U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

x Annual Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

 

For the fiscal year ended December 31, 2019

 

o Transition Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

 

Commission file number: 1-7865

 

HMG/COURTLAND PROPERTIES, INC.
(Name of Registrant in its Charter)

 

Delaware

 

59-1914299

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

1870 S. Bayshore Drive, Coconut Grove (Miami), Florida

 

33133

(Address of principal executive offices)

 

(Zip Code)

 
 
 
 
 
 
 

 

Issuer’s telephone number, including area code: (305) 854-6803

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Name of each exchange

Title of class

on which registered:

Common Stock - Par value $1.00 per share

NYSE Amex

 
 
 
 
 
 
 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act
Yes
o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.05) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

 
 
 
 
 
 
 

 

Emerging growth company  ¨

(Do not check if a smaller reporting company)

 
 
 
 
 
 
 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock - Par value $1.00 per
share

HMG

NYSE Amex

 
 
 
 
 
 
 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act).
Yes
o No x

 

The aggregate market value of the voting stock held by non-affiliates of the Registrant (excludes shares of voting stock held by directors, executive officers and beneficial owners of more than 10% of the Registrant’s voting stock; however, this does not constitute an admission that any such holder is an “affiliate” for any purpose) based on the closing price of the stock as traded on the NYSE Amex Exchange on the last business day of the Registrant’s most recently completed second fiscal quarter (June 30, 2019) was $5,792,476. The number of shares outstanding of the issuer’s common stock, $1 par value as of the latest practicable date: 1,013,292 shares of common stock, $1 par value, as of March 18, 2020.

 

     
 
 
 
 
 
 
 
 
 
 

 TABLE OF CONTENTS

 

 

PAGE

PART I

 

 

 

 

 

Item 1.

Description of Business

3

Item 2.

Description of Property

5

Item 3.

Legal Proceedings

5

Item 4.

Mine Safety Disclosures

5

 

 

 

PART II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

6

Item 6.

Selected Financial Data

8

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

8

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

11

Item 8.

Financial Statements and Supplementary Data

12

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

31

Item 9A.

Controls and Procedures

31

Item 9B.

Other Information

31

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

32

Item 11.

Executive Compensation

33

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

35

Item 13.

Certain Relationships and Related Transactions, and Director Independence

36

Item 14.

Principal Accounting Fees and Services

37

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

38

 

 

 

 

Signatures

38

 

Certifications

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 

Part I.

 

Cautionary Statement.

 

An investment in our common stock involves a high degree of risk. These risks should be considered carefully with the uncertainties described below, and all other information included in this Annual Report on Form 10-K, before deciding whether to purchase our common stock. Additional risks and uncertainties not currently known to management or that management currently deems immaterial may also become important factors that may harm our business, financial condition or results or operations. The trading price of our common stock could decline due to any of these risks and uncertainties and you may lose part or all your investment.

 

This Annual Report contains certain statements relating to future results of the Company that are considered “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions; interest rate fluctuation; competitive pricing pressures within the Company’s market; equity and fixed income market fluctuation; technological change; changes in law; changes in fiscal, monetary, regulatory and tax policies; monetary fluctuations as well as other risks and uncertainties detailed elsewhere in this Annual Report or from time-to-time in the filings of the Company with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

 

Item 1. Description of Business.

 

HMG/Courtland Properties, Inc. and subsidiaries (“HMG”, or the “Company”), is a Delaware corporation organized in 1972. The Company’s business is the ownership and management of income-producing commercial properties and it will consider other investments if they offer growth or profit potential.

 

HMG qualifies under the U.S. Internal Revenue Code for taxation as a real estate investment trust (“REIT”), excluding its 95% owned taxable REIT subsidiary Courtland Investments, Inc. (“CII”), which files a separate tax return.

 

As previously reported on Form 8-K dated July 19, 2019, pursuant to the terms of a Construction and Mini Perm Loan Agreement ("Loan Agreement"), between Murano At Three Oaks Associates LLC, a Florida limited liability company formed in September 2018 (the “Borrower”) which is 25% owned by HMG, and PNC Bank, National Association ("Lender"), Lender provided a construction loan to the Borrower for the principal sum of approximately $41.59 million (“Loan”). The proceeds of the Loan shall be used to finance the construction of multi-family residential apartments containing 318 units totaling approximately 312,000 net rentable square feet on a 17.5-acre site located in Fort Myers, Florida ("Project").  The Project site was purchased by the Borrower concurrently with the closing of the Loan. Total development costs for the Project are estimated at approximately $56.08 million and the Borrower’s equity totals approximately $14.49 million. HMG’s share of the equity is 25%, or approximately $3.62 million.  As of December 31, 2019, there was no outstanding balance on the Loan.  In 2020, there have been two draws on the Loan totaling approximately $2.7 million. The project is on budget and as a percentage of the total budget the amount completed is approximately 31%.

