UNITED STATES
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 March 31, 2003
------------------------------------------------
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 001-12917
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WELLSFORD REAL PROPERTIES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Maryland 13-3926898
- ---------------------------------- ----------------------------------------
(State of Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
535 Madison Avenue, New York, NY 10022
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(Address of Principal Executive Offices)
(Zip Code)
(212) 838-3400
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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
----------- -----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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The number of the registrant's shares of common stock outstanding was 6,453,730
as of May 7, 2003 (including 169,903 shares of class A-1 common stock).
1
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TABLE OF CONTENTS
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Page
Number
------
PART I. FINANCIAL INFORMATION:
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002.........................................3
Consolidated Statements of Operations (unaudited) for the
Three Months Ended March 31, 2003 and 2002....................4
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 2003 and 2002....................5
Notes to Consolidated Financial Statements (unaudited)............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......26
Item 4. Controls and Procedures..........................................27
PART II. OTHER INFORMATION:
-----------------
Item 1. Legal Proceedings................................................28
Item 6. Exhibits and Reports on Form 8-K.................................28
Signatures ........................................................29
Certifications ........................................................30
2
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
Real estate assets, at cost:
Land ........................................................ $ 20,437,840 $ 20,437,840
Buildings and improvements .................................. 125,182,910 125,184,726
------------- -------------
145,620,750 145,622,566
Less:
Accumulated depreciation ................................. (14,684,352) (13,530,908)
Impairment reserve ....................................... (2,174,853) (2,174,853)
------------- -------------
128,761,545 129,916,805
Residential units available for sale ........................ 13,650,492 14,541,634
Construction in progress .................................... 5,410,831 5,410,831
------------- -------------
147,822,868 149,869,270
Notes receivable ............................................... 28,096,000 28,612,000
Investment in joint ventures ................................... 95,512,638 94,180,991
------------- -------------
Total real estate and investments .............................. 271,431,506 272,662,261
Cash and cash equivalents ...................................... 41,975,719 38,644,315
Restricted cash and investments ................................ 9,509,440 9,543,934
Prepaid and other assets ....................................... 11,350,381 11,924,533
------------- -------------
Total assets ................................................... $ 334,267,046 $ 332,775,043
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ...................................... $ 113,877,645 $ 112,232,830
Accrued expenses and other liabilities, including
the liability for deferred compensation of
$8,943,062 and $8,933,607 ................................. 14,304,344 15,536,789
------------- -------------
Total liabilities .............................................. 128,181,989 127,769,619
------------- -------------
Company-obligated, mandatorily redeemable convertible preferred
securities of WRP Convertible Trust I, holding solely
8.25% junior subordinated debentures of Wellsford Real
Properties, Inc. ("Convertible Trust Preferred Securities").. 25,000,000 25,000,000
Minority interest .............................................. 3,443,902 3,438,127
Commitments and contingencies
Shareholders' equity:
Series A 8% convertible redeemable preferred stock,
$.01 par value per share, 2,000,000 shares authorized,
no shares issued and outstanding .......................... -- --
Common stock, 98,825,000 shares authorized, $.02 par
value per share - 6,282,189 and 6,280,683 shares
issued and outstanding .................................... 125,644 125,614
Class A-1 common stock, 175,000 shares authorized,
$.02 par value per share - 169,903 shares
issued and outstanding .................................... 3,398 3,398
Paid in capital in excess of par value ...................... 162,750,468 162,751,498
Retained earnings ........................................... 21,449,624 20,617,085
Accumulated other comprehensive loss; share of unrealized
loss on interest rate protection contract purchased by
joint venture investment, net of income tax benefit ...... (124,347) (253,500)
Deferred compensation ....................................... (189,498) (277,664)
Treasury stock, 310,030 and 311,624 shares .................. (6,374,134) (6,399,134)
------------- -------------
Total shareholders' equity ..................................... 177,641,155 176,567,297
------------- -------------
Total liabilities and shareholders' equity ..................... $ 334,267,046 $ 332,775,043
============= =============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
3
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended
March 31,
-------------
2003 2002
---- ----
REVENUES
Rental revenue .................................. $ 4,235,307 $ 3,727,216
Revenue from sales of residential units ......... 1,196,000 2,078,585
Interest revenue ................................ 958,043 1,068,167
Fee revenue ..................................... 565,398 116,980
------------ ------------
Total revenues ............................... 6,954,748 6,990,948
------------ ------------
COSTS AND EXPENSES
Cost of sales of residential units .............. 1,054,754 1,905,560
Property operating and maintenance .............. 1,111,092 1,310,278
Real estate taxes ............................... 378,156 364,330
Depreciation and amortization ................... 2,283,391 1,260,805
Property management ............................. 86,269 131,709
Interest ........................................ 1,585,087 1,493,736
General and administrative ...................... 1,510,203 1,673,663
------------ ------------
Total costs and expenses ..................... 8,008,952 8,140,081
------------ ------------
Income from joint ventures ......................... 3,125,472 420,203
------------ ------------
Income (loss) before minority interest, income taxes
and accrued distributions and amortization of
costs on Convertible Trust Preferred Securities . 2,071,268 (728,930)
Minority interest (expense) benefit ................ (5,775) 45,470
------------ ------------
Income (loss) before income taxes and accrued
distributions and amortization of costs on
Convertible Trust Preferred Securities .......... 2,065,493 (683,460)
Income tax expense (benefit) ....................... 888,000 (27,000)
------------ ------------
Income (loss) before accrued distributions and
amortization of costs on Convertible Trust
Preferred Securities ............................ 1,177,493 (656,460)
Accrued distributions and amortization of costs
on Convertible Trust Preferred Securities,
net of income tax benefit of $180,000 and
$105,000 ........................................ 344,954 419,954
------------ ------------
Net income (loss) .................................. $ 832,539 $ (1,076,414)
============ ============
Net income (loss) per common share, basic .......... $ 0.13 $ (0.17)
