gyrodyne_10q-093009.htm
FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
|
[X]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the
quarterly period ended September 30,
2009
OR
|
[
]
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ____________ to ____________
Commission
file number 0-1684
Gyrodyne Company of America,
Inc.
(Exact
name of registrant as specified in its charter)
|
New York
|
11-1688021
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification
No.)
|
1 Flowerfield, Suite 24, St. James, NY 11780
(Address
and Zip Code of principal executive offices)
(631) 584-5400
(Registrant’s
telephone number, including area code)
_____________________________________________
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes___ No___
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [
] Accelerated
filer [ ]
Non-accelerated
filer [
] Smaller
reporting company [X]
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes __ No X
On
November 1, 2009, 1,289,878 shares of the Registrant’s common stock, par value
$1.00 per share, were outstanding.
INDEX TO
QUARTERLY REPORT OF GYRODYNE COMPANY OF AMERICA, INC.
QUARTER
ENDED SEPTEMBER 30, 2009
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Seq.
Page
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Form
10-Q Cover
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1
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Index
to Form 10-Q
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2
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PART
I - FINANCIAL INFORMATION
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3
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Item
1. Financial Statements.
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3
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Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008
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3
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Consolidated
Statements of Operations
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4
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Consolidated
Statements of Cash Flows
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5
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Notes
to Consolidated Financial Statements
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6
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
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11
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Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
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17
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Item
4T. Controls and Procedures.
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17
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PART
II - OTHER INFORMATION
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17
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Item
1. Legal Proceedings.
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17
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Item
6. Exhibits.
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18
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| SIGNATURES |
19 |
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EXHIBIT
INDEX
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20
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PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements.
|
GYRODYNE
COMPANY OF AMERICA, INC.
|
|
AND
SUBSIDIARIES
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
ASSETS
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
REAL
ESTATE
|
|
|
|
|
|
|
|
Rental
property:
|
|
|
|
|
|
|
|
Land
|
|
$ |
5,079,017 |
|
|
$ |
2,929,017 |
|
|
Building
and improvements
|
|
|
30,259,484 |
|
|
|
17,887,414 |
|
|
Machinery
and equipment
|
|
|
257,455 |
|
|
|
254,352 |
|
|
|
|
|
35,595,956 |
|
|
|
21,070,783 |
|
|
Less
accumulated depreciation
|
|
|
3,500,970 |
|
|
|
3,010,709 |
|
|
|
|
|
32,094,986 |
|
|
|
18,060,074 |
|
|
Land
held for development:
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
558,466 |
|
|
|
558,466 |
|
|
Land
development costs
|
|
|
1,334,246 |
|
|
|
1,213,092 |
|
|
|
|
|
1,892,712 |
|
|
|
1,771,558 |
|
|
Total
real estate, net
|
|
|
33,987,698 |
|
|
|
19,831,632 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
|
2,049,512 |
|
|
|
1,205,893 |
|
|
Investment
in Marketable Securities
|
|
|
- |
|
|
|
8,413,279 |
|
|
Rent
Receivable, net of allowance for doubtful accounts of $36,000
and $35,000, respectively
|
|
|
134,779 |
|
|
|
118,076 |
|
|
Interest
Receivable
|
|
|
1,376 |
|
|
|
49,678 |
|
|
Prepaid
Expenses and Other Assets
|
|
|
777,559 |
|
|
|
571,129 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
36,950,924 |
|
|
$ |
30,189,687 |
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,113,129 |
|
|
$ |
379,948 |
|
|
Accrued
liabilities
|
|
|
276,300 |
|
|
|
118,227 |
|
|
Tenant
security deposits payable
|
|
|
482,141 |
|
|
|
393,360 |
|
|
Mortgages
payable
|
|
|
18,276,665 |
|
|
|
10,560,486 |
|
|
Deferred
income taxes
|
|
|
1,195,061 |
|
|
|
5,336,000 |
|
|
Pension
liability
|
|
|
730,004 |
|
|
|
715,365 |
|
|
Total
Liabilities
|
|
|
22,073,300 |
|
|
|
17,503,386 |
|
|
|
|
|
|
|
|
|
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Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
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STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
Common
stock, $1 par value; authorized 4,000,000 shares;
1,531,086
|
|
|
|
|
|
|
|
|
|
shares
issued; 1,289,878 shares outstanding
|
|
|
1,531,086 |
|
|
|
1,531,086 |
|
|
Additional
paid-in capital
|
|
|
7,978,395 |
|
|
|
7,978,395 |
|
|
Accumulated
other comprehensive loss
|
|
|
(1,845,048 |
) |
|
|
(1,731,231 |
) |
|
Balance
of undistributed income other than gain or loss on sales of
properties
|
|
|
8,750,888 |
|
|
|
6,445,748 |
|
|
|
|
|
16,415,321 |
|
|
|
14,223,998 |
|
|
Less
cost of 241,208 shares of common stock held in treasury
|
|
|
(1,537,697 |
) |
|
|
(1,537,697 |
) |
|
Total
Stockholders’ Equity
|
|
|
14,877,624 |
|
|
|
12,686,301 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
36,950,924 |
|
|
$ |
30,189,687 |
|
See
notes to consolidated financial statements
|
GYRODYNE
COMPANY OF AMERICA, INC.
