|
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 nine months ended September 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 $3.2
million and $6.2 million, of large capital real estate investment trusts (REITs) as of September 30, 2017 and December 31, 2016,
respectively.
Net realized and unrealized (loss) gain
from investments in marketable securities for the three and nine months ended September 30, 2017 and 2016 is summarized below:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
Description
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net realized gain from sales of securities
|
|
$
|
115,000
|
|
|
$
|
318,000
|
|
|
$
|
26,000
|
|
|
$
|
301,000
|
|
Unrealized net gain (loss) in trading securities
|
|
|
(105,000
|
)
|
|
|
(257,000
|
)
|
|
|
215,000
|
|
|
|
315,000
|
|
Total net gain from investments in marketable securities
|
|
$
|
10,000
|
|
|
$
|
61,000
|
|
|
$
|
241,000
|
|
|
$
|
616,000
|
|
For the three months ended September 30,
2017, net realized gain from sales of marketable securities was approximately $115,000, and consisted of approximately $221,000
of gross gains and $105,000 of gross losses. For the nine months ended September 30, 2017, net realized gains from sales of marketable
securities was approximately $26,000, and consisted of approximately $313,000 of gross gains net of $287,000 of gross losses.
For the three months ended September 30,
2016, net realized gain from sales of marketable securities was approximately $318,000, and consisted of approximately $408,000
of gross gains and $90,000 of gross losses. For the nine months ended September 30, 2016, net realized gain from sales of marketable
securities was approximately $301,000, and consisted of approximately $620,000 of gross gains net of $319,000 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 RESIDENTIAL 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 nine months
ended September 30, 2017 JY-TV reported a net loss of approximately $500,000, which includes depreciation and amortization expense
of $1.2 million and interest expense of $845,000. The Company’s portion of that loss for the nine months ended September
30, 2017 is approximately $167,000.
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 September 30, 2017, the Company was in compliance with all debt covenants. The construction
loan matures on May 19, 2018.
As of September 30, 2017, the Company’s
portfolio of other investments had an aggregate carrying value of approximately $6.2 million and we have committed to further fund
approximately $2.5 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 nine months ended September
30, 2017, we made contributions to other investments of approximately $1.7 million, including five new investments totaling approximately
$1.1 million in contributions plus $600,000 in follow on contributions to existing investments. The new investments consist of
an investment in a partnership owning multi-family residential real estate in Atlanta, Georgia for $400,000, $250,000 in a partnership
owning a mortgage secured by property being developed in Hollywood, Florida, $300,000 in a pool of mortgage loans secured by property
located near the west coast of Florida, $75,000 co-investment with current investee in a partnership owning one stock, and $75,000
in a seed capital fund.
During the nine months ended September
30, 2017, we received distributions from other investments of approximately $1.2 million. Such distributions included $368,000
from one investment in a partnership owning one stock which was sold in March 2017, a $260,000 distribution from an investment
in a pool of mortgages sold back to the seller bank in July 2017, and various other distributions primarily from real estate and
related investments.
Net income from other investments for the
three and nine months ended September 30, 2017 and 2016, is summarized below:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
Description
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Partnerships owning diversified businesses
|
|
$
|
17,000
|
|
|
$
|
58,000
|
|
|
$
|
196,000
|
|
|
$
|
103,000
|
|
Partnerships owning real estate and related
|
|
|
59,000
|
|
|
|
84,000
|
|
|
|
187,000
|
|
|
|
148,000
|
|
Income from investment in 49% owned affiliate (T.G.I.F. Texas, Inc.)
|
|
|
4,000
|
|
|
|
15,000
|
|
|
|
45,000
|
|
|
|
24,000
|
|
Total net income from other investments
|
|
$
|
80,000
|
|
|
$
|
157,000
|
|
|
$
|
428,000
|
|
|
$
|
274,000
|
|
The following tables present gross unrealized
losses and fair values for those investments that were in an unrealized loss position as of September 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 September 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
|
|
$
|
140,000
|
|
|
$
|
(23,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
140,000
|
|
|
$
|
(23,000
|
)
|
Partnerships owning diversified businesses investments
|
|
|
132,000
|
|
|
|
(6,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
132,000
|
|
|
|
(6,000
|
)
|
Total
|
|
$
|
272,000
|
|
|
$
|
(29,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
272,000
|
|
|
$
|
(29,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
nine months ended September 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 September 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
September 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
|
|
$
|
352,000
|
|
|
|
-
|
|
|
$
|
352,000
|
|
|
$
|
-
|
|
Money market mutual funds
|
|
|
1,213,000
|
|
|
|
1,213,000
|
|
|
|
-
|
|
|
|
-
|
|
U.S. T-Bills
|
|
|
2,935,000
|
|
|
|
2,935,000
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
746,000
|
|
|
|
-
|
|
|
|
746,000
|
|
|
|
-
|
|
Marketable equity securities
|
|
|
4,357,000
|
|
|
|
4,357,000
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
9,603,000
|
|
|
$
|
8,505,000
|
|
|
$
|
1,098,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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 September 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:
Nine months ended September 30,
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
20,000
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
20,000
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
34,000
|
|
|
$
|
42,000
|
|
State
|
|
|
4,000
|
|
|
|
5,000
|
|
|
|
|
38,000
|
|
|
|
47,000
|
|
Decreased valuation allowance
|
|
|
(38,000
|
)
|
|
|
(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.
