1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only
of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information
and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated
financial statements be read in conjunction with the Company's Annual Report for the year ended December 31, 2016. The balance
sheet as of December 31, 2016 was derived from audited consolidated financial statements as of that date. The results of operations
for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for future periods
or the full year.
The condensed consolidated financial statements include the accounts
of HMG/Courtland Properties, Inc. (the "Company") and entities in which the Company owns a majority voting interest or
controlling financial interest. All material transactions and balances with consolidated and unconsolidated entities have been
eliminated in consolidation or as required under the equity method.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the consolidated financial statements and footnotes thereto
included in the HMG/Courtland Properties, Inc. Annual Report on Form 10-K for the year ended December 31, 2016 for recent accounting
pronouncements. The Company does not believe that any recently issued, but not yet effective accounting standards, if currently
adopted, will have a material effect on the Company’s consolidated financial position, results of operations and cash flows.
3.
INVESTMENTS IN MARKETABLE SECURITIES
Investments in marketable securities consist primarily of
large capital corporate equity and debt securities in varying industries or issued by government agencies with readily
determinable fair values. These securities are stated at fair value, as determined by the most recent traded price of each
security at the balance sheet date. Consistent with the Company's overall current investment objectives and activities its
entire marketable securities portfolio is classified as trading. Included in investments in marketable securities is
approximately $6.1 million and $6.2 million, of large capital real estate investment trusts (REITs) as of June 30, 2017 and
December 31, 2016, respectively.
Net realized and unrealized (loss) gain from investments in marketable
securities for the three and six months ended June 30, 2017 and 2016 is summarized below:
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
Description
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net realized (loss) gain from sales of securities
|
|
$
|
(71,000
|
)
|
|
$
|
31,000
|
|
|
$
|
(89,000
|
)
|
|
$
|
(17,000
|
)
|
Unrealized net gain in trading securities
|
|
|
175,000
|
|
|
|
361,000
|
|
|
|
320,000
|
|
|
|
572,000
|
|
Total net gain from investments in marketable securities
|
|
$
|
104,000
|
|
|
$
|
391,000
|
|
|
$
|
231,000
|
|
|
$
|
555,000
|
|
For the three months ended June 30, 2017, net realized loss from
sales of marketable securities was approximately $71,000, and consisted of approximately $98,000 of gross losses and $27,000 of
gross gains. For the six months ended June 30, 2017, net realized loss from sales of marketable securities was approximately $89,000,
and consisted of approximately $182,000 of gross losses net of $93,000 of gross gains.
For the three months ended June 30, 2016, net realized gain from
sales of marketable securities was approximately $31,000, and consisted of approximately $116,000 of gross gains and $85,000 of
gross losses. For the six months ended June 30, 2016, net realized loss from sales of marketable securities was approximately $17,000,
and consisted of approximately $212,000 of gross gains net of $229,000 of gross losses.
Investment 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 net earnings. However, the
amount of investment gains or losses on marketable securities for any given period has no predictive value and variations in amount
from period to period have no practical analytical value.
4.
INVESTMENT IN REAL ESTATE PARTNERSHIP
In September 2014, the Company, through
a wholly owned subsidiary (HMG Orlando LLC, a Delaware limited liability company), acquired a one-third equity membership interest
in JY-TV Associates, LLC a Florida limited liability company (“JY-TV”) and entered into the Amended and Restated Operating
Agreement of JY-TV (the “Agreement”). On May 19, 2015, pursuant to the terms of a Construction
Loan Agreement, between JY-TV Associates LLC (“JY-TV” or the “Borrower”, which is one-third owned by a
wholly-owned subsidiary of the Company) and Wells Fargo Bank ("Lender"), Lender loaned to the Borrower the principal
sum of $27 million pursuant to a senior secured construction loan ("Loan"). The proceeds of the Loan were used to finance
the previously reported construction of multi-family residential apartments containing 240 units totaling approximately 239,000
net rentable square feet on a 9.5-acre site located in Orlando, Florida ("Project"). The Project is approximately 97%
leased. For the six months ended June 30, 2017 JY-TV reported a net loss of approximately $457,000, which includes depreciation
and amortization expense of $777,000 and interest expense of $573,000. The Company’s portion of that loss is approximately
$153,000. In March 2017, JY-TV distributed $390,000 to its members. The Company’s portion of that distribution was $130,000.
