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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
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{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12917
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Wellsford Real Properties, Inc.
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(Exact name of registrant as specified in its charter)
Maryland 13-3926898
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
610 Fifth Avenue, New York, NY 10020
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(Address of principal executive offices)
(Zip Code)
(212) 333-2300
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(Registrant's telephone number, including area code)
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
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Number of shares of common stock, $.01 par value, outstanding as of November
14, 1997: 16,572,043.
Number of shares of Class A common stock, $.01 par value, outstanding as of
November 14, 1997: 339,806.
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WELLSFORD REAL PROPERTIES, INC.
FORM 10-Q
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INDEX
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Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1997
(unaudited) and December 31, 1996 3
Consolidated Statements of Income (unaudited) for
the three and nine months ended September 30, 1997
and 1996. 4
Consolidated Statements of Cash Flows (unaudited) for
the nine months ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION 19
SIGNATURES 21
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
Real estate assets, at cost
Land $ -- $ --
Buildings and improvements -- --
------------ ------------
-- --
Less, accumulated depreciation -- --
------------ ------------
-- --
Construction in progress 21,864,426 21,306,000
------------ ------------
21,864,426 21,306,000
Notes receivable 145,879,967 17,800,000
Investment in joint venture 32,425,349 --
------------ ------------
Total real estate assets 200,169,742 39,106,000
Cash and cash equivalents 5,532,540 --
Restricted cash 6,717,105 5,520,000
Prepaid and other assets 1,982,939 134,000
------------ ------------
Total Assets $214,402,326 $ 44,760,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 14,755,000 $ 14,755,000
Credit facility 10,000,000 --
Accrued expenses and other liabilities 6,667,004 --
------------ ------------
Total Liabilities 31,422,004 14,755,000
------------ ------------
Commitments and contingencies -- --
Minority interest 3,092,105 --
Shareholders' Equity: 30,005,000
Common Stock, 197,650,000 shares authorized -
16,572,043 shares, $.01 par value per share,
issued and outstanding at September 30, 1997 165,720 --
Class A Common Stock, 350,000 shares
authorized - 339,806 shares, $.01 par
value per share, issued and outstanding
at September 30, 1997 Series A 8% 3,398 --
Convertible Redeemable Preferred Stock,
$.01 par value per share, 2,000,000 shares
authorized, no shares issued and outstanding -- --
Paid in capital in excess of par value 178,288,032 --
Retained Earnings 1,431,067 --
------------ ------------
Total Shareholders' Equity 179,888,217 30,005,000
------------ ------------
Total Liabilities and Shareholders' Equity $214,402,326 $ 44,760,000
============ ============
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1997 1996 1997 1996
------------- ------------ ------------ -----------
REVENUE
Rental Income $ 671,585 $ -- $ 1,259,854 $ --
Interest income 2,537,300 356,000 4,124,890 356,000
------------- ----------- ----------- ----------
Total Revenue 3,208,885 356,000 5,384,744 356,000
------------- ----------- ----------- ----------
EXPENSES
Property operating
and maintenance 176,008 -- 241,257 --
Real estate taxes 70,692 -- 105,692 --
Depreciation and
amortization 106,613 -- 220,514 --
Property management 11,897 -- 18,356 --
General and
administrative 1,266,005 -- 1,521,124 --
----------- ----------- ----------- -----------
Total Expenses 1,631,215 0 2,106,943 0
----------- ----------- ----------- -----------
Income from
joint venture 160,235 -- 160,235 --
----------- ----------- ----------- -----------
Income before
taxes 1,737,905 356,000 3,438,036 356,000
Income tax
expense 719,000 -- 1,003,000 --
----------- ----------- ----------- -----------
Net Income
(loss) $ 1,018,905 $ 356,000 $ 2,435,036 $ 356,000
=========== ========== =========== ===========
Net income
(loss) per
common share -
Note 5 $ 0.06 $ 0.14
=========== ===========
Weighted average
number of
common shares
outstanding -
Note 5 $16,911,849 $ 16,911,849
=========== ===========
See accompanying notes.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
----------------------------
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,435,036 $ 356,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 220,514 --
Decrease (increase) in assets
Restricted cash (1,197,105) 4,059,000
Prepaid and other assets (1,881,127) (134,000)
(Decrease) increase in liabilities
Accrued expenses and other liabilities 6,667,004 --
------------ -----------
Net cash provided by operating activities 6,244,322 4,281,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate assets (49,784,452) (9,073,000)
Investment in notes receivable (97,653,823) (17,800,000)
Investment in joint revenue (2,320,593) --
------------ -----------
Net cash provided by (used in)
investing activities (149,758,868) (26,873,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from credit facility 56,900,000 --
Repayment of credit facility (46,900,000) --
Proceeds from bridge loan 6,000,000 --
Repayment of bridge loan (6,000,000) --
Proceeds from private offering
of common shares 121,986,453 --
Equity contributions prior to
and at spin-off 17,060,633 22,592,000
------------- ------------
Net cash provided by (used in)
financing activities 149,047,086 22,592,000
------------- ------------
Net increase (decrease) in cash
and cash equivalents 5,532,540 --
Cash and cash equivalents, beginning
of period -- --
------------- ------------
Cash and cash equivalents, end
of period $ 5,532,540 $ --
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 1,233,525 $ 384,000
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Purchase price of commercial office
property acquired $ 15,870,435 $ --
Less: shares issued (2,250,000) --
------------- -------------
Cash paid $ 13,620,435 $ --
============= =============
Gross investment in joint venture $ 32,425,349 $ --
Properties contributed (54,332,555) --
Debt contributed 30,426,144 --
Warrants issued (6,198,345) --
------------- -------------
Cash paid $ 2,320,593 $ --
============= =============
See accompanying notes.
