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| GYRO > SEC Filings for GYRO > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
The statements made in this Form 10-Q that are not historical facts contain
"forward-looking information" within the meaning of the Private Securities
Litigation Reform Act of 1995, and Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, both as amended, which can
be identified by the use of forward-looking terminology such as "may," "will,"
"anticipates," "expects," "projects," "estimates," "believes," "seeks," "could,"
"should," or "continue," the negative thereof, other variations or comparable
terminology. Important factors, including certain risks and uncertainties, with
respect to such forward-looking statements that could cause actual results to
differ materially from those reflected in such forward-looking statements
include, but are not limited to, the effect of economic and business conditions,
including risks inherent in the real estate markets of Suffolk and Westchester
Counties in New York, Palm Beach County in Florida and Fairfax County in
Virginia, the ability to obtain additional capital in order to develop the
existing real estate, uncertainties associated with the Company's litigation
against the State of New York for just compensation for the Flowerfield property
taken by eminent domain, and other risks detailed from time to time in the
Company's SEC reports. These and other matters the Company discusses in this
Report, or in the documents it incorporates by reference into this Report, may
cause actual results to differ from those the Company describes. The Company
assumes no obligation to update or revise any forward-looking information,
whether as a result of new information, future events or otherwise.
The consolidated financial statements of the Company include accounts of the Company and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the Company's consolidated financial statements and related notes. In preparing these financial statements, management has utilized information available including its past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of the Company's results of operations to those of companies in similar businesses.
Revenue Recognition
Rental revenue is recognized on a straight-line basis, which averages minimum rents over the terms of the leases. The excess of rents recognized over amounts contractually due, if any, is included in deferred rents receivable on the Company's balance sheets. Certain leases also provide for tenant reimbursements of common area maintenance and other operating expenses and real estate taxes. Ancillary and other property related income is recognized in the period earned.
Real Estate
Rental real estate assets, including land, buildings and improvements, furniture, fixtures and equipment are recorded at cost. Tenant improvements, which are included in buildings and improvements, are also stated at cost. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Renovations and/or replacements, which improve or extend the life of the asset, are capitalized and depreciated over their estimated useful lives.
Depreciation is computed utilizing the straight-line method over the estimated useful life of ten to thirty nine years for buildings and improvements and three to twenty years for machinery and equipment.
The Company is required to make subjective assessments as to the useful life of its properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to those properties. These assessments have a direct impact on the Company's net income. Should the Company lengthen the expected useful life of a particular asset, it would be depreciated over more years, and result in less depreciation expense and higher annual net income.
Real estate held for development is stated at the lower of cost or net realizable value. In addition to land, land development and construction costs, real estate held for development includes interest, real estate taxes and related development and construction overhead costs which are capitalized during the development and construction period. Net realizable value represents estimates, based on management's present plans and intentions, of sale price less development and disposition cost, assuming that disposition occurs in the normal course of business.
Long Lived Assets
On a periodic basis, management assesses whether there are any indicators that the value of the real estate properties may be impaired. A property's value is considered to be impaired if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. Such future cash flow estimates consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. To the extent impairment occurs, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property.
The Company is required to make subjective assessments as to whether there are impairments in the value of its real estate properties and other investments. These assessments have a direct impact on the Company's net income, since an impairment charge results in an immediate negative adjustment to net income. In determining impairment, if any, the Company has adopted Financial Accounting Standards Board ("FASB") Statement No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets."
On January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair-value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
On January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which permits companies to choose to measure certain financial instruments and other items at fair value in order to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently. However, the Company has not elected to measure any additional financial instruments and other items at fair value (other than those previously required under other GAAP rules or standards) under the provisions of this standard.
