PORTSMOUTH SQUARE: Discussion and analysis by management of the financial position and results of operations. (form 10-K)

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NEGATIVE EFFECTS OF CIVIL AUTHORITY ACTIONS ON OUR ACTIVITY

On February 25, 2020, the City of San Francisco issued the proclamation by the
Mayor declaring the existence of a local emergency. The negative effects of the
civil authority actions related to the novel strain of coronavirus ("COVID-19")
on our business have been significant. In March 2020, the World Health
Organization declared COVID-19 a global pandemic. This contagious virus, which
has continued to spread, has adversely affected workforces, customers, economies
and financial markets globally. It has also disrupted the normal operations of
many businesses, including ours. To mitigate the harm from the pandemic, on
March 16, 2020, the City and County of San Francisco, along with a group of five
other Bay Area counties and the City of Berkeley, issued parallel health officer
orders imposing shelter in place limitations across the Bay Area, requiring
everyone to stay safe at home except for certain essential needs. Since February
2020, several unfavorable events and civil authority actions have unfolded
causing demand for our hotel rooms to suffer including cancellations of all
citywide conventions, reduction of flights in and out of the Bay Area and
decline in both leisure and business travel.



In December 2020, due to the surge in COVID-19 cases and hospitalizations, the
Health Officer of the City and County of San Francisco has suspended or
restricted certain activities. Health Order C19-07q (the "Order") incorporates
suspensions, reductions in capacity limits, and other restrictions contained in
the Regional Stay At Home Order issued by the California Department of Public
Health on December 3, 2020. Effective December 17, 2020, the Bay Area Region,
including San Francisco, is required to comply with the State's December 3, 2020
Regional Stay-at-Home Order. The Order strongly discourages anyone in the County
from travelling for leisure, recreation, business or other purposes that can be
postponed until after the current surge. With limited exceptions, this Order
imposed a mandatory quarantine on anyone traveling, moving, or returning to the
County from anywhere outside the Bay Area. Effective January 20, 2021, Health
Order C19- 07r revised and replaced the previous Order; it continues to
temporarily prohibit certain businesses and activities from resuming but allows
certain other businesses, activities, travel and governmental functions to occur
subject to specified health and safety restrictions, limitations, and conditions
to limit the transmission of COVID-19. Quarantine and isolation requirements and
recommendations upon moving to, traveling to, or returning to the County have
not changed from the previous Order.



On March 24, 2021, the City and County of San Francisco announced it moved into
the orange tier which removed the suggested Shelter in Place for guests
travelling to San Francisco. This was a very positive step for the hotel
community. This tier opens up activities in the city including expanded
restaurant capacities, museums and attractions. For the hotel it allows for
guests to gather in public spaces and for outlets and amenities to open up at
limited capacities including fitness centers. It does not change the very
stringent cleaning and sanitation requirements set forth by the Health Officer
of the City and County of San Francisco which proves to be a costly measure to
maintain. Effective May 6, 2021, the City and County of San Francisco moved
into
the yellow tier guidelines.



In response to the decrease in demand, we have since furloughed all managers at
the Hotel except for members of the executive team and continue to limit hourly
staff to a minimum. By the end of March 2020, we had temporarily closed all of
our food and beverage outlets, valet parking, concierge and bell services,
fitness center, as well as the executive lounge facility. We continue to
implement social distancing standards and cleaning processes designed by
Interstate and Hilton to keep employees and guests safe. The full impact and
duration of the COVID-19 outbreak continues to evolve as of the date of this
report. The pandemic effectively eliminated our ability to generate any profits,
due to the drastic decline in both leisure and business travel. As a result,
management believes the ongoing length and severity of the economic downturn
caused by the pandemic will have a material adverse impact on our future
business, financial condition, liquidity and financial results. We are also
assessing the potential impact on the impairment analysis of our long-lived
assets and the realization of our deferred tax assets. As of the date of this
report, the effects of the pandemic continue to affect our economy, business and
leisure travel, and our needs to continue to curtail certain revenue generating
activities at the Hotel. We expect that the effects will have a material adverse
effect on our business until the pandemic ends.



