NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2018 and 2017
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 after completing the environmental remediation of the land.
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, 2018 and 2017. 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, 2018 and 2017 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:
|
|
•
|
Level 1 – Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
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.
|
|
|
•
|
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, 2018 and 2017, 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, 2018, there was no such margin balance outstanding. As of December 31,
2017, there was approximately $267,000 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, 2018, there was approximately $9.9 million in margin such margin balances outstanding.
As of December 31, 2017, there was no such margin balance 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, 2018, and 2017, 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 1,600 and 12,500 stock options outstanding as of December 31, 2018
and 2017, respectively. The 2018 and 2017 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 February 2018, JY-TV sold its residential apartments located
in Orlando, Florida for cash. The Company’s portion of the gain on sale of real estate for this property was approximately
$5.5 million (or $5.40 per share), net of incentive fee.
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.
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, 2018, we had no bank deposits in excess
of federally insured limits. As of December 31, 2017, we had approximately $52,000 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, 2018 and 2017 is as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Noncontrolling interest balance at beginning of year
|
|
$
|
233,000
|
|
|
$
|
223,000
|
|
|
Noncontrolling partners’ interest in operating gains of CII
|
|
|
7,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest balance at end of year
|
|
$
|
240,000
|
|
|
$
|
233,000
|
|
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 2018, the lease was renewed for one year with two one-year extension options expiring on December 1, 2021,
with an increase of 5% in rent for each year extended. Beginning in December 2018 the base rent is $58,344 per year payable in
equal monthly installments plus sales tax 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 2018 and 2017.
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. 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. This guidance became effective January 1, 2018 and did not have a material impact on the Company’s consolidated
financial statements.
In June 2018, the FASB issued ASU 2018-07, “Compensation –
Stock Compensation (Topic 718).” ASU 2018-07 simplifies the accounting for nonemployee stock-based payment transactions.
This ASU is effective for public entities for interim and annual reporting periods beginning after December 15, 2018, and early
application is permitted. The Company has evaluated the potential impact of this guidance and does not believe it will have a material
impact on the Company’s consolidated financial statements.
The Company does not believe that any recently issued, but not yet
effective accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial
position, results of operations and cash flows.
2. INVESTMENT PROPERTIES
The components of the Company’s investment properties and
the related accumulated depreciation information follow:
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
Office building and other commercial property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Office - (Coconut Grove, FL) – Building
|
|
$
|
652,197
|
|
|
$
|
356,664
|
|
|
$
|
295,533
|
|
|
Corporate Office – (Coconut Grove, FL) – Land
|
|
|
325,000
|
|
|
|
—
|
|
|
|
325,000
|
|
|
Other (Hopkinton, RI) – Land (50 acres)
|
|
|
142,976
|
|
|
|
—
|
|
|
|
142,976
|
|
|
Other (Montpelier, Vermont) – Building
|
|
|
52,000
|
|
|
|
52,000
|
|
|
|
—
|
|
|
Other (Montpelier, Vermont) - Land and improvements (5.4 acres)
|
|
|
111,689
|
|
|
|
—
|
|
|
|
111,689
|
|
|
|
|
$
|
1,283,862
|
|
|
$
|
408,664
|
|
|
$
|
875,198
|
|
|
|
|
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 (6.0 acres)
|
|
|
111,689
|
|
|
|
—
|
|
|
|
111,689
|
|
|
|
|
$
|
1,250,731
|
|
|
$
|
393,266
|
|
|
$
|
857,464
|
|
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.
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 $1.76 million and $2.96 million of large capital real estate investment
trusts (REITs) as of December 31, 2018 and 2017, respectively.
For the years ended December 31, 2018 and 2017, net unrealized (losses)
gains on trading securities were approximately ($454,000) and $199,000, respectively.
