HMG HMG Courtland Properties Incorporated

See notes to the condensed consolidated financial statements

See notes to the condensed consolidated financial statements

See notes to the condensed consolidated financial statements

HMG/COURTLAND PROPERTIES, INC. AND SUBSIDIARIES

In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements prepared in accordance with instructions for Form 10-Q, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the results for the periods presented. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. It is suggested that these condensed consolidated financial statements be read in conjunction with the Company's Annual Report for the year ended December 31, 2020. The balance sheet as of December 31, 2020 was derived from audited consolidated financial statements as of that date. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.

The condensed consolidated financial statements include the accounts of HMG/Courtland Properties, Inc. (the "Company") and entities in which the Company owns a majority voting interest or controlling financial interest. All material transactions and balances with consolidated and unconsolidated entities have been eliminated in consolidation or as required under the equity method.

Management continues monitoring and managing operations to timely react to potential impacts of the ongoing COVID-19 pandemic on our business, financial condition, liquidity, results of operations and prospects. The ultimate extent of any impact of the pandemic we may experience is highly uncertain and cannot be predicted with confidence.

During the quarter ended March 31, 2021, the value of our portfolio in marketable securities remained valued at approximately the same value as of December 31, 2020. We have made no substantial changes to our outlook regarding our marketable securities holdings from the prior year end. We experienced no further valuation impairments in our other investments during the current quarter. We will continue monitoring these investments to determine if any further valuation adjustments are necessary. Our construction project in Fort Myers, Florida was completed in March 2021 and is approximately 33% leased.

Our liquidity remains strong and able to support continuing operations, fund commitments in other investments and meet all other liabilities as they become due in the foreseeable future. We continue to seek and explore development opportunities primarily in the multi-family segment, together with qualified partners in various markets.

There are several new accounting pronouncements issued or proposed by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s condensed consolidated financial position, operating results, or cash flow.

Pursuant to the terms of a Construction and Mini Perm Loan Agreement ("Loan Agreement"), between Murano At Three Oaks Associates LLC, a Florida limited liability company formed in September 2018 (the “Borrower” or “Murano”) which is 25% owned by HMG, and PNC Bank, National Association ("Lender"), Lender provided a construction loan to the Borrower for the principal sum of approximately $41.59 million (“Loan”). The proceeds of the Loan were used to finance the construction of multi-family residential apartments containing 318 units totaling approximately 312,000 net rentable square feet on a 17.5-acre site located in Fort Myers, Florida ("Project"). The Project site was purchased by the Borrower concurrently with the closing of the Loan. Total development costs for the Project are estimated to come in at approximately $54.08 million, or approximately $2 million less than originally projected. The Borrower’s equity totals approximately $14.49 million. HMG’s share of the equity is 25%, or approximately $3.62 million. As of March 31, 2021, the outstanding balance on the Loan was approximately $36.59 million. The Project has been completed and a certificate of occupancy was obtained in March 2021. The Project is approximately 33% leased. For the three months ended March 31, 2021 Murano reported a net loss of $576,000 including $55,000 loss from operations (due to rent concessions which burned off by end of March 2021), depreciation and amortization of $383,000 and $138,000 of interest expense. HMG’s portion of the 2021 loss was approximately $144,000.

HMG and the other members (or affiliates thereof) of the Borrower ("Guarantors") entered into a Completion Guaranty ("Completion Guaranty") and a Guaranty and Suretyship Agreement ("Repayment Guaranty") (collectively, the “Guaranties”). Under the Completion Guaranty, each Guarantor shall unconditionally guaranty, as a primary obligor, and become surety for the prompt payment and performance by Borrower of the “Guaranteed Obligations” (as defined). Under the Repayment Guaranty, Guarantor unconditionally guarantees, as a primary obligor, and becomes surety for the prompt payment and performance of, as defined (i) all Interest Obligations, (ii) all Loan Document Obligations, (iii) all Expense Obligations, (iv) the Carrying Cost Obligations, (v) the Principal Amount, (vi) interest on each of the foregoing including, if applicable, interest at the Default Rate (as defined). At all times prior to the First Reduction Date (as defined below), the Guarantors are collectively responsible for 30% of the Principal Obligations, (ii) at all times after the First Reduction Date, the Guarantors are collectively responsible for 15% of the Principal Obligations, and (iii) at all times after the Second Reduction Date, 0% of the Principal Obligations. First Reduction Date occurs upon satisfaction of the following conditions: (i) no Event of Default has occurred and is continuing; (ii) Completion of Construction has occurred; and (iii) the Project has achieved a DSCR of not less than 1.25 to 1.00 for two (2) consecutive fiscal quarters.