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
Wellsford Real Properties, Inc. (the "Company") was formed on January 8,
1997, as a corporate subsidiary of Wellsford Residential Property Trust
(the "Trust"). The Trust was formed in 1992 as the successor to
Wellsford Group Inc. (and affiliates) which was formed in 1986. On May
30, 1997, the Trust merged (the "Merger") with Equity Residential
Properties Trust ("EQR"). Immediately prior to the Merger, the Trust
contributed certain of its assets to the Company and the Company assumed
certain liabilities of the Trust. Immediately after the contribution of
assets to the Company and immediately prior to the Merger, the Trust
distributed to its common shareholders all the outstanding shares of the
Company owned by the Trust (the "Spin-off"). The common shareholders of
the Trust received 0.25 common share of the Company for each common
share of the Trust owned. Upon consummation of the Spin-off and Merger,
the Company had issued and outstanding approximately 4,572,043 shares of
common stock and 339,806 shares of Class A common stock that was issued
to an affiliate of EQR.
The Company was organized to create and realize value by identifying and
making opportunistic real estate investments through the direct
acquisition, rehabilitation, development, financing and management of
real properties and/or participation in these activities through the
purchase of debt or equity securities of entities engaged in such real
estate businesses. The Company has established three strategic business
units ("SBUs") within which it intends to execute its business plan:
Wellsford Commercial Properties Trust ("WCPT"), an SBU for debt and
equity investments and an SBU for property development and land
investments. At the time of the Spin-off, the management of the Company
had implemented its business strategy by identifying, negotiating and
consummating the following initial investments: (i) five office
properties, three of which are vacant, located in Northern New Jersey
containing an aggregate of approximately 949,400 square feet and
acquired for an aggregate of approximately $47.6 million, or
approximately $50 per square foot of building area (the "Commercial
Properties"); (ii) a $25 million subordinated secured mezzanine loan due
in April 2007 and bearing interest at approximately 12% per annum (the
"277 Park Loan") with respect to a class A office building located at
277 Park Avenue, New York City; (iii) a $17.8 million mortgage due in
July 1999 and bearing interest at 9% per annum (the "Sonterra Mortgage")
on, and option to purchase, a 344-unit class A residential apartment
complex in Tucson, Arizona and (iv) an approximate 80% interest in
Phases I, II and III of, and in options to acquire (at fixed prices) and
develop Phases IV and V of, a 1,880-unit class A multifamily development
("Palomino Park") in a suburb of Denver, Colorado. These investments
were financed with proceeds from the Spin-off (and related
transactions), the Private Placement (Note 2), and a $14.8 million tax
exempt mortgage note payable which requires interest only payments at a
variable rate (currently approximately 4%) until it matures in December
2035 (the "Palomino Park Bonds"). The tax exempt mortgage note payable
is security for tax-exempt bonds, which are backed by a letter of credit
from a AAA rated financial institution. The Company and EQR have
guaranteed the reimbursement of the financial institution in the event
that the letter of credit is drawn upon (the latter guarantee being the
"EQR Enhancement").
The accompanying consolidated financial statements include the assets
and liabilities contributed to and assumed by the Company from the
Trust, from the time such assets and liabilities were acquired or
incurred, respectively, by the Trust. Such financial statements have
been prepared using the historical basis of the assets and liabilities
and the historical results of operations related to the Company's assets
and liabilities.