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
Description
|
|
Cost
Basis
|
|
|
Fair
Value
|
|
|
Unrealized
Gain
|
|
|
Cost
Basis
|
|
|
Fair
Value
|
|
|
Unrealized
Gain
|
|
|
Real Estate Investment Trusts
|
|
$
|
1,888,000
|
|
|
$
|
1,760,000
|
|
|
$
|
(128,000
|
)
|
|
$
|
2,848,000
|
|
|
$
|
2,958,000
|
|
|
$
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual Funds, ETF & other
|
|
|
210,000
|
|
|
|
206,000
|
|
|
|
(4,000
|
)
|
|
|
258,000
|
|
|
|
290,000
|
|
|
|
32,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Equity Securities
|
|
|
606,000
|
|
|
|
608,000
|
|
|
|
2,000
|
|
|
|
650,000
|
|
|
|
785,000
|
|
|
|
135,000
|
|
|
Total Equity Securities
|
|
|
2,704,000
|
|
|
|
2,574,000
|
|
|
|
(130,000
|
)
|
|
|
3,756,000
|
|
|
|
4,033,000
|
|
|
|
276,000
|
|
|
Debt Securities
|
|
|
517,000
|
|
|
|
502,000
|
|
|
|
(15,000
|
)
|
|
|
485,000
|
|
|
|
517,000
|
|
|
|
32,000
|
|
|
Total
|
|
$
|
3,221,000
|
|
|
$
|
3,076,000
|
|
|
$
|
(145,000
|
)
|
|
$
|
4,241,000
|
|
|
$
|
4,550,000
|
|
|
$
|
309,000
|
|
As of December 31, 2018, debt securities are scheduled to mature
as follows:
|
|
|
Cost
|
|
|
Fair Value
|
|
|
2019 – 2023
|
|
$
|
111,000
|
|
|
$
|
110,000
|
|
|
2024 – 2028
|
|
|
153,000
|
|
|
|
146,000
|
|
|
2029 – thereafter
|
|
|
253,000
|
|
|
|
246,000
|
|
|
|
|
$
|
517,000
|
|
|
$
|
502,000
|
|
Net (loss) gain from investments in marketable securities for the
years ended December 31, 2018 and 2017 is summarized below:
|
Description
|
|
2018
|
|
|
2017
|
|
|
Net realized gains from sales of marketable securities
|
|
$
|
51,000
|
|
|
$
|
62,000
|
|
|
Net unrealized (losses) gains from marketable securities
|
|
|
(454,000
|
)
|
|
|
199,000
|
|
|
Total net (losses) gains from investments in marketable securities
|
|
$
|
(403,000
|
)
|
|
$
|
261,000
|
|
Net realized gain from sales of marketable securities consisted
of approximately $240,000 of gains net of $189,000 of losses for the year ended December 31, 2017. The comparable amounts in fiscal
year 2017 were approximately $364,000 of gains net of $302,000 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.
4. 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 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
45 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, 2018, and 2017, other investments had an aggregate
carrying value of $6.0 million and $6.4 million, respectively. As of December 31, 2018, the Company has committed to fund an additional
$1.0 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, 2018 and 2017 the Company made cash contributions in these investments of approximately $1.4 million and $2.1 million, respectively,
and received cash distributions of $1.8 million and $1.5 million, respectively.
The Company’s other investments are summarized below.
|
|
|
Carrying values as of December 31,
|
|
|
Investment Focus
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Technology and communications
|
|
$
|
150,000
|
|
|
$
|
163,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified businesses
|
|
|
2,372,000
|
|
|
|
2,615,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate and related
|
|
|
3,182,000
|
|
|
|
2,999,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (private banks and insurance company)
|
|
|
335,000
|
|
|
|
635,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
6,039,000
|
|
|
$
|
6,412,000
|
|
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.
Income from other investments is summarized below (excluding
other than temporary impairment loss):
|
|
|
2018
|
|
|
2017
|
|
|
Income from investment in 49% owned affiliate (a)
|
|
$
|
74,000
|
|
|
$
|
70,000
|
|
|
Real estate and related (b)
|
|
|
217,000
|
|
|
|
224,000
|
|
|
Diversified businesses (c)
|
|
|
63,000
|
|
|
|
270,000
|
|
|
Other (private banks) (d)
|
|
|
34,000
|
|
|
|
-
|
|
|
Technology and related
|
|
|
-
|
|
|
|
27,000
|
|
|
Total income from other investments
|
|
$
|
388,000
|
|
|
$
|
591,000
|
|
(a) This
gain represents income from the Company’s 49% owned affiliate, T.G.I.F. Texas, Inc. (“TGIF”). In 2018 and 2017
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 2018 was primarily from one investment in a partnership owning rental apartments in San Antonio, Texas which were sold
in March 2018 at a gain to the Company of approximately $105,000. Also included in the 2018 gain are cash distributions from investments
in real estate partnerships which distributed proceeds above their carrying value. The gain in 2017 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 2018 and 2017 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.