|
|
AND
SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS
OF
OPERATIONS
|
|
(UNAUDITED)
|
| |
|
Nine
Months Ended
|
|
|
Three
Months Ended
|
|
| |
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
Income
|
|
$ |
3,227,568 |
|
|
$ |
2,254,477 |
|
|
$ |
1,198,441 |
|
|
$ |
830,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
expenses
|
|
|
1,189,964 |
|
|
|
886,604 |
|
|
|
422,249 |
|
|
|
356,035 |
|
|
General
and administrative expenses
|
|
|
2,989,270 |
|
|
|
1,832,731 |
|
|
|
1,214,240 |
|
|
|
661,331 |
|
|
Depreciation
|
|
|
490,376 |
|
|
|
248,893 |
|
|
|
192,768 |
|
|
|
108,645 |
|
|
Total
|
|
|
4,669,610 |
|
|
|
2,968,228 |
|
|
|
1,829,257 |
|
|
|
1,126,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
123,202 |
|
|
|
419,752 |
|
|
|
9,097 |
|
|
|
124,589 |
|
|
Realized
gain on marketable securities
|
|
|
159,805 |
|
|
|
16,769 |
|
|
|
35,956 |
|
|
|
1,237 |
|
|
Interest
expense
|
|
|
(676,764 |
) |
|
|
(317,744 |
) |
|
|
(259,472 |
) |
|
|
(140,139 |
) |
|
Total
|
|
|
(393,757 |
) |
|
|
118,777 |
|
|
|
(214,419 |
) |
|
|
(14,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Benefit for Income Taxes
|
|
|
(1,835,799 |
) |
|
|
(594,974 |
) |
|
|
(845,235 |
) |
|
|
(310,038 |
) |
|
Benefit
for Income Taxes
|
|
|
(4,140,939 |
) |
|
|
(2,800,000 |
) |
|
|
(13,939 |
) |
|
|
- |
|
|
Net
Income (Loss)
|
|
$ |
2,305,140 |
|
|
$ |
2,205,026 |
|
|
$ |
(831,296 |
) |
|
$ |
(310,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$ |
1.79 |
|
|
$ |
1.71 |
|
|
$ |
(0.64 |
) |
|
$ |
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number Of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
1,289,878 |
|
|
|
1,289,878 |
|
|
|
1,289,878 |
|
|
|
1,289,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated financial statements
|
GYRODYNE
COMPANY OF AMERICA, INC.
|
|
AND
SUBSIDIARIES
|
|
CONSOLIDATED STATEMENTS
OF CASH
FLOWS
|
|
(UNAUDITED)
|
| |
|
Nine
Months Ended
|
|
| |
|
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,305,140 |
|
|
$ |
2,205,026 |
|
|
Adjustments
to reconcile net income to net cash
used in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
500,323 |
|
|
|
262,688 |
|
|
Bad
debt expense
|
|
|
18,000 |
|
|
|
18,000 |
|
|
Net
periodic pension benefit cost
|
|
|
214,639 |
|
|
|
9,088 |
|
|
Realized
gain on marketable securities
|
|
|
(159,805 |
) |
|
|
(16,769 |
) |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
|
Land
development costs
|
|
|
(121,154 |
) |
|
|
(328,830 |
) |
|
Accounts
receivable
|
|
|
(34,703 |
) |
|
|
(66,191 |
) |
|
Interest
receivable
|
|
|
48,302 |
|
|
|
14,183 |
|
|
Prepaid
expenses and other assets
|
|
|
(247,936 |
) |
|
|
(171,101 |
) |
|
(Decrease)
increase in liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
733,181 |
|
|
|
(322,756 |
) |
|
Accrued
liabilities
|
|
|
158,073 |
|
|
|
10,107 |
|
|
Deferred
income taxes
|
|
|
(4,140,939 |
) |
|
|
(2,800,000 |
) |
|
Pension
liability
|
|
|
(200,000 |
) |
|
|
- |
|
|
Tenant
security deposits
|
|
|
88,781 |
|
|
|
134,216 |
|
|
Total
adjustments
|
|
|
(3,143,238 |
) |
|
|
(3,257,365 |
) |
|
Net
cash used in operating activities
|
|
|
(838,098 |
) |
|
|
(1,052,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase
of medical office buildings
|
|
|
(13,022,966 |
) |
|
|
(7,014,362 |
) |
|
Costs
associated with property, plant and equipment
|
|
|
(1,504,469 |
) |
|
|
(947,005 |
) |
|
Proceeds
from sale of marketable securities
|
|
|
8,163,813 |
|
|
|
- |
|
|
Principal
repayments on investment in marketable securities
|
|
|
295,454 |
|
|
|
2,269,762 |
|
|
Net
cash used in investment activities
|
|
|
(6,068,168 |
) |
|
|
(5,691,605 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from mortgage
|
|
|
8,000,000 |
|
|
|
5,250,000 |
|
|
Principal
payments on mortgages
|
|
|
(283,821 |
) |
|
|
(117,382 |
) |
|
Loan
origination fees
|
|
|
33,706 |
|
|
|
(128,855 |
) |
|
Net
cash provided by financing activities
|
|
|
7,749,885 |
|
|
|
5,003,763 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
843,619 |
|
|
|
(1,740,181 |
) |
|
Cash
and cash equivalents at beginning of period
|
|
|
1,205,893 |
|
|
|
3,455,141 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
2,049,512 |
|
|
$ |
1,714,960 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
676,764 |
|
|
$ |
317,744 |
|
See
notes to consolidated financial statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. The
Company:
Gyrodyne
Company of America, Inc. (“Gyrodyne” or the “Company”) is a
self-managed and self-administered real estate investment trust (“REIT”) formed
under the laws of the State of New York. The Company operates
primarily in one segment. The Company’s 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 the Company’s
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 the Company 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, the Company has approximately 62.5 acres of
undeveloped property in St James, New York and a 10% limited partnership
interest in an undeveloped Florida property “the Grove”.