============ ============
Net income (loss) per common share, diluted ........ $ 0.13 $ (0.17)
============ ============
Weighted average number of common shares
outstanding, basic .............................. 6,452,092 6,409,248
============ ============
Weighted average number of common shares
outstanding, diluted ............................ 6,452,691 6,409,248
============ ============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
4
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
March 31,
-------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................... $ 832,539 $ (1,076,414)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................... 2,292,720 1,270,134
Amortization of deferred compensation ................. 88,166 310,833
Undistributed joint venture income .................... (2,298,148) (331,153)
Undistributed minority interest (benefit) ............. 5,775 (45,470)
Shares issued for director compensation ............... 24,000 20,000
Changes in assets and liabilities:
Restricted cash and investments .................... 34,494 (1,720,345)
Residential units available for sale ............... 891,142 1,433,486
Prepaid and other assets ........................... 863,211 1,326,172
Accrued expenses and other liabilities ............. (1,232,445) (3,630,630)
------------ ------------
Net cash provided by (used in) operating activities ... 1,501,454 (2,443,387)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate assets ........................... (3,984) (80,394)
Repayments of notes receivable .............................. 516,000 1,216,364
------------ ------------
Net cash provided by investing activities ............. 512,016 1,135,970
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing from mortgage notes payable ....................... 40,000,000 --
Deferred financing costs .................................... (326,881) --
Repayment of mortgage notes payable ......................... (38,355,185) (1,942,371)
Interest funded by construction loan......................... -- 334,043
Proceeds from option exercisess ............................. -- 51,360
Distributions to minority interest .......................... -- (15,232)
------------ ------------
Net cash provided by (used in) financing activities ... 1,317,934 (1,572,200)
------------ ------------
Net increase (decrease) in cash and cash equivalents ........... 3,331,404 (2,879,617)
Cash and cash equivalents, beginning of period ................. 38,644,315 36,148,529
------------ ------------
Cash and cash equivalents, end of period ....................... $ 41,975,719 $ 33,268,912
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest .................... $ 1,603,376 $ 1,227,296
============ ============
Cash paid during the period for income taxes, net of tax
refunds ................................................... $ 19,823 $ 5,270
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Other comprehensive income (loss); share of unrealized loss
on interest rate protection contract purchased
by joint venture investment, net of tax benefit ....... $ 129,153 $ (41,837)
============ ============
Net reclass of 28 Silver Mesa units from land, building
and improvements and accumulated depreciation to
residential units available for sale in 2002 .......... $ -- $ 4,413,808
============ ============
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</FN>
5
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Business
Wellsford Real Properties, Inc. (and its subsidiaries, collectively the
"Company"), was formed as a Maryland corporation on January 8, 1997 as a
corporate subsidiary of Wellsford Residential Property Trust (the "Trust").
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"). On June 2, 1997, the Company
sold 6,000,000 shares of its common stock in a private placement to a group
of institutional investors at $20.60 per share, the Company's then book
value per share.
The Company is a real estate merchant banking firm headquartered in New
York City which acquires, develops, finances and operates real properties
and organizes and invests in private and public real estate companies. The
Company has established three strategic business units ("SBUs") within
which it executes its business plan: (i) Commercial Property Investments
which are held in the Company's subsidiary, Wellsford Commercial Properties
Trust, through its ownership interest in Wellsford/Whitehall Group, L.L.C.
("Wellsford/Whitehall"); (ii) Debt and Equity Investments-Wellsford Capital
SBU; and (iii) Development and Land Investments-Wellsford Development SBU.
See Note 3 for additional information regarding the Company's SBUs.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Financial Statement Presentation.
----------------------------------------------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its majority-owned and controlled subsidiaries. Investments
in entities where the Company does not have a controlling interest are
accounted for under the equity method of accounting. These investments are
initially recorded at cost and are subsequently adjusted for the Company's
proportionate share of the investment's income (loss), additional
contributions or distributions. Investments in entities where the Company
does not have the ability to exercise significant influence are accounted
for under the cost method. All significant inter-company accounts and
transactions among the Company and its subsidiaries have been eliminated in
consolidation.
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 notes of the Company
have been prepared in accordance with 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 rules. 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 consolidated financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2002, as filed with the Securities and Exchange
Commission. The results of operations and cash flows for the three months
ended March 31, 2003 and 2002 are not necessarily indicative of a full year
results.
6
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
Summary of Significant Accounting Policies (continued)
Estimates.
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassification.
----------------
Amounts in certain accounts in the Consolidated Balance Sheets and the
Consolidated Statements of Cash Flows have been reclassified to conform to
the current period presentation.
Recently Issued Pronouncements.
------------------------------
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 "Consolidation of Variable Interest Entities" ("FIN
46"). The provisions of FIN 46 are effective immediately for variable
interest entities formed or acquired after January 31, 2003 and in the
interim period beginning after June 15, 2003 for variable interest entities
in which the Company holds such an interest before February 1, 2003. The
Company is in the process of determining if any of its investments are
variable interest entities, however the Company does not currently
anticipate that the adoption of FIN 46 will result in a change in its
accounting for such interests.
In December 2002, SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," was issued as an amendment to SFAS
No. 123. The provisions of SFAS No. 148 are effective for financial
statements for fiscal years ending after December 15, 2002. The Company has
determined that the prospective method of transition will be used to
account for stock-based compensation on a fair value basis in the future.
This method would result in the Company applying the provision of SFAS No.
123 to all future grants and significant modifications to the terms of
previously granted options by expensing the determined fair value of the
options over the future vesting periods.
SFAS No. 148 also requires companies to disclose the effect of expensing
options on the statement of operations in interim periods as if the
provisions of SFAS No. 123 were adopted in prior years. See Note 5.