(d) In the first quarter
of 2018 the Company’s investments in two private banks experienced mergers with publicly traded larger banks and we received
stock in those publicly traded banks plus approximately $34,000 in cash. The cash portion was recorded as gain from other investments.
The bank securities we received from the mergers were mostly sold during 2018 at a total gain of approximately $136,000 which is
included in gains from sales of marketable securities. A portion of the shares received from the mergers are being held in our
marketable securities portfolio at the carrying value equal to our original investment in the private banks (with an unrealized
gain of approximately $14,000 as of December 31, 2018).
Other than temporary impairment losses from other investments
For the year ended December 31, 2018 and 2017, there were no valuation
losses from other than temporary impairment losses from other investments.
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, 2018 and 2017, aggregated by investment
category and the length of time that investments have been in a continuous loss position:
|
|
|
As of December 31, 2018
|
|
|
|
|
12 Months or Less
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
|
Investment Description
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Partnerships owning investments in technology related industries
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
Partnerships owning investments in diversified businesses
|
|
|
273,000
|
|
|
|
(27,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
273,000
|
|
|
|
(27,000
|
)
|
|
Total
|
|
$
|
273,000
|
|
|
$
|
(27,000
|
)
|
|
$
|
132,000
|
|
|
$
|
(18,000
|
)
|
|
$
|
405,000
|
|
|
$
|
(45,000
|
)
|
|
|
|
As of December 31, 2017
|
|
|
|
|
12 Months or Less
|
|
|
Greater than 12 Months
|
|
|
Total
|
|
|
Investment Description
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Partnerships owning investments in technology related industries
|
|
|
138,000
|
|
|
$
|
(24,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
138,000
|
|
|
$
|
(24,000
|
)
|
|
Total
|
|
$
|
138,000
|
|
|
$
|
(24,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
138,000
|
|
|
$
|
(24,000
|
)
|
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, 2018 and 2017, using quoted prices in active markets
for identical assets (Level 1) and significant other observable inputs (Level 2). For the year ended December 31, 2018 and 2017,
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,
2018
|
|
|
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
355,000
|
|
|
$
|
-
|
|
|
$
|
355,000
|
|
|
$
|
—
|
|
|
Money market mutual funds
|
|
|
1,594,000
|
|
|
|
1,594,000
|
|
|
|
—
|
|
|
|
—
|
|
|
US T-bills
|
|
|
17,429,000
|
|
|
|
17,429,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
502,000
|
|
|
|
—
|
|
|
|
502,000
|
|
|
|
—
|
|
|
Marketable equity securities
|
|
|
2,574,000
|
|
|
|
2,574,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Total assets
|
|
$
|
22,454,000
|
|
|
$
|
21,597,000
|
|
|
$
|
857,000
|
|
|
$
|
—
|
|
|
|
|
Fair value measurement at reporting date using
|
|
|
Description
|
|
Total
December 31,
2017
|
|
|
Quoted Prices in Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
$
|
352,000
|
|
|
$
|
—
|
|
|
$
|
352,000
|
|
|
$
|
—
|
|
|
Money market mutual funds
|
|
|
1,633,000
|
|
|
|
1,633,000
|
|
|
|
—
|
|
|
|
—
|
|
|
US T-bills
|
|
|
2,935,000
|
|
|
|
2,935,000
|
|
|
|
—
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
517,000
|
|
|
|
—
|
|
|
|
517,000
|
|
|
|
—
|
|
|
Marketable equity securities
|
|
|
4,033,000
|
|
|
|
4,033,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Total assets
|
|
$
|
9,470,000
|
|
|
$
|
8,601,000
|
|
|
$
|
869,000
|
|
|
$
|
—
|
|
Carrying amount is the estimated fair value for corporate debt securities
and time deposits based on a market-based approach using observable (Level 2) inputs such as prices of similar assets in active
markets.
