NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2017 and 2016
|
|
1.
|
DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Business and Consolidation
. The consolidated financial statements
include the accounts of HMG/Courtland Properties, Inc. (“we” or the “Company”) and entities in which the
Company owns a majority voting interest or controlling financial interest. The Company was organized in 1972 and (excluding its
95% owned subsidiary Courtland Investments, Inc., which files a separate tax return) qualifies for taxation as a real estate investment
trust (“REIT”) under the Internal Revenue Code. The Company’s business is the ownership and management of income-producing
commercial properties and its management considers other investments if such investments offer growth or profit potential. The
Company’s recurring operating revenue is from property rental operations of its corporate offices.
All material transactions and balances with consolidated and unconsolidated
entities have been eliminated in consolidation or as required under the equity method.
The Company’s consolidated subsidiaries are described below:
Courtland Investments, Inc. (“CII”).
In March
2016, this 95% owned corporation of the Company amended its Certificate of Incorporation so that, as amended, the holders of Class
A and Class B common stock of CII shall have and possess the exclusive right to notice of and to vote at any meeting of the stockholders
and any adjournment thereof, and the exclusive right to express consent to corporate action in writing without a meeting. Class
A and Class B shareholders of CII shall have equal voting rights. CII is the Company’s taxable REIT subsidiary which files
a separate tax return. CII’s operations are not part of the REIT tax return.
HMG Orlando, LLC (“HMGO”).
This wholly owned
limited liability company was formed in August 2014. In September 2014 HMGO 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”). JY-TV was formed in 2014 for the sole purpose of purchasing and constructing
two hundred forty (240) unit rental apartments on approximately 9.5 acres in Orlando, Florida. The other two initial members of
JY-TV are not related to the Company. The construction on the rental apartments was completed in September 2016, with partial occupancy
commencing in June 2016. On February 20, 2018 JY-TV sold the apartments to an unrelated third party.
260 River Corp (“260”).
This wholly owned corporation
of the Company owns an approximate 70% interest in a vacant commercially zoned building located on 5.4 acres in Montpelier, Vermont.
Development of this property is being considered.
HMG Bayshore, LLC (“HMGBS”).
This is a wholly
owned Florida limited liability company which owns an investment in an entity which invests in mortgages secured by real estate.
HMG Atlanta, LLC (“HMGATL”).
This is a wholly
owned Florida limited liability company which owns a 1.5% interest in an entity which owns and operates two residential real estate
properties located in north east Atlanta, Georgia.
Baleen Associates, Inc. (“Baleen”).
This corporation
is wholly owned by CII and its sole asset is a 50% interest in a partnership which operates an executive suite rental business
in Coconut Grove, Florida.
Preparation of Financial Statements
. The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 are taxed as capital gains. State
income taxes are not significant. 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”). This 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.
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, 2017 and 2016. The Company’s federal income tax returns since 2014 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.
Depreciation
. Depreciation of the corporate offices properties
held for investment is computed using the straight-line method over its estimated useful life of 39.5 years. Depreciation expense
for the corporate offices for each of the years ended December 31, 2017 and 2016 was approximately $15,000.
Fair Value of Financial Instruments.
The Company records
its financial assets and liabilities at fair value, which is defined under the applicable accounting standards as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measure date. The Company uses valuation
techniques to measure fair value, maximizing the use of observable outputs and minimizing the use of unobservable inputs. The standard
describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value which are the following:
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·
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
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|
·
|
Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
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|
·
|
Level 3 – Inputs include management’s best estimate of what market participants would use in pricing the asset
or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
|
An investment’s categorization within the valuation hierarchy
is based upon the lowest level of input that is significant to the fair value measurement.
The carrying value of financial instruments including other receivables,
notes and advances due from related parties (if any), accounts payable and accrued expenses and mortgages and notes payable approximate
their fair values at December 31, 2017 and 2016, due to their relatively short terms or variable interest rates.
Cash equivalents are classified within Level 1 or Level 2 of the
fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources
with reasonable levels of transparency. Other investments which are measured by investees at net asset value per share or its equivalent
are also classified within Level 2.