The
Company believes it has qualified, and expects to continue to qualify as a REIT
under Section 856(c)(1) of the Internal Revenue Code of 1986 as amended (the
“Code”). Accordingly, the Company generally will not be subject to
federal and state income tax, provided that distributions to its shareholders
equal at least 90% of its REIT taxable income as defined under the
Code. The Company is permitted to participate in certain activities
from which it was previously precluded in order to maintain its qualifications
as a REIT; however these activities must be conducted in an entity which elected
to be treated as a taxable REIT subsidiary (“TRS”) under the
Code. The Company has one taxable REIT subsidiary which will be
subject to federal and state income tax on the income from these
activities.
2. Basis
of Quarterly Presentations:
The
accompanying quarterly financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
(“GAAP”). The financial statements of the Company included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”) and, in the opinion of management,
reflect all adjustments which are necessary to present fairly the results for
the three and nine-month periods ended September 30, 2009 and 2008.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with GAAP have been condensed or omitted pursuant to such
rules and regulations; however, management believes that the disclosures are
adequate to make the information presented not misleading.
This
report should be read in conjunction with the audited financial statements and
footnotes therein included in the Annual Report on Form 10-K for the year ended
December 31, 2008.
The
results of operations for the three and nine-month periods ended September 30,
2009 are not necessarily indicative of the results to be expected for the full
year.
3. Principle of
Consolidation:
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany balances
and transactions have been eliminated in consolidation.
4. Investment
in Marketable Securities:
The
Company’s marketable securities consisted of debt securities classified as
available-for-sale and are reported at fair value, with the unrealized gains and
losses excluded from operating results and reported as a separate component of
stockholders' equity net of the related tax effect. These debt securities
consist of hybrid mortgage-backed securities fully guaranteed by agencies of the
U.S. Government and are managed by and held in an account with a major financial
institution. During the quarter ended September 30, 2009, the Company
sold its remaining marketable securities.
5. Earnings per
Share:
Basic
earnings per common share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the
period. Dilutive earnings per share give effect to stock options and
warrants which are considered to be dilutive common stock
equivalents. Basic income (loss) per common share was computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding. Treasury shares have been excluded from the
weighted average number of shares. As of March 20, 2007, all outstanding stock
options were either exercised or expired.
6. Income Taxes:
Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
7. Mortgages
Payable:
Mortgages
payable is comprised of the following:
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
Mortgage
payable - Port Jefferson Professional Park (a)
|
|
$ |
5,346,774 |
|
|
$ |
5,415,486 |
|
|
Mortgage
payable - Cortlandt Medical Center (b)
|
|
|
4,987,500 |
|
|
|
5,145,000 |
|
|
Mortgage
payable – Fairfax Medical Center (c)
|
|
|
7,942,391 |
|
|
|
- |
|
|
Total
|
|
$ |
18,276,665 |
|
|
$ |
10,560,486 |
|
|
(a)
In June 2007, in connection with the purchase of ten office buildings in
the Port Jefferson Professional Park (the “Port Jefferson Buildings”) in
Port Jefferson Station, New York, the Company assumed a $5,551,191
mortgage payable to a bank (the “Mortgage”). The Mortgage bears interest
at 5.75% through February 1, 2012 and adjusts to the higher of 5.75% or
275 basis points in excess of the Federal Home Loan Bank’s five year Fixed
Rate Advance thereafter. The Mortgage is collateralized by the Port
Jefferson Buildings and matures on February 1,
2022.
|
(b) In
June 2008, in connection with the purchase of the Cortlandt Medical Center, the
Company borrowed $5,250,000 from a bank (the “Cortlandt Mortgage”). The
Cortlandt Mortgage originally bore interest at a per annum rate of 225 basis
points above the one month LIBOR rate through maturity on July 1, 2018, subject
to monthly adjustment. The Cortlandt Mortgage is collateralized by the Cortlandt
Medical Center. As part of the terms and conditions of the Cortlandt Mortgage,
the Company exercised an option to enter into an interest rate swap agreement in
November 2008 thereby fixing the interest rate at 5.66% through November 1,
2011.
