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, 2017. The balance
sheet as of December 31, 2017 was derived from audited consolidated financial statements as of that date. The results of operations
for the three and six months ended June 30, 2018 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, 2017 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 market
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. Accordingly,
all unrealized gains (losses) on this portfolio are recorded in the condensed consolidated statements of income. Included in investments
in marketable securities is approximately $3.09 million and $2.96 million of large capital real estate investment trusts (REITs)
as of June 30, 2018 and December 31, 2017, respectively.
Approximate net realized and unrealized (loss) gain from investments in marketable securities for the
three and six months ended June 30, 2018 and 2017 is summarized below:
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
|
Description
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Net realized gain (loss) from sales of securities
|
|
$
|
4,000
|
|
|
$
|
(71,000
|
)
|
|
$
|
(4,000
|
)
|
|
$
|
(89,000
|
)
|
|
Unrealized net gain in trading securities
|
|
|
41,000
|
|
|
|
175,000
|
|
|
|
28,000
|
|
|
|
320,000
|
|
|
Total net gain from investments in marketable securities
|
|
$
|
45,000
|
|
|
$
|
104,000
|
|
|
$
|
24,000
|
|
|
$
|
231,000
|
|
For the three months ended June 30, 2018, net realized gain
from sales of marketable securities was approximately $4,000 which approximately all consisted of gross gains. For the six months
ended June 30, 2018, net realized loss from sales of marketable securities was approximately $4,000 and consisted of approximately
$29,000 of gross losses net of $25,000 of gross gains.
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.
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
As previously reported on Form 8-K dated February 20, 2018, JY-TV Associates, LLC, a Florida limited liability
company (“JY-TV”) (“Seller”) an entity one-third owned by HMG, completed the sale of its multi-family residential
apartments located in Orlando, Florida pursuant to the previously reported Agreement of Sale (the “Agreement”) to Murano
240, LLC (as per an Assignment and Assumption of Agreement of Sale with Cardone Real Estate Acquisitions, LLC), a Delaware limited
liability company, an unrelated entity (“Purchaser”). The final sales price was $50,150,000 and the sales proceeds
were received in cash and payment of outstanding debt. The gain on the sale to HMG is approximately $5.5 million, net of the incentive
fee.
For the six months ended June 30,
2018 JY-TV reported a net income of approximately $17.9 million, which includes approximately $18.2 million in gain on sale
of property, depreciation and amortization expense of $402,000, interest expense of $159,000 and write-off of certain prepaid
and other assets upon the sale of property of approximately $147,000. The Company’s portion of JY-TV’s net income
is approximately $5.9 million ($144,000 of loss from operations and $6.1 million in gain on sale of property (before the
$608,000 incentive fee). JY-TV made distributions totaling $21.75 million in February 2018. The Company’s portion of
those distributions was $7.25 million. In June 2018 JY-TV made another distribution of $825,000, of which the Company’s
portion was $275,000. Final accounting and distribution from JY-TV is expected before the end of fiscal 2018.
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.
5.
OTHER INVESTMENTS
As of June 30, 2018, the Company’s portfolio of other investments had an aggregate carrying value
of approximately $5.6 million and we have committed to fund additional amounts of approximately $2.0 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, 2018, we made cash contributions to other investments of approximately
$668,000, consisting of $393,000 in follow on existing investment commitments and $275,000 in two new investments in a partnership
owning real estate in Orlando, Florida for $200,000 and a partnership owning diversified businesses of $75,000.
During the six months ended June 30, 2018, we received cash
distributions from other investments of approximately $1.3 million. These distributions included approximately $475,000 (net of
10% holdback pending year end audit of partnership) received in June 2018 from the redemption of an investment in a partnership
owning investment contracts which resulted in a loss of less than $1,000, $404,000 from one investment in a partnership owning
rental apartments in San Antonio, Texas which were sold in March 2018 at a gain to the Company of approximately $105,000, and $106,000
in distributions from an on-going investment in a power and energy partnership. The other distributions were primarily from real
estate and related investments. Also, in the first quarter of 2018 the Company’s investments in two private banks experienced
mergers with publicly traded larger banks and we received stock in those publicly traded banks plus approximately $34,000 in cash.
The cash portion was recorded as gain from other investments. The bank securities we received from the mergers are being held in
our marketable securities portfolio at the carrying value equal to our original investment in the private banks (with an unrealized
gain of approximately $168,000 as of June 30, 2018).
