Gyrodyne, LLC — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Gyrodyne is liquidating its real-estate portfolio and pursuing zoning and entitlement work to enhance sale values before distributing remaining proceeds and dissolving. It reports under the liquidation basis of accounting, not as a continuing operating business.
Business context and portfolio
At year-end, the portfolio comprised Flowerfield, an industrial park on a 68-acre site in St. James, New York; Cortlandt Manor medical properties; and one remaining building in the Port Jefferson medical office park. The developed properties totaled approximately 167,620 rentable square feet and were 69% leased to 42 tenants. The company operates as one segment.
Financial position and performance
| Metric | December 31, 2017 | December 31, 2016 |
|---|---|---|
| Real estate held for sale | $33.02 million | $31.03 million |
| Cash and cash equivalents | $5.27 million | $3.77 million |
| Total assets | $38.38 million | $38.99 million |
| Total liabilities | $11.74 million | $10.88 million |
| Net assets in liquidation | $26.64 million | $28.11 million |
Net assets in liquidation were approximately $17.97 per share at year-end. During 2017, the company recorded a $4.79 million increase in real-estate liquidation value, largely offset by a $4.81 million unfavorable remeasurement of assets and liabilities. Net assets increased by $8,418 before the $1.48 million distribution to shareholders. The filing presents no conventional income statement or cash-flow statement under liquidation accounting, so comparable revenue, profit, operating cash flow and margins are not provided.
Gyrodyne sold three Port Jefferson buildings for $2.8 million gross and reported $2.59 million net proceeds. It sold all mortgage-backed securities during 2017; year-end holdings were zero, compared with $4.09 million in 2016. Capital expenditures on the real-estate portfolio, excluding entitlement costs, were approximately $566,000. No debt was reported on the December 31, 2017 statement of net assets.
The company paid a $1.00-per-share special distribution in July 2017, totaling $1.48 million. The filing estimates net assets in liquidation of $26.64 million, or $17.97 per share, but says this estimate excludes possible additional value from entitlement efforts and is subject to material uncertainty.
Changes versus the prior comparable period
- Cash rose by approximately $1.49 million, while total assets declined by approximately $0.61 million; net assets fell by approximately $1.47 million after the 2017 distribution.
- Real-estate value increased by approximately $1.99 million net, reflecting valuation increases partly offset by the sale of three buildings.
- Occupancy declined from 77% on a pro forma 2016 basis to 69% in 2017, primarily due to tenant terminations at Flowerfield as the company repositioned the park for an expanded Stony Brook University relationship.
- 2017 leasing activity included seven new leases and 14 terminations, resulting in a net decrease of approximately $283,000 in annual lease commitments and 12,000 square feet. Sixteen renewals were also signed.
- Entitlement and rezoning costs were approximately $1.7 million in 2017, compared with approximately $897,000 in 2016.
Outlook, management commentary and risks
Management aims to complete property sales and liquidation by the end of 2019, but timing depends on property markets, buyers, financing and municipal approvals. The company estimates approximately $2.5 million in additional entitlement costs through 2019 and believes the value gains could exceed the costs, without assurance. Its estimated net liquidation value includes $33.02 million of gross real-estate proceeds and $10.62 million of estimated liquidation and operating costs net of receipts.
Flowerfield’s subdivision application received approval without conditions from the Suffolk County Planning Commission, but still required Town of Smithtown review, including the SEQRA process. At Cortlandt Manor, the company was pursuing a proposed medical-oriented district and development approvals; a public hearing was anticipated in June 2018. The company intends to position properties for sale, not develop them itself.
After year-end, Stony Brook University Hospital’s lease expansion increased its space from approximately 13,747 to 26,573 square feet, with a net lease commitment of approximately $3.5 million through 2025. The company is responsible for building out the additional space. A bank credit facility of up to $3.0 million closed on March 21, 2018, secured by Flowerfield property; its initial advance of up to $1.1 million was intended for tenant improvements. The facility has an eight-month interest-only phase and then converts to a term loan maturing in 2025.
Material risks include uncertain entitlement outcomes and timing, illiquid real estate, occupancy and tenant-default risk, geographic and tenant concentration, rising interest rates, healthcare-sector pressures on medical tenants, environmental and other contingent liabilities, and the settlement requirement that property sales be at or above December 2014 appraised values. Distributions may be delayed, reduced or eliminated; shareholders could potentially be required to return distributions if creditor reserves prove inadequate. The company also warns that its liquidation estimates rely substantially on management estimates and Level 3 valuation inputs.
The company reported that disclosure controls and internal control over financial reporting were effective at December 31, 2017. The auditor gave an unqualified opinion on the liquidation-basis financial statements.
Important facts for investors to verify
- Whether the $17.97-per-share liquidation estimate remains supportable after actual property sales, costs, distributions and any changes to the projected liquidation timetable.
- Progress, conditions and final decisions on the Flowerfield and Cortlandt Manor entitlement and environmental-review processes.
- Actual costs and occupancy impact of the Stony Brook buildout, credit-line draws, interest expense and compliance with the debt-service covenant.
- Lease renewals, tenant retention and the effect of the reported 2017 occupancy decline, including dependence on major tenants.
- Potential creditor claims, sale costs, retention bonuses and other liabilities that could reduce or delay shareholder distributions.
- The filing contains inconsistent comparative per-share figures: its discussion cites 2016 net assets of $17.96 per share, while a financial-statement note cites $18.96. Investors should verify the correct 2016 figure in the filed statements and related disclosures.