(c) In
March 2009, in connection with the purchase of the Fairfax Medical Center in
Fairfax, Virginia, by Virginia Healthcare Center, LLC (“VHC”), a wholly-owned
subsidiary of the Company, VHC borrowed $8,000,000 from a bank (the “Fairfax
Mortgage”). The Fairfax Mortgage bears interest at 5.875% through April 10, 2014
and thereafter adjusts to the higher of 5.50% or 300 basis points over the
weekly average yield on five-year United States Treasury securities. The Fairfax
Mortgage is collateralized by a Deed of Trust and Security Agreement
establishing a first trust lien upon the land, buildings and improvements as
well as a Collateral Assignment of Leases and Rents and matures on April 10,
2019. The payment of the indebtedness evidenced by the Fairfax Mortgage and the
performance by VHC of its obligations thereunder have been guaranteed by the
Company.
8. Retirement Plans:
The
Company records net periodic pension benefit cost pro rata throughout the
year. The following table provides the components of net periodic
pension benefit cost for the plan for the three and nine months ended September
30, 2009 and 2008:
| |
|
Nine
Months Ended
September
30,
|
|
|
Three
Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Pension
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
Cost
|
|
$ |
102,852 |
|
|
$ |
69,944 |
|
|
$ |
34,284 |
|
|
$ |
23,315 |
|
|
Interest
Cost
|
|
|
111,655 |
|
|
|
100,480 |
|
|
|
37,218 |
|
|
|
33,493 |
|
|
Expected
Return on Plan Assets
|
|
|
(87,911 |
) |
|
|
(166,680 |
) |
|
|
(29,304 |
) |
|
|
(55,560 |
) |
|
Amortization
of Actuarial Loss
|
|
|
88,043 |
|
|
|
5,345 |
|
|
|
29,348 |
|
|
|
1,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Periodic Benefit Cost After Curtailments and Settlements
|
|
$ |
214,639 |
|
|
$ |
9,089 |
|
|
$ |
71,546 |
|
|
$ |
3,030 |
|
During
the nine months ended September 30, 2009, the Company made a $200,000
contribution to the plan, of which approximately $100,000 was applied to
2008. The minimum required contribution for the December 31, 2009
plan year is $254,780 plus additional interest depending on the actual date of
deposit. During the nine months ended September 30, 2008, the Company
did not make a contribution to the plan.
9.
Commitments
and Contingencies:
Lease revenue
commitments - The approximate future minimum revenues from rental
property under the terms of all noncancellable tenant leases, assuming no new or
renegotiated leases are executed for such premises, are as
follows:
|
Twelve
Months Ending September 30,
|
|
Amount
|
|
|
|
|
|
|
|
2010
|
|
$ |
3,898,000 |
|
|
2011
|
|
|
2,546,000 |
|
|
2012
|
|
|
1,432,000 |
|
|
2013
|
|
|
1,095,000 |
|
|
2014
|
|
|
660,000 |
|
|
Thereafter
|
|
|
1,787,000 |
|
|
|
|
$ |
11,418,000 |
|
Employment
agreements – The Company has employment agreements with two officers that
provide for annual salaries aggregating approximately $397,000 and other
benefits in the event of a change in control, termination by the Company without
cause or termination by the officer for good reason (the “Employment
Agreements”). On June 12, 2009, the Company and its two officers mutually agreed
to terminate the automatic extension provisions of the Employment Agreements. As
a result, the term of the Employment Agreements end on June 12,
2012.
Land consulting
agreement – The Company retained DPMG, Inc. d/b/a Landmark National,
commencing on March 1, 2007, for general consulting, review of pertinent
documents, consultations regarding land planning and economic feasibility
studies and coordination with project engineers associated with the Company’s
claim for additional compensation in its condemnation litigation (See Part II
Item 1: Legal Proceedings). The agreement provides for equal monthly payments of
$27,778 terminating on February 1, 2010.
10. Revolving Credit
Note:
The
Company's line of credit has a borrowing limit of $1,750,000, bears interest at
the lending institution's prime-lending rate (3.25% at September 30, 2009) plus
1%, and is subject to certain financial covenants. The line is secured by
certain real estate and expires on June 1, 2011. As of September 30, 2009 and
December 31, 2008, $1,750,000 was available under this agreement and the Company
was in compliance with the financial covenants.
11.
