Critical Accounting Policies and Estimates.
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America requires us to make estimates and assumptions in applying our critical accounting policies that affect the reported amounts of assets and liabilities and the disclosure (if any) of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Our estimates and assumptions concern, among things, potential impairment of our other investments and other long-lived assets, uncertainties for Federal and state income tax and allowance for potential doubtful accounts. We evaluate those estimates and assumptions on an ongoing basis based on historical experience and on various other factors which we believe are reasonable under the circumstances. Note 1 of the consolidated financial statements, included elsewhere on this Form 10-K, includes a summary of the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. The Company believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the Company's consolidated financial statements:Marketable Securities . All unrealized gains and losses on the Company's investment portfolio are included in the Consolidated Statements of Income. Our investments in equity and debt marketable securities are carried at fair value and based on quoted market prices or other observable inputs. Marketable securities are subject to fluctuations in value in accordance with market conditions. Other Investments. The Company's other investments consist primarily of nominal equity interests in various privately held entities, including limited partnerships whose purpose is to invest venture capital funds in growth-oriented enterprises. The Company does not have significant influence over any investee and the Company's investment typically represents less than 3% of the investee's ownership. These investments generally do not meet the criteria of accounting under the equity method and are carried at cost less distributions and other than temporary unrealized losses. These investments do not have available quoted market prices, so we must rely on valuations and related reports and information provided to us by those entities for the purposes of determining other-than-temporary declines. These valuations are by their nature subject to estimates which could change significantly from period to period. The Company regularly reviews the underlying assets in its other investment portfolio for events, that may indicate the investment has suffered other-than-temporary decline in value including. These events include but are not limited to bankruptcies, closures and declines in estimated fair value. When a decline is deemed other-than-temporary, we permanently reduce the cost basis component of the investments to its estimated fair value, and the loss is recorded as a component of income from other investments. As such, any recoveries in the value of the investments will not be recognized until the investments are sold. We believe our estimates of each of these items historically have been adequate. However, due to uncertainties inherent in the estimation process, it is reasonably possible that the actual resolution of any of these items could vary significantly from the estimate and, accordingly, there can be no assurance that the estimates may not materially change in the near term. Real Estate. Land, buildings and improvements, furniture, fixtures and equipment are recorded at cost. Tenant improvements, which are included in buildings and improvements, are stated at cost. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Renovations and/or replacements, which improve or extend the life of the asset are capitalized and depreciated over the shorter of their estimated useful lives, or the remaining lease term (if leased). Depreciation is computed utilizing the straight-line method over the estimated useful lives of ten to forty years for buildings and improvements and five to ten years for furniture, fixtures and equipment. Tenant improvements are amortized on a straight-line basis over the shorter of the term of the related leases or the assets useful life. The Company is required to make subjective assessments as to the useful lives of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Should the Company lengthen the expected useful life of a particular asset, it would be depreciated over more years, and result in less depreciation expense and higher annual net income. Assessment by the Company of certain other lease related costs must be made when the Company has a reason to believe that the tenant will not be able to execute under the term of the lease as originally expected. The Company periodically reviews the carrying value of certain of its properties and long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected future cash flows of such assets or analyze the fair value of the asset, to determine if such sum or fair value is less than the carrying value of such assets to ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using quoted market prices, if available, for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets and would adjust the carrying value of the asset to fair value. Judgments as to impairments and assumptions used in projecting future cash flow are inherently imprecise. 8 Results of Operations: For the years endedDecember 31, 2019 and 2018, the Company reported net income of approximately$270,000 ($0.27 per share) and$4.1 million ($4.07 per share), respectively. Revenues:
Total revenues for the years ended
Expenses:
Total expenses for the year ended
Operating expenses of rental and other properties decreased by approximately$292,000 (or 68%). This decrease was primarily due to non-recurring costs to remediate the Company'sMontpelier, Vermont property as previously disclosed in Form 10-Q for the period endedSeptember 30, 2018 . The Company agreed to pay a fixed fee of$500,000 to a third-party local developer to implement the remediation plan. The Company's portion of the fixed fee is approximately 70%, or$350,000 . The remediation work began inDecember 2019 . General and administrative expenses for the year endedDecember 31, 2019 as compared to that of 2018 decreased by approximately$39,000 (or 18%) primarily due to non-recurring expenses approximately$56,000 expensed in 2018 relating to a proposed property development inOrlando, Florida did not proceed and was terminated.