7
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
3. Segment Information
The Company's operations are organized into three SBUs. The following table
presents condensed balance sheet and operating data for these SBUs:
(amounts in thousands)
Commercial Debt and Development
Property Equity and Land
Investments Investments Investments Other* Consolidated
----------- ----------- ----------- ------ ------------
March 31, 2003
----------------------
Investment properties:
Real estate held for investment,
net ............................ $ -- $ -- $128,199 $ -- $128,199
Real estate held for sale** ....... -- 5,974 -- -- 5,974
Residential units available for
sale ........................... -- -- 13,650 -- 13,650
-------- -------- -------- -------- --------
Real estate, net ..................... -- 5,974 141,849 -- 147,823
Notes receivable ..................... -- 28,096 -- -- 28,096
Investment in joint ventures ......... 56,574 38,939 -- -- 95,513
Cash and cash equivalents ............ -- 6,263 324 35,389 41,976
Restricted cash and investments ...... -- -- 566 8,943 9,509
Prepaid and other assets ............. -- 8,924 1,474 952 11,350
-------- -------- -------- -------- --------
Total assets ......................... $ 56,574 $ 88,196 $144,213 $ 45,284 $334,267
======== ======== ======== ======== ========
Mortgage notes payable ............... $ -- $ -- $113,878 $ -- $113,878
Accrued expenses and other liabilities -- 4,075 2,393 7,836 14,304
Convertible Trust Preferred Securities -- -- -- 25,000 25,000
Minority interest .................... 6 -- 3,438 -- 3,444
Equity ............................... 56,568 84,121 24,504 12,448 177,641
-------- -------- -------- -------- --------
Total liabilities and shareholders'
equity ............................ $ 56,574 $ 88,196 $144,213 $ 45,284 $334,267
======== ======== ======== ======== ========
Decemeber 31, 2002
------------------------
Investment properties:
Real estate held for investment, $ -- $ -- $129,300 $ -- $129,300
net
Real estate held for sale** ....... -- 6,027 -- -- 6,027
Residential units available for
sale ........................... -- -- 14,542 -- 14,542
-------- -------- -------- -------- --------
Real estate, net ..................... -- 6,027 143,842 -- 149,869
Notes receivable ..................... -- 28,612 -- -- 28,612
Investment in joint ventures ......... 55,592 38,589 -- -- 94,181
Cash and cash equivalents ............ -- 6,220 166 32,258 38,644
Restricted cash and investments ...... -- -- 610 8,934 9,544
Prepaid and other assets ............. -- 9,125 1,669 1,131 11,925
-------- -------- -------- -------- --------
Total assets ......................... $ 55,592 $ 88,573 $146,287 $ 42,323 $332,775
======== ======== ======== ======== ========
Mortgage notes payable ............... $ -- $ -- $112,233 $ -- $112,233
Accrued expenses and other liabilities -- 3,602 2,637 9,298 15,537
Convertible Trust Preferred Securities -- -- -- 25,000 25,000
Minority interest .................... 6 -- 3,432 -- 3,438
Equity ............................... 55,586 84,971 27,985 8,025 176,567
-------- -------- -------- -------- --------
Total liabilities and shareholders'
equity ............................ $ 55,592 $ 88,573 $146,287 $ 42,323 $332,775
======== ======== ======== ======== ========
<FN>
- ----------
* Includes corporate cash, restricted cash and investments, other assets,
accrued expenses and other liabilities that have not been allocated to the
operating segments.
** Real estate held for sale (but classified as an operating property in the
Debt and Equity Investments SBU as it is the Company's intent to sell these
assets, but the Company can not demonstrate that such assets will be sold
within one year), is net of an impairment reserve of $2,175 at March 31,
2003 and December 31, 2002, respectively.
</FN>
8
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
Segment Information (continued)
(amounts in thousands)
Commercial Debt and Development
Property Equity and Land
Investments Investments Investments Other* Consolidated
----------- ----------- ----------- ------ ------------
For the Three Months
Ended March 31, 2003
------------------------
Rental revenue ........................ $ -- $ 321 $ 3,914 $ -- $ 4,235
Revenue from sales of residential
units .............................. -- -- 1,196 -- 1,196
Interest revenue ...................... -- 846 -- 112 958
Fee revenue ........................... -- 226 (6) 345 565
------- ------- ------- ------- -------
Total revenues ........................ -- 1,393 5,104 457 6,954
------- ------- ------- ------- -------
Cost of sales of residential units .... -- -- 1,055 -- 1,055
Operating expenses .................... -- 196 1,379 -- 1,575
Depreciation and amortization ......... 1,095 59 1,111 18 2,283
Interest .............................. -- -- 1,510 75 1,585
General and administrative ............ -- 10 -- 1,500 1,510
------- ------- ------- ------- -------
Total costs and expenses .............. 1,095 265 5,055 1,593 8,008
------- ------- ------- ------- -------
Income from joint ventures ............ 2,686 439 -- -- 3,125
Minority interest expense ............. -- -- (6) -- (6)
------- ------- ------- ------- -------
Income (loss) before income taxes and
accrued distributions and
amortization of costs on Convertible
Trust Preferred Securities ......... $ 1,591 $ 1,567 $ 43 $(1,136) $ 2,065
======= ======= ======= ======= =======
For the Three Months
Ended March 31, 2002
------------------------
Rental revenue ........................ $ -- $ 309 $ 3,418 $ -- $ 3,727
Revenue from sales of residential
units .............................. -- -- 2,079 -- 2,079
Interest revenue ...................... -- 918 -- 150 1,068
Fee revenue ........................... -- 130 (13) -- 117
------- ------- ------- ------- -------
Total revenues ........................ -- 1,357 5,484 150 6,991
------- ------- ------- ------- -------
Cost of sales of residential units .... -- -- 1,906 -- 1,906
Operating expenses .................... -- 221 1,583 -- 1,804
Depreciation and amortization ......... 141 55 1,048 17 1,261
Interest .............................. -- 7 1,457 30 1,494
General and administrative ............ -- 11 -- 1,663 1,674
------- ------- ------- ------- -------
Total costs and expenses .............. 141 294 5,994 1,710 8,139
------- ------- ------- ------- -------
Income from joint ventures ............ 242 178 -- -- 420
Minority interest benefit ............ -- -- 45 -- 45
------- ------- ------- ------- -------
Income (loss) before income taxes
and accrued distributions and
amortization of costs on Convertible
Trust Preferred Securities ......... $ 101 $ 1,241 $ (465) $(1,560) $ (683)
======= ======= ======= ======= =======
<FN>
- ----------
* Includes interest revenue, fee revenue, depreciation and amortization
expense, interest expense and general and administrative expenses that have
not been allocated to the operating segments.