The Company and certain affiliates of the other two members of the
Borrower ("Guarantors") entered into a Completion Guaranty Agreement ("Completion Guaranty") and a Repayment
Guaranty Agreement ("Repayment Guaranty") (collectively, the “Guaranties”) with the Lender. Under the Completion
Guaranty, Guarantors shall unconditionally guaranty, on a joint and several bases, lien free completion of all improvements with
respect to the Project and any construction or completion obligations required to be made by the Borrower pursuant to any approved
leases. Under the Repayment Guaranty, Guarantors shall provide an unconditional guaranty including the repayment of $11.5 million
of the principal balance of the Loan, repayment of all accrued but unpaid interest and payment of any other sums payable under
any of the Loan Agreement. Each Guarantor is required to maintain compliance at all times with certain financial covenants, as
defined. As of June 30, 2017, the Company was in compliance with all debt covenants. The construction loan matures on May 19, 2018.
5.
OTHER INVESTMENTS
As of June 30, 2017, the Company’s portfolio of other
investments had an aggregate carrying value of approximately $5.8 million and we have committed to further fund approximately
$1.8 million as required by agreements with the investees. The carrying value of these investments is equal to contributions
less distributions and loss valuation adjustments, if any.
During the six months ended June 30, 2017, we made contributions
to other investments of approximately $1 million, including three new investments totaling $725,000 in contributions and $275,000
in follow on contributions to existing investments. The new investments primarily consist of an investment in a partnership owning
multi-family residential real estate in Atlanta, Georgia for $400,000, and $250,000 in a partnership owning a mortgage secured
by property being developed in Hollywood, Florida.
During the six months ended June 30, 2017, we received distributions
from other investments of approximately $763,000, including $368,000 from one investment in a partnership owning one stock which
was purchased in February 2016 for $250,000 and stock was sold in March 2017 at a gain of $118,000. The other distributions were
primarily from real estate and related investments.
Net income from other investments for the three and six months ended
June 30, 2017 and 2016, is summarized below:
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
Description
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Partnerships owning diversified businesses
|
|
$
|
37,000
|
|
|
$
|
13,000
|
|
|
$
|
179,000
|
|
|
$
|
44,000
|
|
Partnerships owning real estate and related
|
|
|
24,000
|
|
|
|
57,000
|
|
|
|
127,000
|
|
|
|
63,000
|
|
Income from investment in 49% owned affiliate (T.G.I.F. Texas, Inc.)
|
|
|
8,000
|
|
|
|
9,000
|
|
|
|
42,000
|
|
|
|
9,000
|
|
Total net income from other investments
|
|
$
|
69,000
|
|
|
$
|
79,000
|
|
|
$
|
348,000
|
|
|
$
|
116,000
|
|
The following tables present gross unrealized losses and fair values
for those investments that were in an unrealized loss position as of June 30, 2017 and December 31, 2016, aggregated by investment
category and the length of time that investments have been in a continuous loss position:
|
|
As of June 30, 2017
|
|
|
|
12 Months or Less
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
Investment Description
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
Partnerships owning investments in technology related industries
|
|
$
|
155,000
|
|
|
$
|
(8,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
155,000
|
|
|
|
(8,000
|
)
|
Partnerships owning diversified businesses investments
|
|
|
132,000
|
|
|
|
(6,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
132,000
|
|
|
|
(6,000
|
)
|
Total
|
|
$
|
287,000
|
|
|
$
|
(14,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
287,000
|
|
|
|
(14,000
|
)
|
|
|
As of December 31, 2016
|
|
|
|
12 Months or Less
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
Investment Description
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
Partnerships owning investments in technology related industries
|
|
$
|
151,000
|
|
|
$
|
(11,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
151,000
|
|
|
|
(11,000
|
)
|
Partnerships owning diversified businesses investments
|
|
|
498,000
|
|
|
|
(30,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
498,000
|
|
|
|
(30,000
|
)
|
Total
|
|
$
|
649,000
|
|
|
$
|
(41,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
649,000
|
|
|
$
|
(41,000
|
)
|
When evaluating the investments for other-than-temporary impairment,
the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial
condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not
it will be required to sell, the investment before recovery of the investment’s amortized cost basis.