Fair Value of Financial Instruments
Effective
January 1, 2008, the Company adopted Accounting Codification Statement
(“ASC”) 820-10 (formerly Statement No. 157, “Fair Value Measurements”
(“FAS No. 157”)), which establishes a framework for measuring fair value by
creating a three-level fair value hierarchy that ranks the quality and
reliability of information used to determine fair value, and requires new
disclosures of assets and liabilities measured at fair value based on their
level in the hierarchy. ASC 820-10 also defines fair value as the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date. 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. The application of ASC 820-10, however, may change current
practice within an organization. ASC 820-10 was effective January 1, 2008,
applied prospectively. In February 2008, the FASB issued ASC 820-10-15-15
(formerly FAS Staff Position No.157-2, "Effective Date of FASB Statement No.
157"), which provided a one-year deferral for the implementation of ASC 820-10
for certain non-financial assets and liabilities measured on a nonrecurring
basis. The provisions of ASC 820-10 relating to certain non-financial assets and
liabilities is effective prospectively, beginning January 1, 2009. The adoption
of ASC 820-10 with respect to financial and non-financial assets and liabilities
did not have a material financial impact on the Company’s consolidated results
of operations or financial condition.
ASC
820-10 establishes a hierarchy for inputs used in measuring fair value that
maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the
financial instrument developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that reflect the
Company’s estimates about what assumptions market participants would use in
pricing the financial instrument developed based on the best information
available in the circumstances. The fair value hierarchy is broken down into
three levels based on the reliability of inputs as follows:
|
|
•
|
|
Level
1: Valuations based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to
access. Since valuations are based on quoted prices that are readily and
regularly available in an active market, valuation of these products does
not entail a significant degree of
judgment.
|
Financial
instruments utilizing Level 1 inputs generally include exchange-traded equity
securities listed in active markets and most U.S. Government
securities.
|
|
•
|
|
Level
2: Valuations based on quoted prices for similar instruments in active
markets or quoted prices for identical or similar instruments in markets
that are not active or for which all significant inputs are observable,
either directly or indirectly.
|
Financial
instruments utilizing Level 2 inputs generally include certain mortgage-backed
securities, or MBS, and corporate debt securities and certain financial
instruments classified as derivatives, including interest rate swap contracts
and credit default swaps, where fair value is based on observable market
inputs.
|
|
•
|
|
Level
3: Inputs are unobservable inputs for the asset or liability, and include
situations where there is little, if any, market activity for the asset or
liability. In certain cases, the inputs used to measure fair value may
fall into different levels of the fair value hierarchy. In such cases, the
level in the fair value hierarchy within which the fair value measurement
in its entirety falls has been determined based on the lowest level input
that is significant to the fair value measurement in its entirety. Our
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.
|
12. Acquisition of
Properties:
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 a bank. In addition, $131,966 of pre-acquisition development
related costs associated with the acquisition were capitalized. The total
capitalized costs were allocated as follows:
|
Land
|
|
$ |
2,150,000 |
|
|
Buildings
|
|
$ |
10,872,966 |
|
|
Mortgage
payable
|
|
$ |
(8,000,000 |
) |
|
Cash
|
|
$ |
5,022,966 |
|
The
Company had non-recurring acquisition fees of $57,495 which were expensed as
incurred.
On a pro
forma basis, the comparison of revenues, loss before benefit for income taxes,
benefit for income taxes, net income (loss) and net income (loss) per common
share for the three and nine-months ended September 30, 2009 and 2008, as if the
Company owned the Fairfax Medical Center at the beginning of both periods, are
as follows:
| |
|
Nine
Months Ended
|
|
|
Three
Months Ended
|
|
| |
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$ |
3,548,568 |
|
|
$ |
3,263,226 |
|
|
$ |
1,198,441 |
|
|
$ |
1,166,535 |
|
|
Loss
Before Benefit for Income Taxes
|
|
$ |
1,792,799 |
|
|
$ |
498,224 |
|
|
$ |
845,235 |
|
|
$ |
277,788 |
|
|
Benefit
for Income Taxes
|
|
$ |
(4,140,939 |
) |
|
$ |
(2,800,000 |
) |
|
$ |
13,939 |
|
|
$ |
- |
|
|
Net
Income (Loss)
|
|
$ |
2,348,140 |
|
|
$ |
2,301,776 |
|
|
$ |
(831,296 |
) |
|
$ |
(277,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Common Share:
|
|
$ |
1.82 |
|
|
$ |
1.78 |
|
|
$ |
(0.64 |
) |
|
$ |
(0.22 |
) |
The
transaction qualifies for tax deferral treatment under Section 1033 of the
Internal Revenue Code and completes the reinvestment program of the $26.3
million advance payment received in connection with the condemnation of the 245
acres of the Flowerfield property and is also a qualified REIT
Investment.