Each Guarantor is required to maintain compliance with the following financial covenants, as defined: (1) liquidity shall not be less than $2.5 million. Liquidity is defined as the sum of unencumbered, unrestricted cash and cash equivalents and marketable securities, and (2) net worth shall not be less than $10 million. As of March 31, 2021, HMG was in compliance with all covenants required by Guarantors in the Loan Agreement.

The Company’s property located in Montpelier Vermont has completed the required environmental remediation as previously disclosed.  Groundwater monitoring is ongoing and will continue on a long term (annually or biannually) until levels of contaminants reach acceptable levels .  The costs of such monitoring are expected to be less than $4,000 per year. The owners agreed with a local developer on a fixed fee of $500,000 to remediate the property, of which a balance of approximately $61,000 is owed and payable upon the property receiving a Certificate of Completion (COC) from the State of Vermont Agency of Natural Resources (“ANR”).  The COC provides certain liability protections for environmental contamination at the property under Vermont’s Brownfields Reuse and Environmental Liability Limitation Act program (“BRELLA”). We are expecting to receive the COC sometime in the second quarter of 2021.

In August 2020, the existing owners of the property amended and restated the previously reported Pre-Development Agreement.  The Amended and Restated Pre-Development Agreement calls for the transfer of 50% of our interest in the property to the local developer which remediated the property and 10% to an unrelated real estate consultant which has assisted us in the process of remediating and developing the property.  The transfer of ownership will occur upon receipt of the COC and will result in the Company owning approximately 28% of the project thereafter.  Also, in August 2020, we entered into a lease agreement with an unrelated party which covers approximately 3.5 acres of land and existing improvements together with an expansion building of approximately 8,000 square feet. The term of the lease will commence on the earlier of: (a) 30 days after the date the project is substantially completed (as defined); or (b) the date that the tenant opens for business (the “Commencement Date”) and shall continue until the 10^th anniversary of the Commencement Date.  The lease provides the tenant the option to renew or extend the lease for two consecutive renewal terms of five years each.  Average gross annual rent over the ten-year initial term is approximately $229,000.  Under the terms of the lease the tenant is responsible for real estate taxes, insurance, and maintenance (except for capital repairs and replacements, as defined). The remainder of the property (approximately 2.5 acres) is subject to development limitations related to wetlands, the location of the Winooski River and institutional controls that have been or will be implemented to address contamination related to historical site operations.

On March 1, 2021 the project was completed, a certificate of occupancy was obtained, and the lease commenced upon tenant taking possession of the property. The total costs of renovation and construction is expected to be approximately $2.5 million (pending final accounting). The Company’s portion of the total costs (28% ownership) is approximately $695,000 of which $395,000 has been paid as of March 31, 2021 and $300,000 is accrued and not yet paid, including $164,000 accrued in this quarter. Loss from operations and estimated depreciation expense for the period ended March 31, 2021 was minimal.  

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 $1.61 million and $1.66 million in preferred stock of large capital real estate investment trusts (REITs) as of March 31, 2021 and December 31, 2020, respectively.

Net realized and unrealized gain from investments in marketable securities for the three months ended March 31, 2021 and 2020 is summarized below: 

For the three months ended March 31, 2021, net realized gains from sales of marketable securities of approximately $6,000 consisted of approximately $46,000 of gross gains net of $40,000 of gross losses. For the three months ended March 31, 2020, net realized losses from sales of marketable securities of approximately $27,000 consisted of approximately $39,000 of gross losses net of $12,000 of gross gains.