The valuation of other investments not included above requires significant
judgment by the Company’s management due to the absence of quoted market values, inherent lack of liquidity and long-term
nature of such assets and have been classified within Level 3. Such investments are valued initially based upon transaction price.
Valuations are reviewed periodically utilizing available market data and additional factors to determine if the carrying value
of these investments should be adjusted. In determining valuation adjustments, emphasis is placed on market participants’
assumptions and market-based information over entity-specific information.
Marketable Securities
. The entire marketable securities portfolio
is classified as trading consistent with the Company’s overall investment objectives and activities. Accordingly, all unrealized
gains and losses on the Company’s marketable securities investment portfolio are included in the Consolidated Statements
of Income.
Gross gains and losses on the sale of marketable securities are
based on the first-in first-out method of determining cost.
Marketable securities from time to time are pledged as collateral
pursuant to broker margin requirements. As of December 31, 2017, and 2016 there was approximately $267,000 and $49,000 of marketable
securities pledged as collateral pursuant to margin agreements.
Treasury bills, from time to time, are pledged as collateral pursuant
to broker margin requirements. As of December 31, 2017, and 2016 there were no such margin balances outstanding.
Notes and other receivables.
Management periodically performs
a review of amounts due on its notes and other receivable balances to determine if they are impaired based on factors affecting
the collectability of those balances. Management’s estimates of collectability of these receivables requires management to
exercise significant judgment about the timing, frequency and severity of collection losses, if any, and the underlying value of
collateral, which may affect recoverability of such receivables. As of December 31, 2017, and 2016, the Company had no allowances
for bad debt.
Equity investments.
Investments in which the Company does
not have a majority voting or financial controlling interest but has the ability to exercise influence are accounted for under
the equity method of accounting, even though the Company may have a majority interest in profits and losses. The Company follows
ASC Topic 323-30 in accounting for its investments in limited partnerships. This guidance requires the use of the equity method
for limited partnership investments of more than 3 to 5 percent.
The Company has no voting or financial controlling interests in
its other investments which include entities that invest venture capital funds in growth-oriented enterprises. These other investments
are carried at cost less adjustments for other than temporary declines in value.
Income (loss) per common share
. Net income (loss) per common
share (basic and diluted) is based on the net income (loss) divided by the weighted average number of common shares outstanding
during each year. Diluted net loss per share includes the dilutive effect of options to acquire common stock. Common shares outstanding
include issued shares less shares held in treasury. There were 12,500 stock options outstanding as of December 31, 2017 and 2016,
respectively. The 2017 and 2016 options were not included in the diluted earnings per share computation as their effect would have
been de minimums or anti-dilutive.
Gain on sales of properties
. Gain on sales of properties
is recognized when the minimum investment requirements have been met by the purchaser and title passes to the purchaser.
In July 2017 CII sold a 20,000 square foot undeveloped residential
parcel of land located in Paxton, Massachusetts for approximately $44,000 and recognized a gain of approximately $10,000. There
were no sales of property in 2016.
Cash and cash Equivalents
. For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less
to be cash and cash equivalents.
Concentration of Credit Risk
. Financial instruments that
potentially subject the Company to concentration of credit risk are cash and cash equivalent deposits in excess of federally insured
limits, marketable securities, other receivables and notes and mortgages receivable. From time to time the Company may have bank
deposits in excess of federally insured limits (presently $250,000). The Company evaluates these excess deposits and transfers
amounts to brokerage accounts and other banks to mitigate this exposure. As of December 31, 2017, and 2016, respectively, we had
approximately $52,000 and $50,000 of deposits in excess of federally insured limits. The Company has not experienced any losses
in such accounts and believes that it is not exposed to any significant credit risk on cash.
Other intangible assets:
Deferred loan costs, when applicable, are amortized on a straight-line
basis over the life of the loan. This method approximates the effective interest rate method.
Noncontrolling Interest
. Noncontrolling interest represents
the noncontrolling or minority partners’ proportionate share of the equity of the Company’s majority owned subsidiaries.
