Gyrodyne, LLC — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a quarterly filing. Gyrodyne is a New York real estate owner pursuing entitlements and sales of its remaining properties, with the intent to settle liabilities, distribute remaining proceeds and dissolve.
Business context and outlook
At year-end, the portfolio comprised Flowerfield, a 63-acre industrial property in St. James, and Cortlandt Manor, a 13.8-acre medical office property. The portfolio had 161,292 rentable square feet and was 81% leased to 39 tenants, compared with 75% leased to 32 tenants at December 31, 2020. The company does not plan to develop the properties; it is seeking approvals to position them for sale at enhanced values.
Management extended its target for completing entitlements, property sales and liquidation from December 31, 2022 to December 31, 2024. It anticipated preliminary approvals during 2022, but timing depends on regulators, market conditions and other parties. Management said the company may also consider offers for properties before completing the entitlement process, or a sale of the company, if the timing and value are attractive.
Financial position and operating metrics
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Net assets in liquidation | $23.03 million | $22.49 million |
| Estimated net assets per share | $15.53 | $15.17 |
| Real estate held for sale | $42.55 million | $39.05 million |
| Cash and cash equivalents | $5.67 million | $1.63 million |
| Total liabilities | $25.26 million | $18.42 million |
| Mortgage loans payable | $10.03 million | $5.16 million |
| Rent and tenant reimbursements received | $2.66 million | $2.43 million |
| Property operating costs | $1.63 million | $1.51 million |
| Net operating income, as reported in MD&A | $1.03 million | $0.93 million |
The company uses liquidation-basis accounting, so its principal statements report net assets and changes in net assets rather than conventional income, balance-sheet, and cash-flow statements. Conventional net income and margin figures are therefore not presented clearly in the filing. Net assets increased $539,826 in 2021: a $3.995 million increase in estimated real estate value was largely offset by a $3.455 million adverse remeasurement of assets and liabilities. Management attributes the higher real estate estimate to entitlement progress and market conditions, while the longer liquidation timeline and higher estimated selling costs and retention bonuses offset some of the increase.
FY2021 operating cash-flow components disclosed by management included $2.656 million of rent and reimbursements, $1.629 million of operating costs, and $1.028 million of net operating income. Other disclosed cash-flow items included $4.869 million in loan proceeds and $430,702 in real estate sale proceeds. The company sold approximately five acres of non-contiguous land for a $500,000 purchase price.
At December 31, 2021, the company estimated $12.85 million of liquidation and operating costs, net of estimated receipts, in addition to its other liabilities. Its liquidation forecast includes $42.55 million of gross real estate proceeds, $3.22 million of selling costs, $3.28 million of retention bonuses, $1.37 million of future entitlement costs and $1.53 million of final liquidation costs.
Material changes and financing
- Two significant purchase agreements were terminated: a $16.8 million agreement for a Flowerfield parcel and a $5.72 million agreement for Cortlandt Manor property. Earnest-money deposits were returned.
- In September 2021, the company borrowed $4.95 million secured by the Cortlandt Manor property, using part of the proceeds to repay $1.05 million outstanding on a prior working-capital facility. The new loan bears 3.75% interest initially, has a five-year term with a possible five-year extension, and includes prepayment fees subject to stated exceptions.
- Existing Flowerfield loans of $2.2 million and $3.0 million converted to amortizing loans in 2021, each at a fixed 3.85% interest rate and with 2028 maturities. The company reported compliance with loan covenants.
- Management estimated that, if the liquidation plan is completed by December 31, 2024, cash at that date would be approximately $23.03 million before future special distributions, equivalent to $15.53 per share using 1,482,680 shares. This estimate is based on December 31, 2021 values and is not a guarantee of proceeds or distributions.
Entitlements, risks and unusual matters
- Management incurred approximately $567,000 in entitlement costs in 2021 and estimated a further $1.368 million through the end of 2024. Some vendor fees are deferred until the first post-subdivision lot sale.
- Flowerfield’s environmental impact statement was accepted by the Smithtown Planning Board in March 2021; management anticipated further subdivision approvals in 2022. Cortlandt Manor approvals also remained pending. Both projects face regulatory backlogs, labor constraints, climate-related concerns and community opposition.
- Opponents may challenge approvals under Article 78 proceedings, which management said could take two years or more and push sales beyond 2024. The 2015 class-action settlement requires arm’s-length property sales at or above the properties’ 2014 appraised values.
- COVID-19 contributed to approval delays and, in management’s view, to termination of the two purchase agreements. The company also cited possible effects on tenant operations, leasing demand and property values. Three largest tenants generated approximately 23%, 22% and 10% of 2021 rental income; the filing also highlights tenant concentration and exposure to healthcare and local economic conditions.
- Management reported ineffective disclosure controls and ineffective internal control over financial reporting due to an auditor-identified material weakness in accounting for estimated real estate values. Management said remediation work was underway. The auditor issued an unqualified opinion on the financial statements and identified real estate liquidation valuation as a critical audit matter.
- In March 2022, director Elliot Levine resigned; the board reduced its planned size from six seats to five and said it intended to appoint a replacement to the Audit Committee.
Key facts for investors to verify
- Progress and final outcomes of both subdivision and entitlement processes, including any litigation or approval conditions.
- Whether property valuations, sale prices, selling costs and the projected $15.53-per-share liquidation estimate are achievable; the estimates rely substantially on unobservable valuation inputs.
- Liquidity and debt-service capacity through liquidation, including the terms and repayment requirements of the $4.95 million mortgage and Flowerfield loans.
- Tenant renewals, occupancy, rent collections and exposure to major tenants; 19 leases representing about 23.93% of gross annual rental revenue were scheduled to expire in 2022.
- Remediation of the material weakness in real estate valuation controls and any resulting changes to reported net assets.
- Potential creditor, tax, legal, retention-bonus and other liquidation claims that could reduce or delay shareholder distributions.