Gyrodyne, LLC annual report, FY2016

Business context and reporting period

Gyrodyne, LLC filed this Form 10-K for the fiscal year ended December 31, 2016. The company is winding down through property sales and plans to dissolve after selling its remaining real estate and settling obligations. It reports on a liquidation basis of accounting, adopted September 1, 2015; accordingly, conventional income statements and cash-flow statements are not presented. The 2015 comparison covers only the post-merger period beginning September 1, 2015, so it is not directly comparable to full-year 2016.

At year-end, the portfolio comprised 178,330 rentable square feet across Flowerfield, Port Jefferson and Cortlandt Manor, with 76% occupancy and 50 tenants. No mortgage debt is listed on the statement of net assets.

Key financial metrics

Management estimates approximately $28.1 million of net assets available for liquidation distributions, equivalent to $18.96 per share based on 1,482,680 shares. This estimate includes projected liquidation costs and assumes completion by the end of 2018; it excludes any incremental value from property-enhancement efforts. The company sold its mortgage-backed securities in February 2017.

During 2016, Gyrodyne sold Fairfax Medical Center for $14.015 million and five Port Jefferson buildings for $4.246 million in aggregate. Reported net proceeds were approximately $13.301 million and $3.982 million, respectively. It paid two special cash distributions totaling $10.75 per share, or $15.939 million overall. The filing does not provide a clear annual revenue, profit, cash-flow, or margin figure under its liquidation-basis presentation.

Material changes versus the prior comparable period

• Net assets in liquidation decreased by $15.344 million during 2016, principally reflecting $15.939 million of shareholder distributions; before those distributions, net assets increased by $594,845.
• Real estate value fell by $15.925 million year over year, chiefly because of property sales, partly offset by a $2.336 million increase in the estimated net realizable value of remaining real estate.
• Occupancy increased to 76% from 72% on a pro forma basis excluding assets sold. Management attributed the improvement mainly to new tenants at Cortlandt and Port Jefferson.
• Five Port Jefferson buildings were sold in 2016, compared with one in the post-merger 2015 period. Fairfax Medical Center was also sold in 2016.

Outlook, management commentary, risks and unusual items

Management plans to pursue zoning and entitlement work at Flowerfield and Cortlandt Manor before selling those properties, with liquidation targeted by the end of 2018. It estimates approximately $3.36 million of additional land-development costs through 2018 and believes the work could improve sale proceeds, but no resulting appreciation is included in the reported real-estate value or the $18.96-per-share estimate. Entitlement decisions and timing depend on municipal authorities; management estimates the process could take six months to two years.

• A settlement of the shareholder class action, approved by the court in April 2016, requires arm’s-length property sales at or above December 2014 appraised values. The filing says the aggregate appraised value of remaining properties at year-end was $550,000 below those values, potentially constraining sale options.
• Distributions and timing are uncertain and depend on sale prices, occupancy, leasing, expenses, claims and reserves. Management cautions that actual proceeds may be below estimates and that distributions could be reduced or eliminated. Shareholders could be required to return distributions if reserves prove insufficient to pay creditors.
• At year-end, the company had $7.9 million of cash and marketable securities. Management says cash and expected sale proceeds should fund liquidation, but rental operations net of property expenses are below combined overhead, capital expenditure and land-development needs.
• A March 2017 agreement to sell two Port Jefferson buildings for $2.0 million remained subject to a buyer evaluation period and termination right. The company also agreed to buy an adjacent Cortlandt residence for $319,512.
• The Fairfax sale carries a remaining master-lease obligation estimated at up to $50,593. The company’s 10.12% investment in Callery-Judge Grove has a carrying value of zero; any recovery is uncertain because partnership obligations exceed the reported payment from the property buyer.
• 2016 retention-plan payments totaled $1.254 million. The final $233,200 payment under the prior Incentive Compensation Plan was also made in 2016. The CEO was expected to separate in April 2017, with the CFO appointed CEO effective May 1, 2017.

Important facts for investors to verify

• Whether the reported $31.025 million real-estate value and $28.112 million net assets in liquidation can be realized after selling costs, liabilities and any changes in market conditions.
• Progress, cost and approvals for the Flowerfield and Cortlandt entitlement plans, and whether those efforts generate value above their estimated cost.
• Compliance with the December 2014 appraisal price floor and the status and closing of the $2.0 million Port Jefferson sale agreement.
• Lease renewals and occupancy: 26 leases representing $513,000 of annual rent were scheduled to expire in 2017, and 10 leases representing $767,000 were scheduled to expire in 2019.
• Updates to liquidation timing, remaining cash needs, creditor reserves, contingent liabilities and future per-share distributions.