 

HMG and the other members (or affiliates thereof) of the Borrower ("Guarantors") entered into a Completion Guaranty ("Completion Guaranty") and a Guaranty and Suretyship Agreement ("Repayment Guaranty") (collectively, the “Guaranties”).  Under the Completion Guaranty, each Guarantor shall unconditionally guaranty, as a primary obligor, and become surety for the prompt payment and performance by Borrower of the “Guaranteed Obligations” (as defined).  Under the Repayment Guaranty, Guarantor unconditionally guarantees, as a primary obligor, and becomes surety for the prompt payment and performance of, as defined (i) all Interest Obligations, (ii) all Loan Document Obligations, (iii) all Expense Obligations, (iv) the Carrying Cost Obligations, (v) the Principal Amount, (vi) interest on each of the foregoing including, if applicable, interest at the Default Rate (as defined).  At all times prior to the First Reduction Date (as defined below), the Guarantors are collectively responsible for 30% of the Principal Obligations, (ii) at all times after the First Reduction Date, the Guarantors are collectively responsible for15% of the Principal Obligations, and (iii) at all times after the Second Reduction Date, 0% of the Principal Obligations. First Reduction Conditions" means satisfaction of the following conditions: (i) no Event of Default has occurred and is continuing; (ii) Completion of Construction has occurred; and (iii)   the Project has achieved a DSCR of not less than 1.25 to 1.00 for two (2) consecutive fiscal quarters.

 

Each Guarantor is required to maintain compliance with the following financial covenants, as defined: (1) liquidity shall not be less than $2.5 million. Liquidity is defined as the sum of unencumbered, unrestricted cash and cash equivalents and marketable securities, and (2) net worth shall not be less than $10 million.  As of December 31, 2019, HMG was in compliance with all covenants required by Guarantors in the Loan Agreement.

 

The Company’s portfolio of REIT marketable securities consists primarily of preferred equity of large capital publicly traded REITs with a market value of approximately $1.86 million as of December 31, 2019. 

 
  3  
 

The Company’s investments in non-REIT marketable securities include equity and debt securities issued primarily by large capital companies or government agencies with readily determinable fair values in varying industries. This includes real estate investment trusts and mutual funds focusing in commercial real estate activities. Substantially all the Company’s marketable securities investments are in companies listed on major national stock markets, however the overall investment portfolio and some of the Company’s investment strategies could be viewed as risky and the market values of the portfolio may be subject to fluctuations. Consistent with the Company’s overall investment objectives and activities, management classifies all marketable securities as being held in a trading portfolio. Accordingly, all unrealized gains and losses on the Company’s investments in marketable securities are recorded in the Consolidated Statements of Income. Marketable securities are stated at market value as determined by the most recently traded price of each security at the balance sheet date. Information regarding the amounts and types of investments in marketable securities is set forth in Note 3 of the Notes to Consolidated Financial Statements.

 

The Company may realize gains and losses in its overall investment portfolio from time to time to take advantage of market conditions and/or manage the portfolio’s resources and the Company’s tax liability. The Company may utilize margin for its marketable securities purchases using standard margin agreements with national brokerage firms. The use of available leverage is guided by the business judgment of management. The Company may also use options and futures to hedge concentrated stock positions and index futures to hedge against market risk and enhance the performance of the Company’s portfolio while reducing the overall portfolio’s risk and volatility.

 

The Company’s other investments consist primarily of nominal equity interests in various privately held entities, including limited partnerships whose purpose is to invest venture capital funds in growth-oriented enterprises. The Company does not have significant influence over any investee and the Company’s investments typically represent less than 5% of the investee’s ownership. Some of these investments give rise to exposure resulting from the volatility in capital markets. The Company mitigates its risks by diversifying its investment portfolio. Information with respect to the amounts and types of other investments including the nature of the declines in value is set forth in Note 4 of the Notes to Consolidated Financial Statements.