13. Recent
Accounting Pronouncements:
In April
2009, the FASB issued ASC 825-10 and ASC 270-10-05-05-1(formerly Staff Position
No. 107-1 and APB 28-1), Interim Disclosures about Fair Value of Financial
Instruments, or FSP FAS 107-1 and APB 28-1. ASC 825-10 and ASC
270-10-05-05-1 amends FAS 107, Disclosures about Fair Value of Financial
Instruments (“FAS No. 107”), to require an entity to provide disclosures about
fair value of financial instruments in interim financial information and amends
APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in
summarized financial information at interim reporting periods. Under ASC 825-10
(formerly FAS 107-1 and APB 28-1), a publicly-traded company shall include
disclosures about the fair value of its financial instruments whenever it issues
summarized financial information for interim reporting periods. In addition,
entities must disclose, in the body or in the accompanying notes of its
summarized financial information for interim reporting periods and in its
financial statements for annual reporting periods, the fair value of all
financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial position, as
required by ASC 825-10 and ASC 270-05-05-1 (formerly FAS No. 107, FSP FAS 107-1
and APB 28-1) are effective for interim and annual reporting periods ending
after June 15, 2009. The Company adopted this pronouncement on July 1,
2009. The adoption did not have a material effect on the Company’s
financial position or results of operations.
In April
2009, the FASB issued ASC 320-10-65-1 (formerly Staff Position No. 115-2 and FAS
124-2), Recognition and Presentation of Other-Than- Temporary Impairments, or
FSP FAS 115-2 and FAS 124-2. ASC 320-10-65-1 (i) changes existing
guidance for determining whether an impairment is other than temporary to debt
securities and (ii) replaces the existing requirement that the entity’s
management assert it has both the intent and ability to hold an impaired
security until recovery with a requirement that management assert: (a) it does
not have the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost basis. Under ASC
320-10-65-1, declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses. The amount of the impairment related to
other factors is recognized in other comprehensive income. ASC
320-10-65-1 is effective for interim and annual reporting periods ending after
June 15, 2009. The Company adopted this pronouncement on July 1,
2009. The adoption did not have a material effect on the Company’s
financial position or results of operations.
In April
2009, the FASB issued ASC 820-10-65-4 (formerly Staff Position No. FAS 157-4),
Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly. ASC 820-10-65-4 affirms that the objective of fair
value when the market for an asset is not active is the price that would be
received to sell the asset in an orderly transaction, and clarifies and includes
additional factors for determining whether there has been a significant decrease
in market activity for an asset when the market for that asset is not active.
ASC 820-10-65-4 requires an entity to base its conclusion about whether a
transaction was not orderly on the weight of the evidence. ASC 820-10-65-4 also
amended ASC 820-10 (formerly FAS No. 157) to expand certain disclosure
requirements. ASC 820-10-65-4 is effective for interim and annual
reporting periods ending after June 15, 2009, and shall be applied
prospectively. The Company adopted this pronouncement on July 1,
2009. The adoption did not have a material effect on the Company’s
financial position or results of operations.
In April
2009, the FASB issued ASC 805-10, 805-20 and 805-30 (formerly FASB Staff
Position No. 141(R)-1), Accounting for Assets Acquired and Liabilities Assumed
in a Business Combination That Arise from Contingencies, to amend and clarify
ASC 805 (formerly FAS No. 141(R). FSP 141(R)-1). ASC 805-10, 805-20
and 805-30 requires an acquirer to recognize at fair value, at the acquisition
date, an asset acquired or a liability assumed in a business combination that
arises from a contingency if the acquisition-date fair value of that asset or
liability can be determined during the measurement period. If the fair value
cannot be determined during the measurement period, an asset or a liability
shall be recognized at the acquisition date if the asset or liability can be
reasonably estimated and if information available before the end of the
measurement period indicates that it is probable that an asset existed or that a
liability had been incurred at the acquisition date. ASC 805-10, 805-20 and
805-30 amends the disclosure requirements of ASC 805 to include business
combinations that occur either during the current reporting period or after the
reporting period but before the financial statements are issued. ASC 805-10,
805-20 and 805-30 are effective for fiscal years beginning after December 15,
2008 and interim periods within those years. The Company adopted this
pronouncement on January 1, 2009. The adoption did not have a
material effect on the Company’s financial position or results of
operations
In May
2009, the FASB issued ASC 855-10 (formerly Statement No. 165, “Subsequent
Events” (“FAS 165”)), which establishes general standards of accounting for, and
requires disclosure of, events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. The
Company adopted the provisions of ASC 855-10 for the quarter ended June 30,
2009. The adoption did not have a material effect on the Company’s
financial position or results of operations.
