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| GYRO > SEC Filings for GYRO > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
When we use the terms "Gyrodyne," "the Company," "we," "us," and "our," we mean Gyrodyne Company of America, Inc. and all entities owned by us, including non-consolidated entities, except where it is clear that the term means only the parent company. References herein to our Quarterly Report are to this Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.
Forward Looking Statements. 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 Quarterly 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.
Overview:
General: We are a self-managed and self-administered real estate investment trust formed under the laws of the State of New York. We operate primarily in one segment. Our primary business is the investment in and the acquisition, ownership and management of a geographically diverse portfolio of medical office, industrial and development of industrial and residential properties. Substantially all of our properties are subject to net leases in which the tenant must reimburse Gyrodyne for a portion of or all or substantially all of the costs and /or cost increases for utilities, insurance, repairs and maintenance, and real estate taxes. However, certain leases provide that the Company is responsible for certain operating expenses.
As of September 30, 2009 we had 100% ownership in three medical office parks, comprising approximately 130,000 rentable square feet and a multitenant industrial park comprising approximately 127,000 rentable square feet. In addition, we have approximately 62.5 acres of undeveloped property in St. James, New York and approximately a 10% limited partnership interest in an undeveloped Florida property called "the Grove".
Our revenues and cash flows are generated predominantly from property rent
receipts. As a result, growth in revenues and cash flows is directly correlated
to our ability to (1) re-lease suites that are vacant or may become vacant at
favorable rates, (2) successfully settle the condemnation litigation lawsuit,
(3) expand our existing income producing assets through additional investment,
and (4) acquire additional income-producing real estate assets.
Business Strategy: We have focused our business strategy during the current financial crisis to strike a balance between preserving capital and improving the market value of our portfolio to meet our long term goal of executing on a liquidity event or series of liquidity events within approximately the next three years. Included within this strategy, are the following objectives:
· actively managing our portfolio to improve our net operating income and operating cash flow from these assets while simultaneously increasing the market values of the underlying operating properties;
· actively pursuing the re-zoning effort of the Flowerfield property to maximize its value;
· employing cost-saving strategies to reduce our general and administrative expenses; and
· diligently managing the condemnation lawsuit.
We believe these objectives will strengthen our business and enhance the value of our underlying real estate portfolio.
Third Quarter 2009 Transaction Summary
The following summarizes our significant transactions and other activity during the three months ended September 30, 2009.
Leasing - We entered into 18 new leases and lease extensions encompassing approximately 30,000 square feet. The Company recognized $40,053 in tenant deferred revenue.
Condemnation lawsuit - The trial in the Court of Claims commenced on August 13, 2009 and concluded on August 18, 2009. The Court set November 23, 2009 as the deadline for the parties to submit post-trial memoranda of law.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. 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. On a regular basis, we evaluate our assumptions, judgments and estimates. 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. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report.
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.
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 ASC 360-10 (formerly Financial Accounting Standards Board ("FASB") Statement No. 144), "Accounting for the Impairment or Disposal of Long Lived Assets."
Assets and Liabilities Measured at Fair-Value
On January 1, 2008, the Company adopted ASC 820-10 (formerly 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. ASC 820-10 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 ASC825-10 (formerly 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.
ASC 820-10 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, ASC 820-10 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.
Three Months Ended September 30, 2009 compared with September 30, 2008.
Rental income for the three months ended September 30, 2009 and 2008 were $1,198,441 and $830,286, respectively, an increase of $368,155 or 44%. The increase is primarily comprised of $309,815 attributable to the acquisition of the Fairfax Medical Center on March 31, 2009 and an increase in rental revenue from new leases net of lower renewal rates of approximately $58,340. The majority of the impact of the lower lease rates was from one tenant who we converted to a longer term more favorable net lease. This lease conversion is in line with meeting our strategy of balancing short term cash flows with long term value of the underlying properties.