 

Reference is made to Item 13. Certain Relationships and Related Transactions and Director Independence for discussion of the Company’s organizational structure and related party transactions.

 

Investment in Affiliate.

 

The Company’s investment in affiliate consists of a 49% equity interest in T.G.I.F. Texas, Inc. (“TGIF”). TGIF was incorporated in Texas and operates solely from the Company’s corporate office in Miami, Florida. The Company’s CEO, Maurice Wiener, is also the CEO of TGIF. Its assets consist primarily of promissory notes receivable from its shareholders including CII and Mr. Wiener and other investments including marketable debt and equity securities. This investment’s carrying value as of December 31, 2019 and 2018 was approximately $1.4 million and $1.6 million, respectively. CII’s note payable to TGIF which is due on demand was approximately $1.0 million and $1.3 million as of December 31, 2019 and 2018, respectively. Reference is made to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Insurance, Environmental Matters and Other:

 

In the opinion of management, all significant real estate assets of the Company are adequately covered by insurance or are self-insured.

 

As previously reported, in May 2018, the Company (an approximate 70% owner) and the other (approximate 30%) owner of a 6-acre property located in Montpelier, Vermont (the “Property”), together “the Owners”, received a Determination of Eligibility under the Brownfields Reuse and Liability Limitation Act (BRELLA) related to an environmental remediation (“the remediation plan”) of the Property.  Under BRELLA the Owners will receive a Certificate of Completion upon performance of all actions required under the approved corrective action plan developed for the Property.  Statutory liability protections become effective upon issuance of the Certificate of Completion.  Forbearance from state enforcement action is in effect during the BRELLA provided that all required activities are being implemented in good faith. Areas of concern identified in the Phase II Environmental Site Assessment conducted by an environmental consulting firm in consultation with the Vermont Department of Environmental Conservation (VTDEC) include (1) discharges of coal tar to the bank of the Winooski River on the northern portion of the property (the “River Coal Tar”), (2) buried coal tar present in several locations on the northern portion of the Property (the “Subsurface Coal Tar”) and (3) urban fill soils (the “Urban Fill Soils”) located throughout the southern portion of the property.  In April 2019, the Owners entered into a Pre-Development Agreement with an unrelated local Montpelier real estate developer to remediate the Property.  The Owners agreed to pay a fixed fee of $500,000 to the local developer to implement the remediation plan.  The Company’s portion of the fixed fee is approximately 70%, or $350,000 and has been accrued on the consolidated financial statements as of December 31, 2019. The remediation work began in December 2019.  Groundwater monitoring will continue for another year before a Certificate of Completion can be issued.

 

We are not aware of any federal, state or local environmental laws or regulations that will materially affect our earnings or competitive position or result in material capital expenditures. However, we cannot predict the effect of possible future environmental legislation or regulations on our operations. 

 
  4  
 

Competition and the Company’s Market

 

The Company competes for suitable opportunities for real estate investments with other real estate investment trusts, foreign investors, pension funds, insurance companies and other investors. The Company also competes with other real estate investors and borrowers for available sources of financing.

 

In addition, to the extent the Company leases properties it must compete for tenants with other lessors offering similar facilities. Tenants are sought by providing modern, well-maintained facilities at competitive rentals. The Company has attempted to facilitate successful leasing of its properties by investing in facilities that have been developed according to the specifications of tenants and special local needs.

 

Employees.

 

The Company’s management is provided in accordance with its Advisory Agreement (the “Agreement”) with HMGA, Inc. (“the Adviser”), as described below under “Terms of the Agreement”. Reference is also made to Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Terms of the Advisory Agreement. Under the terms of the Agreement, the Adviser serves as the Company’s investment adviser and, under the supervision of the directors of the Company, administers the day-to-day operations of the Company. All officers of the Company who are officers of the Adviser are compensated solely by the Adviser for their services. The Agreement is renewable annually upon the approval of a majority of the directors of the Company who are not affiliated with the Adviser and a majority of the Company’s shareholders. The contract may be terminated at any time on 120 days written notice by the Adviser or upon 60 days written notice by a majority of the unaffiliated directors of the Company or the holders of a majority of the Company’s outstanding shares.

 

On July 25, 2019, the shareholders of the Company approved the renewal of the Advisory Agreement between the Company and the Adviser for a term commencing January 1, 2020 and expiring December 31, 2020.