The accompanying consolidated financial statements and related notes of
the Company have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally
included in financial statements prepared under generally accepted
accounting principles have been condensed or omitted pursuant to such
rule. In the opinion of management, all adjustments considered
necessary for a fair presentation of the Company's financial position,
results of operations and cash flows have been included and are of a
normal and recurring nature. These financial statements should be read
in conjunction with the Company's Form 10 that was declared effective by
the Securities and Exchange Commission on April 24, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of
an Enterprise and Related Information" which is effective for fiscal
years beginning after December 15, 1997. Accordingly, the Company plans
to adopt SFAS No. 131 with the fiscal year beginning January 1, 1998.
SFAS No. 131 does not have any impact on the financial results or
financial condition of the Company, but will result in certain changes
in required disclosures of segment information.
2. Capitalization
On June 2, 1997, the Company sold 12,000,000 shares of common stock in a
private placement (the "Private Placement") exempt from the registration
requirements of the Securities Act of 1933, as amended, under Regulation
D thereof, to a group of institutional investors at $10.30 per share,
the Company's then book value per share. Pursuant to a registration
rights agreement executed by the Company and the purchasers of such
shares, the Company has filed a shelf registration statement with the
Securities and Exchange Commission with respect to such shares. The
proceeds of the Private Placement of approximately $123.6 million have
been applied to (a) approximately $53 million to repay the Company's
credit facility and other debt on the date of the Private Placement, (b)
$5 million to purchase a portion of the 277 Park Loan, (c) approximately
$7 million on renovations and tenant fit-out for the Commercial
Properties, and (d) the balance towards the investments described in
Note 3 and towards working capital.
The Company has (i) the commitment, until May 30, 2000, of an affiliate
of EQR to acquire at the Company's option up to $25 million of the
Company's Series A 8% Convertible Redeemable Preferred Stock ("Series A
Preferred"), each share of Series A Preferred being convertible into
shares of common stock at a price of $11.124 (the "EQR Preferred
Commitment") and (ii) a $50 million two-year line of credit (extendible
for one year) from BankBoston and Morgan Guaranty Trust Company of New
York (the "Line of Credit") which initially bears interest at an annual
rate equal to LIBOR plus 175 basis points. The EQR Preferred Commitment
is pledged as security for the Line of Credit. If at May 30, 2000, the
affiliate of EQR has purchased less than $25 million of Series A
Preferred, it has the right to purchase the balance of the $25 million
commitment not purchased prior to that time.
3. Recent Activities
Wellsford Commercial Properties Trust ("WCPT")
On August 28, 1997, the Company, through its subsidiary WCPT, in a joint
venture with WHWEL Real Estate Limited Partnership ("Whitehall"), an
affiliate of Goldman, Sachs & Co., formed a private real estate
operating company, Wellsford/Whitehall Properties, L.L.C. ("Wellsford
Commercial"). Wellsford Commercial currently focuses on opportunistic
acquisitions of underperforming or vacant properties, in excellent
locations within recovering markets, where management can create
significant value through adaptive reuse. Wellsford Commercial's initial
target markets include New York, New Jersey, Connecticut and the Boston
and Washington D.C. metropolitan areas. WCPT manages Wellsford
Commercial on a day-to-day basis, and certain major decisions require
the consent of both partners. WCPT intends to qualify as a real estate
investment trust ("REIT") and has a 50.1% interest in Wellsford
Commercial. Except in certain limited circumstances, all of the
Company's office property activities will be conducted through Wellsford
Commercial.
Wellsford Commercial currently owns and operates ten properties
containing approximately 2.1 million square foot ("SF") of office space
in New Jersey and Washington, D.C. These properties consist of the
Commercial Properties, which were contributed by the Company upon
formation of Wellsford Commercial, and 300 Atrium Drive, 400 Atrium
Drive, 500 Atrium Drive and 1275 K Street, which were contributed by
Whitehall upon formation of Wellsford Commercial, as well as 700 Atrium
Drive which was acquired in September 1997 for $18.1 million. The
properties contributed by Whitehall were encumbered by approximately $48
million of debt bearing interest at LIBOR plus 3% which was assumed by
Wellsford Commercial. The lender on this note is Goldman Sachs Mortgage
Corporation. Wellsford Commercial has an interest rate protection
agreement related to this debt which caps LIBOR at 7.69% until June 15,
2000.
WCPT is entitled to incentive compensation equal to (a) 17.5% of
available cash after a return of capital to WCPT and Whitehall and a
17.5% return on equity to each of them, and (b) 22.5% of available cash
after a 22.5% return on equity to WCPT and Whitehall. The Company and
Whitehall have committed to make additional equity contributions of $50
million each for new acquisitions, capital needs, and working capital.
