Gyrodyne, LLC — Q2 2018 Form 10-Q
Business context and reporting period. This report covers the quarter ended June 30, 2018; financial changes are presented for the six months ended June 30. Gyrodyne is liquidating its real estate portfolio, pursuing zoning and entitlement approvals to enhance property values, and plans to dissolve after selling its properties and settling obligations. It reports on the liquidation basis of accounting, so conventional income-statement and cash-flow-statement results are not presented.
Key financial position and operating metrics
| Metric | June 30, 2018 | December 31, 2017 |
|---|---|---|
| Real estate held for sale | $33.02 million | $33.02 million |
| Cash and cash equivalents | $3.84 million | $5.27 million |
| Total assets | $36.98 million | $38.38 million |
| Total liabilities | $10.23 million | $11.74 million |
| Net assets in liquidation | $26.76 million | $26.64 million |
| Estimated liquidation value per share | $18.05 | $17.97 |
Revenue, profit, margins and cash flow: The filing does not provide conventional revenue, net income, margin, or cash-flow-statement figures under liquidation accounting. Management estimates $1.04 million of cumulative free cash flow from rental operations through the projected liquidation period. In the six months, the company borrowed $1.1 million, spent approximately $508,000 on entitlement efforts and $1.11 million on real-estate capital expenditures excluding entitlement costs, and incurred $118,392 in costs to secure the credit line.
Debt and liquidity: Mortgage debt was $1.1 million, up from none at year-end, under a secured non-revolving credit facility of up to $3 million; $1.9 million remained available for eligible improvements. The loan is secured by Flowerfield property, carries a 1.35:1 debt-service-ratio covenant, and the company reported compliance at June 30. Management said cash on hand should fund the liquidation process and dissolution for the next 12 months.
Material changes and activity
- Net assets in liquidation increased $117,770 over the six months, principally attributed to savings in officers’ and directors’ insurance and the timing of individual property sales. Estimated value per share rose $0.08.
- Cash decreased by approximately $1.43 million from year-end; the company also recorded $1.1 million of new mortgage debt.
- In June, the company agreed to sell 11 Medical Drive in Port Jefferson for $800,000, with an outside closing date of September 21, 2018 and no extension right.
- Leasing activity included three new leases (about 2,000 square feet; roughly $23,000 annual rent), nine renewals (about 9,000 square feet; roughly $114,000 annual rent), and one expansion and one downsizing producing a net increase of about 10,500 square feet and $82,000 annual rent. Tenant allowances and abatements were approximately $1.1 million and $42,000.
Outlook, risks and unusual items
- Management’s liquidation estimate assumes completion by the end of 2019. Based on June 30 estimates, it projected approximately $26.76 million of net assets, or $18.05 per share, before any future special distributions. This estimate excludes potential incremental sale value from entitlement efforts and is not a guarantee of actual proceeds or distribution timing.
- The company expects to spend about $2 million more on Flowerfield and Cortlandt Manor entitlement and rezoning efforts through the remaining liquidation period; approximately $508,000 was incurred in the first half. Approvals and timing depend on municipal processes and environmental review. The company says it does not intend to develop the properties, but to position them for sale.
- Flowerfield’s subdivision application is subject to environmental review; the company was preparing an Environmental Impact Statement and anticipated submission in Q3 2018. Cortlandt Manor proposals also remain subject to planning and environmental review. The filing gives no assurance that approvals or value increases will result.
- Estimated proceeds and distributions depend on property-sale prices, rental cash flows, sale timing, liquidation costs, entitlement expenses, and contingent liabilities. Management warns distributions could be reduced or eliminated if asset-sale proceeds and available cash are insufficient to meet obligations; in some circumstances, shareholders could be required to return distributions to pay creditors.
- Other disclosed exposures include $431,716 of employment and severance contingencies, tenant concentration (three largest tenants represented approximately 20%, 18%, and 6% of rental income for the six months), and healthcare-regulatory risks affecting medical tenants. The company’s estimated real-estate values rely substantially on management assumptions and Level 3 valuation inputs.
- A previously disclosed shareholder class action was settled and court-approved in 2016; the $650,000 fee award was paid. Management said other ordinary-course legal proceedings were not expected to result in material losses.
Important facts for investors to verify
- Whether the $800,000 Port Jefferson sale closed on schedule and whether sale proceeds match the estimate.
- Progress, cost and municipal outcomes for Flowerfield and Cortlandt Manor entitlements, including the Flowerfield environmental review and Cortlandt Manor zoning process.
- Actual property valuations and sale proceeds versus the $33.02 million estimated real-estate value, and whether those estimates reflect market conditions and required selling costs.
- Cash use, additional credit-line draws, loan terms and covenant compliance, and whether liquidity remains adequate through liquidation.
- Changes to the projected end-2019 liquidation timeline, estimated $18.05-per-share distribution, contingent liabilities and retention-bonus obligations.