In accordance with ASC Topic 320-10-65, Recognition and Presentation of Other-Than-Temporary
Impairments there were no impairment valuation adjustments for the three and six months ended June 30, 2017 and 2016.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with ASC Topic 820, the Company measures cash and
cash equivalents, marketable debt and equity securities at fair value on a recurring basis. Other investments are measured at fair
value on a nonrecurring basis.
The following are the major categories of assets and liabilities
measured at fair value on a recurring basis during as of June 30, 2017 and December
31, 2016, using quoted prices in active markets for identical assets (Level 1) and significant other observable inputs (Level 2).
For the periods presented, there were no major assets measured at fair value on a recurring basis which uses significant unobservable
inputs (Level 3):
Assets and liabilities measured at fair value on a recurring
basis are summarized below:
|
|
Fair value measurement at reporting date using
|
|
Description
|
|
Total
June 30,
2017
|
|
|
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
351,000
|
|
|
|
-
|
|
|
$
|
351,000
|
|
|
$
|
-
|
|
Money market mutual funds
|
|
|
1,754,000
|
|
|
|
1,754,000
|
|
|
|
-
|
|
|
|
-
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
713,000
|
|
|
|
-
|
|
|
|
713,000
|
|
|
|
-
|
|
Marketable equity securities
|
|
|
7,083,000
|
|
|
|
7,083,000
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
9,901,000
|
|
|
$
|
8,837,000
|
|
|
$
|
1,064,000
|
|
|
$
|
-
|
|
|
|
Fair value measurement at reporting date using
|
|
Description
|
|
Total
December 31,
2016
|
|
|
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
350,000
|
|
|
$
|
-
|
|
|
$
|
350,000
|
|
|
$
|
-
|
|
Money market mutual funds
|
|
|
2,182,000
|
|
|
|
2,182,000
|
|
|
|
-
|
|
|
|
-
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
714,000
|
|
|
|
-
|
|
|
|
714,000
|
|
|
|
-
|
|
Marketable equity securities
|
|
|
7,037,000
|
|
|
|
7,037,000
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
10,283,000
|
|
|
$
|
9,219,000
|
|
|
$
|
1,064,000
|
|
|
$
|
-
|
|
Carrying amount is the estimated fair value for corporate debt securities
and time deposits based on a market-based approach using observable (Level 2) inputs such as prices of similar assets in active
markets.
7.
INCOME TAXES
The Company as a qualifying real estate investment trust (“REIT”)
distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not
required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be
carried forward to reduce future taxable income but cannot be carried back.
The Company’s 95%-owned taxable REIT subsidiary, CII, files
a separate income tax return and its operations are not included in the REIT’s income tax return.
The Company accounts for income taxes in accordance with ASC Topic
740, “Accounting for Income Taxes.” ASC Topic 740 requires a Company to use the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are recognized for the tax consequences of “temporary differences”
by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. Deferred taxes only pertain to CII. As of June 30, 2017, and December
31, 2016, the Company has recorded a net deferred tax liability of $76,000 as a result of timing differences associated with the
carrying value of the investment in affiliate (TGIF) and other investments. CII’s NOL carryover to 2018 is estimated at $1
million expiring beginning in 2028 and has been fully reserved due to CII historically having tax losses.
The provision for income taxes in the consolidated
statements of comprehensive income consists of the following:
Six
months ended June 30,
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
20,000
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
20,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
59,000
|
|
|
$
|
42,000
|
|
State
|
|
|
7,000
|
|
|
|
5,000
|
|
|
|
|
66,000
|
|
|
|
47,000
|
|
Decreased
valuation allowance
|
|
|
(66,000
|
)
|
|
|
(47,000
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
20,000
|
|
The Company follows the provisions of ASC Topic 740-10, “Accounting
for Uncertainty in Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with ASC Topic 740, and prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This topic also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no significant
uncertain tax positions requiring recognition in our consolidated financial statements. Our evaluation was performed for the tax
years ended December 31, 2016. The Company’s federal income tax returns since 2013 are subject to examination by the Internal
Revenue Service, generally for a period of three years after the returns were filed.
We may from time to time be assessed interest or penalties by major
tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the
event we have received an assessment for interest and/or penalties, it has been classified in the consolidated financial statements
as selling, general and administrative expense.
8.
STOCK OPTIONS
Stock based compensation expense is recognized using the fair-value
method for all awards. During the six months ended June 30, 2017 there were no options granted, exercised, expired or forfeited.