In June
2009, the FASB issued ASC 105-10 (formerly Statement No. 168 (“FAS168”)), “The
FASB Accounting Standard Codification and the Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162” (“FAS162”). ASC
105-10 replaces FAS 162 “The Hierarchy of Generally Accepted Accounting
Principles” and establishes the “FASB Accounting Standard Codification”
(Codification) as a source of authoritative accounting principles recognized by
the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with generally accepted accounting principles
in the United States. The codification does not change current GAAP, but changes
the referencing of financial standards, and is intended to simplify user access
to authoritative GAAP by providing all the authoritative literature related to a
particular topic in one place. All guidance contained in the
Codification carries an equal level of authority. On the effective date of ASC
105-10, the Codification will supersede all then-existing non-SEC accounting and
reporting standards. All other nongrandfathered non-SEC accounting literature
not included in the Codification will become nonauthoritative. ASC 105-10 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Company adopted this pronouncement for
the quarter ended September 30, 2009. The adoption did not have a
material effect on the Company’s financial position or results of
operations.
14. Reclassifications:
Certain
amounts in the prior year have been reclassified to conform to the
classification used in the current year.
15. Subsequent
Events:
Subsequent
to September 30, 2009, the Company announced the hiring of Mr. Gary Fitlin, to
the position of Chief Financial Officer.
Subsequent
to September 30, 2009 and through November 6, 2009, the date which management
evaluated all subsequent events, and on which the financial statements were
issued other than the above event, the Company had no reportable subsequent
events.
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
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.
Global
Credit and Financial Crisis: The continued concerns about the impact
of a wide spread and long term global credit and financial crisis have
contributed to market volatility and diminishing expectations for the real
estate industry, including the potential depression in our common stock
price. The continued progression of our condemnation lawsuit has also
added volatility to our common stock price. As a result, our business
continues to be impacted including (1) difficulty obtaining financing to
renovate or expand our current real estate holdings, (2) difficulty in
consummating property acquisitions, (3) increased challenges in re-leasing
space, and (4) potential risks stemming from late rental receipts, tenant
defaults, or bankruptcies.
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:
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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;
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actively
pursuing the re-zoning effort of the Flowerfield property to maximize its
value;
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employing
cost-saving strategies to reduce our general and administrative expenses;
and
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diligently
managing the condemnation lawsuit.
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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.
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 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.
The
Company had 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. In the quarter ending September 30, 2009, the Company
liquidated its remaining investments in these hybrid mortgage backed
securities.
RESULTS
OF OPERATIONS
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.
Rental
expenses for the nine months ended September 30, 2009 and 2008 were $1,189,964
and $886,604, respectively, an increase of $303,360 or 34%. The
acquisition of the medical centers in Fairfax, Virginia and Cortlandt Manor, New
York, were primarily responsible for the increase in rental expense of $380,653,
which was offset by a reduction in rental expenses of $77,293, primarily from
the Port Jefferson and Flowerfield 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.
LIQUIDITY
AND CAPITAL RESOURCES
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 operating activities was $838,098 and $1,052,339 during the nine months
ended September 30, 2009 and 2008, respectively. The cash used in operating
activities in the current period was primarily related to land development costs
of $121,154, prepaid expenses and other assets of $247,936, and pension
contributions of $200,000.
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.
On June
2, 2008, the Company acquired the Cortlandt Medical Center (“CMC”) in Cortlandt
Manor, New York. CMC consists of five buildings which are situated on
5.0 acres with approximately 30,000 square feet of rentable space and an
occupancy rate of approximately 97% when acquired. The purchase price
was $7,000,000 or approximately $234.81 per square foot. There is no
material relationship between the Company and the seller. Of the
$7,000,000 purchase price for CMC, the Company paid $1,750,000 in cash and
received financing in the amount of $5,250,000 from M&T Bank. In
addition, approximately $14,362 of costs associated with the acquisition was
capitalized.
LIMITED
PARTNERSHIP INVESTMENT
The
Company owns a 9.99% 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 September 30, 2009, the carrying value of the Company’s
investment was $0. The Grove had reported to its limited partners that in
October 2009 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 September 30, 2009, strictly on a
pro-rata basis, the estimated fair value of the Company's interest in the Grove
property would be approximately $17,134,000 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
remained open until July 15, 2009. The Company’s non-participation in
the offering diluted its ownership interest to 9.99% from 10.93%.
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.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Not
required for smaller reporting companies.
Item
4T. Controls and Procedures.
The
Company’s management, including the Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), have evaluated the effectiveness of the Company’s
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) as of September 30, 2009. Based upon that evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission and that information is accumulated and
communicated to the Company’s management, including the CEO and CFO, to allow
timely decisions regarding required disclosure. It should be noted that design
of any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions
regardless of how remote.
There
have been no changes in the Company’s internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of
Exchange Act Rule 13a-15 that occurred during the Company’s last fiscal quarter
that has materially affected, or that is reasonably likely to materially affect,
the Company’s internal control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
Gyrodyne Company of America,
Inc. v. The State University of New York at Stony Brook
On May 1,
2006 the Company commenced litigation in the Court of Claims of the State of New
York seeking just compensation for the 245.5 acres in St. James and Stony Brook,
New York (the “Property”) that were appropriated by the State on November 2,
2005 under the power of eminent domain. On November 10, 2008,
Gyrodyne and the State of New York filed with the Court of Claims their
respective appraisals regarding the value of the Property. As of the November
2005 appropriation date, Gyrodyne’s appraiser has valued the Property at
$125,000,000, based in part upon a separate zoning analysis report that Gyrodyne
also filed with the Court which concluded that there was a high probability the
Property would have been rezoned from light industrial use to a Planned
Development District. The State’s appraiser appraised the Property
using the current light industrial zoning at a fair market value of
$22,450,000.