Whitehall may exchange the membership units it receives in Wellsford
Commercial relating to capital contributions in excess of an additional
$25 million up to an additional $50 million, for shares of the Company's
common stock or, in the Company's sole discretion, cash, based upon the
price paid for such membership units and the current market value of the
Company's common stock.
In connection with the transactions described above, the Company issued
warrants (the "Warrants") to Whitehall to purchase 4,132,230 shares of
common stock at an exercise price of $12.10 per share. The Warrants are
exercisable for five years for either, at the Company's option, shares
of the Company's common stock or cash. The exercise price for the
Warrants is payable either with membership units in Wellsford Commercial
or cash.
In addition, the Company entered into a Term Loan Agreement ("TLA") with
Wellsford Commercial pursuant to which the Company has agreed to loan to
Wellsford Commercial up to approximately $86.3 million for a period of
90 days ending on November 26, 1997. Approximately $78.9 million has
been advanced under the TLA as of September 30, 1997. The loan bears
interest at LIBOR plus 3% and may be extended for an additional 90 days
at LIBOR plus 4%.
See Note 7 for the September 30, 1997 financial statements of Wellsford
Commercial.
Value Property Trust
On September 18, 1997, the Company and its subsidiary, Wellsford Capital
Corporation, entered into a definitive agreement with Value Property
Trust (NYSE: VLP), a real estate investment trust, pursuant to which the
Company will acquire VLP in a merger transaction for cash and stock
valued at approximately $169 million.
Pursuant to the terms of the merger agreement, the Company will pay to
VLP shareholders approximately $130 million in cash and issue an
aggregate of approximately 3.35 million shares of its common stock
resulting in each VLP shareholder receiving $11.58 in cash and 0.2984
common shares of the Company for each share of VLP. VLP primarily owns
21 properties (with 2.1 million SF) and currently has approximately $64
million in net cash. The portfolio is diversified both by property type
and geographic location. Seven office/industrial properties with
600,000 SF are located in Southern California, and 14 office/industrial
and retail properties with 1.5 million SF are located primarily
throughout the mid-Atlantic region.
The closing of the transaction under such agreement is subject to the
satisfaction of various closing conditions, including approval of VLP
shareholders. The proposed acquisition, which will be accounted for as
a purchase, is expected to be completed by January, 1998.
The Company has entered into an agreement to sell, upon completion of
the merger, for $65 million, 13 of the VLP properties to an affiliate of
Whitehall ("Whitehall Property Buyer").
The Abbey Company
On August 28, 1997, the Company and Morgan Guaranty Trust Company of New
York ("MGT") originated a $70 million secured credit facility to
affiliates of The Abbey Company, Inc. ("Abbey"), an owner and operator
of office, industrial, and retail properties in Southern California.
The loan facility will be made available to Abbey for three years.
Advances under the facility can be made for up to 80% of the value of
the borrowing base collateral which will initially consist of 10
properties, all cross-collateralized, totaling approximately 1.1 million
SF and having an average occupancy rate of 94% as of August 28, 1997.
The initial advance under the facility was for approximately $48.4
million ($24.2 million of which represented the Company's 50%
participation). Under the terms of its participation agreement with
MGT, the Company will take a 50% junior participation on all advances
under the facility.
The Company will be entitled to receive interest on its advances under
the facility at LIBOR plus 400 basis points.
Abbey is owned 90% by Don Abbey and 10% by Mace Siegel and associates.
Mr. Siegel is the Chairman of Macerich, a REIT traded on the New York
Stock Exchange.
4. Commitments and Contingencies
The Company has entered into employment agreements with four of its
officers. Such agreements are for terms which expire between 1999 and
2002, and provide for aggregate annual fixed payments of approximately
$1.0 million, $1.0 million and $0.6 million in 1997, 1998 and 1999
through 2002, respectively.
The Company has established its 1997 Management Incentive Plan (the
"Management Incentive Plan"). Awards under the Management Incentive Plan
may take the form of stock options, including corresponding stock
appreciation rights and reload options, restricted stock awards and
stock purchase awards. The Company may also provide stock purchase
loans to enable Management Incentive Plan participants to pay for stock
purchase awards. The maximum number of shares of common stock that may
be the subject of awards under the Management Incentive Plan is
1,750,000 shares. Options to acquire 591,375 shares of common stock
were granted under the Management Incentive Plan at the closing of the
Spin-off to sixteen individuals including directors, executive officers
and employees of the Company.
The Company has established a Rollover Stock Option Plan (the "Rollover
Plan"), which is substantially similar to the Management Incentive Plan,
for the purpose of issued options and
corresponding rights to purchase common stock in replacement for former
Trust share options. All 1,326,235 options issuable under the Rollover
Plan were issued at the closing of the Merger primarily to certain
executive officers and directors of the Company in exchange for existing
Trust options of equal value.