 

The Adviser is majority owned by Mr. Wiener. The officers and directors of the Adviser are as follows: Maurice Wiener, Chairman of the Board, Chief Executive officer and President and Carlos Camarotti, Vice President - Finance and Assistant Secretary.

 

Advisory Fees. For the years ended December 31, 2019 and 2018, the Company and its subsidiaries incurred Adviser fees of approximately $741,000 and $1,300,000, respectively.  This consisted of $660,000 in regular compensation for 2019 and 2018, and $81,000 and $640,000 in incentive fee compensation for 2019 and 2018, respectively.

 

Item 2. Description of Property.

 

Executive offices (Coconut Grove, Florida). The principal executive offices of the Company and the Adviser are located at 1870 South Bayshore Drive, Coconut Grove, Florida, 33133, in premises owned by the Company’s subsidiary CII and is primarily leased to the Adviser pursuant to a lease agreement originally dated December 1, 1999.  In December 2019, the lease was renewed for one year with one one-year extension options remaining with an increase in rent of 5% per year. The lease (as extended) provides for base rent of $61,261 per year beginning on December 1, 2019 and payable in equal monthly installments during the term of the lease which expires (unless extended) on December 1, 2020. The Adviser, as tenant, pays utilities, certain maintenance and security expenses relating to the leased premises.

 

The Company regularly evaluates potential real estate acquisitions for future investment or development and would utilize funds currently available or from other resources to implement its strategy.

 

Item 3. Legal Proceedings.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable to the Company. 

 
  5  
 

Part II.

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The high and low per share closing sales prices of the Company’s stock on the NYSE Amex Exchange (ticker symbol: HMG) for each quarter during the past two years were as follows:

 

 

 

High

 

 

Low

 

March 31, 2019

 

$

16.23

 

 

$

12.60

 

June 30, 2019

 

$

14.63

 

 

$

13.17

 

September 30, 2019

 

$

14.20

 

 

$

13.16

 

December 31, 2019

 

$

14.09

 

 

$

12.83

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

$

18.45

 

 

$

12.59

 

June 30, 2018

 

$

15.40

 

 

$

12.64

 

September 30, 2018

 

$

15.65

 

 

$

13.88

 

December 31, 2018

 

$

14.75

 

 

$

13.60

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

On December 13, 2019 the Company declared a dividend of $0.50 per share (72% capital gain and 28% return of capital) which was payable on January 13, 2020 to all shareholders of record as of December 30, 2019.

 

On December 14, 2018 the Company declared a capital gain dividend of $0.50 per share which was payable on January 9, 2019 to all shareholders of record as of December 28, 2018.

 

On March 7, 2018 the Company declared a capital gain dividend of $2.50 per share which was payable on March 30, 2018 to all shareholders of record as of March 21, 2018.

 

The Company’s policy has been to pay dividends as are necessary for it to qualify for taxation as a REIT under the Internal Revenue Code.

 

As of March 8, 2020, there were approximately 391 shareholders of record of the Company’s common stock.

 

The following table illustrates securities currently authorized for issuance under the Company’s equity compensation plan, the 2011 Stock Option Plan:

 

 

 

Number of securities

 

 

 

 

 

 

 

 

 

to be issued upon

 

 

Weighted average

 

 

Number of securities remaining

 

 

 

exercise of

 

 

exercise price of

 

 

available for future issuance under

 

 

 

outstanding options

 

 

outstanding options

 

 

equity compensation plans

 

Equity compensation plan approved by shareholders

 

 

9,600

 

 

$

13.55

 

 

 

36,608

 

Equity compensation plan not approved by shareholders

 

 

 

 

 

 

 

 

 

Total

 

 

9,600

 

 

$

13.55

 

 

 

36,608

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

On July 25, 2019 the Company granted options to purchase 8,000 shares of the Company’s common stock to three directors and one officer.  The exercise price of the options is equal to $13.20 per share, the market price of the stock on the date of grant and the options expires on June 29, 2021.

 

The following table summarizes stock option activity during the year ended December 31, 2019:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

 

Options

 

 

Exercise

 

 

 

Outstanding

 

 

Price

 

Outstanding at January 1, 2019

 

 

1,600

 

 

$

15.30

 

Exercised

 

 

-

 

 

 

-

 

Forfeited

 

 

-

 

 

 

-

 

Expired unexercised

 

 

-

 

 

 

-

 

Granted options

 

 

8,000

 

 

 

13.20

 

Outstanding at December 31, 2019

 

 

9,600

 

 

$

13.55

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

As of December 31, 2019, the options outstanding and exercisable had no intrinsic value.