Rental expenses for the three months ended September 30, 2009 and 2008 were $422,249 and $356,035, respectively, an increase of $66,214 or 19%. The acquisition of the Fairfax Medical Center increased rental expenses by $108,888 which was offset by a reduction in rental expenses of $42,674 primarily from the Port Jefferson and Flowerfield properties.
General and Administrative expenses for the three months ended September 30, 2009 and 2008 were $1,214,240 and $661,331, respectively, an increase of $552,909 or 84%. The three major contributing factors to the increase in general and administrative expenses were an increase of $422,182 in condemnation litigation expenses; an increase in real estate development and asset acquisition expenses of $41,773 and $57,495, respectively, and increased costs associated with the Company's pension plan of $68,517, offset by favorable decreases in other G&A expenses of $37,058.
Depreciation for the three months ended September 30, 2009 and 2008 were $192,768 and $108,645, respectively, an increase of $84,123. Approximately $69,795 of the increase is the result of the acquisition of the Fairfax Medical Center. The remaining increase of $14,328 is from renovations in the remaining developed property portfolio.
Interest income for the three months ended September 30, 2009 and 2008 was $9,097 and $124,589, respectively, a decrease of $115,492 or 93%. The decrease is primarily due to the sale of the Company's remaining investments in REIT-qualified securities and a redirection of those funds into real estate acquisitions.
Realized gain on marketable securities for the three months ended September 30, 2009 and 2008 was $35,956 and $1,237, respectively, an increase of $34,719. The increase is attributable to the sale of the remaining investment in hybrid mortgage backed securities.
Interest expense for the three months ended September 30, 2009 and 2008 was $259,472 and $140,139, respectively, an increase of $119,333 or 85%. The increase is due to the debt incurred to purchase the Fairfax Medical Center.
The increase in the benefit for income tax of $13,939 is due to deferred tax adjustments from our investment in the "Grove".
The Company is reporting a net loss of $831,296 and $310,038 for the three months ended September 30, 2009 and 2008, respectively, primarily due to the impact of the items discussed above.
Nine Months Ended September 30, 2009 compared with September 30, 2008.
Rental income for the nine months ended September 30, 2009 and 2008 were $3,227,568 and $2,254,477, respectively, an increase of $973,091 or 43%. Approximately $1,068,916 of the increase is attributable to the acquisition of the medical centers in Fairfax, Virginia and Cortlandt Manor, New York, offset by $95,825 related to lower renewal rates and an increase in vacancy at our Port Jefferson and Flowerfield facilities. The majority of the impact of the lower lease rates was from one tenant who we converted to a longer term more favorable net lease. This lease conversion is in line with meeting our strategy of balancing short term cash flows with long term value of the underlying properties.
General and Administrative expenses for the nine months ended September 30, 2009 and 2008 were $2,989,270 and $1,832,731, respectively, an increase of $1,156,539 or 63%. The major contributing factors to the increase in general and administrative expenses were an increase of $671,393 in condemnation litigation expenses, an increase in real estate development and asset acquisition expenses of $41,773 and $57,495, respectively, an increase in legal and consulting fees of $114,275 and costs associated with the Company's pension plan increased by $205,551 and an increase in other expenses of $66,052.
Depreciation for the nine months ended September 30, 2009 and 2008 were $490,376 and $248,893, respectively, an increase of $241,483. Approximately $216,293 of the increase is the result of the acquisition of the medical centers in Fairfax, Virginia and Cortlandt Manor, New York. The remaining increase of $25,190 is from renovations in the remaining developed property portfolio.
Interest income for the nine months ended September 30, 2009 and 2008 were $123,202 and $419,752, respectively, a decrease of $296,550 or 71%. The decrease of $296,550 is primarily due to the sale of the Company's remaining investments in REIT qualified securities and a redirection of those funds into real estate acquisitions.