Statement of Financial Accounting Standards ("SFAS") 123 "Accounting for
Stock-Based Compensation" established a fair value based method of
accounting for share based compensation plans, including share options.
The disclosure requirements of SFAS 123 are effective for financial
statements for fiscal years beginning after December 15, 1995. However,
registrants may elect to continue accounting for share option plans
under Accounting Principles Board ("APB") 25, but are required to
provide proforma net income and earnings per share information "as if"
the new fair value approach had been adopted. Because the Company has
elected to continue to account for its share based compensation plans
under APB 25, there has been no impact on the Company's consolidated
financial statements resulting from SFAS 123.
Pursuant to SFAS 123, the pro forma net income available to common
shareholders for the three and nine month periods ended September 30,
1997, as if the fair value approach to accounting for share-based
compensation had been applied, would be $0.8 million and $2.1 million,
respectively, or $0.05 and $0.12 per common share, respectively, after
income taxes. No options were outstanding prior to the Spin-off. The
fair values of the options used in calculating these amounts were
calculated using the Black-Scholes option pricing model and the
following assumptions: (i) a risk-free interest rate of 6.24%, (ii) an
expected life of 10 years, and (iii) an expected volatility of 20%. The
Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and
are fully transferable. In addition, option pricing models require the
input of highly subjective assumptions including the expected share
price volatility. Because the Company's employee share options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee share options.
5. Earnings Per Share
The Company was a corporate subsidiary of the Trust until the Spin-off.
Net income per share for the periods ended September 30, 1997 was
calculated using the weighted average number of shares outstanding of
16,911,849, which includes the Company's common shares and Class A
common shares, for the period May 30, 1997 to September 30, 1997.
The Financial Accounting Standards Board issued SFAS 128, "Earnings per
Share," which will require the Company to change the method previously
used to compute earnings per share and to restate all prior periods as
of December 31, 1996. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. At this time, the Company does not expect that these
requirements will have a material effect on either basic or diluted
earnings per share for any prior period.
6. Income Taxes
The provision for income taxes consists of the following components:
Current federal tax $ 762,000
Current state tax 215,000
Deferred federal tax 20,000
Deferred state tax 6,000
----------
$1,003,000
==========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The Company's deferred income tax liability of $26,000 at
September 30, 1997 is included in Accrued Expenses and Other Liabilities
and is the result of rental income recorded for book purposes but not
for income tax purposes.
7. Investment in Joint Venture
As of September 30, 1997, the Company, through its subsidiary, WCPT,
owned a 50.1% interest in Wellsford Commercial (see Note 3). The
following is a summary of the financial position of Wellsford Commercial
which was formed on August 28,1997:
September 30,
1997
--------------
Real estate, net $ 176,915,203
Cash 1,400,644
Other assets 2,104,856
-------------
Total assets $ 180,420,703
=============
Atrium Mortgage Loan $ 48,092,954
Bridge Loan from the Company 78,899,440
Other liabilities 3,108,479
Equity 50,319,830
-------------
Total liabilities and equity $ 180,420,703
=============
The following is a summary of the results of operations of Wellsford
Commercial:
Period from August 28,
1997 (inception) to
September 30, 1997
----------------------
Revenues
- --------
Rental income $ 2,075,340
Other income 134,568
Expenses
- --------
Operating expense (909,449)
Interest expense (673,247)
Depreciation and amortization (228,180)
General and administrative (79,202)
------------
Net income $ 319,830
============
Net income per unit $ 0.06
============
Wellsford Commercial's real estate assets are comprised of the
Commercial Properties, 300 Atrium Drive, 400 Atrium Drive, 500 Atrium
Drive, 700 Atrium Drive, and 1275 K Street as described in Note 3.
Wellsford Commercial's debt is comprised as follows:
Amount Interest Rate Maturity Security
------------ -------------
Atrium mortgage
loan $ 48,092,954 LIBOR +3% 5/15/00* 300, 400 and
500 Atrium Drive
Bridge loan from
the Company 78,899,440 LIBOR +3% 11/26/97** Unsecured
------------
Total $126,992,394
============
* extendable for two years, with each one year extension increasing the
interest rate by 0.75%.
** extendable for 90 days at LIBOR +4%.
Wellsford Commercial has 5,000,000 membership units outstanding which
were issued upon its formation at a value of $10 per unit.
Allocations of income and distributions between the members of Wellsford
Commercial are generally made in accordance with the ownership
percentages as described in its operating agreement.