As the
State's appraisal is $3,865,000 less than the $26,315,000 Advance Payment
already made to Gyrodyne, if the Court of Claims were to adopt the State of New
York’s November 10, 2008 appraisal, the State could recoup the $3,865,000
difference between the Advance Payment and the State of New York’s November 10,
2008 appraisal, including interest already paid on the Advance
Payment.
The
Company believes the State’s appraisal is fundamentally flawed in that it
misapplied the eminent domain law’s requirement that just compensation be
determined based upon the highest and best use and the probability that such use
could have been achieved.
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.
Faith Enterprises v.
Gyrodyne, Supreme Court, Suffolk County, Index # 3511/2007.
This
case, reported on in prior reports, was settled with no consideration being paid
by the Company to the plaintiffs. The settlement stipulation that
discontinued the matter was signed by all parties and was filed with the Suffolk
Supreme Court on July 16, 2009.
In
addition, in the normal course of business, the Company is a party to various
legal proceedings. After reviewing all actions and proceedings pending against
or involving the Company, management considers the aggregate loss, if any, will
not be material to the Company’s financial statements.
Items 2
through 5 are not applicable to the three months ended September 30,
2009.
Item
6. Exhibits.
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3.1
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Restated
Certificate of Incorporation of Gyrodyne Company of America, Inc.
(1)
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3.2
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Amended
and Restated Bylaws of Gyrodyne Company of America, Inc.
(2)
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4.1
|
Form
of Stock Certificate of Gyrodyne Company of America, Inc.
(4)
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4.2
|
Rights
Agreement, dated as of August 10, 2004, by and between Gyrodyne Company of
America, Inc. and Registrar and Transfer Company, as Rights Agent,
including as Exhibit B the forms of Rights Certificate and of Election to
Purchase. (3)
|
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31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
(5)
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31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
(5)
|
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32.1
|
CEO
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(5)
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32.2
|
CFO
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(5)
|
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(1)
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Incorporated
herein by reference to the Annual Report on Form 10-KSB/A, filed with the
Securities and Exchange Commission on September 5,
2001.
|
|
(2)
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Incorporated
herein by reference to Form 8-K, filed with the Securities and Exchange
Commission on June 18, 2008.
|
|
(3)
|
Incorporated
herein by reference to Form 8-K, filed with the Securities and Exchange
Commission on August 13, 2004.
|
|
(4)
|
Incorporated
herein by reference to the Quarterly Report on Form 10-Q, filed with the
Securities and Exchange Commission
on November 13, 2008.
|
|
(5)
|
Filed
as part of this report.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GYRODYNE
COMPANY OF AMERICA, INC.
|
Date:
November 6, 2009
|
/s/ Stephen V. Maroney
|
|
|
By
Stephen V. Maroney
|
|
|
President,
Chief Executive Officer and
Treasurer
|
|
Date:
November 6, 2009
|
/s/ Gary Fitlin
|
|
|
By
Gary Fitlin
|
|
|
Chief
Financial Officer
|
EXHIBIT
INDEX
|
3.1
|
Restated
Certificate of Incorporation of Gyrodyne Company of America, Inc.
(1)
|
|
3.2
|
Amended
and Restated Bylaws of Gyrodyne Company of America, Inc.
(2)
|
|
4.1
|
Form
of Stock Certificate of Gyrodyne Company of America, Inc.
(4)
|
|
4.2
|
Rights
Agreement, dated as of August 10, 2004, by and between Gyrodyne Company of
America, Inc. and Registrar and Transfer Company, as Rights Agent,
including as Exhibit B the forms of Rights Certificate and of Election to
Purchase. (3)
|
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
(5)
|
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
(5)
|
|
32.1
|
CEO
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(5)
|
|
32.2
|
CFO
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(5)
|
|
(1)
|
Incorporated
herein by reference to the Annual Report on Form 10-KSB/A, filed with the
Securities and Exchange Commission on September 5,
2001.
|
|
(2)
|
Incorporated
herein by reference to Form 8-K, filed with the Securities and Exchange
Commission on June 18, 2008.
|
|
(3)
|
Incorporated
herein by reference to Form 8-K, filed with the Securities and Exchange
Commission on August 13, 2004.
|
|
(4)
|
Incorporated
herein by reference to the Quarterly Report on Form 10-Q, filed with the
Securities and Exchange Commission
on November 13, 2008.
|
|
(5)
|
Filed
as part of this report.
|
Seq. Page
20