As a result of the Coronavirus Aid, Relief, and Economic Security Act (the
"CARES Act") signed into law on March 27, 2020, additional avenues of relief may
be available to workers and families through enhanced unemployment insurance
provisions and to small businesses through programs administered by the Small
Business Administration ("SBA"). The CARES Act includes, among other things,
provisions relating to payroll tax credits and deferrals, net operating loss
carryback periods, alternative minimum tax credits and technical corrections to
tax depreciation methods for qualified improvement property. The CARES Act also
established a Paycheck Protection Program ("PPP"), whereby certain small
businesses are eligible for a loan to fund payroll expenses, rent, and related
costs. On April 9, 2020, Justice entered into a loan agreement ("SBA Loan") with
CIBC Bank USA under the CARES Act. Justice received proceeds of $4,719,000 from
the SBA Loan. In accordance with the requirements of the CARES Act, Justice used
proceeds from the SBA Loan for payroll costs and other qualified expenses. The
SBA Loan was scheduled to mature on April 9, 2022 with a 1.00% interest rate and
is subject to the terms and conditions applicable to loans administered by the
U.S. Small Business Administration under the CARES Act. On June 10, 2021, the
SBA Loan was forgiven in full.



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On February 3, 2021, Justice entered into a second loan agreement ("Second SBA
Loan") with CIBC Bank USA administered by the SBA. Justice received proceeds of
$2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice had used all
proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA
Loan is scheduled to mature on February 3, 2026 and has a 1.00% interest rate
and is subject to the terms and conditions applicable to loans administered by
the U.S. Small Business Administration under the CARES Act. All payments of
principal and interest are deferred until either: (a) if the SBA approves the
forgiveness amount, the date the forgiveness amount is remitted by the SBA to
CIBC; or (b) if Justice does not apply for forgiveness within 10 months after
the last day of the covered period specified in the loan agreement or if the
forgiveness amount is not approved, the date that is 10 months after the last
day of the covered period. The loan may be forgiven if the funds are used for
payroll and other qualified expenses. All unforgiven portion of the principal
and accrued interest will be due at maturity. Justice submitted its application
for full loan forgiveness on September 3, 2021.



RESULTS OF OPERATIONS



The Company's principal business is conducted through its general and limited
partnership interest in the Justice Investors Limited Partnership ("Justice" or
the "Partnership"). Justice owns a 544-room 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. 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 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 reopening date, upon
completion of a major renovation, 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 incentive fee in the form of a self-exhausting,
interest free note payable to be earned through 2030. The key money incentive
fee of $4,750,000 was received on July 1, 2015. As of June 30, 2021 and 2020,
the balance of the note was $2,692,000 and $3,008,000, respectively, and are
included in related party and other notes payable in the consolidated balance
sheets.



On February 1, 2017, Justice entered into a Hotel management agreement ("HMA")
with Interstate Management Company, LLC ("Interstate") to manage the Hotel with
an effective takeover date of February 3, 2017. The term of 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 the
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. As of June 30, 2020, balance of the key money including
accrued interest was $1,009,000 and is included in restricted cash in the
consolidated balance sheets. As of June 30, 2021, the key money balance was zero
as the Hotel obtained approval from Interstate to use the funds for hotel
operations during the first quarter of fiscal year 2021. As of June 30, 2021 and
2020, balance of the unamortized portion of the key money are $1,396,000 and
$1,646,000, respectively, and are included in the related party notes payable in
the consolidated balance sheets. 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.



Fiscal Year Ended June 30, 2021 Compared to Fiscal Year Ended June 30, 2020

The Company incurred a net loss of $ 5,286,000 for the year ended June 30, 2021 compared to the net loss of $ 3,223,000 for the year ended June 30, 2020. The variation is mainly attributable to lower hotel revenues.



The Company had net loss from Hotel operations of $7,873,000 for the year ended
June 30, 2021 compared to net loss of $4,012,000 for the year ended June 30,
2020. The change was primarily attributable to the $28,171,000 decrease in Hotel
revenue, offset by the $19,422,000 decrease in operating expenses.



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The following table presents a more detailed presentation of the hotel’s operations for the years ended. June 30, 2021 and 2020.


For the year ended June 30,                             2021               2020
Hotel revenues:
Hotel rooms                                        $   12,138,000     $   36,465,000
Food and beverage                                         293,000          3,529,000
Garage                                                  2,117,000          2,368,000
Other operating departments                               120,000            477,000
Total hotel revenues                                   14,668,000         42,839,000
Operating expenses excluding depreciation and
amortization                                          (17,911,000 )      (37,333,000 )
Operating (loss) income before interest,
depreciation and amortization                          (3,243,000 )       
5,506,000
Gain on sale of assets                                     12,000                  -
Gain on forgiveness of debt                             4,719,000                  -
Interest expense - mortgage                            (7,282,000 )       (7,326,000 )
Depreciation and amortization expense                  (2,079,000 )       (2,192,000 )
Net loss from Hotel operations                     $   (7,873,000 )   $   (4,012,000 )