</FN>
9
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
Segment Information (continued)
Commercial Property Investments-Wellsford/Whitehall
---------------------------------------------------
The Company's commercial property investments currently consist solely of
its interest in Wellsford/Whitehall, a joint venture by and among the
Company, various entities affiliated with the Whitehall Funds
("Whitehall"), private real estate funds sponsored by The Goldman Sachs
Group, Inc. ("Goldman Sachs"), as well as a family based in New England.
The Company had a 32.59% interest in Wellsford/Whitehall at March 31, 2003.
The Company's investment in Wellsford/Whitehall, which is accounted for on
the equity method, was approximately $56,574,000 and $55,592,000 at March
31, 2003 and December 31, 2002, respectively. The following table details
the changes in the Company's investment in Wellsford/Whitehall during the
three months ended March 31, 2003:
Investment balance at January 1, 2003 .............. $ 55,592,000
Contributions.................................... --
Distributions.................................... (738,000)
Share of:
(Loss) from operations........................ (57,000)
Gains from asset sales........................ 2,743,000
Accumulated other comprehensive income........ 129,000
Amortization..................................... (1,095,000)
------------
Investment balance at March 31, 2003................ $ 56,574,000
============
Pursuant to an amended agreement executed in December 2000, Whitehall has
agreed to pay the Company fees with respect to assets sold by
Wellsford/Whitehall equal to 25 basis points of the sales proceeds and up
to 60 basis points (30 basis points are deferred pending certain return on
investment hurdles being reached) for each purchase of real estate made by
certain other affiliates of Whitehall, until such purchases aggregate
$400,000,000. The Company earned fees of approximately $345,000 related to
asset sales during the three months ended March 31, 2003. No such fees were
earned during the three months ended March 31, 2002.
10
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
Segment Information (continued)
The following table presents condensed balance sheets and operating data
for the Wellsford/Whitehall segment:
(amounts in thousands)
Condensed Balance Sheet Data March 31, 2003 December 31, 2002
---------------------------- ------------------ -----------------
Real estate, net ........... $ 352,584 $ 351,997
Cash and cash equivalents .. 12,813 16,169
Assets held for sale ....... 35,803 164,696
Other assets (A) ........... 30,397 24,457
Total assets ............... 431,597 557,319
Mortgages payable .......... 96,517 96,826
Credit facility ............ 115,657 132,349
Liabilities attributable to
properties held for
sale ..................... 26,865 140,825
Common equity .............. 185,755 179,742
Other comprehensive loss ... (651) (1,297)
For the Three Months Ended March 31,
------------------------------------
Condensed Operating Data 2003 2002
------------------------ ---- ----
Rental revenue (B) .............. $ 10,953 $ 11,904
Interest and other income (C) ... 150 188
-------- --------
Total revenues ................ 11,103 12,092
-------- --------
Operating expenses .............. 5,096 4,910
Depreciation and amortization ... 2,928 2,449
Interest ........................ 2,688 3,354
General and administrative ...... 792 1,366
--------- --------
Total expenses ................ 11,504 12,079
--------- --------
(Loss) income before discontinued
operations .................... (401) 13
Income from discontinued
operations .................... 225 729
Gain on sale of assets .......... 8,454 --
--------- --------
Income .......................... $ 8,278 $ 742
========= ========
- ----------
(A) Includes the marked to market value of an interest rate protection
contract of $2 and $13 at March 31, 2003 and December 31, 2002,
respectively.
(B) Includes income (including amounts in discontinued operations) of $68
and $136 from the straight-lining of tenant rents for the three months
ended March 31, 2003 and 2002, respectively.
(C) Includes lease cancellation income (including amounts in discontinued
operations) of $87 and $300 for the three months ended March 31, 2003
and 2002, respectively.
11
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
Segment Information (continued)
At March 31, 2003, Wellsford/Whitehall owned and operated 28 properties
(including 19 office properties, five retail properties and four land
parcels) aggregating approximately 2,892,000 square feet of improvements
(including approximately 546,000 square feet under renovation), primarily
located in New Jersey, Massachusetts and Maryland. Wellsford/Whitehall
completed the following sales during the three months ended March 31, 2003:
(amounts in thousands, except square feet and per share foot amounts)
Month Gross Sales Price
of Leasable Per
Sale Property Location Square Feet Sales Price Square Foot Gain (Loss)
----- ------------------------------ --------------------------- ----------- ----------- ----------- -----------
January Decatur ....................... Decatur, GA 10,000 $ 2,370 $ 234 $ 10
February Portfolio sale (A):
Mountain Heights Center #1 .. Berkeley Hts, NJ 183,000
Mountain Heights Center #2 .. Berkeley Hts, NJ 123,000
Greenbrook Corporate Center . Fairfield, NJ 201,000
180/188 Mt. Airy Road ....... Basking Ridge, NJ 104,000
One Mall North .............. Columbia, MD 97,000
Gateway Tower ............... Rockville, MD 248,000
--------
Total portfolio sale .......... 956,000 136,835 143 8,321
March 60 Turner Street .............. Waltham, MA 16,000 1,300 81 123
-------- --------- -------
982,000 $ 140,505 143 $ 8,454
======== ========= =======
<FN>
- ----------
(A) The portfolio sale of assets was to a single purchaser.
</FN>
Debt and Equity Investments-Wellsford Capital
--------------------------------------------
At March 31, 2003, the Company had the following investments: (i) direct
debt investments of $28,096,000 which bore interest at a weighted average
annual yield of approximately 11.75% for the three months ended March 31,
2003 and had an average remaining term to maturity of approximately 3.9
years; (ii) approximately $32,147,000 of equity investments in companies
which were organized to invest in debt instruments, including $28,517,000
in Second Holding Company, L.L.C., a company which was organized to
purchase investment and non-investment grade rated real estate debt
instruments and investment-grade rated other asset-backed securities
("Second Holding"); and (iii) approximately $6,792,000 in Reis, Inc., a
real estate information and database company ("Reis"). In addition, the
Company owned and operated two commercial properties with a net book value
of approximately $5,974,000 totaling approximately 175,000 square feet
located in Salem, New Hampshire and Philadelphia, Pennsylvania at March 31,
2003.