Wellsford Commercial expects to meet its liquidity requirements, such as
financing renovations to its properties, with operating cash flow from
its properties, equity contributions from the owners of Wellsford
Commercial, WCPT and Whitehall, and a $375 million loan facility that
Wellsford Commercial is currently negotiating, consisting of a $225
million secured term loan facility and a $150 million secured revolving
credit facility. There can be no assurance that such loan facility will
be consummated.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. General
The Company was organized to create and realize value by identifying and
making opportunistic real estate investments through the direct
acquisition, rehabilitation, development, financing and management of
real properties and/or participation in these activities through the
purchase of debt instruments or equity interests of entities engaged in
such real estate businesses. Management is concentrating its efforts on
defining and building focused operating businesses with recurring
sources of income. The Company intends to maximize shareholder value
over time through growth in cash flow and net asset value per share.
The Company believes that while liquidity has returned to many real
estate markets and that the supply and demand of many real estate asset
classes are in relative equilibrium, there are specific opportunities
which are expected to continue to exist because of market inefficiencies
and impediments to investment, such as transactional complexity, time-
consuming regulatory approvals, the prospect of no or limited immediate
cash flow and a lack of available property information and market
information analysis. In this regard, the Company is organized into
three SBUs, each covering a separate line of business which management
believes currently offers such opportunities. They are (i) acquiring
underperforming office and other commercial properties below replacement
cost, renovating and/or repositioning them, and owning, operating and/or
reselling such properties, (ii) investing in real estate-related debt
instruments with the potential for high yields or returns more
characteristic of equity ownership and (iii) engaging in selective land
and property development when justified by expected returns. As
opportunities emerge, the Company may in the future expand its real
estate-related businesses and activities.
The Company currently does not intend to qualify as a REIT under the
Internal Revenue Code of 1986, as amended (the "Code"). Consequently,
the Company has the flexibility to respond quickly to opportunities
without the structural limitations inherent in REITs and to operate,
when deemed advantageous by management, on a more highly leveraged basis
than most REITs. The Company does intend to elect REIT status for
certain of its subsidiaries or affiliates when management deems it
beneficial to the Company's shareholders. By not qualifying as a REIT
under the Code (which would require the Company to distribute each year
at least 95% of its net taxable income, excluding capital gains), the
Company has the ability and currently intends to retain for reinvestment
its cash flow generated from operations and to sell properties without
the substantial income tax penalties which may be imposed on REITs in
such transactions. In addition, the Company differs from opportunity
funds that are typically structured as private partnerships. In that
regard, the business of the Company is conducted without the payment of
acquisition, disposition or advisory fees to general partners which
should result in additional cash flow being available for reinvestment
as well as mitigate the potential for conflicts of interest. In
addition, unlike investors in opportunity funds, the Company's
shareholders are expected to have enhanced liquidity through their
ability to sell or margin their stock. The Company also hopes to
attract a broader range of investors because there will be no stipulated
investment minimum. However, unlike REITs and opportunity funds, the
Company is subject to corporate level taxation.
Commercial Properties. The Company seeks to acquire commercial
properties below replacement cost and operate and/or resell the
properties after renovation, redevelopment and/or repositioning. The
Company believes that appropriate well-located commercial properties
which are currently underperforming can be acquired on advantageous
terms and repositioned with the expectation of achieving enhanced
returns which are greater than returns which could be achieved by
acquiring a stabilized property.
The Company has agreed with Whitehall to conduct its business and
activities relating to office properties (but not other types of
commercial properties) located in North America solely through its
interest in Wellsford Commercial except, in certain circumstances, where
Wellsford Commercial has declined the investment opportunity. Wellsford
Commercial currently focuses on acquiring, redeveloping and developing
office properties in the Northeast United States. Wellsford Commercial
seeks opportunistic acquisitions of office properties, including
underperforming or vacant properties, in excellent locations within
recovering markets, where management can create significant value
through adaptive reuse.
High Yield Debt Investments. The Company makes loans that constitute,
or will invest in real estate-related senior, junior or otherwise
subordinated debt instruments, which may be unsecured or secured by
liens on real estate, interests therein or the economic benefits
thereof, and which have the potential for high yields or returns more
characteristic of equity ownership. These investments may include debt
that is acquired at a discount, mezzanine financing, commercial
mortgage-backed securities ("CMBS"), secured and unsecured lines of
credit, distressed loans, and loans previously made by foreign and other
financial institutions. The Company believes that there are
opportunities to acquire real estate debt securitized by the use of
CMBS, especially in the low or below investment grade tranches, at
significant returns as a result of inefficiencies in pricing, while
utilizing management's real estate expertise to analyze the underlying
properties and thereby effectively minimizing risk.