For the year ended June 30, 2021, the Hotel had operating loss of $3,243,000
before non-recurring charges, interest, depreciation, and amortization on total
operating revenues of $14,668,000 compared to operating income of $5,506,000
before non-recurring charges, interest, depreciation, and amortization on total
operating revenues of $42,839,000 for the year ended June 30, 2020. Room
revenues decreased by $24,327,000 for the year ended June 30, 2021 compared to
the year ended June 30, 2020, food and beverage revenue decreased by $3,236,000,
revenue from garage decreased by $251,000, and revenue from other operating
departments decreased by $357,000. The year over year decline in all areas are
result of the business interruption attributable to a variety of responses by
federal, state, and local civil authority to the COVID-19 outbreak in March 2020
which continues to affect us. The following table sets forth the monthly average
occupancy percentage of the Hotel for the fiscal years ended June 30, 2021 and
2020.



           Month                July      August       September       October       November       December       January       February      March      April       May        June       Fiscal Year
            Year                 2020        2020          2020           2020          2020           2020           2021          2021         2021       2021       2021       2021       2020 - 2021
    Average Occupancy %            44 %        55 %            62 %          64 %           52 %           30 %          29 %           45 %       67 %       66 %       71 %       78 %              55 %




           Month                July      August       September      

October November December January February March April May June Fiscal year

            Year                 2019        2019          2019           2019          2019           2019           2020          2020         2020       2020       2020       2020       2019 - 2020
    Average Occupancy %            98 %        99 %            98 %          97 %           99 %           98 %          96 %           96 %       35 %       10 %       27 %       34 %              74 %




Operating expenses decreased by $19,422,000 for the year ended June 30, 2021 to
$17,911,000 compared to the year ended June 30, 2020 of $37,333,000 primarily
due to decrease in salaries and wages, rooms commission, credit card fees,
management fees, and franchise fees.



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
year ended June 30, 2021 and 2020.



 For the Year        Average           Average
Ended June 30,      Daily Rate       Occupancy %       RevPAR

2021               $        111                55 %   $     61
2020               $        248                74 %   $    183




The Hotel's revenues decreased by 65% year over year. Average daily rate
decreased by $137, average occupancy dropped 19%, and RevPAR decreased by $122
for the twelve months ended June 30, 2021 compared to the twelve months ended
June 30, 2020.


In order to provide our guests with best-in-class technology experience, we
completed the upgrade of our new internet system from Cisco including a complete
hotel re-cabling with the latest Ethernet and fiber and installed new 55" smart
4K televisions and Hilton's stay connected internet streaming products,
including Netflix streaming. We also replaced mattresses and pillows in all
guestrooms during the fiscal year ended June 30, 2020. Replacement of all
corridor floor coverings was completed in July 2021 and a guestroom carpet
replacement program commenced in June 2021 and is scheduled to be completed
prior to fiscal year ending June 30, 2022. The COVID-19 pandemic and design
delays have pushed back the plans for the conversion of the Justice offices,
Fitness Center, SPA and Executive Lounge; projects that would add 19 guest rooms
to our inventory. The long-term value of these rooms is in utilizing them as
income producing guest rooms, and we will work to implement a new timeline as
business returns. Part of this renovation will be funded by the Hotel's
furniture, fixture and equipment reserve account with our lender. Lastly, the
Hotel completed the installation of a complete exterior building maintenance
system which will enable periodic window washing, replaced and upgraded all
computers in the business center and administrative offices.



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The Company had a net gain on marketable securities of $1,399,000 for the year
ended June 30, 2021 compared to a net loss on marketable securities of $322,000
for the year ended June 30, 2020. For the year ended June 30, 2021, the Company
had $1,031,000 net gain related to the Company's investment in the common stock
of Comstock Mining Inc. ("Comstock" - NYSE MKT: LODE). For the year ended June
30, 2020, the Company had net zero gain related to the Company's investment in
the common stock of Comstock. As of June 30, 2021 and 2020, investments in
Comstock represent approximately 19% and 60%, respectively, of the Company's
investment portfolio. For the year ended June 30, 2021, the Company had a net
realized loss of $540,000 and a net unrealized gain of $1,939,000. For the year
ended June 30, 2020, the Company had a net realized loss of $177,000 and a net
unrealized loss of $145,000. 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.