 
  6  
 

The following table summarizes stock option activity during the year ended December 31, 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 December 31, 2018

 

 

1,600

 

 

$

15.30

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

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.

 

As previously reported on December 14, 2018, HMG announced that its Board of Directors has authorized the purchase of up to $500,000 of HMG common stock on the open market or through privately negotiated transactions.  The program will be in place through December 31, 2021.  During the years ended December 31, 2019 and 2018, there were no shares purchased as part of this publicly announced program.

 
  7  
 

Item 6. Selected Financial Data:

 

Not applicable to the Company.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Critical Accounting Policies and Estimates.

 

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions in applying our critical accounting policies that affect the reported amounts of assets and liabilities and the disclosure (if any) of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Our estimates and assumptions concern, among things, potential impairment of our other investments and other long-lived assets, uncertainties for Federal and state income tax and allowance for potential doubtful accounts. We evaluate those estimates and assumptions on an ongoing basis based on historical experience and on various other factors which we believe are reasonable under the circumstances. Note 1 of the consolidated financial statements, included elsewhere on this Form 10-K, includes a summary of the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. The Company believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the Company’s consolidated financial statements:

 

Marketable Securities. All unrealized gains and losses on the Company’s investment portfolio are included in the Consolidated Statements of Income. Our investments in equity and debt marketable securities are carried at fair value and based on quoted market prices or other observable inputs. Marketable securities are subject to fluctuations in value in accordance with market conditions.

 

Other Investments. The Company’s other investments consist primarily of nominal equity interests in various privately held entities, including limited partnerships whose purpose is to invest venture capital funds in growth-oriented enterprises. The Company does not have significant influence over any investee and the Company’s investment typically represents less than 3% of the investee’s ownership. These investments generally do not meet the criteria of accounting under the equity method and are carried at cost less distributions and other than temporary unrealized losses. These investments do not have available quoted market prices, so we must rely on valuations and related reports and information provided to us by those entities for the purposes of determining other-than-temporary declines. These valuations are by their nature subject to estimates which could change significantly from period to period. The Company regularly reviews the underlying assets in its other investment portfolio for events, that may indicate the investment has suffered other-than-temporary decline in value including.  These events include but are not limited to bankruptcies, closures and declines in estimated fair value. When a decline is deemed other-than-temporary, we permanently reduce the cost basis component of the investments to its estimated fair value, and the loss is recorded as a component of income from other investments. As such, any recoveries in the value of the investments will not be recognized until the investments are sold.

 

We believe our estimates of each of these items historically have been adequate. However, due to uncertainties inherent in the estimation process, it is reasonably possible that the actual resolution of any of these items could vary significantly from the estimate and, accordingly, there can be no assurance that the estimates may not materially change in the near term.

 

Real Estate. Land, buildings and improvements, furniture, fixtures and equipment are recorded at cost. Tenant improvements, which are included in buildings and improvements, are stated at cost. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Renovations and/or replacements, which improve or extend the life of the asset are capitalized and depreciated over the shorter of their estimated useful lives, or the remaining lease term (if leased).

 

Depreciation is computed utilizing the straight-line method over the estimated useful lives of ten to forty years for buildings and improvements and five to ten years for furniture, fixtures and equipment. Tenant improvements are amortized on a straight-line basis over the shorter of the term of the related leases or the assets useful life.

 

The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company’s net income. Should the Company lengthen the expected useful life of a particular asset, it would be depreciated over more years, and result in less depreciation expense and higher annual net income.

 

Assessment by the Company of certain other lease related costs must be made when the Company has a reason to believe that the tenant will not be able to execute under the term of the lease as originally expected.

 

The Company periodically reviews the carrying value of certain of its properties and long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected future cash flows of such assets or analyze the fair value of the asset, to determine if such sum or fair value is less than the carrying value of such assets to ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using quoted market prices, if available, for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets and would adjust the carrying value of the asset to fair value. Judgments as to impairments and assumptions used in projecting future cash flow are inherently imprecise.

 
  8  
 

Results of Operations:

 

For the years ended December 31, 2019 and 2018, the Company reported net income of approximately $270,000 ($0.27 per share) and $4.1 million ($4.07 per share), respectively.

 

Revenues:

 

Total revenues for the years ended December 31, 2019 and 2018 were approximately $75,000 and $73,000, respectively.   This is primarily comprised of rental revenue from the leasing of the corporate offices to the Adviser.

