Gyrodyne, LLC — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The August 31, 2015 merger changed the company’s reporting basis: results through August 31 are presented on a going-concern basis, while September 1–December 31 are presented on a liquidation basis. Accordingly, 2015 and 2014 operating results are not directly comparable.
Business context and strategy
Gyrodyne owns and manages medical-office and industrial properties in New York and Virginia and is pursuing an orderly liquidation. Its strategy is to sell properties opportunistically, pursue zoning and entitlement work at Flowerfield and Cortlandt Manor to seek higher sale values, settle liabilities, and distribute remaining proceeds. Management anticipates completing liquidation in or around 2018, but the timing is uncertain.
The merger completed the predecessor corporation’s tax liquidation. Former corporation shareholders, noteholders and GSD interest holders received approximately 22.6%, 30.0% and 47.4% of Gyrodyne, LLC shares, respectively. The notes were exchanged for equity; the company reported no notes payable at December 31, 2015.
Key financial and operating metrics
| Metric | 2015 disclosure | Comparable / context |
|---|---|---|
| Revenue | $1.825 million for the eight months ended August 31, 2015 | $2.799 million for full-year 2014; periods differ |
| Net loss | $2.502 million for the eight months ended August 31, 2015, or $1.69 per share | $3.105 million for full-year 2014, or $2.09 per share; not directly comparable |
| Discontinued operations | $407,136 income for the eight months ended August 31, 2015 | $608,355 income for 2014 |
| Operating cash flow | $(2.294) million for the eight months ended August 31, 2015 | $(5.470) million for full-year 2014 |
| Investing and financing cash flow | $128,000 provided by investing; $5.606 million provided by the rights offering | The 2014 investing outflow was $3.550 million; no financing cash flow |
| Cash and investments | At December 31, cash was $5.876 million and marketable securities were $5.002 million | Combined balance: approximately $10.9 million |
| Net assets in liquidation | $43.456 million, or estimated $29.31 per share, at December 31 | Down $2.864 million from the September 1 liquidation-basis amount |
| Real estate valuation | $46.950 million estimated net realizable value at December 31 | Excludes potential additional value from entitlement efforts |
| Liabilities | $14.879 million total, including $13.463 million estimated liquidation and operating costs net of receipts | No notes payable at year-end following merger conversion |
| Portfolio | 257,563 rentable square feet; 78% leased across 94 tenants | 79% leased across 101 tenants at December 31, 2014 |
| Annual base rent | $4.459 million across the properties at December 31 | Effective rent per square foot was $19.52 versus $19.83 a year earlier |
The filing does not present a full-year 2015 revenue, profit or cash-flow statement on a single accounting basis. It reports a $43.5 million estimated eventual cash balance before future distributions if liquidation is completed around 2018; this is a forecast, not a guaranteed distribution.
Material changes and notable transactions
- The June 2015 rights offering issued 2,224,020 shares at $2.75 per share and generated $5.606 million net proceeds. Subscriptions substantially exceeded the available shares.
- The August 31 merger converted predecessor notes and interests into LLC shares and eliminated the predecessor’s mortgage and revolving balances as obligations between entities. The filing says the mortgages were no longer outstanding after the merger.
- The company sold 5 Medical Drive for $760,000 on December 30, 2015. It sold 6 Medical Drive for $850,000 in January 2016 and had contracts for two more Port Jefferson buildings totaling $1.72 million, subject to buyer termination rights.
- In February 2016, the company agreed to sell Fairfax Medical Center for $14.315 million, subject to an evaluation period and closing conditions. The agreement includes a potential two-year master lease obligation of approximately $210,000 if specified vacant space is not re-tenanted.
- Management recorded approximately $464,000 of land-development costs in 2015 and estimated a further $3.15 million over the following two years for research, zoning changes, entitlements and special permits.
Outlook, risks and contingencies
- Management’s liquidation estimate depends on property sale prices, rental cash flows, sale timing, expenses and liability settlements. The company cautions that actual proceeds and distributions may be materially lower than estimated, delayed, or eliminated.
- Management expects about $3.15 million of additional enhancement spending, but zoning and entitlement approvals, costs, buyer interest and resulting property values are uncertain. The company does not intend to develop the properties itself.
- Occupancy declined to 78% from 79%; 43 leases covering 60,000 square feet and $1.324 million of annual rent were scheduled to expire in 2016. Lease renewals, vacancies, tenant credit and weak local markets could affect cash flow and sale values.
- Real estate liquidity, interest rates, financing availability, concentrated geographic exposure, healthcare-sector changes, environmental matters and thin trading in the shares are identified risks. The Grove partnership interest has a zero carrying value; any future payment is uncertain and not expected before 2017 at the earliest.
- A putative class action settlement provided for supplemental disclosures and arm’s-length property sales at or above recent appraised values. Plaintiff could seek up to $650,000 in fees and expenses; the company estimated approximately $300,000 net exposure after expected insurance reimbursement. Court approval was pending at the filing date.
- The filing describes a material weakness in controls identified in the third-quarter reporting process concerning accounting for the complex merger and liquidation basis. Management said remediation was completed and controls were effective at December 31, 2015; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether the $43.5 million estimated liquidation value and $29.31-per-share estimate are supported by realizable sale proceeds and the assumptions for costs and timing.
- Whether the Fairfax sale and Port Jefferson contracts close, and the final proceeds, sale costs and any master-lease or retention-bonus obligations.
- Whether the $3.15 million entitlement program secures approvals and produces value sufficient to justify the spending.
- Actual lease renewals, occupancy, tenant retention and cash generation, particularly given 2016 expirations and local-market concentration.
- Final settlement approval, legal expenses and insurance recovery, along with any other creditor, contingent-liability or reserve requirements.
- Progress on control remediation and any later changes to the liquidation estimates or expected distribution schedule.