During the year ended June 30, 2021 and 2020, the Company performed an
impairment analysis of its other investments and determined its investments had
other than temporary impairments and recorded impairment losses of $38,000
and
$80,000, respectively.



The Company consolidates Justice (Hotel) for financial reporting purposes and is
not taxed on its non-controlling interest in the Hotel. The income tax benefit
during the years ended June 30, 2021 and 2020 represents the income tax effect
on the Company's pretax loss which include its share in net loss of the Hotel.



MARKETABLE SECURITIES AND OTHER INVESTMENTS



As of June 30, 2021 and 2020, the Company had investments in marketable equity
securities of $3,536,000 and $565,000, respectively. The following table shows
the composition of the Company's marketable securities portfolio by selected
industry groups:



                                                   % of Total
      As of June 30, 2021                          Investment
        Industry Group            Fair Value       Securities

Communication services            $ 1,334,000             37.7 %
Basic materials                       720,000             20.3 %
Industrials                           653,000             18.5 %
REITs and real estate companies       438,000             12.4 %
Energy                                250,000              7.1 %
Healthcare                            141,000              4.0 %
                                  $ 3,536,000            100.0 %




                                                    % of Total
      As of June 30, 2020                           Investment
        Industry Group             Fair Value       Securities

Basic materials                   $    377,000             66.7 %
REITs and real estate companies        162,000             28.7 %
Energy                                  26,000              4.6 %
                                  $    565,000            100.0 %



As of June 30, 2021, the Company held twelve different equity positions in its
investment portfolio. The Company held three equity securities that comprised
more than 10% of the equity value of the portfolio. The largest security
position represents 38% of the portfolio and consists of the common stock of
ViacomCBS Inc. (NASDAQ: VIACP) which is included in the communication services
industry group.



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The following table shows the net gain or loss on the Company’s marketable securities and associated margin interest and transaction costs for the respective years.



       For the years ended June 30,                    2021            2020

Net gain (loss) on marketable securities $ 1,399,000 $ (322,000)

       Impairment loss on other investments             (38,000 )      

(80,000)

       Dividend and interest income                      17,000        

134,000

       Margin interest expense                          (11,000 )      

(19,000)

       Trading expenses                                (130,000 )    

(111,000)

Net gain (loss) on marketable securities $ 1,237,000 $ (398,000)

FINANCIAL POSITION AND LIQUIDITY



The Company had cash and cash equivalents of $2,310,000 and $4,710,000 as of
June 30, 2021 and 2020, respectively. In addition, the Hotel had $6,222,000 and
$10,666,000 of restricted cash held by its senior lender Wells Fargo Bank, N.A.
("Lender") as of June 30, 2021 and 2020, respectively. Of the $10,666,000
restricted cash held as of June 30, 2020, $2,432,000 was for a possible future
property improvement plan ("PIP") requested by our franchisor, Hilton. However,
Hilton confirmed that it will not require a PIP for our Hotel until relicensing
which shall occur at the earlier of (i) January 2030, which is six years after
the maturity date of our current senior and mezzanine loans, or (ii) upon the
sale of our Hotel. On August 19, 2020, Lender released PIP deposits in the
amount of $2,379,000 to the Hotel. The funds were utilized to fund operating
expenses, including franchise and management fees and other expenses.



On April 9, 2020, Justice entered into a loan agreement ("SBA Loan") with CIBC
Bank USA under the Coronavirus Aid, Relief, and Economic Security Act ("CARES
Act") administered by the U.S. Small Business Administration (the "SBA").
Justice received proceeds of $4,719,000 from the SBA Loan. In accordance with
the requirements of the CARES Act, Justice used the proceeds from the SBA Loan
for payroll costs and other qualified expenses. The SBA Loan was scheduled to
mature on April 9, 2022 with a 1.00% interest rate and is subject to the terms
and conditions applicable to loans administered by the U.S. Small Business
Administration under the CARES Act. On June 10, 2021, the SBA Loan was forgiven
in full.


On February 3, 2021, Justice entered into a second loan agreement ("Second SBA
Loan") with CIBC Bank USA administered by the SBA. Justice received proceeds of
$2,000,000 from the Second SBA Loan. As of June 30, 2021, Justice had used all
proceeds from the Second SBA Loan primarily for payroll costs. The Second SBA
Loan is scheduled to mature on February 3, 2026 and has a 1.00% interest rate
and is subject to the terms and conditions applicable to loans administered by
the U.S. Small Business Administration under the CARES Act. All payments of
principal and interest are deferred until either: (a) if the SBA approves the
forgiveness amount, the date the forgiveness amount is remitted by the SBA to
CIBC; or (b) if Justice does not apply for forgiveness within 10 months after
the last day of the covered period specified in the loan agreement or if the
forgiveness amount is not approved, the date that is 10 months after the last
day of the covered period. The loan may be forgiven if the funds are used for
payroll and other qualified expenses. All unforgiven portion of the principal
and accrued interest will be due at maturity. Justice submitted its application
for full loan forgiveness on September 3, 2021.