A summary for the years ended December 31, 2017 and 2016 is as follows:
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|
2017
|
|
|
2016
|
|
|
Noncontrolling interest balance at beginning of year
|
|
$
|
223,000
|
|
|
$
|
211,000
|
|
|
Noncontrolling partners’ interest in operating gains (losses) of consolidated subsidiary
|
|
|
10,000
|
|
|
|
5,000
|
|
|
Noncontrolling partners’ contribution
|
|
|
-
|
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest balance at end of year
|
|
$
|
233,000
|
|
|
$
|
223,000
|
|
Revenue recognition
. CII is the lessor of the Company’s
principal executive offices and the Adviser corporate offices. This lease agreement is classified as an operating lease and accordingly
all rental revenue is recognized as earned based upon total fixed cash flow over the initial term of the lease, using the straight-line
method. In December 2017 the lease was renewed for two years expiring on December 1, 2019, with an increase of 5% in rent for each
year extended. Beginning in December 2017 the base rent is $55,566 per year payable in equal monthly installments during the term
of the lease. The Adviser, as tenant, pays utilities, certain maintenance and security expenses relating to the leased premises.
Impairment of long-lived assets
. The Company periodically
reviews the carrying value 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. There was no impairment of long-lived assets in 2017 and 2016.
Share-based compensation.
The Company accounts for share-based compensation in accordance
with ASC Topic 718 “Share-Based Payments”. The Company has used the Black-Scholes option pricing model to estimate
the fair value of stock options on the dates of grant.
Recent accounting pronouncements
.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts
with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer
of promised goods or services to customers when it satisfies performance obligations. The ASU will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective. In February 2017, the FASB issued ASU No. 2017-05,
Other
Income: Gains and Losses from the Derecognition of Nonfinancial Assets
, which amends ASC Topic 610-20. ASU No. 2017-05 provides
guidance on how entities recognize sales, including partial sales, of nonfinancial assets (and in-substance nonfinancial assets)
to non-customers. ASU No. 2017-05 requires the seller to recognize a full gain or loss in a partial sale of nonfinancial assets,
to the extent control is not retained. Any noncontrolling interest retained by the seller would, accordingly, be measured at fair
value. Both ASU No. 2014-09 and 2017-05 will become effective for the Company beginning with the first quarter of 2018. The standards
permit the use of either the full retrospective method or the modified retrospective method. The Company has concluded it will
use the modified retrospective method for transition under both standards, in which case the cumulative effect of applying the
standards, if any, would be recognized at the date of initial application.
The Company has reviewed its revenue streams and determined that
the significant majority of its revenue is derived from financial instruments (i.e. receivables, debt & equity securities,
investments and financial instruments), which are not in scope of the revenue standard. In addition, the Company also has sales
of real estate which have historically been primarily all-cash transactions with no contingencies and no future involvement in
the operations. For its all-cash sale transactions, the Company does not anticipate a significant change to the timing of revenue
recognition upon adoption of this new revenue standard.
In February 2016, the FASB issued ASU 2016
-
02,
Leases. The standard requires all leases with lease terms over 12 months to be capitalized as a right
-
of
-
use
asset and lease liability on the balance sheet at the date of lease commencement. Leases will be classified as either finance or
operating. This distinction will be relevant for the pattern of expense recognition in the income statement. This standard will
be effective for the calendar year ending December 31, 2019. The Company is currently in the process of evaluating the impact of
adoption of this ASU on the financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments
— Measurement of Credit Losses on Financial Instruments
, which requires measurement and recognition of expected credit
losses for financial assets held. ASU 2016-13 is effective for the Company beginning January 1, 2020 and we are currently
evaluating the impact that ASU 2016-13 will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of
Certain Cash Receipts and Cash Payments
, which addresses eight specific cash flow issues with the objective of reducing the
existing diversity in practice. ASU 2016-15 is effective for the Company beginning January 1, 2018. The adoption of ASU 2014-09
is not expected to have a material impact on the Company’s consolidated financial statements.