Net income from other investments for the three and six months ended June 30, 2018 and 2017, is approximately
as follows:
|
|
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
|
Description
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Partnerships owning real estate and related
|
|
$
|
32,000
|
|
|
$
|
24,000
|
|
|
$
|
164,000
|
|
|
$
|
127,000
|
|
|
Partnerships owning diversified businesses
|
|
|
27,000
|
|
|
|
37,000
|
|
|
|
42,000
|
|
|
|
179,000
|
|
|
Other (bank stocks)
|
|
|
2,000
|
|
|
|
|
|
|
|
34,000
|
|
|
|
|
|
|
Income from investment in 49% owned affiliate (T.G.I.F. Texas, Inc.)
|
|
|
12,000
|
|
|
|
8,000
|
|
|
|
51,000
|
|
|
|
42,000
|
|
|
Total net income from other investments
|
|
$
|
73,000
|
|
|
$
|
69,000
|
|
|
$
|
291,000
|
|
|
$
|
348,000
|
|
The following tables present
approximate gross unrealized losses and fair values for those investments that were in an unrealized loss position as of June
30, 2018 and December 31, 2017, aggregated by investment category and the length of time that investments have been in a
continuous loss position:
|
|
|
As of June 30, 2018
|
|
|
|
|
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
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
121,000
|
|
|
$
|
(42,000
|
)
|
|
$
|
121,000
|
|
|
$
|
(42,000
|
)
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
121,000
|
|
|
$
|
(42,000
|
)
|
|
$
|
121,000
|
|
|
$
|
(42,000
|
)
|
|
|
|
As of December 31, 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
|
|
$
|
138,000
|
|
|
$
|
(24,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
138,000
|
|
|
$
|
(24,000
|
)
|
|
Total
|
|
$
|
138,000
|
|
|
$
|
(24,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
138,000
|
|
|
$
|
(24,000
|
)
|
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.
There were no impairment valuation adjustments for the three
and six months ended June 30, 2018 and 2017.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with ASC Topic 820, the Company measures cash
and cash equivalents and 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 as of June 30, 2018 and December 31, 2017, 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 where significant unobservable inputs were used (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,
2018
|
|
|
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
|
|
$
|
50,000
|
|
|
|
-
|
|
|
$
|
50,000
|
|
|
$
|
-
|
|
|
Money market mutual funds
|
|
|
1,747,000
|
|
|
|
1,747,000
|
|
|
|
-
|
|
|
|
-
|
|
|
US T-Bills
|
|
|
16,884,000
|
|
|
|
16,884,000
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
534,000
|
|
|
|
-
|
|
|
|
534,000
|
|
|
|
-
|
|
|
Marketable equity securities
|
|
|
4,657,000
|
|
|
|
4,657,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Total assets
|
|
$
|
23,872,000
|
|
|
$
|
23,288,000
|
|
|
$
|
584,000
|
|
|
$
|
-
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
Description
|
|
Total
December 31,
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
|
|
|
1,633,000
|
|
|
|
1,633,000
|
|
|
|
-
|
|
|
|
-
|
|
|
US T-Bills
|
|
|
2,935,000
|
|
|
|
2,935,000
|
|
|
|
-
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
517,000
|
|
|
|
-
|
|
|
|
517,000
|
|
|
|
-
|
|
|
Marketable equity securities
|
|
|
4,033,000
|
|
|
|
4,033,000
|
|
|
|
-
|
|
|
|
-
|
|
|
Total assets
|
|
$
|
9,470,000
|
|
|
$
|
8,601,000
|
|
|
$
|
869,000
|
|
|
$
|
-
|
|
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.
Distributed capital gains on sales of real estate as they relate
to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax.
In March 2018, the Company paid a cash dividend of approximately
$2.5 million (or $2.50 per share) to shareholders of record as of March 21, 2018. The dividend was a capital gain distribution
to shareholders. No dividends were declared for the year ended December 31, 2017.
In January 2017, the Company paid a cash dividend of approximately
$501,000 (or $.50 per share) to shareholders of record as of December 29, 2016. The dividend was a return of capital to shareholders.
No dividends were declared for the year ended December 31, 2017.
The 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 basis 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, 2018, and December
31, 2017, the Company has recorded a net deferred tax liability of approximately $118,000 and $84,000, respectively, primarily
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 $989,000, the estimated tax benefits of which have 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,
|
|
2018
|
|
|
2017
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
39,000
|
|
|
$
|
59,000
|
|
|
State
|
|
|
6,000
|
|
|
|
7,000
|
|
|
|
|
|
45,000
|
|
|
|
66,000
|
|
|
Decreased valuation allowance
|
|
|
(11,000
|
)
|
|
|
(66,000
|
)
|
|
Total
|
|
$
|
34,000
|
|
|
$
|
-
|
|
8.
STOCK OPTIONS
In January and March 2018 three directors
and one officer exercised options to purchase a total of 10,900 shares at $9.31 per share (options to purchase 1,600 shares by
one director were exchanged for new options via Stock Option Agreement re-load provision). Stock based compensation expense is
recognized using the fair-value method for all awards. During the six months ended June 30, 2018 there were no options granted,
expired or forfeited.
