Description

HMG/Courtland Properties (“HMG”) is a small REIT formed in 1972 operating out of a corporate owned home in Coconut Grove, Florida. There are 1,048,926 shares outstanding giving this a market cap of just under 12 million dollars. It is therefore thinly traded and maybe only appropriate for small funds or personal accounts or medium sized funds with lots of patience in building a position.

There really is only one reason to consider this as an investment: The price in relation to the intrinsic value. If you like simple situations where you can buy a dollar for .50 cents, then you might like this cigar butt security. Coming up with other reasons to initiate a position is a bit of a stretch. That being said there are a few:

• Management owns a considerable amount of the stock, which should somewhat align everyone’s interest.

• Management recently initiated a reduction in their advisory fees for managing the REITs assets.

• HMG paid out a $4.00 dividend in 2013 and is paying out a .50 cent dividend in 2014. (With this security a bird in the hand is worth two in the bush, so the quicker it liquidates or the more it pays out - the better.) Today they announced a buy back authorization as well.

• There might be a few hidden assets on the balance sheet that could boost intrinsic value.

2013 was a transformational year for HMG. On February 25^th, 2013 HMG completed the sale of their primary asset, the Grove Isle Property. HMG realized a gain of approximately $19 million or $19 dollars per share. This was fairly remarkable considering the stock was trading for about $5 prior to this announcement. In March of 2013 they also sold their other asset known as “Monty’s Property” without realizing any impairment to what was then the only remaining goodwill on the HMG balance sheet. These two transactions very much simplified HMG’s balance sheet, removing any goodwill and a low basis property and replacing it with cold cash. As a result, stated book value bumped from approximately $14 per share to approximately $29 per share on the March 31^st 2013 10q. At around this time I started to speculate that the company was going to pursue a liquidation. My basis for this speculation was the average age of the board, combined with high insider ownership. I just didn’t see them redeploying the cash into illiquid long term investments. They didn’t look like the type that should be buying green bananas, in other words. I was wrong. They ended up paying out a $4.00 dividend, utilizing a substantial net operating loss carryover and paying taxes of 1.6 million in taxes for 2013. HMG appears to have redeployed most of the cash into securities of other publicly traded REITs and has made an investment in an apartment complex and is still sitting on a large amount of cash. Today we have a liquid book value per share of 22.70. This compares favorably to the last price of 12.45 per share, providing a considerable margin of safety. A stock price at roughly 50% of intrinsic value is the main reason to consider an investment here.

The ownership here is fairly complicated. Transco Realty Trust holds 477,300 shares of HMG. HMGA Inc. (The Adviser to the REIT) owns 54,530 shares of HMG. HMGA Inc. also owns 37% of the stock of Transco. Mr. Maurice Wiener holds 34% of Transco (Which trades now and then under the symbol TCRTS) and 72% of HMGA Inc.. By my math, when added to his direct ownership of 46,600 shares it appears that Mr. Wiener owns roughly 335,000 shares of HMG. So if valued at book value, Mr. Wiener owns nearly $7.5 million worth of this company. Mr. Wiener is 72. Part of the bet (at this price) is that Mr. Wiener will continue to run things until he feels that it is necessary to wind down operations. Assuming he doesn’t do anything dangerous or stupid, he should be able to extract book value for his ownership. At 72 one might assume that he would contemplate doing so within 10 years? I have tried to get an understanding of his plans but he is very tight lipped about it. My understanding is that he is married with no kids. I do note that he continues to increase his ownership of TCRTS over the years, presumably by buying it directly or having TCRTS retire shares in treasury. I only recently purchased a marker in TCRTS as a way to get more information. TCRTS is not an SEC registrant. My impression is that Mr. Wiener is capable of understanding the real value of his own company and that 7.5 million is a meaningful amount of money to him.

The day to day operations of HMG are handled by the Adviser, known creatively as HMGA, Inc, and majority owned by Mr. Wiener. In 2013 HMG was able to lower their Advisory fees from an annual rate of $1,020,000 to $660,000. At $660,000 it appears to me that HMG is still overpaying the Adviser by about $560,000, but it is a step in the right direction and appears to be sensible considering the change to their business. Somewhat impressive - this reduction in fees appears to have been initiated out of the kindness of their hearts.

In addition to the company paying out $4.00 in 2013, they announced last week a .50 cent dividend. It should be more and could be more in my opinion. But it was likely more than he was required to pay out, so I think it is a good sign that Mr. Scrooge cares a little bit about Tiny Tim at Christmas time.

This morning, as I was half way through this write up, the company announced that they have authorized a share repurchase program for up to $500,000 of HMG common stock. Another good sign I believe. REIT ownership laws are strict and have to be followed to maintain REIT status, so I think they are limited with their ability to buy back a lot of stock. A REIT is deemed to be “closely held” if at any time during the last half of the taxable year, more than 50% in value of its outstanding stock is owned directly or indirectly by or for not more than 5 individuals.

Lastly the TGIF investment that HMG owns 49% of is based on the equity method, so all dividends received simply reduce the carrying value. I can’t prove it, because I’m not even sure what TGIF is, but I suspect it is on the balance sheet for below intrinsic value. There isn’t much information on TGIF, but form their 2005 Annual Report apparently TGIF is a Texas Corporation that owns one net leased property in Louisiana. In 2005 the companies carrying value was $3million and the Company had a note payable to TGIF of 3.7 million, due on demand. I’ve searched all other references of TGIF, and I am not aware that they ever sold the Louisiana property. They also own 5.4 commercially zoned acres in Montpelier, VT. Might be some extra value there, I don’t know.

Let’s talk for a moment about the elephant in the room: On 12/8/14 investment power house “The Street” lowered HMG from hold to sell. Below is a copy of their rigorous research piece:

"We rate HMG COURTLAND PROPERTIES (HMG) a SELL. This is driven by multiple weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share and generally disappointing historical performance in the stock itself."

For those that don’t know me, I’m being sarcastic. My favorite line from above is “generally disappointing historical performance in the stock itself.” I guess when you earn $20 dollars per share in 2013, it is hard to match that in 2014. SELL SELL SELL! Anyway - it goes without saying here that there is no real coverage. It is discounted heavily for a minority share discount and liquidity discount. I think at this price though that there is a large margin of safety and that when you buy cheap good things can happen.

The negatives:

The two board members on the audit committee are 80 something and 90 something. A little too old in my opinion. I have checked the PCAOB report on their auditor though and the auditor appears to be a regional firm in good standing with PCAOB. (For some reason I always get nervous with companies based in Florida). There is also lots of insider selling by the directors. This is just weird. It caused me a lot of consternation, but I guess there are many reasons to sell a stock and only one reason to buy a stock.

Other negatives should be obvious, it is a microcap, closely held, and takes a while to establish a position. That being said, there has been plenty of stock available for the last two months.

I’ll conclude by quoting duke716 from his October 16, 2001 write up of HMG on VIC at 7.40 per share that I think is still applicable today in 2014:

“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

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