Second Holding
The Company accounts for its investment in Second Holding on the equity
method of accounting as its interests are represented by two of eight board
seats with one-quarter of the vote on any major business decisions. The
Company's investment was approximately $28,517,000 and $28,166,000 at March
31, 2003 and December 31, 2002, respectively and includes undistributed
earnings of approximately $2,543,000 and $2,192,000 at March 31, 2003 and
December 31, 2002, respectively. The Company's share of income from Second
Holding was approximately $351,000 and $90,000 for the three months ended
March 31, 2003 and 2002, respectively. The Company also earns management
fees for its role in
12
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
Segment Information (continued)
analyzing real estate-related investments for Second Holding. The net fees
earned by the Company, which are based upon the total assets of Second
Holding, amounted to approximately $220,000 and $117,000 for the three
months ended March 31, 2003 and 2002, respectively.
The following table presents condensed balance sheets and operating data
for Second Holding:
(amounts in thousands)
Condensed Balance Sheet Data March 31, 2003 December 31, 2002
---------------------------- ------------------ -----------------
Cash and cash equivalents..... $ 119,320 $ 16,876
Investments................... 1,790,532 1,785,758
Other assets (A).............. 49,710 37,462
Total assets.................. 1,959,562 1,840,096
Medium-term notes (B)......... 1,722,490 1,552,945
Long-term debt (C)(D)......... 118,594 169,988
Total equity.................. 56,402 55,910
For the Three Months Ended March 31,
------------------------------------
Condensed Operating Data 2003 2002
------------------------ ---- ----
Interest...................... $ 11,084 $ 8,426
-------- -------
Total revenue ................ 11,084 8,426
-------- -------
Interest expense ............. 8,803 7,316
Fees and other ............... 1,197 831
-------- -------
Total expenses ............... 10,000 8,147
-------- -------
Net income attributable
to members (D)............. $ 1,084 $ 279
======== =======
- ----------
(A) Other assets includes an interest rate swap asset with a fair value of
$20,722 and $22,638 at March 31, 2003 and December 31, 2002,
respectively.
(B) At March 31, 2003, the net reported amount of medium-term notes
includes the face amount of such notes of $1,725,000, plus a fair
value adjustment for swaps of $61, offset by unamortized discounts and
debt issuance costs of $2,571. At December 31, 2002, the net reported
amount of medium-term notes included the face amount of such notes of
$1,555,000, plus a fair value adjustment for swaps of $513, offset by
unamortized discounts and debt issuance costs of $2,568.
(C) Long-term debt outstanding is a privately placed ten-year junior
subordinated bond-issue maturing April 2010, issued at a fixed rate of
7.96% per annum with a face amount of $100,000 and $150,000 at March
31, 2003 and December 31, 2002, respectively. The effect of fair value
adjustments for the long-term debt was $20,661 and $22,125 at March
31, 2003 and December 31, 2002, respectively, net of unamortized debt
issuance costs.
(D) The partner which was admitted in the latter part of 2000 (who is
committed to provide an insurance policy, through one of its
affiliates, for the payment of principal and interest through April
2010 for the junior subordinated bond-issue) is entitled to 35% of net
income, as defined by the agreement, while other partners, including
the Company, share in the remaining 65%. The Company's allocation of
income is approximately 51.1% of the remaining 65%.
13
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
Segment Information (continued)
Development and Land Investments-Wellsford Development
------------------------------------------------------
At March 31, 2003, the Company had an 85.85% interest as the managing owner
in a five phase, 1,800 unit class A multifamily development ("Palomino
Park") in Highlands Ranch, a south suburb of Denver, Colorado. Three phases
aggregating 1,184 units are completed and operational as a rental property.
A 264 unit fourth phase is being converted into condominiums. The Company
has sold 158 units as of March 31, 2003 and 40 of the unsold units are
available for rent and included in operations until the sales inventory has
to be replenished. The land for the remaining approximate 352 unit fifth
phase is being held for possible future development or sale.
Sales of condominium units at the Silver Mesa phase of Palomino Park
commenced in February 2001. The following table provides information
regarding sales of Silver Mesa units:
For the Three Months Ended
March 31,
-------------------------- Project
2003 2002 Totals
---- ---- ------------
Number of units sold ........... 5 9 158
Gross proceeds ................. $ 1,196,000 $ 2,079,000 $ 33,763,000
Principal paydown on Silver Mesa
Conversion Loan ............. $ 990,000 $ 1,741,000 $ 28,672,000
The following table details operating information related to the Silver
Mesa units being rented. As the Company continues to sell units, future
rental revenues and corresponding operating expenses will diminish.
For the Three Months Ended
March 31,
--------------------------
2003 2002
---- ----
Rental revenue.................. $ 274,000 $ 435,000
Net operating income (A)........ $ 197,000 $ 258,000
- ----------
(A) Net operating income is defined as rental revenue, less property
operating and maintenance expenses, real estate taxes and property
management fees.
In February 2003, the Company obtained a $40,000,000 permanent loan secured
by a first mortgage on Green River (the "Green River Mortgage"). The Green
River Mortgage matures in March 2013 and bears interest at a fixed rate of
5.45% per annum. Principal payments are based on a 30-year amortization
schedule. Proceeds were used to repay maturing construction debt of
approximately $37,107,000, with excess proceeds available for working
capital purposes.
14
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
4. Shareholders' Equity
The Company did not declare or distribute any dividends for the three
months ended March 31, 2003 and 2002.