On December 16, 2020, Justice and InterGroup entered into a loan modification
agreement which increased Justice's borrowing from InterGroup as needed up to
$10,000,000. During the fiscal year ending June 30, 2021, InterGroup has
advanced $3,650,000 to Justice per the aforementioned loan modification
agreement. The Partnership is also allowed to seek additional loans and sell
partnership interests. Upon the consent of the general partner and a super
majority in interest, the Partnership may sell additional classes or series of
units of the Partnership under certain conditions in order to raise additional
capital. Additionally, on August 28, 2020, the Board of InterGroup passed
resolutions to provide funding to Portsmouth if necessary.



In order to increase its liquidity position and to take advantage of the
favorable interest rate environment, InterGroup refinanced its 151-unit
apartment complex in Parsippany, New Jersey on April 30, 2020, generating net
proceeds of $6,814,000. In June 2020, InterGroup refinanced one of its
California properties and generated net proceeds of $1,144,000. During the
fiscal year ended June 30, 2021, InterGroup completed refinancing on six of its
California properties and generated net proceeds of $6,762,000. InterGroup is
currently evaluating other refinancing opportunities and it could refinance
additional multifamily properties should the need arise, or should management
consider the interest rate environment favorable. InterGroup has an
uncollateralized $8,000,000 revolving line of credit from CIBC Bank USA ("CIBC")
and the entire $8,000,000 is available to be drawn down as of June 30, 2021
should additional liquidity be necessary.



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Our known short-term liquidity requirements primarily consist of funds necessary
to pay for operating and other expenditures, including management and franchise
fees, corporate expenses, payroll and related costs, taxes, interest and
principal payments on our outstanding indebtedness, and repairs and maintenance
of the Hotel.



Our long-term liquidity requirements primarily consist of funds necessary to pay
for scheduled debt maturities and capital improvements of the Hotel. We will
continue to finance our business activities primarily with existing cash,
including from the activities described above, and cash generated from our
operations. After considering our approach to liquidity and accessing our
available sources of cash, we believe that our cash position, after giving
effect to the transactions discussed above, will be adequate to meet anticipated
requirements for operating and other expenditures, including corporate expenses,
payroll and related benefits, taxes and compliance costs and other commitments,
for at least twelve months from the date of issuance of these financial
statements, even if current levels of low occupancy and low RevPAR were to
persist. The objectives of our cash management policy are to maintain existing
leverage levels and the availability of liquidity, while minimizing operational
costs. We believe that our cash on hand, along with other potential
aforementioned sources of liquidity that management may be able to obtain, will
be sufficient to fund our working capital needs, as well as our capital lease
and debt obligations for at least the next twelve months and beyond. However,
there can be no guarantee that management will be successful with its plan.

MATERIAL CONTRACTUAL OBLIGATIONS

The following table provides a summary of the Company’s significant financial obligations, which also include interest.


                                                           Year             Year             Year            Year           Year
                                          Total            2022             2023             2024            2025           2026         Thereafter
Mortgage notes payable                $ 110,745,000     $ 1,632,000     $  1,721,000     $ 107,392,000     $       -     $         -     $         -
PPP and other notes payable               2,664,000         481,000          183,000                 -             -       2,000,000               -
Related party notes payable              10,739,000         567,000        7,217,000           567,000       567,000         567,000       1,254,000
Interest                                 16,720,000       7,088,000        6,180,000         3,452,000             -               -               -
Total                                 $ 140,868,000     $ 9,768,000     $ 15,301,000     $ 111,411,000     $ 567,000     $ 2,567,000     $ 1,254,000



OFF-BALANCE SHEET ARRANGEMENTS

The Company has 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 Interstate has the power and ability under the terms of
its management agreement to adjust Hotel room rates on an ongoing basis, there
should be minimal impact on partnership revenues due to inflation. For the two
most recent fiscal years, the impact of inflation on the Company's income is not
viewed by management as material.



CRITICAL ACCOUNTING POLICIES



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 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, 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.

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