SFAS No. 157 emphasizes that fair value is a market-based measurement, not an
entity-specific measurement. Therefore, a fair-value measurement should be
determined based on the assumptions that market participants would use in
pricing the asset or liability. As a basis for considering market participant
assumptions in fair-value measurements, SFAS No. 157 establishes a fair-value
hierarchy that distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy)
and the reporting entity's own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair-value measurement is based on inputs from different levels of the fair-value hierarchy, the level in the fair-value hierarchy within which the entire fair-value measurement falls is based on the lowest level input that is significant to the fair-value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair-value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Currently, the Company has investments in hybrid mortgage-backed securities, with a AAA rating fully guaranteed by U.S. government agencies (the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). The fair values of mortgage-backed securities originated by U.S. government agencies are based on a pricing model that incorporates prepayment speeds and spreads to determine appropriate average life of mortgage-backed securities. The spreads are sourced from broker/dealer's trade prices and the new issue market. As the significant inputs used to price the mortgage-backed securities are observable market inputs, the fair values of these securities are included in the Level 2 fair value hierarchy.
The Company is reporting a net loss of $605,152 for the three month period ended June 30, 2009 compared to net income totaling $2,642,711 for the same period in the prior year. Prior year results included a benefit for income taxes amounting to $2,800,000 associated with the reinvestment of condemnation proceeds and the deferral of tax pursuant to Section 1033 of the Internal Revenue Code. Basic and diluted net (loss) income per share amounted to $ (0.47) and $2.05 for the three month periods ended June 30, 2009 and 2008, respectively.
For the six month period ended June 30, 2009, the Company is reporting net income totaling $3,136,436 compared to $2,515,064 for the same period during the prior year. The current period includes a benefit for income taxes amounting to $4,127,000, which is also the result of the reinvestment of condemnation proceeds while the prior year period reflects the tax benefit cited in the quarterly results. Basic and diluted net income per share amounted to $2.43 and $1.95 for the six month periods ended June 30, 2009 and 2008, respectively.
Rental income totaled $1,169,157 for the current three month reporting period compared to $763,324 for the same period last year. For the most part, this $ 405,833 increase is attributable to the acquisition of the Fairfax Medical Center on March 31, 2009 and the Cortlandt Medical Center which was acquired in June of 2008. For the six months ended June 30, 2009, the Company generated rental income totaling $2,027,867 compared to $1,424,191 for the same period last year. Here again, the $603,676 increase is attributable for the most part to the acquisition of the medical centers in Fairfax, Virginia and Cortlandt Manor, New York.
For the six month period ended June 30, 2009, the expenses for the Company experienced similar increases and contributing factors. Expenses for the current six month period increased by $996,877, amounting to $2,839,093 compared to $1,842,216 during the same period last year. Rental property expenses, which amounted to $766,380, increased by $235,811 over the prior year and, as in the quarterly results, were mostly attributable to the addition of two new properties in Fairfax, Virginia, and Cortlandt Manor, New York. General and administrative expenses increased by $603,705, amounting to $1,775,105 compared to $1,171,400 during the prior year. The same contributing factors accounted for the majority of this increase for the six month period; legal and consulting fees amounted to $158,379 and increased by $118,601; condemnation litigation fees totaled $457,207 and increased by $248,787; and costs associated with the Company's pension plan amounted to $143,093, an increase of $137,034. In addition, salaries and benefits increased by $54,470, fees for outside services increased by $14,674 and corporate governance matters increased by $33,551. Again reflecting the acquisitions of the two new facilities in Virginia and New York, depreciation increased by $157,361, amounting to $297,608 for the current period.
As a result of the sale of a majority of the Company's investments in REIT qualified securities and a redirection of those funds into real estate acquisitions, interest income declined by $115,163 for the three month period ended June 30, 2009, amounting to $19,211. Similarly, interest income declined by $181,058 for the six month period, amounting to $114,105.
Profits generated by the above referenced sales of securities, coupled with prepayments, resulted in gains of $407 and $7,630 for the three month periods ended June 30, 2009 and 2008, respectively. For the six month periods, those gains amounted to $123,849 and $15,532 for 2009 and 2008, respectively.
Mirroring the increases brought about by the acquisitions mentioned earlier in this report, interest expense associated with the financing of the acquisition of those two facilities is reflected in the results for both the three and six month periods ended June 30, 2009. For the quarter, interest expense amounted to $255,922, an increase of $157,315 over the same period last year. For the six months ended June 30, 2009, interest expenses increased by $239,686 over the prior year, totaling $417,292.