The following table summarizes stock option
activity during the six months ended June 30, 2018:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Outstanding at January 1, 2018
|
|
|
12,500
|
|
|
$
|
9.31
|
|
|
Exercised (including 1,600 shares exchanged via re-load option)
|
|
|
12,500
|
|
|
|
9.31
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
Expired unexercised
|
|
|
-
|
|
|
|
-
|
|
|
Granted (via re-load option)
|
|
|
1,600
|
|
|
|
15.30
|
|
|
Outstanding at June 30, 2018
|
|
|
1,600
|
|
|
$
|
15.30
|
|
The following table summarizes information
concerning outstanding and exercisable options as of June 30, 2018:
|
|
|
Number of
securities to be
issued upon
exercise of
outstanding options
|
|
|
Weighted-average
exercise price of
outstanding options
|
|
|
Number of securities
remaining available for future
issuance under equity
compensation plans
|
|
|
Equity compensation plan approved by shareholders
|
|
|
1,600
|
|
|
$
|
15.30
|
|
|
|
47,608
|
|
|
Equity compensation plan not approved by shareholders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
1,600
|
|
|
$
|
15.30
|
|
|
|
47,608
|
|
As of June 30, 2018, the stock options
outstanding and exercisable had no intrinsic value.
|
|
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 $74,000 ($0.07
per share) for the three months ended June 30, 2018, and net income of approximately $5.1 million ($5.06 per share) for the six
months ended June 30, 2018. For the three months ended June 30, 2017, we reported a net loss of $21,000 ($0.02 per share) and for
the six months ended June 30, 2017 we reported net income of $31,000 ($0.03 per share).
REVENUES
Rentals and related revenues for the three and six months ended
June 30, 2018 were approximately $18,000 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, 2017 rental and related revenues were $19,000 and $36,000, respectively.
Net realized and unrealized gain from investments in marketable
securities:
Net realized (loss) gain from investments in marketable securities
for the three and six months ended June 30, 2018 was approximately ($4,000) and $4,000, respectively. 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. Unrealized net gain from investments in marketable securities for the three and six months ended June 30, 2018 was
approximately $41,000 and $28,000, respectively. Unrealized net gain from investments in marketable securities for the three and
six months ended June 30, 2017 was approximately $175,000 and $320,000, respectively. For further details refer to Note 3 to Condensed
Consolidated Financial Statements (unaudited).
Equity loss in residential real estate partnership:
Equity loss from operations in residential real estate partnership
for the six months ended June 30, 2018 was approximately $144,000. Equity loss from operations in residential real estate partnership
for the six months ended June 30, 2017 was approximately $35,000 and $152,000, 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, 2018 was approximately $73,000 and $291,000, respectively. Net income from other investments for the three and six
months ended June 30, 2017 was approximately $69,000 and $348,000, 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, 2018 was approximately $98,000 and $188,000, respectively. Interest, dividend and other income for the three and
six months ended June 30, 2017 was approximately $123,000 and $264,000, respectively. The decreases in the three and six-month
comparable periods was primarily due to decreased dividend income.
EXPENSES
Interest expense for the three and six
months ended June 30, 2018 as compared with the same periods in 2017 increased by approximately $12,000 (74%) and $18,000 (56%),
respectively. The increases in the three and six- month comparable periods were primarily due to increase margin borrowings and
increased interest rates.
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 $1.34 million due on demand and contributions committed to
other investments of approximately $2.0 million due upon demand. The $9.9 million in margin is related to the purchase of US T-bills
at quarter end. The T-bills were sold in July 2018 and the margin was repaid. The purchase of T-bills at quarter end is for the
purposes of qualifying for the REIT asset test. The funds necessary to meet the other 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, 2018, net cash used in operating
activities was approximately $1.0 million, primarily consisting of operating expenses and $500,000 partial payment of the incentive
fee due to the Advisor.
For the six months ended June 30, 2018, net cash provided by
investing activities was approximately $8.55 million. This consisted primarily of distributions from investment in residential
real estate partnership of $7.525 million (mainly from the sales proceeds of the Orlando, Florida property), net proceeds from
redemptions of marketable securities of $1.03 million, distributions from other investments of $1.34 million, proceeds from collection
of mortgage loan receivable of $500,000 and distribution from affiliate of $193,000. These sources of funds were partially offset
by uses of cash consisting primarily of $1.35 million in purchases of marketable securities and $668,000 of contributions to other
investments.
For the six months ended June 30, 2018, net cash provided by
financing activities was approximately $6.99 million, consisting of margin borrowings of $9.643 million and $92,000 of proceeds
from stock options exercised. These sources of funds were partially offset by a dividend payment of $2.53 million and repayment
of note payable to affiliate of $210,000.