Stock based compensation expense is recognized
using the fair-value method for all awards. During the nine months ended September 30, 2017 there were no options granted, exercised,
expired or forfeited.
The following table summarizes information
concerning outstanding and exercisable options as of September 30, 2017:
Number Outstanding
and exercisable
|
|
|
Weighted Average
Strike Price
|
|
|
12,500
|
|
|
$
|
9.31
|
|
As of September 30, 2017, the options outstanding
and exercisable had an intrinsic value of approximately $13,000.
|
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
$182,000 ($0.18 per share) and $151,000 ($0.15 per share) for the three and nine months ended September 30, 2017, respectively.
For the three months ended September 30, 2016, we reported a net loss of $49,000 ($0.05 per share), and for the nine months ended
September 30, 2016 we reported net income of $181,000 ($0.18 per share).
REVENUES
Rentals and related revenues for the three
and nine months ended September 30, 2017 were approximately $16,000 and $52,000, respectively and primarily consists of rent from
the Advisor to CII for its corporate office. For the three and nine months ended September 30, 2016 rental and related revenues
were $16,000 and $49,000, respectively.
Net realized and unrealized gain from
investments in marketable securities:
Net realized gain from sales of marketable
securities for the three and nine months ended September 30, 2017 was approximately $115,000 and $26,000, respectively. Net realized
gain from sales of marketable securities for the three and nine months ended September 30, 2016 was approximately $318,000 and
$301,000, respectively. Net unrealized loss from investments in marketable securities for the three months ended September 30,
2017 and 2016 was approximately $105,000 and $257,000, respectively. Net unrealized gain from investments in marketable securities
for the nine months ended September 30, 2017 and 2016 was approximately $215,000 and $315,000, 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 nine months ended September 30, 2017 was approximately $14,000 and $167,000, respectively. This is
as compared with equity loss of $52,000 for the three and nine months ended September 30, 2016. 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 nine months ended September 30, 2017 was approximately $80,000 and $428,000, respectively. This is as compared with net
income from other investments for the three and nine months ended September 30, 2016 of approximately $157,000 and $274,000, 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 nine months ended September 30, 2017 was approximately $109,000 and $373,000, respectively. This is as compared with
interest, dividend and other income for the three and nine months ended September 30, 2016 was approximately $148,000 and $452,000,
respectively. The decreases in the three and nine-month prior year comparable periods was primarily due to decreased dividend income
as a result of increased sale of marketable securities.
EXPENSES
General and administrative expenses for
the three months ended September 30, 2017 as compared with the same period in 2016 increased by approximately $37,000 (45%). The
increase was due primarily to $26,000 in expenses relating to a prospective real estate transaction in Orlando, Florida which did
not close.
Professional fees and expenses for the
three and nine months ended September 30, 2017 decreased by approximately $33,000 (60%) and $44,000 (25%), respectively as compared
with the prior year comparable periods. The decreases were primarily from decreased shareholder relations legal fees and decreased
tax consulting fees.
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
$1.55 million due on demand, contributions committed to other investments of approximately $2.5 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 nine months ended September 30,
2017, net cash used in operating activities was approximately $501,000, primarily consisting of operating expenses.
For the nine months ended September 30,
2017, net cash provided by investing activities was approximately $2.8 million. This consisted primarily of proceeds from sales
of marketable securities of $5.6 million, distributions from other investments of $1.2 million, distributions from investment in
residential partnership of $130,000 and distribution from TGIF of $193,000. These sources of funds were partially offset by uses
including $2.7 million in purchases of marketable securities and $1.7 million of contributions to other investments
For the nine months ended September 30,
2017, net cash used in financing activities was $532,000, consisting of dividends paid of $501,000 and $50,000 principal repayment
on loan due to TGIF. This is partially offset by increased margin borrowings of $20,000.