 

Expenses:

 

Total expenses for the year ended December 31, 2019 as compared to that of 2018 decreased by approximately $353,000 (or 21%). 

 

Operating expenses of rental and other properties decreased by approximately $292,000 (or 68%).  This decrease was primarily due to non-recurring costs to remediate the Company’s Montpelier, Vermont property as previously disclosed in Form 10-Q for the period ended September 30, 2018. The Company agreed to pay a fixed fee of $500,000 to a third-party local developer to implement the remediation plan.  The Company’s portion of the fixed fee is approximately 70%, or $350,000. The remediation work began in December 2019.

 

General and administrative expenses for the year ended December 31, 2019 as compared to that of 2018 decreased by approximately $39,000 (or 18%) primarily due to non-recurring expenses approximately $56,000 expensed in 2018 relating to a proposed property development in Orlando, Florida did not proceed and was terminated.

 

Interest expense for the year ended December 31, 2019 as compared to that of 2018 decreased by approximately $33,000 (or 37%) primarily due to decreased broker margin balances and lower outstanding debt balance due to affiliate.

 

Other Income:

 

Net realized and unrealized gains from investments in marketable securities:

 

Net gain (loss) from investments in marketable securities, including marketable securities distributed by partnerships in which the Company owns minority positions, for the years ended December 31, 2019 and 2018, is as follows:

 

 

 

2019

 

 

2018

 

Net realized gain from sales of marketable securities

 

$

42,000

 

 

$

51,000

 

Net unrealized gain (loss) from marketable securities

 

 

236,000

 

 

 

(454,000

)

Total net gain (loss) from investments in marketable securities

 

$

278,000

 

 

$

(403,000

)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

Net realized gain from sales of marketable securities consisted of approximately $108,000 of gains net of $66,000 of losses for the year ended December 31, 2019. The comparable amounts in fiscal year 2018 were approximately $240,000 of gains net of $189,000 of losses.

 

Consistent with the Company’s overall current investment objectives and activities, the entire marketable securities portfolio is classified as trading (as defined by U.S generally accepted accounting principles). Unrealized gains or losses from marketable securities are recorded as other income in the Consolidated Statements of Income.

 

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.

 

Investments in marketable securities give rise to exposure resulting from the volatility of capital markets. The Company attempts to mitigate its risk by diversifying its marketable securities portfolio.

 

Equity gain (loss) in residential real estate partnerships:

 

For the year ended December 31, 2019 a gain of approximately $4,000 represents our portion of interest income earned on funds invested in Murano At Three Oaks Associates LLC (Fort Myers, Florida) prior to commencement of development.

 

For the year ended December 31, 2018 (through the date of sale) JY-TV Associates LLC (Orlando, Florida) reported a net loss from operations of approximately $411,000, which includes depreciation and amortization expense of $447,000 and interest expense of $159,000.  The Company’s portion of the 2018 loss from operations was approximately $137,000.  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 was approximately $5.5 million, net of the incentive fee.

 
  9  
 

Income from other investments is summarized below (excluding other than temporary impairment losses):

 

 

 

2019

 

 

2018

 

Partnerships owning real estate and related investments (a)

 

$

668,000

 

 

$

217,000

 

Venture capital funds – diversified businesses (a)

 

 

113,000

 

 

 

63,000

 

Venture capital funds – technology businesses

 

 

-

 

 

 

34,000

 

Investment in 49% owned affiliate and other (b)

 

 

25,000

 

 

 

74,000

 

Total income from other investments

 

$

806,000

 

 

$

388,000

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

(a) The gains in 2019 and 2018 consist of various cash distributions from investments owning real estate and related investments and diversified businesses which made cash distributions from the sale or refinancing of operating companies or properties.  During the year ended December 31, 2019, we received cash distributions from other investments of approximately $2,059,000.  This consisted of distributions from existing investments (primarily real estate related). In December 2019 we received $409,000 from a partnership which sold one of its two rental apartments in Atlanta, Georgia and we recognized a gain of $109,000, before incentive fee. In September 2019 we received $563,000 from a partnership which sold its sole asset, a multifamily residential property located in Austin, Texas and we recognized a gain of $429,000, before incentive fee.  The remaining gains from real estate and related investments were from distributions made in excess of our carrying value. In August 2019, we redeemed a stock fund for $316,000 and recognized a gain of $66,000, before incentive fee. Also, in the first quarter of 2019 the Company’s $300,000 investments in a private insurance company publicly registered all shares and began trading on the NASDAQ on March 29, 2019.  Accordingly, we have transferred this investment to marketable securities.  As of December 31, 2019, this investment had an unrealized loss of approximately $111,000.