The Company does not believe that other standards which have been
issued but are not yet effective will have a significant impact on its financial statements.
The components of the Company’s investment properties and
the related accumulated depreciation information follow:
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|
December 31, 2017
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
Office building and other commercial property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Office - (Coconut Grove, FL) – Building
|
|
$
|
652,198
|
|
|
$
|
341,266
|
|
|
$
|
310,931
|
|
|
Corporate Office – (Coconut Grove, FL) – Land
|
|
|
325,000
|
|
|
|
—
|
|
|
|
325,000
|
|
|
Other (Hopkinton, RI) – Land (50 acres)
|
|
|
109,845
|
|
|
|
—
|
|
|
|
109,845
|
|
|
Other (Montpelier, Vermont) – Building
|
|
|
52,000
|
|
|
|
52,000
|
|
|
|
—
|
|
|
Other (Montpelier, Vermont) - Land and improvements (5.4 acres)
|
|
|
111,689
|
|
|
|
—
|
|
|
|
111,689
|
|
|
|
|
$
|
1,250,731
|
|
|
$
|
393,266
|
|
|
$
|
857,464
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
Office building and other commercial property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Office - (Coconut Grove, FL) – Building
|
|
$
|
652,198
|
|
|
$
|
325,868
|
|
|
$
|
326,330
|
|
|
Corporate Office – (Coconut Grove, FL) – Land
|
|
|
325,000
|
|
|
|
—
|
|
|
|
325,000
|
|
|
Other (Hopkinton, RI) – Land (50 acres)
|
|
|
82,348
|
|
|
|
—
|
|
|
|
82,348
|
|
|
Other (Paxton, MA) – Land (20,000 square feet)
|
|
|
18,982
|
|
|
|
—
|
|
|
|
18,982
|
|
|
Other (Montpelier, Vermont) – Building
|
|
|
52,000
|
|
|
|
52,000
|
|
|
|
—
|
|
|
Other (Montpelier, Vermont) - Land and improvements (5.4 acres)
|
|
|
111,689
|
|
|
|
—
|
|
|
|
111,689
|
|
|
|
|
$
|
1,242,217
|
|
|
$
|
377,868
|
|
|
$
|
864,349
|
|
In July 2017 CII sold a 20,000 square foot
undeveloped residential parcel of land located in Paxton, Massachusetts for approximately $44,000 and recognized a gain of approximately
$10,000. There were no sales of property in 2016.
|
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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 income. Included
in investments in marketable securities is approximately $2.96 million and $6.25 million of large capital real estate investment
trusts (REITs) as of December 31, 2017 and 2016, respectively.
For the years ended December 31, 2017 and 2016, net unrealized gains
(losses) on trading securities were approximately $199,000 and ($21,000), respectively.
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
Description
|
|
Cost
Basis
|
|
|
Fair
Value
|
|
|
Unrealized
Gain
|
|
|
Cost
Basis
|
|
|
Fair
Value
|
|
|
Unrealized
Gain
|
|
|
Real Estate Investment Trusts
|
|
$
|
2,848,000
|
|
|
$
|
2,958,000
|
|
|
$
|
110,000
|
|
|
$
|
6,197,000
|
|
|
$
|
6,249,000
|
|
|
$
|
52,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds, ETF & other
|
|
|
258,000
|
|
|
|
290,000
|
|
|
|
32,000
|
|
|
|
222,000
|
|
|
|
244,000
|
|
|
|
22,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Equity Securities
|
|
|
650,000
|
|
|
|
785,000
|
|
|
|
135,000
|
|
|
|
525,000
|
|
|
|
544,000
|
|
|
|
19,000
|
|
|
Total Equity Securities
|
|
|
3,756,000
|
|
|
|
4,033,000
|
|
|
|
276,000
|
|
|
|
6,944,000
|
|
|
|
7,037,000
|
|
|
|
93,000
|
|
|
Debt Securities
|
|
|
485,000
|
|
|
|
517,000
|
|
|
|
32,000
|
|
|
|
696,000
|
|
|
|
713,000
|
|
|
|
17,000
|
|
|
Total
|
|
$
|
4,241,000
|
|
|
$
|
4,550,000
|
|
|
$
|
309,000
|
|
|
$
|
7,640,000
|
|
|
$
|
7,750,000
|
|
|
$
|
110,000
|
|
As of December 31, 2017, debt securities are scheduled to mature
as follows:
|
|
|
Cost
|
|
|
Fair Value
|
|
|
2018 – 2022
|
|
$
|
47,000
|
|
|
$
|
51,000
|
|
|
2023 – 2027
|
|
|
177,000
|
|
|
|
188,000
|
|
|
2028 – thereafter
|
|
|
261,000
|
|
|
|
278,000
|
|
|
|
|
$
|
485,000
|
|
|
$
|
517,000
|
|
Net gain (loss) from investments in marketable securities for the
years ended December 31, 2017 and 2016 is summarized below:
|
Description
|
|
2017
|
|
|
2016
|
|
|
Net realized gains from sales of marketable securities
|
|
$
|
62,000
|
|
|
$
|
271,000
|
|
|
Net unrealized gains (losses) from marketable securities
|
|
|
199,000
|
|
|
|
(21,000
|
)
|
|
Total net gains from investments in marketable securities
|
|
$
|
261,000
|
|
|
$
|
250,000
|
|
Net realized gain from sales of marketable securities consisted
of approximately $364,000 of gains net of $302,000 of losses for the year ended December 31, 2017. The comparable amounts in fiscal
year 2016 were approximately $648,000 of gains net of $377,000 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 of marketable securities on hand are recorded in 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.
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 do not meet the criteria of accounting
under the equity method and accordingly are carried at cost less distributions and other than temporary unrealized losses.
The Company’s portfolio of other investments consists of approximately
46 individual investments primarily in limited partnerships with varying investment objectives and focus. Management has categorized
these investments by investment focus: technology and communications, diversified businesses, real estate related and other.
As of December 31, 2017, and 2016, other investments had an aggregate
carrying value of $6.4 million and $5.3 million, respectively. As of December 31, 2017, the Company has committed to fund an additional
$2.4 million as required by agreements with current investees or for new investments. The carrying value of these investments is
equal to contributions less distributions and other than temporary impairment loss adjustments. During the years ended December
31, 2017 and 2016 the Company made contributions in these investments of approximately $2.1 million and $2.2 million, respectively,
and received distributions of $1.5 million and $1.1 million, respectively.
The Company’s other investments are summarized below.
|
|
|
Carrying values as of December 31,
|
|
|
Investment Focus
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Technology and communications
|
|
$
|
163,000
|
|
|
$
|
172,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified businesses
|
|
|
2,615,000
|
|
|
|
2,601,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate and related
|
|
|
2,999,000
|
|
|
|
1,900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (primarily private banks)
|
|
|
635,000
|
|
|
|
635,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,412,000
|
|
|
$
|
5,308,000
|
|
The Company regularly reviews the underlying assets in its investment
portfolio for events, including but not limited to bankruptcies, closures and declines in estimated fair value, that may indicate
the investment has suffered other-than-temporary decline in value. When a decline is deemed other-than-temporary, an investment
loss is recognized.
Net income from other investments is summarized below (excluding
other than temporary impairment loss):
|
|
|
2017
|
|
|
2016
|
|
|
Income from investment in 49% owned affiliate (a)
|
|
$
|
70,000
|
|
|
$
|
12,000
|
|
|
Real estate and related (b)
|
|
|
224,000
|
|
|
|
148,000
|
|
|
Diversified businesses (c)
|
|
|
270,000
|
|
|
|
231,000
|
|
|
Technology and related
|
|
|
27,000
|
|
|
|
(13,000
|
)
|
|
Total net income from other investments
|
|
$
|
591,000
|
|
|
$
|
378,000
|
|
(a) This gain represents income from the Company’s 49%
owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”). The increase in gain from TGIF in 2017 as compared with 2016 is primarily
due to gains on disposition of other real estate investments. In 2017 and 2016 TGIF declared and paid a cash dividend, the Company’s
portion of which was approximately $193,000 each year. These dividends were recorded as reduction in the investment carrying value
as required under the equity method of accounting for investments.