Interest expense for the year ended
Other Income:
Net realized and unrealized gains from investments in marketable securities:
Net gain (loss) from investments in marketable securities, including marketable
securities distributed by partnerships in which the Company owns minority
positions, for the years ended
2019
2018
Net realized gain from sales of marketable securities$ 42,000 $ 51,000 Net unrealized gain (loss) from marketable securities
236,000 (454,000 )
Total net gain (loss) from investments in marketable securities
Net realized gain from sales of marketable securities consisted of approximately$108,000 of gains net of$66,000 of losses for the year endedDecember 31, 2019 . The comparable amounts in fiscal year 2018 were approximately$240,000 of gains net of$189,000 of losses. Consistent with the Company's overall current investment objectives and activities, the entire marketable securities portfolio is classified as trading (as defined byU.S generally accepted accounting principles). Unrealized gains or losses from marketable securities are recorded as other income in the Consolidated Statements of Income. Investment gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net earnings. However, the amount of investment gains or losses on marketable securities for any given period has no predictive value and variations in amount from period to period have no practical analytical value.
Investments in marketable securities give rise to exposure resulting from the volatility of capital markets. The Company attempts to mitigate its risk by diversifying its marketable securities portfolio.
Equity gain (loss) in residential real estate partnerships:
For the year endedDecember 31, 2019 a gain of approximately$4,000 represents our portion of interest income earned on funds invested inMurano At Three Oaks Associates LLC (Fort Myers, Florida ) prior to commencement of development. For the year endedDecember 31, 2018 (through the date of sale)JY-TV Associates LLC (Orlando, Florida ) reported a net loss from operations of approximately$411,000 , which includes depreciation and amortization expense of$447,000 and interest expense of$159,000 . The Company's portion of the 2018 loss from operations was approximately$137,000 . As previously reported on Form 8-K datedFebruary 20, 2018 ,JY-TV Associates, LLC , aFlorida limited liability company ("JY-TV") ("Seller") an entity one-third owned by HMG, completed the sale of its multi-family residential apartments located inOrlando, Florida pursuant to the previously reported Agreement of Sale (the "Agreement") toMurano 240, LLC (as per an Assignment and Assumption of Agreement of Sale withCardone Real Estate Acquisitions, LLC ), aDelaware limited liability company, an unrelated entity ("Purchaser"). The final sales price was$50,150,000 and the sales proceeds were received in cash and payment of outstanding debt. The gain on the sale to HMG was approximately$5.5 million , net of the incentive fee. 9
Income from other investments is summarized below (excluding other than temporary impairment losses):
2019
2018
Partnerships owning real estate and related investments (a)
113,000
63,000
Venture capital funds - technology businesses -
34,000
Investment in 49% owned affiliate and other (b) 25,000
74,000
Total income from other investments$ 806,000
$ 388,000 (a) The gains in 2019 and 2018 consist of various cash distributions from investments owning real estate and related investments and diversified businesses which made cash distributions from the sale or refinancing of operating companies or properties. During the year endedDecember 31, 2019 , we received cash distributions from other investments of approximately$2,059,000 . This consisted of distributions from existing investments (primarily real estate related). InDecember 2019 we received$409,000 from a partnership which sold one of its two rental apartments inAtlanta, Georgia and we recognized a gain of$109,000 , before incentive fee. InSeptember 2019 we received$563,000 from a partnership which sold its sole asset, a multifamily residential property located inAustin, Texas and we recognized a gain of$429,000 , before incentive fee. The remaining gains from real estate and related investments were from distributions made in excess of our carrying value. InAugust 2019 , we redeemed a stock fund for$316,000 and recognized a gain of$66,000 , before incentive fee. Also, in the first quarter of 2019 the Company's$300,000 investments in a private insurance company publicly registered all shares and began trading on the NASDAQ onMarch 29, 2019 . Accordingly, we have transferred this investment to marketable securities. As ofDecember 31, 2019 , this investment had an unrealized loss of approximately$111,000 . (b) This gain represents income from the Company's 49% owned affiliate,T.G.I.F. Texas, Inc. ("TGIF"). In 2019 and 2018 TGIF declared and paid a cash dividend of which the Company's portion was approximately$221,000 and$193,000 , respectively. These dividends were recorded as reduction in the investment carrying value as required under the equity method of accounting for investments.
