item could not be reconciled from the filings: the company reports paying $5.9 million of cash interest, which is less than the bank-loan interest charge, and the filing does not explain the gap. On this basis, the cash the hotel produced before interest was about $12.3M, $14.2M (excluding the legal recovery) and $13.2M in fiscal 2017 to 2019. It was -$0.4M and -$0.8M in fiscal 2023 and 2024, years of heavy capital spending ($5.9M and $4.1M) and, in fiscal 2024, the loan default, then $4.8M in fiscal 2025 and $9.0M in fiscal 2026. We left out fiscal 2020 to 2022 as pandemic-distorted. The median of the remaining seven years is $9.0 million, or $12.29 a share, and that is our starting level. That cash flow is consistent with the lender's own test: management calculates a 13.9% debt yield under the senior loan agreement. Measured against the $67 million senior loan, that implies about $9.3 million of net operating income. Growth: pre-interest cash flow rose 87% in fiscal 2026. For fiscal 2027 we assume a 5% decline to $8.6 million. The City removed the pedestrian bridge to Portsmouth Square, and the hotel was closed from July 31 to August 9, 2026. The company must also design and build a new Kearny Street entrance, and it cannot yet estimate the cost. The City has agreed to make certain payments toward that work, but the company must start repaying them in 2029. We credit no further growth. Revenue is only now back near its pre-pandemic dollar level, so the hotel has not shown lasting pricing power. Any further gains would depend on San Francisco travel demand, which is not a lever the company controls. Debt: the senior loan costs the greater of 7.65% or SOFR plus 4.75%, about 9% in fiscal 2026. The mezzanine loan costs 7.25% until March 28, 2027 and 11.25% after that. Both mature April 9, 2027, with three one-year extensions to April 2030. The first extension needs a 1.10x debt service coverage ratio, and management calculates 1.45x. The second and third need 1.40x and 1.50x plus a 13% and 14% debt yield. The company also owes InterGroup a $38.1 million note at 9%, now due July 31, 2029, plus $21.3 million of accrued interest and shared costs. Total debt is $162.5 million after a small securities portfolio. Hotel cash and lender-held reserves of $13.4 million roughly offset $13.0 million of hotel payables, so we gave no credit for cash. Because every loan costs well above 6%, we added $14.7 million for the extra interest over the remaining terms, for an adjusted debt of $177.2 million, about $241 a share. Hotel lender payments of roughly $10 million a year after the mezzanine rate step-up are more than the base case's pre-interest cash flow. The company has only $1.9 million left to borrow from InterGroup. Bear case: cash flow before interest is $7.0 million in fiscal 2027 and then falls back to the fiscal 2025 level of about $5 million. Drivers are softer San Francisco demand and labor costs resetting when the Local 2 and Teamsters contracts expire in August and December 2028. The hotel is worth about $85 million against $177 million owed, so it owes roughly $92 million more than it is worth: -$125.30 a share. In this case the hotel could not meet the later extension tests, and shareholders would likely be left with nothing. Base case: $8.6 million in fiscal 2027, then fiscal 2026's $9.0 million held flat. The company owns the hotel and pays no ground rent. Nothing in the filings puts an end date on it, so the cash flow continues as long as capital spending maintains the property. The hotel is worth about $150 million against $177 million owed, about $28 million short: -$37.58 a share. Bull case: the renovated rooms and the 14 added rooms keep pricing improving for two more years. Cash flow before interest reaches $9.5 million in fiscal 2027, $10.5 million in fiscal 2028 and then $11.0 million, still below what this hotel produced in fiscal 2017 to 2019. The hotel is worth about $181 million against $177 million owed, leaving about $4 million: $5.80 a share. Margin-of-safety price: the median and the low cases both leave nothing for shareholders, and even the high case is worth only about $6 a share. No price is supported by a dependable 20% annual return in the cases, so the margin-of-safety price is zero. The cases would be too low if San Francisco demand lifts the hotel well past its pre-pandemic cash flow, or if InterGroup converts or forgives what it is owed. Neither is evidenced today. The costs of the new entrance and of any Hilton requirements at the 2030 franchise expiry are not in the cases and would lower every case.