(b) The gain in 2017 and 2016 consists primarily of cash distributions
from an investment in real estate partnership which distributed proceeds from sales of its real estate.
(c) The gain in 2017 and 2016 consists of cash distributions
from various investments in partnerships owning diversified businesses which made cash distributions from the sale or refinancing
of operating companies and/or distributions from operating activities.
Other than temporary impairment losses from other investments
For the year ended December 31, 2017, there were no valuation losses
from other than temporary impairment losses from other investments. For the year ended December 31, 2016, valuation losses from
other than temporary impairment losses from other investments of $69,000 were recorded, consisting of a valuation loss from an
investment in a limited liability company which invests in medical technology and experienced other than temporary impairment loss.
Net gain 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.
The following tables present gross unrealized losses and fair values
for those investments that were in an unrealized loss position as of December 31, 2017 and 2016, aggregated by investment
category and the length of time that investments have been in a continuous loss position:
|
|
|
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
|
)
|
|
|
|
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
|
)
|
|
|
5.
|
FAIR VALUE 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 the years ended December 31, 2017 and 2016, using quoted prices in active markets
for identical assets (Level 1) and significant other observable inputs (Level 2). For the year ended December 31, 2017 and 2016,
there were no major assets or liabilities measured at fair value on a recurring basis which uses significant unobservable inputs
(Level 3):
|
|
|
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
|
|
|
$
|
—
|
|
|
|
|
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.
6. INVESTMENT IN AFFILIATE
Investment in affiliate consists of CII’s 49% equity interest
in T.G. I.F. Texas, Inc. (“T.G.I.F.”). T.G.I.F. is a corporation which holds promissory notes receivable from its shareholders,
including CII and Maurice Wiener, the Chairman of both the Company and T.G.I.F. Reference is made to Note 9 for discussion on notes
payable by CII to T.G.I.F. This investment is recorded under the equity method of accounting. For the years ended December 31,
2017 and 2016, income from investment in affiliate amounted to approximately $70,000 and $12,000, respectively and is included
in net income from other investments in HMG’s consolidated statements of income. The increase in gain from TGIF in 2017 as
compared with 2016 is primarily due to gains on disposition of other real estate investments. In 2017 and 2016 T.G.I.F. declared
and paid a cash dividend of $.07 per share. CII’s dividend amount received was approximately $193,000 each year. This dividend
is recorded as a reduction in the carrying amount of CII investment in T.G.I.F. as required under the equity method of accounting.
7. LOANS, NOTES AND OTHER RECEIVABLES
|
|
|
As of December 31,
|
|
|
Description
|
|
2017
|
|
|
2016
|
|
|
Promissory note and accrued interest due from purchaser of Grove Isle (a)
|
|
$
|
1,034,000
|
|
|
$
|
1,034,000
|
|
|
Promissory note and accrued interest due from entity owning apartments (b)
|
|
|
500,000
|
|
|
|
500,000
|
|
|
Promissory note and accrued interest due from individual (c)
|
|
|
-
|
|
|
|
78,000
|
|
|
Other
|
|
|
28,000
|
|
|
|
11,000
|
|
|
Total loans, notes and other receivables
|
|
$
|
1,562,000
|
|
|
$
|
1,623,000
|
|
|
|
(a)
|
In February 2013, the Company sold its interest in a hotel, resort and marina property known as Grove Isle and received a $1
million promissory note from the purchaser as part of the purchase proceeds. This note bears interest of 4% per annum and will
mature upon the earlier of ten years (February 25, 2023) or when any expansion or development occurs at Grove Isle (as defined
in the purchase agreement). All interest due on this loan has been collected.