Other than temporary impairment ("OTTI") losses from other investments:
There were no OTTI losses for the year ended
Income or loss from other investments may fluctuate significantly from period to period in the future and could have a significant impact on the Company's net earnings. However, the amount of investment gain or loss from other investments for any given period has no predictive value and variations in amount from period to period have no practical analytical value.
Interest, dividend and other income
Interest, dividend and other income for the year ended
(Provision for) benefit from income taxes:
The Company qualifies as a real estate investment trust and distributes its taxable ordinary income to stockholders in conformity with requirements of the Internal Revenue Code and is not required to report deferred items due to its ability to distribute all taxable income. In addition, net operating losses can be carried forward to reduce future taxable income but cannot be carried back. Distributed capital gains on sales of real estate as they relate to REIT activities are not subject to taxes; however, undistributed capital gains may be subject to corporate tax. The provision for income taxes for the year endedDecember 31, 2019 was approximately$29,000 and is primarily attributable to deferred tax expense relating to CII. The benefit from income taxes for the year endedDecember 31, 2018 was approximately$39,000 and was primarily attributable to deferred tax benefit relating to CII.
As of
The Company's 95%-owned taxable REIT subsidiary, CII, files a separate income tax return and its operations are not included in the REIT's income tax return.
For CII, the Company follows the liability method of accounting for income taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amount and the tax basis of assets and liabilities at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. As a result of timing differences associated with the carrying value of other investments, unrealized gains and losses of marketable securities, depreciable assets and the future benefit of a net operating loss, as ofDecember 31, 2019 , and 2018 the Company has recorded a net deferred tax liability of$80,000 and$48,000 , respectively. 10
As of
Effect of Inflation.
Inflation affects the costs of maintaining the Company's investments.
Liquidity, Capital Expenditure Requirements and Capital Resources.
The Company's material commitments primarily consist of a note payable to the Company's 49% owned affiliate,T.G.I.F. Texas, Inc. ("TGIF") of approximately$1.0 million due on demand (see Item 13. Certain Relationships and Related Transactions and Director Independence), and contributions committed to other investments of approximately$792,000 due upon demand. The$9.9 million in margin is primarily related to the purchase of US T-bills at quarter end. The T-bills were sold inJanuary 2020 and the related margin was repaid. The purchase of T-bills at each fiscal quarter end is for the purposes of qualifying for the REIT asset test. The funds necessary to meet the other obligations are expected from the proceeds from the sales of investments, distributions from investments and available cash and equivalents ($15.4 million atDecember 31, 2019 ). A summary of the Company's contractual cash obligations atDecember 31, 2019 is as follows: Payments Due by Period Contractual Obligations Total Less than 1 year 1 - 3 years 4 - 5 years After 5 years Note payable$ 1,000,000 $ 1,000,000 - - -
Other investments commitments 792,000 792,000
- - - Total$ 1,792,000 $ 1,792,000 - - -
The timing of amounts due under commitments for other investments is determined by the managing partners of the individual investments.
Material Changes in Operating, Investing and Financing Cash Flows.
The Company's cash flows are generated primarily from its dividends, interest and sales proceeds of marketable securities, distributions from investments
and borrowings.
For the year endedDecember 31, 2019 , net cash used in operating activities was approximately$798,000 , primarily consisting of net loss before income taxes and other income of approximately$1,262,000 , plus interest, dividends and other income of approximately$483,000 . For the year endedDecember 31, 2019 , net cash used in investing activities was approximately$2.8 million and consisted primarily of$3.4 million investment in residential real estate partnership which (as previously reported) is constructing multi-family residential apartments inFort Myers, Florida , purchases of marketable securities of$1.9 million , contributions to other investments of$1.0 million and additions in notes and loan participation receivable of$700,000 . These uses of funds were partially offset by net proceeds from the sale of marketable securities of$2.0 million , distributions from other investments of$2.1 million , and a dividend from TGIF of$221,000 . For the year endedDecember 31, 2019 , net cash used in financing activities was approximately$788,000 and consisted primarily of dividends paid of$506,646 and$340,000 of repayment of note payable to TGIF. These uses were partially offset by$59,000 in margin borrowings net of repayments.
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