 

(b) This gain represents income from the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”).  In 2019 and 2018 TGIF declared and paid a cash dividend of which the Company’s portion was approximately $221,000 and $193,000, respectively. These dividends were recorded as reduction in the investment carrying value as required under the equity method of accounting for investments.

 

Other than temporary impairment (“OTTI”) losses from other investments:

 

There were no OTTI losses for the year ended December 31, 2019 and 2018.

 

Income or loss from other investments 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 gain or loss from other investments for any given period has no predictive value and variations in amount from period to period have no practical analytical value.

 

Interest, dividend and other income

Interest, dividend and other income for the year ended December 31, 2019 as compared with 2018 increased by approximately $97,000 (or 25%).  This was primarily due to increased interest income from T-bills and increased interest income earned on new loans made in late December 2018.

 

(Provision for) benefit from income taxes:

 

The Company qualifies as a real estate investment trust and 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. 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.

 

The provision for income taxes for the year ended December 31, 2019 was approximately $29,000 and is primarily attributable to deferred tax expense relating to CII.  The benefit from income taxes for the year ended December 31, 2018 was approximately $39,000 and was primarily attributable to deferred tax benefit relating to CII.

 

As of December 31, 2019, the Company, excluding its taxable REIT subsidiary, CII, is expected to have a tax net operating loss carryover (NOL) of approximately $447,000.

 

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. 

 

For CII, the Company follows the liability method of accounting for income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amount and the tax basis of assets and liabilities at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. As a result of timing differences associated with the carrying value of other investments, unrealized gains and losses of marketable securities, depreciable assets and the future benefit of a net operating loss, as of December 31, 2019, and 2018 the Company has recorded a net deferred tax liability of $80,000 and $48,000, respectively.

 
  10  
 

As of December 31, 2019, CII has an estimated NOL of approximately $949,000 which has been fully reserved due to CII historically having tax losses.

 

Effect of Inflation.

 

Inflation affects the costs of maintaining the Company’s 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 $1.0 million due on demand (see Item 13. Certain Relationships and Related Transactions and Director Independence), and contributions committed to other investments of approximately $792,000 due upon demand. The $9.9 million in margin is primarily related to the purchase of US T-bills at quarter end.  The T-bills were sold in January 2020 and the related margin was repaid.  The purchase of T-bills at each fiscal 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 and equivalents ($15.4 million at December 31, 2019).

 

A summary of the Company’s contractual cash obligations at December 31, 2019 is as follows:

 

 

 

Payments Due by Period

 

Contractual

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations

 

Total

 

 

Less than 1 year

 

 

1 – 3 years

 

 

4 – 5 years

 

 

After 5 years

 

Note payable

 

$

1,000,000

 

 

$

1,000,000

 

 

 

 

 

 

 

 

 

 

Other investments commitments

 

 

792,000

 

 

 

792,000

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,792,000

 

 

$

1,792,000

 

 

 

 

 

 

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

The timing of amounts due under commitments for other investments is determined by the managing partners of the individual investments.

 

Material Changes in Operating, Investing and Financing Cash Flows.

 

The Company’s cash flows are generated primarily from its dividends, interest and sales proceeds of marketable securities, distributions from investments and borrowings.

 

For the year ended December 31, 2019, net cash used in operating activities was approximately $798,000, primarily consisting of net loss before income taxes and other income of approximately $1,262,000, plus interest, dividends and other income of approximately $483,000.

 

For the year ended December 31, 2019, net cash used in investing activities was approximately $2.8 million and consisted primarily of $3.4 million investment in residential real estate partnership which (as previously reported) is constructing multi-family residential apartments in Fort Myers, Florida, purchases of marketable securities of $1.9 million, contributions to other investments of $1.0 million and additions in notes and loan participation receivable of $700,000. These uses of funds were partially offset by net proceeds from the sale of marketable securities of $2.0 million, distributions from other investments of $2.1 million, and a dividend from TGIF of $221,000.

 

For the year ended December 31, 2019, net cash used in financing activities was approximately $788,000 and consisted primarily of dividends paid of $506,646 and $340,000 of repayment of note payable to TGIF.  These uses were partially offset by $59,000 in margin borrowings net of repayments.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risks.