Property Development. The Company engages in selective development
activities as opportunities arise and when justified by expected
returns. The Company believes that by pursuing selective development
activities it can achieve returns which are greater than returns which
could be achieved by acquiring stabilized properties. Certain
development activities may be conducted in joint ventures with local
developers who may bear the substantial portion of the economic risks
associated with the construction, development and initial rent-up of
properties. As part of its strategy, the Company may seek to obtain
bond financing from local governmental authorities which generally bears
interest at rates substantially below rates available from conventional
financing.
The Company currently has the following two multifamily development
projects, both of which are phases of Palomino Park, in which it has
invested $21.9 million (a net equity investment of $7.1 million after
deducting the Palomino Park Bonds) through September 30, 1997:
Number Estimated Estimated
Name of Units Location Total Cost Stabilization Date
---- -------- -------- ---------- ------------------
Blue Ridge 456 Denver $42.5 million First Qtr. 1998
Red Canyon 304 Denver 33.6 million First Qtr. 1999
--- -------------
760 $76.1 million
=============
These projects are being developed pursuant to fixed-price contracts.
The Company is committed to purchase 100% of these projects upon
completion and the achievement of certain occupancy levels, which is
anticipated to occur at the dates disclosed above.
Blue Ridge is owned by Park at Highlands LLC ("Phase I LLC"), a limited
liability company, the members of which are Wellsford Park Highlands
Corp. ("WPHC") (99%), a subsidiary of the Company and Al Feld ("Feld")
(1%). Red Canyon is owned by Red Canyon at Palomino Park LLC ("Phase II
LLC"), a limited liability company, the members of which are WPHC (99%)
and Feld (1%). Al Feld is a Denver-based developer specializing in the
construction of luxury residential properties. He has constructed over
3,000 units since 1984.
The construction loan on Blue Ridge is for approximately $36.8 million,
matures on December 31, 1998 (with a 6-month extension at the option of
the Phase I LLC upon fulfillment of certain conditions), and bears
interest at the prime rate, except that the Phase I LLC may elect to
cause a portion of the previously advanced principal to bear interest at
LIBOR plus 175 basis points. Feld has guaranteed repayment of this
loan.
The construction loan on Red Canyon is for approximately $29.5 million,
matures on September 29, 1999 (with a 6-month extension at the option of
the Phase II LLC upon fulfillment of certain conditions), and bears
interest at the prime rate, except that the Phase II LLC may elect to
cause a portion of the previously advanced principal to bear interest at
LIBOR plus 165 basis points. Feld has guaranteed repayment of this
loan.
An affiliate of EQR has agreed to purchase the Phase I loan and the
Phase II loan when due (the "EQR Take-out Commitment"), assuming
completion of construction, if they are not satisfied by the Phase I LLC
(in the case of the Phase I loan) or the Phase II LLC (in the case of
the Phase II loan) or by Feld pursuant to his guaranties, for the lesser
of the loan balance or the final agreed upon budget, which is currently
estimated to be approximately $66 million.
The Company may in the future make equity investments in entities owned
and/or operated by unaffiliated parties and which engage in real estate-
related businesses and activities or businesses that service the real
estate industry. Some of the entities in which the Company may invest
may be start-up companies or companies in need of additional capital.
The Company may also manage and lease properties owned by it or in which
it has an equity or debt investment.
The accompanying consolidated financial statements include the assets
and liabilities contributed to and assumed by the Company from the
Trust, from the time such assets and liabilities were acquired or
incurred, respectively, by the Trust. Such financial statements have
been prepared using the historical basis of the assets and liabilities
and the historical results of operations related to the Company's assets
and liabilities.
Risks Associated with Forward-Looking Statements.
This Form 10-Q, together with other statements and information publicly
disseminated by the Company, contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company or industry results
to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Such factors include, among others the following, which are discussed in
greater detail in the "Risk Factors" section of the Company's
registration statement on Form S-11 (file No. 333-32445) filed with the
Securities and Exchange Commission on July 30, 1997, as may be amended,
which is incorporated herein by reference: general economic and business
conditions, which will, among other things, affect demand for commercial
and residential properties, availability and credit worthiness of
prospective tenants, lease rents and the availability of financing;
difficulty of locating suitable investments; competition; risks of real
estate acquisition, development, construction and renovation; vacancies
at existing commercial properties; dependence on rental income from real
property; adverse consequences of debt financing; risks of investments
in debt instruments, including possible payment defaults and reductions
in the value of collateral; illiquidity of real estate investments; lack
of prior operating history; and other risks listed from time to time in
the Company's reports filed with the SEC. Therefore, actual results
could differ materially from those projected in such statements.
