Description

HMG/Courtland Properties, Inc. is a unique investment opportunity. The underlying value of HMG is phenomenal and the situation unique. It's a Micro-Cap, yet established, REIT trading on the American Stock Exchange. HMG's balance sheet and earnings are exceptionally strong.

P/E RATIO: 4.2

P/E Ratio w/provision of taxes reversed: 3.2

Though the 10Q reflects a provision of income taxes of $720,000 for the 6 months ending 6/30/01, if HMG distributes a dividend to shareholders, this provision should be reversed since the REIT would not be taxed on earnings.

Earnings

1999: $4.16/share

2000: $3.68/share (diluted)

6 mos. Ending 6/30/01: .84

6 mos. Ending 2001
Reversing Tax Provision: $1.50

Price/Book: .39

Potential Dividend 2001: $1.57/share++ (fully diluted).

Potential Earnings

Earnings are derived from rental income, sale of real estate, and investments.

Rental Income: Rental properties include a hotel in Coconut Grove, Florida (Grove Isle). Their tenant has a long-term lease. Lease payments were increased in August, 2001 by $24,000 per month and should result in an increase in annual earnings of .26/share.

HMG's real estate: primarily acquired in the late 70's and early 80's. Recently, they've sold off real estate (including raw land) resulting in significant capital gains.

Investments: HMG's earnings during 1999 and 2000 were exceptionally strong. 2000 earnings were primarily as a result of astute investments. HMG's balance sheet reflects $17/share(basic) in cash and investments.

RELATIVE VALUE TO OTHER REITS

Most REITS sell around their underlying value. The vast majority of REITS sell above book value. Being a micro-cap REIT, HMG's valuation to price is the most attractive I've seen for a REIT with a strong balance sheet.

RESTRICTIONS

During the last shareholder meeting, a resolution was passed whereby shareholders cannot acquire in excess of 2% of HMG stock. This resolution was to assure HMG remains in compliance with the REIT requirement that the five largest shareholders in a REIT cannot own more than 50% of the REIT's stock.

I am one of those five largest shareholders in HMG.

STOCK OPTIONS

Management also has 86,000 shares in options that can be exercised at an average price of $7.84/share.

LIQUIDATION VALUE

In July,1983, the current chairman of the Board of HMG acquired a substantial amount of HMG stock ranging in price from $22 to $25 per share.

Book Value is currently $18.77 per share (basic).

Accumulated Depreciation approximates $6.65/share (basic).

Capital improvements in the Grove Isle Hotel that were incurred by the long term tenant and not reflected in the balance sheet totaled $5.5 Million or $5.05/share (basic).

Without considering price appreciation of existing properties over the past twenty years, underlying value approximates: $30.47/share (basic) and $28.82/share (fully diluted)!

POTENTIAL DIVIDENDS

In September, 2000, HMG paid a dividend of $1.00/share. Prior to that date, HMG hadn't paid a dividend for several years and accumulated an NOL. That NOL was exhausted in fiscal year 2000.

Based upon the 10Q from 6/30/01, HMG has made a provision for income taxes for the six months ending 6/30/01 of $720,000. HMG's explanation of expenses in that 10Q is: "the payment of any future dividends may reduce or eliminate the Company's income tax liability and would reduce or eliminate this quarter's current provision…."

REITs "may elect to retain long-term capital gains and pay income tax on them at regular corporate rates." If they do so, "a maximum corporate tax rate of 35 percent" is applicable for REITS (See Real Estate Investment Trusts Handbook, 2nd Ed. William A. Kelley, Jr. Esq. (p. 141 and p.91).

For fiscal year 2001, we can anticipate distributions of 90% of income should management elect to not have HMG taxed on earnings.

Moreover, such "capital gain" dividends would be considered as a long-term capital gain for shareholders rather than ordinary income (See Real Estate Investment Trusts Handbook, 2nd Ed. William A. Kelley, Jr. Esq. (p. 139).

Assuming management exercises their stock options prior to the dividend distribution, the potential dividend accumulated through 6/30/01 is at least $1.57/share. (The 10Q reflects a higher provision for income taxes than one would have expected). The potential yield accumulated through 6/30/01 based on the current market price would thus exceed 20%!

VALUATION DISCREPANCY

HMG's book value increased dramatically in 1999 due to HMG's successful litigation against a former director for breach of fiduciary duty. This litigation resulted in gross recoveries exceeding $4 Million.

Those proceeds were used for astute investments, thus also resulting in exceptionally strong earnings for fiscal year 2000.

UNDERLYING VALUE

Those able to purchase shares should be rewarded through dividend distributions and ultimately through liquidation or buyout. The discrepancy between price and underlying value is just too huge for the astute investor to ignore.

Catalyst

Substantial future dividends would be a key catalyst for the market to begin acknowledging the huge value discrepency.