Gyrodyne, LLC — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015. The merger of Gyrodyne Company of America, Inc. and Gyrodyne Special Distribution, LLC into Gyrodyne, LLC closed August 31; Gyrodyne LLC began trading September 1. The company adopted liquidation-basis accounting effective September 1, so September balances and activity are not directly comparable with prior going-concern financial statements.
Business context and financial position
Gyrodyne is pursuing an orderly sale of its real estate and expects to dissolve after settling liabilities and distributing remaining proceeds. Its holdings include medical office and industrial properties and approximately 68 acres in St. James, New York. It is also evaluating development or zoning opportunities, particularly at Flowerfield and potentially Cortlandt Manor.
| Metric | Amount or status |
|---|---|
| Net assets in liquidation, September 30 | $46.3 million |
| Total assets / liabilities, September 30 | $56.1 million / $9.8 million |
| Real estate at estimated net realizable value | $42.7 million |
| Cash and cash equivalents | $7.6 million |
| Marketable securities | $5.3 million; agency mortgage-backed securities rated AA or AAA, with approximately 2% yield |
| Debt | No notes payable at September 30; the notes were exchanged for Gyrodyne LLC interests in the merger |
| Common interests outstanding | 1,482,680 |
Operating results, cash flow and material comparisons
- Legacy going-concern results: For the eight months ended August 31, 2015, revenue was $1.70 million and net loss was $2.50 million, compared with $2.00 million revenue and $2.23 million net loss for the nine months ended September 30, 2014. The periods differ in length, and property classifications were recast; comparisons require caution.
- Supplemental historical-basis results: The filing presents a reconstructed three-month 2015 net loss of $941,429 versus $405,557 in 2014, and a nine-month net loss of $2.55 million versus $2.23 million. The 2015 three-month revenue shown in that supplemental presentation was $415,533; revenue is not directly comparable because of discontinued-operations reclassification.
- Drivers: The 2015 three-month loss reflected higher strategic-alternative expenses, including merger and proxy costs. For the nine-month period, management cited higher general and administrative expenses and the write-off of dividend-note origination costs. Interest expense for the nine months was $588,645; it ceased on the notes exchanged in the merger.
- FFO/AFFO: Supplemental nine-month FFO was negative $1.88 million and adjusted FFO was $55,766, versus negative $1.39 million and $402,339, respectively, in 2014. These non-GAAP measures are not substitutes for net income or cash flow.
- Cash flow: Operating activities used $2.29 million during the eight months ended August 31, 2015, versus $5.17 million used in the nine months ended September 30, 2014. The rights offering provided $5.61 million net; cash at August 31 was $7.47 million. Investing activities provided $128,000, principally reflecting security principal repayments, offset by property improvements and development spending.
- Leasing: September 30 occupancy was 77% overall, 68% at the industrial park and 86% at the combined medical parks. Lease commitments were $16.2 million. During the quarter, four renewals and one new lease were partly offset by two terminations.
Outlook, risks, contingencies and unusual items
- Management anticipated completing liquidation by December 31, 2016, but said development or zoning work could extend the timeline. The detailed liquidation estimate shows approximately $8.0 million of projected cash at the end of the period plus $42.7 million of estimated net real estate proceeds, supporting approximately $46.3 million in estimated net assets/distributable value. Elsewhere the filing describes $46.3 million as an expected ending cash balance; investors should resolve this apparent inconsistency against the detailed schedule.
- Liquidation values and estimated settlement costs depend on assumptions and may differ materially from realized sale proceeds and actual liabilities. The filing provides no assurance of the timing or amount of future distributions. Estimated costs include $4.5 million of general and administrative and liquidation costs, $1.2 million for pension funding, and approximately $2.8 million in retention bonuses at assumed appraisal-value sales.
- The defined-benefit pension plan is being terminated; the company estimated a $1.20 million funding obligation and had not completed funding or beneficiary distributions by September 30.
- A class-action settlement required supplemental merger disclosures and agreed that property sales would be arm’s-length transactions at or above the most recent appraised values. The plaintiff may seek legal fees and expenses of up to $650,000 in aggregate.
- In October, the company entered two non-binding agreements to sell Port Jefferson Professional Park buildings at 5 and 6 Medical Drive, at prices above their December 2014 pro-rata appraised values. Closing was expected in December 2015, subject to inspection and customary conditions.
- Risks include local real estate and financing conditions, vacancies and tenant defaults, healthcare-sector changes affecting medical tenants, litigation or other claims, and the possibility that sale proceeds may not cover obligations. Management reported a material weakness in internal control over financial reporting relating to accounting for the complex liquidation-basis transaction; disclosure controls were also deemed ineffective.
Most important facts for investors to verify
- Whether property appraisals and estimated selling costs support the $42.7 million net real estate value and $46.3 million net-assets estimate.
- Whether the projected $46.3 million refers to total estimated distributable value rather than cash alone, and whether the liquidation schedule or narrative is authoritative.
- Actual timing, terms and proceeds of the two non-binding Medical Drive sales, the broader property-sale program and any development or zoning decisions.
- Final pension termination funding, litigation-related costs, retention bonuses and other claims or liquidation expenses.
- Remediation of the reported material weakness and any resulting changes to financial reporting or liquidation estimates.