The following table details the components of comprehensive income (loss):
For the Three Months Ended
March 31,
--------------------------
2003 2002
---- ----
Net income (loss)........................ $ 832,539 $ (1,076,414)
Share of unrealized income (loss) on
interest rate protection contract
purchased by joint venture investment,
net of income tax benefit............ 129,153 (41,837)
---------- ------------
Comprehensive income (loss)............. $ 961,692 $ (1,118,251)
========== ============
5. Share Option Plans
Pursuant to the provisions of SFAS No. 148, as described in Note 2, the pro
forma net income (loss) available to common shareholders as if the fair
value approach to accounting for share-based compensation had been applied
for grants of options in prior years is as follows:
(amounts in thousands, except per share amounts)
For the Three Months Ended
March 31,
--------------------------
2003 2002
---- ----
Net income (loss) - as reported......... $ 833 $ (1,076)
Expense................................. (41) (229)
------- --------
Net income (loss) - pro forma........... $ 792 $ (1,305)
======= ========
Net income (loss) per common share,
basic and diluted:
As reported......................... $ 0.13 $ (0.17)
======= ========
Pro forma........................... $ 0.12 $ (0.20)
======= ========
6. Income Taxes
The income tax benefit for the three months ended March 31, 2002 resulted
from expected refundable Federal income taxes arising from the loss for the
period, offset by minimum state and local taxes based upon capital of the
Company. The income tax expense for the three months ending March 31, 2003
resulted from state and local taxes based upon income, minimum state and
local taxes based upon capital and a provision for Federal income taxes.
7. Earnings Per Share
Basic earnings per common share are computed based upon the weighted
average number of common shares outstanding during the period, including
class A-1 common shares. Diluted earnings per
15
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (continued)
Earnings Per Share (continued)
common share are based upon the increased number of common shares that
would be outstanding assuming the exercise of dilutive common share options
and Convertible Trust Preferred Securities.
The following table details the computation of earnings per share, basic
and diluted:
For the Three Months
Ended March 31,
--------------------
2003 2002
---- ----
Numerator for net income (loss) per common
share, basic and diluted .................. $ 832,539 $ (1,076,414)
=========== ============
Denominator:
Denominator for net income (loss) per
common share, basic--weighted average
common shares .......................... 6,452,092 6,409,248
Effect of dilutive securities:
Employee stock options ............... 599 --
Convertible Trust Preferred
Securities ......................... -- --
----------- ------------
Denominator for net income (loss) per common
share, diluted--weighted average
common shares .......................... 6,452,691 6,409,248
=========== ============
Net income (loss) per common share, basic .... $ 0.13 $ (0.17)
=========== ============
Net income (loss) per common share, diluted .. $ 0.13 $ (0.17)
=========== ============
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
- -------
Capitalized terms used herein which are not defined elsewhere in this quarterly
report on Form 10-Q shall have the meanings ascribed to them in the Company's
annual report on Form 10-K for the year ended December 31, 2002, as filed with
the Securities and Exchange Commission on March 26, 2003.
Business
- --------
The Company is a real estate merchant banking firm headquartered in New York
City which acquires, develops, finances and operates real properties and
organizes and invests in private and public real estate companies. The Company
has established three strategic business units ("SBUs") within which it executes
its business plan: (i) Commercial Property Investments which are held in the
Company's subsidiary, Wellsford Commercial Properties Trust, through its
ownership interest in Wellsford/Whitehall Group, L.L.C. ("Wellsford/Whitehall");
(ii) Debt and Equity Investments-Wellsford Capital SBU; and (iii) Development
and Land Investments-Wellsford Development SBU.
Commercial Property Investments-Wellsford/Whitehall
The Company's commercial property investments currently consist solely of its
interest in Wellsford/Whitehall, a joint venture among the Company, various
entities affiliated with the Whitehall Funds ("Whitehall"), private real estate
funds sponsored by The Goldman Sachs Group, Inc. ("Goldman Sachs"), as well as a
family based in New England. The Company had a 32.59% interest in
Wellsford/Whitehall at March 31, 2003.
The Company's investment in Wellsford/Whitehall, which is accounted for on the
equity method, was approximately $56,574,000 and $55,592,000 at March 31, 2003
and December 31, 2002, respectively. The Company's share of income from
Wellsford/Whitehall was approximately $2,686,000 and $242,000 for the three
months ended March 31, 2003 and 2002, respectively.
Pursuant to an amended operating agreement executed in December 2000, Whitehall
has agreed to pay the Company fees with respect to assets sold by
Wellsford/Whitehall equal to 25 basis points of the sales proceeds and up to 60
basis points (30 basis points are deferred pending certain return on investment
hurdles being reached) for each purchase of real estate made by certain other
affiliates of Whitehall, until such purchases aggregate $400,000,000. The
Company earned fees of approximately $345,000 related to asset sales during the
three months ended March 31, 2003. No such fees were earned during the three
months ended March 31, 2002.
17
At March 31, 2003, Wellsford/Whitehall owned and operated 28 properties
(including 19 office properties, five retail properties and four land parcels)
aggregating approximately 2,892,000 square feet of improvements (including
approximately 546,000 square feet under renovation), primarily located in New
Jersey, Massachusetts and Maryland. Wellsford/Whitehall completed the following
asset sales during the three months ended March 31, 2003:
(amounts in thousands, except square feet and per share foot amounts)
Month Gross Sales Price
of Leasable Per
Sale Property Location Square Feet Sales Price Square Foot Gain (Loss)
----- ------------------------------ --------------------------- ----------- ----------- ----------- -----------
January Decatur ....................... Decatur, GA 10,000 $ 2,370 $ 234 $ 10
February Portfolio sale (A):
Mountain Heights Center #1 .. Berkeley Hts, NJ 183,000
Mountain Heights Center #2 .. Berkeley Hts, NJ 123,000
Greenbrook Corporate Center . Fairfield, NJ 201,000
180/188 Mt. Airy Road ....... Basking Ridge, NJ 104,000
One Mall North .............. Columbia, MD 97,000
Gateway Tower ............... Rockville, MD 248,000
--------
Total portfolio sale .......... 956,000 136,835 143 8,321
March 60 Turner Street .............. Waltham, MA 16,000 1,300 81 123
-------- --------- -------
982,000 $ 140,505 143 $ 8,454
======== ========= =======
<FN>
- ----------
(A) The portfolio sale of assets was to a single purchaser.