For the three months ended March 31, 2020, net unrealized loss from marketable securities of approximately $843,000 was primarily the result of the large decline in the overall U.S. stock market experienced as a result of business closures from the on-going pandemic. Our marketable securities have substantially recovered in 2021.

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.

As of March 31, 2021, the Company’s portfolio of other investments had an aggregate carrying value of approximately $5.22 million and we have committed to fund approximately $1.11 million as required by agreements with the investees. The carrying value of these investments is equal to contributions less distributions and impairment valuation adjustments, if any.

During the three months ended March 31, 2021, we made cash contributions to other investments of approximately $316,000. This consisted of $200,000 as an addition to our existing investment in a multi-family residential building located in Hollywood, Florida, $50,000 in a new co-investment in one of the existing portfolio companies of our diversified technology fund, and we committed a total of $500,000 (of which $40,000 was funded), in a new private equity fund which will invest in various technology innovators globally. We also funded approximately $26,000 in follow on commitments of existing investments.

During the three months ended March 31, 2021, we received cash distributions from other investments of approximately $81,000. This consisted of small distributions from existing investments.

Net income from other investments for the three months ended March 31, 2021 and 2020, is summarized below:

The following tables present gross unrealized losses and fair values for those investments that were in an unrealized loss position as of March 31, 2021 and December 31, 2020, aggregated by investment category and the length of time that investments have been in a continuous loss position:

When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis.

There were no OTTI adjustments for the three months ended March 31, 2021.

For the three months ended March 31, 2020, in accordance with ASC Topic 320-10-65, Recognition and Presentation of Other-Than-Temporary Impairments (“OTTI”), we have recognized $50,000 in an impairment valuation adjustment for an investment that has been in a continuous unrealized loss position for over 12 months. This investment is in a small business investment company licensed by the Small Business Administration in which we invested $300,000 in 2007. Distributions to date from this investment total $68,000. The carrying value of this investment is $182,000 after the OTTI adjustment.

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 as of March 31, 2021 and December 31, 2020, using quoted prices in active markets for identical assets (Level 1) and significant other observable inputs (Level 2). For the periods presented, there were no major assets measured at fair value on a recurring basis which uses significant unobservable inputs (Level 3):

Carrying amount is the estimated fair value for corporate debt securities and time deposits based on a market-based approach using observable (Level 2) inputs such as prices of similar assets in active markets.

The Company as a qualifying real estate investment trust (“REIT”) distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be carried forward to reduce future taxable income but cannot be carried back.

The Company’s 95%-owned taxable REIT subsidiary, CII, files a separate income tax return and its operations are not included in the REIT’s income tax return.

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 11, 2020 the Company declared a dividend of $0.50 per share (100% return of capital) which was payable on January 12, 2021 to all shareholders of record as of December 29, 2020.

On December 13, 2019 the Company declared a dividend of $0.50 per share (100% return of capital) which was payable on January 13, 2020 to all shareholders of record as of December 30, 2019.

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 basis of existing assets and liabilities. The effect on deferred income taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes only pertain to CII. As of March 31, 2021 and December 31, 2020, the Company reported a net deferred tax liability of $106,000, and $107,000, respectively. Deferred taxes are primarily a result of timing differences associated with the carrying value of the investment in affiliate (TGIF), other investments and investments in marketable securities.

The benefit from income taxes in the condensed consolidated statements of income consists of the following:

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 year ended December 31, 2020. The Company’s federal income tax returns since 2017 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 condensed consolidated financial statements as general and administrative expense.

During the three months ended March 31, 2021 and 2020 there were no options granted, expired or forfeited.

The following table summarizes information concerning outstanding and exercisable options as of March 31, 2021:

 As of March 31, 2021, the stock options outstanding and exercisable had no intrinsic value.