The following table summarizes information concerning outstanding
and exercisable options as of June 30, 2017:
Number Outstanding
and exercisable
|
|
|
Weighted Average
Strike Price
|
|
|
12,500
|
|
|
$
|
9.31
|
|
|
|
|
|
|
|
|
As of June 30, 2017, the options outstanding and exercisable had
an intrinsic value of approximately $23,000.
|
Item 2.
|
Management's
Discussion and Analysis of Financial
Condition and Results of Operations
|
RESULTS OF OPERATIONS
The Company reported a net loss of approximately $21,000 ($0.02 per
share) for the three months ended June 30, 2017, and net income of approximately $31,000 ($0.03 per share) for the six months ended
June 30, 2017. For the three and six months ended June 30, 2016, we reported net income of $289,000 ($0.28 per share) and $230,000
($0.22 per share), respectively.
REVENUES
Rentals and related revenues for the three and six months ended
June 30, 2017 were approximately $19,000 and $36,000, respectively and primarily consists of rent from the Advisor to CII for its
corporate office. For the three and six months ended June 30, 2016 rental and related revenues were $18,000 and $33,000, respectively.
Net realized and unrealized gain from investments in marketable
securities:
Net realized loss from investments in marketable securities for
the three and six months ended June 30, 2017 was approximately $71,000 and $89,000, respectively. Net realized gain (loss) from
investments in marketable securities for the three and six months ended June 30, 2016 was approximately $31,000 and ($17,000),
respectively. Net unrealized gain from investments in marketable securities for the three and six months ended June 30, 2016 was
approximately $175,000 and $320,000, respectively. Net unrealized gain from investments in marketable securities for the three
and six months ended June 30, 2016 was approximately $361,000 and $572,000, respectively. For further details refer to Note 3 to
Condensed Consolidated Financial Statements (unaudited).
Equity loss in residential real estate partnership:
Equity loss in residential real estate partnership for the three
and six months ended June 30, 2017 was approximately $35,000 and $153,000, respectively. For further details, refer to Note 4 to
Condensed Consolidated Financial Statements (unaudited).
Net income from other investments:
Net income from other investments for the three and six months ended
June 30, 2017 was approximately $69,000 and $348,000, respectively. Net income from other investments for the three and six months
ended June 30, 2016 was approximately $79,000 and $116,000, respectively. For further details refer to Note 5 to Condensed Consolidated
Financial Statements (unaudited).
Interest, dividend and other income:
Interest, dividend and other income for the three and six months
ended June 30, 2017 was approximately $123,000 and $264,000, respectively. Interest, dividend and other income for the three and
six months ended June 30, 2016 was approximately $155,000 and $304,000, respectively. The decreases in the three and six-month
comparable periods was primarily due to decreased dividend income.
EXPENSES
General and administrative expenses for the
three and six months ended June 30, 2017 as compared with the same periods in 2016 decreased by approximately $52,000 (58%) and
$48,000 (29%), respectively. The decreases in the three and six- month comparable periods were primarily due to decreased non-employee
stock compensation of approximately $27,000, and other various operating expenses.
EFFECT OF INFLATION:
Inflation affects the costs of holding the Company's investments.
Increased inflation would decrease the purchasing power of our mainly liquid investments.
LIQUIDITY, CAPITAL EXPENDITURE REQUIREMENTS AND CAPITAL RESOURCES
The Company's material commitments primarily consist of a note payable
to the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”) of approximately $1.6 million due on demand,
contributions committed to other investments of approximately $1.8 million due upon demand. The funds necessary to meet these obligations
are expected from the proceeds from the sales of investments, distributions from investments and available cash.
MATERIAL COMPONENTS OF CASH FLOWS
For the six months ended June 30, 2017, net cash used in operating
activities was approximately $334,000, primarily consisting of operating expenses.
For the six months ended June 30, 2017, net cash provided by investing
activities was approximately $140,000. This consisted primarily of proceeds from sales of marketable securities of $2.8 million,
distributions from other investments of $763,000 and distributions from investment in residential partnership of $130,000. These
sources of funds were partially offset by uses including $2.6 million in purchases of marketable securities and $1 million of contributions
to other investments
For the six months ended June 30, 2017, net cash used in financing
activities was $420,000, consisting dividends paid of $501,000 partially offset by margin borrowings of $81,000.