</FN>
Debt and Equity Investments-Wellsford Capital
The Company, through the Debt and Equity Investments-Wellsford Capital SBU,
makes debt investments directly, or through joint ventures, predominantly in
real estate related senior, junior or otherwise subordinated debt instruments
and also in investment grade rated commercial mortgage backed securities and
other asset-backed securities. The debt investments may be unsecured or secured
by liens on real estate, liens on equity interests in real estate, pools of
mortgage loans, or various other assets including, but not limited to, leases on
aircraft, truck or car fleets, leases on equipment, consumer receivables, pools
of corporate bonds and loans and sovereign debt, as well as interests in such
assets or their economic benefits. Junior and subordinated loans and investments
generally have the potential for high yields or returns more characteristic of
equity ownership. They may include debt that is acquired at a discount,
mezzanine financing, commercial mortgage-backed securities, secured and
unsecured lines of credit, distressed loans, tax exempt bonds secured by real
estate and loans previously made by foreign and other financial institutions.
The Company believes that there are opportunities to acquire real estate debt
and other debt, especially in the low or below investment grade tranches, at
significant returns as a result of inefficiencies in pricing in the marketplace,
while utilizing the expertise of both the Company and its joint venture partners
to analyze the underlying assets and thereby effectively minimizing risk.
At March 31, 2003, the Company had the following investments: (i) direct debt
investments of $28,096,000 which bore interest at a weighted average annual
yield of approximately 11.75% during the three months ended March 31, 2003 and
had an average remaining term to maturity of approximately 3.9 years; (ii)
approximately $32,147,000 of equity investments in companies which were
organized to invest in debt instruments, including $28,517,000 in Second Holding
Company, LLC, a company which was organized to purchase investment and
non-investment grade rated real estate debt instruments and investment-grade
rated other asset-backed securities ("Second Holding"); and (iii) approximately
$6,792,000 invested in Reis, Inc., a real estate information and database
company ("Reis"). In addition, the Company owned and operated two commercial
properties with a net book value of approximately $5,974,000 totaling
approximately 175,000 square feet located in Salem, New Hampshire and
Philadelphia, Pennsylvania at March 31, 2003.
18
Development and Land Investments-Wellsford Development
The Company, through the Development and Land Investments-Wellsford Development
SBU, 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
that could be achieved by acquiring stabilized properties. As part of its
strategy, the Company may seek to issue tax-exempt bond financing authorized by
local governmental authorities which generally bears interest at rates
substantially below rates available from conventional financing.
At March 31, 2003, the Company had an 85.85% interest as the managing owner in a
five phase, 1,800 unit class A multifamily development ("Palomino Park") in
Highlands Ranch, a south suburb of Denver, Colorado. Three phases aggregating
1,184 units are completed and operational as a rental property. A 264 unit
fourth phase is being converted into condominiums. The Company has sold 158
units as of March 31, 2003 and 40 of the unsold units are available for rent and
included in operations until the sales inventory has to be replenished. The land
for the remaining approximate 352 unit fifth phase is being held for possible
future development or sale.
Other Segment Information
The following table provides occupancy rates and gross leasable square
footage/gross rentable units by SBU as of each specified date:
Commmercial Property Development and
Investments (A) Debt and Equity Investments (B) Land Investments (C)
-------------- ------------------------------- --------------------
Gross Gross Gross
Leasable Leasable Rentable
Occupancy % Square Feet Occupancy % Square Feet Occupancy % Units
----------- ----------- ----------- ----------- ----------- -----
March 31, 2003 ....... 73% 2,346,000 58% 175,000 93% 1,184
December 31, 2002 .... 76% 3,328,000 60% 175,000 95% 1,184
March 31, 2002 ....... 75% 3,300,000 62% 175,000 76% 1,292
December 31, 2001 .... 69% 3,307,000 62% 175,000 77% 896
<FN>
- ----------
(A) Occupancy % and Gross Leasable Square Feet exclude square feet for
properties under renovation of 546,000 square feet at March 31, 2003 and
December 31, 2002, 605,000 and 598,000 square feeet at March 31, 2002 and
December 31, 2001, respectively.
(B) Occupancy rates for the remaining assets acquired from Value Property Trust
("VLP") held in this SBU.
(C) Increases in the physical occupancy rate were achieved, in part, by an
increase in concessions during the period. As of March 31, 2003, the
average concession was approximately three months of rent on a 12-month
lease.
</FN>
See Note 3 of the Company's unaudited consolidated financial statements for
quarterly financial information regarding the Company's industry segments.
Results of Operations
- ---------------------
Comparison of the three months ended March 31, 2003 to the three months ended
March 31, 2002
Rental revenue increased $508,000. This increase is primarily due to commenced
operations at the Green River phase at Palomino Park effective January 1, 2002
and reflects revenues in the fiscal 2003 period in excess of the 2002 period
($490,000) and increased physical occupancy at the Blue Ridge and Red Canyon
phases at Palomino Park in the Wellsford Development SBU ($167,000). Such
increase was partially offset by reduced rental operations at the Silver Mesa
phase at Palomino Park from unit sales and fewer units being rented in the 2003
period as compared to the 2002 period ($161,000).
19
Revenues from sales of residential units and the associated cost of sales from
such units were $1,196,000 and $1,055,000, respectively, from five sales during
the three months ended March 31, 2003 and were $2,079,000 and $1,906,000,
respectively, from nine sales during the corresponding 2002 period. Although
fewer units were sold in the current period, the average pre-tax income from
these units were approximately $9,000 greater than in the corresponding 2002
period as a result of sales of larger units.
Interest revenue decreased $110,000. This decrease is due to reduced income
earned on loans of $90,000 from lower average outstanding loan balances in the
2003 period as compared to the 2002 period, as well as reduced interest earned
on cash of $20,000 from lower interest rates during the current period versus
the comparable 2002 period.
Fee revenue increased $448,000. The Company's management fees for its role in
the Second Holding investment increased $103,000 from increased assets under
management in that venture, coupled with increased sales fees payable by
Whitehall derived from Wellsford/Whitehall sales, which fees amounted to
$345,000 during the three months ended March 31, 2003. There were no sale
transactions in the corresponding 2002 period.
Property operating and maintenance expense decreased $199,000. This decrease is
primarily the result of refunds for water charges by the municipality for
Palomino Park coupled with the Company absorbing higher utility costs because of
29% average physical vacancy in the 2002 period compared to 6% in 2003 and
payroll reductions from a smaller property operating staff, offset by increased
tenant replacement costs.