Realized gain on marketable securities for the nine months ended September 30, 2009 and 2008 were $159,805 and $16,769, respectively, an increase of $143,036 or 853%. The increase is attributable to the sale of the remaining investment in marketable securities.
Interest expense for the nine months ended September 30, 2009 and 2008 were $676,764 and $317,744, respectively, an increase of $359,020 or 113%. The increase is due to the debt incurred to purchase the medical centers in Fairfax, Virginia and Cortlandt Manor, New York.
The benefit for income tax for the nine months ended September 30, 2009 and 2008 were $4,140,939 and $2,800,000, respectively, an increase in the benefit of $1,340,939. The increase was primarily due to the re-investment of the condemnation proceeds.
The Company is reporting net income of $2,305,140 and $2,205,026 for the nine months ended September 30, 2009 and 2008, respectively, primarily due to the impact of the items discussed above.
Cash Flows: We believe that a main focus of management is to effectively manage our balance sheet through cash flow management of our tenant leases, maintaining occupancy, and pursuing and recycling of capital.
The Company originally received $26.3 million as an advance payment in connection with the condemnation of 245 acres of the Flowerfield property. The proceeds were invested in hybrid mortgage backed securities pending the identification of REIT-qualified investment properties that would satisfy the Internal Revenue Code Section 1033 ("IRC 1033") deferral requirements. In June 2007, the Company acquired the Port Jefferson Professional Park for approximately $8.9 million. The purchase was a REIT qualified investment that also met the requirements for tax deferred treatment under IRC 1033.
During the nine months ended September 30, 2009, we purchased the Fairfax Medical Center in Fairfax, Virginia, for $12.9 million. After this purchase, the Company has completed the reinvestment of the $26.3 million in condemnation proceeds. This purchase exceeded the tax deferred IRC 1033 remaining balance of $10.4 million, the balance of our condemnation proceeds. The re-investment resulted in a tax benefit of approximately $4.1 million. Furthermore, in mid-2008, we reinvested $7.0 million of condemnation proceeds in the purchase of the Cortlandt Medical Center in Cortlandt Manor, New York, resulting in a tax benefit of $2.8 million.
Management believes there is opportunity to increase its cash flows from its existing property portfolio through renovations and expansions. The extent to which management expands its existing portfolio through renovations, expansions or acquisitions will be dependant on the economic recovery and the availability of additional financing at favorable terms.
We generally finance our operations through existing cash on hand and fund our acquisitions through a combination of cash on hand and debt. The Company has a $1,750,000 revolving credit line with a bank, bearing interest at a rate of prime (3.25% at September 30, 2009) plus 1%. At statement date, the full amount of the credit facility is available.
As of September 30, 2009, the Company had cash, cash equivalents and marketable securities totaling $2,049,512 and anticipates having the capacity to fund normal operating, general and administrative expenses, and its regular debt service requirements.
Net cash used in investing activities was $6,068,168 and $5,691,605 during the nine months ended September 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 and costs associated with property , plant and equipment of $1,504,469, partially offset by the sale of marketable securities of $8,163,813 and principal payments received on the investment in marketable securities of $295,454. 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 $2,269,762.
Net cash provided by financing activities was $7,749,885 and $5,003,763 during the nine months ended September 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.
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.
Financings: On March 31, 2009, the Company, through its wholly owned subsidiary Virginia Healthcare Center, LLC, acquired the Fairfax Medical Center in Fairfax, Virginia (the "Property") from Fairfax Medical Center, LLC (the "Seller"). The Property consists of two office buildings which are situated on 3.5 acres with approximately 58,000 square feet of rentable space and an occupancy rate of approximately 84% when acquired. The purchase price was $12,891,000 or approximately $222 per square foot. There is no material relationship between the Company and the Seller. Of the $12,891,000 purchase price for the Property, the Company paid $4,891,000 in cash and received financing in the amount of $8,000,000 from Virginia Commerce Bank. In addition, $131,966 of costs associated with the acquisition was capitalized.
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