|
|
|
(b)
|
In May 2016 the Company loaned $500,000 to an entity owned by a local real estate developer who is well known to the Company
for the purposes of purchasing apartment units located in Jacksonville, Florida. Nine of the purchased apartment units were provided
as collateral on the loan. The promissory note bears interest at 9.5% per annum payable on a quarterly basis beginning July 1,
2016. The loan matures on April 28, 2021, at which time all unpaid principal and interest is due. All interest due on the loan
has been received.
|
|
|
(c)
|
In December 2007, the Company loaned $400,000 to the same local real estate developer mentioned above and which loan was secured
by numerous real estate interests. All principal and interest were paid on a timely basis by the borrower throughout the life of
the loan. In 2017 the remaining principal and interest outstanding was collected, and the loan collateral was released.
|
|
|
8.
|
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 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 or the “Borrower”, 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 construction of the apartments containing 240 units totaling approximately 239,000
net rentable square feet on a 9.5-acre site located in Orlando, Florida ("Project"). Construction of the Project which
commenced in June 2015, and occupancy began in June 2016. As of December 31, 2017, the Company was in compliance with all debt
covenants. Repayment of the construction was made upon closing of the sale of the Project in February 2018. Approximately 97% of
the Project was leased as of December 31, 2017. For the years ended December 31, 2017 and 2016 JY-TV reported net losses of approximately
657,000 and $849,000, respectively, which includes depreciation and amortization expense of $1.1 million $712,000, respectively,
and interest expense of $1.5 million and $289,000, respectively. The Company’s portion of JY-TV’s losses for fiscal
years 2017 and 2016 was approximately $219,000 and $283,000, respectively.
As previously reported on Form 8-K dated February
20, 2018, JY-TV Associates, LLC, a Florida limited liability company (“JY-TV”) (“Seller”) and 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 and 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 estimated
gain on the sale to HMG is approximately $6.1 million before the incentive fee (or $6.00 per share).
This investment is accounted for under the equity method.
|
|
9.
|
NOTES AND ADVANCES DUE FROM AND TRANSACTIONS WITH RELATED
PARTIES
|
The Company has an agreement (the “Agreement”) with
HMGA, Inc. (the “Adviser”) for its services as investment adviser and administrator of the Company’s affairs.
All officers of the Company who are officers of the Adviser are compensated solely by the Adviser for their services.
The Adviser is majority owned by Mr. Wiener, the Company’s
Chairman, CEO and President. Mr. Wiener is the Chairman of the Board, President and Chief Executive Officer of HMGA; and Carlos
Camarotti is its Vice President - Finance and Assistant Secretary.
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.
In August 2017, the shareholders approved the renewal of the
Advisory Agreement between the Company and the Adviser for a term commencing January 1, 2018 and expiring December 31, 2018, under
the same terms as in 2017.
For the years ended December 31, 2017 and 2016, the Company
incurred Adviser fees of approximately $703,000 and $726,000, respectively, of which $660,000 represented regular compensation
for 2017 and 2016. In 2017 and 2016 Advisor fees include approximately $43,000 and $66,000 in incentive fee compensation, respectively.
The Adviser leases its executive offices from CII pursuant to
a lease agreement. This lease agreement calls for base rent of $55,566 per year payable in equal monthly installments. Additionally,
the Adviser is responsible for all utilities, certain maintenance, and security expenses relating to the leased premises. In 2017,
the lease term was extended two years, expiring in December 2019.
Mr. Wiener is a 19% shareholder and the chairman and director
of T.G.I.F. Texas, Inc., a 49% owned affiliate of CII. As of December 31, 2017, and 2016, T.G.I.F. had amounts due from CII in
the amount of approximately $1,550,000 and $1,600,000, respectively. These amounts are due on demand and bear interest at the prime
rate (4.5 % at December 31, 2017). All interest due has been paid.
As of December 31, 2017, and 2016, T.G.I.F. owns 10,200 shares
of the Company’s common stock.
As of December 31, 2017, and 2016, T.G.I.F. had amounts due
from Mr. Wiener in the amount of approximately $707,000. These amounts bear interest at the prime rate (4.5% at December 31, 2017)
and principal and interest are due on demand. All interest due has been paid.