 

Not Applicable to the Company.

 
  11  
  12  
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of HMG/Courtland Properties, Inc. and Subsidiaries

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of HMG/Courtland Properties, Inc. (a Delaware corporation) and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purposes of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.  Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.  We believe that our audits provide a reasonable basis for our opinion.

 

We have served as the Company’s auditor since December 31, 2010.

 

/s/ Cherry Bekaert LLP
Coral Gables, Florida
March 18, 2020

 
  13  
 

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2019 AND 2018

 
 
 
 
 

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Investment properties, net of accumulated depreciation:

 

 

 

 

 

 

 

 

Office building and other commercial property

 

$

925,963

 

 

$

875,198

 

Total investment properties, net

 

 

925,963

 

 

 

875,198

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

15,382,596

 

 

 

19,738,174

 

Investments in marketable securities

 

 

3,473,521

 

 

 

3,075,718

 

Other investments

 

 

5,585,666

 

 

 

6,039,456

 

Investment in affiliate

 

 

1,442,423

 

 

 

1,637,985

 

Loans, notes and other receivables

 

 

2,519,570

 

 

 

1,796,926

 

Investment in residential real estate partnership

 

 

3,627,598

 

 

 

200,000

 

Other assets

 

 

55,152

 

 

 

73,477

 

TOTAL ASSETS

 

$

33,012,489

 

 

$

33,436,934

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Note payable to affiliate

 

$

1,000,000

 

 

$

1,340,000

 

Margin payable

 

 

9,916,774

 

 

 

9,857,918

 

Dividends payable

 

 

506,646

 

 

 

506,646

 

Accounts payable, accrued expenses and other liabilities

 

 

373,649

 

 

 

370,632

 

Amounts due to the Adviser for incentive fee

 

 

81,333

 

 

 

40,426

 

Deferred income tax payable

 

 

77,485

 

 

 

47,888

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

11,955,887

 

 

 

12,163,510

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Excess common stock, $1 par value; 100,000 shares authorized: no shares issued

 

 

 

 

 

 

Common stock, $1 par value; 1,050,000 shares authorized, 1,013,292 and 1,046,393 shares issued as of December 31, 2019 and December 31, 2018, respectively

 

 

1,013,293

 

 

 

1,046,393

 

Additional paid-in capital

 

 

23,859,686

 

 

 

24,157,986

 

Less: Treasury shares at cost 33,101 shares

 

 

-

 

 

 

(340,281

)

Undistributed gains from sales of properties, net of losses

 

 

54,136,118

 

 

 

54,642,764

 

Undistributed losses from operations

 

 

(58,203,938

)

 

 

(58,473,807

)

Total stockholders’ equity

 

 

20,805,159

 

 

 

21,033,055

 

Noncontrolling interest

 

 

251,443

 

 

 

240,369

 

TOTAL EQUITY

 

 

21,056,602

 

 

 

21,273,424

 

TOTAL LIABILITIES AND EQUITY

 

$

33,012,489

 

 

$

33,436,934

 

 
 
 
 
 
 
 
 

 

See notes to the consolidated financial statements

 
  14  
 

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

     
 
 
 
 
 
 
 

 

REVENUES

 

2019

 

 

2018

 

Real estate rentals and related revenue

 

$

75,387

 

 

$

72,598

 

Total revenues

 

 

75,387

 

 

 

72,598

 

 

 

 

 

 

 

 

 

 

EXPENSES

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

Rental and other properties

 

 

139,181

 

 

 

431,614

 

Adviser’s base fee

 

 

660,000

 

 

 

660,000

 

General and administrative

 

 

180,597

 

 

 

219,830

 

Professional fees and expenses

 

 

203,401

 

 

 

193,341

 

Directors’ fees and expenses

 

 

82,144

 

 

 

81,494

 

Depreciation and Amortization expense

 

 

15,399

 

 

 

15,398

 

Interest expense

 

 

56,300

 

 

 

88,822

 

Total expenses

 

 

1,337,022

 

 

 

1,690,499

 

 

 

 

 

 

 

 

 

 

Loss before other income, income taxes and gain on sale of real estate

 

 

(1,261,635

)

 

 

(1,617,901

)

 

 

 

 

 

 

 

 

 

Net realized and unrealized gains (losses) from investments in marketable securities