2. Results of Operations
Comparison of the nine months ended September 30, 1997 to the nine
months ended September 30, 1996.
Prior to the Company's 1997 investments, the Company's operations
consisted of earning interest income on the Sonterra Mortgage
(originated in July 1996) and the initial phase of construction
development activity with respect to Palomino Park. Therefore, the
increase in operating revenues and expenses reflected in the financial
statements is a result of the acquisition of primarily all of the
Company's operating assets subsequent to September 30, 1996.
3. Liquidity and Capital Resources
The Company expects to meet its short-term liquidity requirements
generally through its working capital and cash flow provided by
operations. The Company considers its ability to generate cash to be
adequate and expects it to continue to be adequate to meet operating
requirements both in the short and long terms.
The Company expects to meet its long-term liquidity requirements such as
refinancing mortgages, financing acquisitions and development, and
financing capital improvements by long-term borrowings, through the
issuance of debt and the offering of additional debt and equity
securities.
The Company has (i) the commitment, until May 30, 2000, of an affiliate
of EQR to acquire at the Company's option up to $25 million of the
Company's Series A 8% Convertible Redeemable Preferred Stock ("Series A
Preferred"), each share of which is convertible into shares of common
stock at a price of $11.124 (the "EQR Preferred Commitment") and (ii) a
$50 million two-year line of credit (extendible for one year) from
BankBoston,N.A. and Morgan Guaranty Trust Company of New York (the "Line
of Credit") which initially bears interest at an annual rate equal to
LIBOR plus 175 basis points. The EQR Preferred Commitment is pledged as
security for the Line of Credit. If at May 30, 2000, the affiliate of
EQR has purchased less than $25 million of Series A Preferred, it has
the right to purchase the remainder of the $25 million not purchased
prior to that time.
With respect to its Palomino Park investment, the Company also has the
EQR Enhancement and the EQR Take-out Commitment.
PART II.
OTHER INFORMATION
Item 1: Legal Proceedings - Not Applicable.
Item 2: Changes in Securities
The following table is a summary of certain information
relating to all securities of the Company sold by the
Company during the period covered by this report that
were not registered under the Securities Act (the
"Private Placements"):
Persons or Class
Type of Date Amount of of Persons to
Securities of Securities Whom Securities
Sold Sale Sold Sold Consideration
- ------------------ -------- ---------- ----------------- -------------
Warrants 8/28/97 5,000,000(1) Whitehall Property (2)
Buyer
Exchange Rights(3) 8/28/97 (3) Whitehall Property (2)
Buyer
(1) In connection with the formation of Wellsford Commercial, the
Company issued Warrants to Whitehall to purchase 4,132,230
shares of Common Stock at an exercise price of $12.10 per
share. The Warrants are exercisable for five years for
either, at the Company's option, shares of Common Stock or
cash. The exercise price for the Warrants is payable either
with membership units in Wellsford Commercial or cash.
(2) In consideration for consummating the Wellsford Commercial
joint venture transaction with the Company.
(3) Whitehall may exchange membership units it receives in
Wellsford Commercial relating to capital contributions made by
Whitehall to Wellsford Commercial in excess of $50 million but
less than $75 million, for shares of Common Stock, or, at the
Company's election, cash based upon the price paid by
Whitehall for such membership units and the then current
market value of shares of Common Stock.
The Company conducted the Private Placements pursuant to Section 4(2) of
the Securities Act. There was no underwriter involved in the Private
Placements.
Item 3: Defaults upon Senior Securities - Not Applicable.
Item 4: Submission of Matters to a Vote of Security Holders - Not
Applicable.
Item 5: Other Information - Not Applicable.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits filed with this Form 10-Q:
27.1 Financial Data Schedule (EDGAR Filing Only)
(b) Reports on Form 8-K filed by the registrant during
its fiscal quarter ended September 30, 1997:
o Form 8-K filed September 11, 1997 relating to
certain investments of the Company.
o Form 8-K filed September 23, 1997 relating to
the Company's definitive agreement with Value
Property Trust.
o Form 8-K/A dated November 11, 1997 containing
certain of the financial statements and pro
forma financial data required by the September
11 Form 8-K.
o Form 8-K/A dated November 11, 1997 containing
the balance of the financial statements
required by the September 11 Form 8-K.
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.
WELLSFORD REAL PROPERTIES, INC.
By: /s/ Jeffrey H. Lynford
------------------------------------------
Jeffrey H. Lynford, Chairman of the Board
/s/ Gregory F. Hughes
------------------------------------------
Gregory F. Hughes, Chief Financial Officer
Dated: November 14, 1997