Mr. Wiener received consulting and director’s fees from
T.G.I.F totaling approximately $29,000 and $25,000 for each of the years ended December 31, 2017 and 2016, respectively.
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.
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.
As previously reported, in January 2017 and 2016, the Company
paid a cash dividend of approximately $501,000 and $517,000 (or $.50 per share) to shareholders of record as of December 29, 2016
and December 31, 2015, respectively. The dividends were a return of capital to shareholders. No dividends were declared for the
year ended December 31, 2017.
As of December 31, 2017, the Company, excluding its taxable
REIT subsidiary, CII, has an estimated tax net operating loss carryover (NOL) estimated at $1.4 million.
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 December 31,
2017, and 2016, the Company has a net deferred tax liability of approximately $84,000 and $76,000, respectively, 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 and is fully reserved due to due to CII historically having tax losses.
The components of income before income taxes and the effect
of adjustments to tax computed at the federal statutory rate for the years ended December 31, 2017 and 2016 were as follows:
|
|
|
2017
|
|
|
2016
|
|
|
Loss before income taxes
|
|
$
|
(294,000
|
)
|
|
$
|
(538,000
|
)
|
|
Computed tax at federal statutory rate of 34%
|
|
$
|
(100,000
|
)
|
|
$
|
(183,000
|
)
|
|
State taxes
|
|
|
9,000
|
|
|
|
(16,000
|
)
|
|
REIT related adjustments
|
|
|
152,000
|
|
|
|
199,000
|
|
|
Adjustment to valuation allowance
|
|
|
(152,000
|
)
|
|
|
(149,000
|
)
|
|
Revaluation of deferred items due to federal rate change
|
|
|
85,000
|
|
|
|
-
|
|
|
Other items, net
|
|
|
17,000
|
|
|
|
37,000
|
|
|
Provision for (benefit from) income taxes
|
|
$
|
11,000
|
|
|
$
|
(112,000
|
)
|
The REIT related adjustments represent the difference between
estimated taxes on undistributed income and/or capital gains and book taxes computed on the REIT’s income before income taxes,
including tax on prohibited REIT income.
The provision for (benefit from) income taxes in the consolidated
statements of comprehensive income consists of the following:
|
Year ended December 31,
|
|
2016
|
|
|
2017
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,000
|
)
|
|
$
|
28,000
|
|
|
State
|
|
|
5,000
|
|
|
|
-
|
|
|
|
|
|
3,000
|
|
|
|
28,000
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
168,000
|
|
|
$
|
9,000
|
|
|
State
|
|
|
8,000
|
|
|
|
-
|
|
|
|
|
|
176,000
|
|
|
|
9,000
|
|
|
Reduced valuation allowance
|
|
|
(168,000
|
)
|
|
|
(149,000
|
)
|
|
Total
|
|
$
|
11,000
|
|
|
($
|
112,000
|
)
|
As of December 31, 2017, and 2016, the components of the deferred
tax assets and liabilities are as follows:
|
|
|
As of December 31, 2017
Deferred tax
|
|
|
As of December 31, 2016
Deferred tax
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Net operating loss carry forward
|
|
$
|
223,000
|
|
|
|
|
|
|
$
|
391,000
|
|
|
|
|
|
|
Excess of book basis of 49% owned corporation over tax basis
|
|
|
|
|
|
$
|
281,000
|
|
|
|
|
|
|
$
|
393,000
|
|
|
Unrealized gain on marketable securities
|
|
|
-
|
|
|
|
50,000
|
|
|
|
-
|
|
|
|
22,000
|
|
|
Excess of tax basis over book basis of other investments
|
|
|
247,000
|
|
|
|
-
|
|
|
|
339,000
|
|
|
|
-
|
|
|
Valuation allowance
|
|
|
(223,000
|
)
|
|
|
|
|
|
|
(391,000
|
)
|
|
|
|
|
|
Totals
|
|
$
|
247,000
|
|
|
$
|
331,000
|
|
|
$
|
339,000
|
|
|
$
|
415,000
|
|