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,
2018 and 2017, income from investment in affiliate amounted to approximately $74,000 and $70,000, respectively and is included
in income from other investments in HMG’s consolidated statements of income. In 2018 and 2017 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
|
|
2018
|
|
|
2017
|
|
|
Promissory note and accrued interest due from purchaser of Grove Isle (a)
|
|
$
|
1,034,000
|
|
|
$
|
1,034,000
|
|
|
Promissory note and accrued interest collateralized by 2
nd
mortgage on raw land (b)
|
|
|
503,000
|
|
|
|
-
|
|
|
Promissory note and accrued interest due from individual (c)
|
|
|
252,000
|
|
|
|
-
|
|
|
Promissory note and accrued interest due from entity owning apartments (d)
|
|
|
-
|
|
|
|
500,000
|
|
|
Other
|
|
|
8,000
|
|
|
|
28,000
|
|
|
Total loans, notes and other receivables
|
|
$
|
1,797,000
|
|
|
$
|
1,562,000
|
|
|
|
(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 December 2018, the Company loaned $500,000 to an entity controlled by a local real estate developer. The loan is collateralized by a second mortgage on raw land located in Lauderhill, Florida. The promissory note bears
interest at 8.5% per annum and calls for interest only payments due on a quarterly basis beginning March 4, 2019 and continuing
through maturity date of June 4, 2020 when all principal and unpaid interest becomes due.
|
|
|
(c)
|
In December 2018, the Company (through CII) loaned $250,000 to the same local real estate developer mentioned in (b) above.
This loan bears interest of 8.5% per annum and all principal and accrued interest is due at maturity on June 4, 2020. The loan
is secured by an assignment of a promissory note due to the borrower of approximately $655,000.
|
|
|
(d)
|
In May 2016, the Company loaned $500,000 to an entity owned
by the same local real estate developer mentioned in (b) 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 principal and accrued interest was paid off in June
2018.
|
8. INVESTMENT IN RESIDENTIAL REAL ESTATE PARTNERSHIP
As previously reported on Form 8-K dated February 20, 2018, JY-TV
Associates, LLC, a Florida limited liability company (“JY-TV”) (“Seller”) an entity one-third owned by
HMG, completed the sale of its multi-family residential apartments located in Orlando, Florida pursuant to the previously reported
Agreement of Sale (the “Agreement”) to Murano 240, LLC (as per an Assignment and Assumption of Agreement of Sale with
Cardone Real Estate Acquisitions, LLC), a Delaware limited liability company, an unrelated entity (“Purchaser”). The
final sales price was $50,150,000 and the sales proceeds were received in cash and payment of outstanding debt. The gain on the
sale to HMG was approximately $5.5 million, net of the incentive fee.
For the year ended December 31, 2018 JY-TV reported net income of
approximately $17.8 million, which includes approximately $18.2 million in gain on sale of property, depreciation and amortization
expense of $447,000, interest expense of $159,000, write-off of certain prepaid and other assets upon the sale of property of approximately
$100,000 and other net operating revenues. The Company’s portion of JY-TV’s net income is approximately $5.9 million
($137,000 of loss from operations and $6.1 million in gain on sale of property (before the $608,000 incentive fee). JY-TV made
distributions totaling $21.75 million in February 2018. The Company’s portion of those distributions was $7.25 million. In
June and December 2018 JY-TV made additional distributions of $1,125,000, of which the Company’s portion was $375,000. Final
accounting has been completed and a final distribution from JY-TV of approximately $6,000 is expected in 2019.
For the year ended December 31, 2017 JY-TV reported a net loss of
approximately $657,000, which includes depreciation and amortization expense of $1.1 million and interest expense of $1.5 million.
The Company’s portion of that loss is approximately $224,000. In March 2017, JY-TV distributed $390,000 to its members. The
Company’s portion of that distribution was $130,000.
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 June 2018, the shareholders approved the renewal of the Advisory
Agreement between the Company and the Adviser for a term commencing January 1, 2019 and expiring December 31, 2019, under the same
terms as in 2018.
For the years ended December 31, 2018 and 2017, the Company and
its subsidiaries incurred Adviser fees of approximately $1,300,000 and $703,000, respectively. This consisted of $660,000 in regular
compensation for 2018 and 2017, and $640,000 and $43,000 in incentive fee compensation for 2018 and 2017, respectively.