As a result, the Company is reporting a loss before benefit for taxes of $605,152 for the three month reporting period, compared to a loss of $157,289 for the same period last year. The quarter ended June 30, 2008 reflected a benefit for income taxes of $2,800,000, resulting in net income totaling $2,642,711. For the six months ended June 30, 2009, the Company is reporting a loss before benefit for income taxes totaling $990,564 compared to a loss of $284,936 for the same period last year. Reflecting a benefit for income taxes of $4,127,000 for the six months ended June 30, 2009, the Company is reporting net income of $3,136,436, compared with $2,515,064, for the same period in the prior year.
Net cash used in operating activities was $952,386 and $839,970 during the six months ended June 30, 2009 and 2008, respectively. The cash used in operating activities in the current period was primarily related to a pension plan contribution of $200,000, increased land development costs of $79,007 and the prepayment of expenses and other assets of $191,031. The cash used in operating activities in the prior period was primarily related to increased payments to vendors of $393,210, the prepayment of expenses and other assets of $304,823 and increased land development costs of $144,283.
Net cash used in investing activities were $6,982,866 and $5,228,964 during the six months ended June 30, 2009 and 2008, respectively. Cash used in investing activities in the current period primarily consisted of the purchase of the Fairfax Medical Center ("FMC"), including deferred acquisition costs, of $13,022,966 partially offset by the sale of marketable securities of $6,805,800. The cash provided by investing activities in the prior period was essentially in connection with the purchase of the Cortlandt Medical Center ("CMC") for $7,014,362 partially offset by principal repayments of marketable securities of $2,128,927.
Net cash provided by financing activities was $7,697,267 and $5,078,201 during the six months ended June 30, 2009 and 2008, respectively. The net cash provided by financing activities in the current period was primarily in connection with obtaining a mortgage of $8,000,000 for the purchase of the FMC. The net cash provided during the prior period was essentially the result of obtaining a mortgage of $5,250,000 for the purchase of the CMC.
As of June 30, 2009, the Company had cash, cash equivalents and marketable securities totaling $2,308,005 and anticipates having the capacity to fund normal operating, general and administrative expenses, and its regular debt service requirements.
Beginning in the second half of 2007, the residential mortgage and capital markets began showing signs of stress, primarily in the form of escalating default rates on sub-prime mortgages, declining residential home values and increasing inventory nationwide. This "credit crisis" spread to the broader commercial credit markets and has reduced the availability of financing and widened spreads. These factors, coupled with a slowing economy, have reduced the volume of real estate transactions and increased capitalization rates. Despite the fact that the Company has invested in medical office buildings, an asset class that has been less vulnerable, if these conditions continue, our portfolio may experience lower occupancy and effective rents, which would result in a corresponding decrease in net income, funds from operations, and cash flows.
LIMITED PARTNERSHIP INVESTMENT
The Company owns a 10.93% limited partnership interest in Callery Judge Grove, L. P. (the "Grove") which owns a 3,700+ acre citrus grove in Palm Beach County, Florida. The Company is accounting for the investment under the equity method. As of June 30, 2009, the carrying value of the Company's investment was $0. The Grove had reported to its limited partners that in November 2008 it received an independent appraisal report of the citrus grove property which reflects the recent approval to develop 2,996 residential units and 235,000 square feet of commercial and retail space. Based upon the appraised value of the citrus grove property, at June 30, 2009, strictly on a pro-rata basis, the estimated fair value of the Company's interest in the Grove property would be approximately $21,700,000, without adjustment for minority interest and lack of marketability discount. The Company cannot predict what, if any, value it will ultimately realize from this investment.
In February 2009, the Grove made an offering to its partners to invest additional funds in the partnership. The offering, or capital call, had a minimum and maximum aggregate offering amount of $4 million and $6 million, respectively, and was due to expire on March, 16, 2009. In March 2009, after careful deliberation, the Company informed the Grove that it would not participate in the offering. Subsequently, the Company was informed that the offering period had been extended and remains open as of the date of this report; not participating in this offering will result in the Company's ownership percentage being diluted.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial conditions, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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