The Adviser leases its executive offices from CII pursuant to a
lease agreement. This lease agreement calls for base rent of $58,344 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 December
2018, the lease was renewed for one year with two one-year extension options with an increase in rent of 5% per year.
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, 2018, and 2017, T.G.I.F. had amounts due from CII in the
amount of approximately $1,340,000 and $1,550,000, respectively. These amounts are due on demand and bear interest at the prime
rate (5.5 % at December 31, 2018). All interest due has been paid.
As of December 31, 2018, and 2017, T.G.I.F. owns 10,200 shares of
the Company’s common stock.
As of December 31, 2018, and 2017, 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 (5.5% at December 31, 2018) 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 $35,000 and $29,000 for the years ended December 31, 2018 and 2017, respectively.
10. INCOME TAXES
The Company as a qualifying real estate investment trust (“REIT”)
distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not
required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be
carried forward to reduce future taxable income but cannot be carried back.
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.
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 is payable on March 30, 2018 to all shareholders of record as of March 21, 2018.
There were no dividends declared for the year ended December 31,
2017.
On December 19, 2016 the Company declared a return of capital dividend
of $.50 per share which was paid on January 9, 2017 to all shareholders of record as of December 29, 2016.
As of December 31, 2017, the Company, excluding CII (its taxable
REIT subsidiary), had an estimated tax net operating loss carryover (NOL) of approximately $1.7 million which was carried forward
to 2018.
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, 2018, and 2017,
the Company has a net deferred tax liability of approximately $48,000 and $84,000, 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 $893,000 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, 2018 and 2017 were as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Income (loss)
before income taxes
|
|
$
|
4,091,000
|
|
|
$
|
(294,000
|
)
|
|
Computed tax at federal statutory rate of (21% in 2018 & 34% in 2017)
|
|
$
|
859,000
|
|
|
$
|
(100,000
|
)
|
|
State taxes
|
|
|
(9,000
|
)
|
|
|
9,000
|
|
|
REIT related adjustments
|
|
|
(847,000
|
)
|
|
|
152,000
|
|
|
Adjustment to valuation allowance
|
|
|
(21,000
|
)
|
|
|
(152,000
|
)
|
|
Revaluation of deferred items due to federal rate change
|
|
|
-
|
|
|
|
85,000
|
|
|
Other items, net
|
|
|
(21,000
|
)
|
|
|
17,000
|
|
|
(Benefit from) provision for income taxes
|
|
$
|
(39,000
|
)
|
|
$
|
11,000
|
|
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 (benefit from) provision for income taxes in the consolidated
statements of income consists of the following:
|
Year ended December 31,
|
|
2018
|
|
|
2017
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
$
|
(2,000
|
)
|
|
State
|
|
$
|
(2,000
|
)
|
|
|
5,000
|
|
|
|
|
|
(2,000
|
)
|
|
|
3,000
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(10,000
|
)
|
|
$
|
168,000
|
|
|
State
|
|
|
(6,000
|
)
|
|
|
8,000
|
|
|
|
|
|
(16,000
|
)
|
|
|
176,000
|
|
|
Change in valuation allowance
|
|
|
(21,000
|
)
|
|
|
(168,000
|
)
|
|
Total
|
|
$
|
(39,000
|
)
|
|
$
|
11,000
|
|
As of December 31, 2018, and 2017, the components of the deferred
tax assets and liabilities are as follows:
|
|
|
As of December 31, 2018
Deferred tax
|
|
|
As of December 31, 2017
Deferred tax
|
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Net operating loss carry forward
|
|
$
|
202,000
|
|
|
|
|
|
|
$
|
223,000
|
|
|
|
|
|
|
Excess of book basis of 49% owned corporation over tax basis
|
|
|
|
|
|
$
|
281,000
|
|
|
|
|
|
|
$
|
281,000
|
|
|
Unrealized gain on marketable securities
|
|
|
5,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000
|
|
|
Excess of tax basis over book basis of other investments
|
|
|
228,000
|
|
|
|
-
|
|
|
|
247,000
|
|
|
|
-
|
|
|
Valuation allowance
|
|
|
(202,000
|
)
|
|
|
|
|
|
|
(223,000
|
)
|
|
|
|
|
|
Totals
|
|
$
|
233,000
|
|
|
$
|
281,000
|
|
|
$
|
247,000
|
|
|
$
|
331,000
|
|