The increase in real estate taxes of $14,000 is primarily attributable to
increased assessments and rates in the 2003 period as compared to the 2002
period for all of the phases at Palomino Park and for the VLP real estate assets
in the Wellsford Capital SBU ($26,000), offset by sales of Silver Mesa
condominium units ($12,000).
Depreciation and amortization expense increased $1,023,000. This increase is
primarily attributable to amortization of joint venture costs attributable to
seven of the eight assets sold during the three months ended March 31, 2003
($954,000) with no properties sold by Wellsford/Whitehall during the 2002
period, additional Green River depreciation as the final sections of this phase
were completed during the 2002 period ($129,000) and fixed asset additions to
the other Palomino Park phases and the VLP assets ($42,000), offset by a reduced
depreciation basis from the transfer of 96 Silver Mesa units from operations to
residential units available for sale during the year ended December 31, 2002
($102,000).
Property management expenses decreased $45,000. Such decrease is due to the
reduction in contractual management fees beginning October 1, 2002 from a 3%
annual fee of gross receipts to a 2% annual fee for the Palomino Park
operational phases ($26,000) and the assumption of certain asset management
duties by the Company in April 2002 related to the VLP properties ($19,000).
Interest expense increased $91,000. This increase is primarily attributable to
the Green River phase as the 2003 period includes interest at a higher fixed
rate from February 2003 on permanent financing, whereas in the 2002 period, the
variable interest rate and the average outstanding balance on the construction
financing were both lower than the 2003 amounts ($136,000). These increases were
partially offset by reduced interest expense from a lower outstanding balance
and a reduced interest rate on the Silver Mesa Conversion Loan ($35,000).
General and administrative expenses decreased $164,000. This decrease is
primarily reduced amortization of stock compensation as a result of stock fully
vesting by December 31, 2002.
20
Income from joint ventures increased $2,705,000. An analysis of the increase
follows:
For The Three Months Ended March 31,
------------------------------------
Increase
2003 2002 (Decrease)
---- ---- ---------
Wellsford/Whitehall:
Operations (A).................. $ (57,000) $ 242,000 $ (299,000)
Gain on sale of assets (B)...... 2,743,000 -- 2,743,000
Second Holding (C)................. 351,000 90,000 261,000
Clairborne Fordham Tower........... 88,000 88,000 --
----------- ---------- -----------
Income (loss) from joint ventures.. $ 3,125,000 $ 420,000 $ 2,705,000
=========== ========== ===========
<FN>
----------
(A) The 2003 period was impacted by the sale of eight properties, lower
occupancy and lower rental rates than the corresponding 2002 period.
(B) Eight properties were sold during the 2003 period with no sales in the
corresponding 2002 period.
(C) The increase in earnings is a result of an increase in invested assets
generating an increase in income for that venture.
</FN>
</table>
Minority interest changed $51,000 from a benefit of $45,000 in the 2002 period
to an expense of $6,000 in the 2003 period, primarily attributable to income in
the Wellsford Development SBU in 2003 whereas this SBU had a loss in the
comparable 2002 period.
Income taxes increased by $915,000 from a benefit of $27,000 in 2002, to an
expense of $888,000 in 2003 primarily from the Company having a loss in the 2002
fiscal period compared to a profit in the corresponding period in 2003.
The increase in net income (loss) per share, basic and diluted of $0.30 per
share is attributable to current period income of $833,000, whereas in the 2002
period, the Company reported a loss of $1,076,000.
Liquidity and Capital Resources
- -------------------------------
The Company expects to meet its short-term liquidity requirements, such as
operating expenses, generally through its available cash, sales of residential
units in the Wellsford Development SBU and cash provided by operations.
The Company expects to meet its long-term liquidity requirements such as
maturing mortgages, financing acquisitions and development, financing capital
improvements and joint venture loan requirements through the use of available
cash, receipt of payments related to notes receivable, sales of residential
units in the Wellsford Development SBU (proceeds from such sales will increase
from the current amount of approximately 10% of net sales proceeds to 100% when
the Silver Mesa Conversion Loan, with a balance of $3,328,000 at March 31, 2003,
is fully repaid), sales of the two remaining VLP assets in the Wellsford Capital
SBU, refinancings and the issuance of debt and the offering of additional debt
and equity securities. 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.
Wellsford/Whitehall expects to meet its short and long-term liquidity
requirements, such as financing additional renovations and tenant improvements
to its properties, repayments of debt maturities and operating expenses with
available cash, operating cash flow from its properties, financing available
under the Wellsford/Whitehall GECC Facility through June 30, 2003
(Wellsford/Whitehall is in the process of negotiating an extension to the period
for the funding of capital additions for tenant improvements and leasing
commissions), proceeds from
21
any asset sales, refinancing of existing loans and draws from the $10,000,000
commitment of additional financing or preferred equity from the principal owners
of Wellsford/Whitehall, if required. At December 31, 2001, the Company and
Whitehall each had completed funding their entire respective capital
commitments. The additional financing/preferred equity commitment, of which the
Company's share is $4,000,000, is fully available to Wellsford/Whitehall until
December 31, 2003. At March 31, 2003, Wellsford/Whitehall's cash and cash
equivalents balance was approximately $12,800,000 and restricted cash available
for certain capital improvements was approximately $13,800,000.
Second Holding expects to meet its liquidity requirements for purchases of
investments with proceeds from the issuance of bonds, medium-term notes and
commercial paper. Liquidity for the repayments of bonds, medium-term notes and
commercial paper is expected to be provided from principal repayments, from
amortization of investments and upon repayment of investments at maturity.
Second Holding also has $375,000,000 available on its line of credit at March
31, 2003. The nature of Second Holding's business results in the entity being
highly leveraged.
The Company's retained earnings included approximately $2,543,000 of
undistributed earnings from Second Holding at March 31, 2003 as distributions
are limited to 48.25% of earnings.
Other Items Impacting the Company's Liquidity and Resources
Second Holding Investments
The following table details the allocation of investments for Second Holding:
March 31, 2003 December 31, 2002
---------------------------- ----------------------------
Amount Percent Amount Percent
----------- ----------- ----------- -----------
Security for Investments (A)
- ----------------------------
Real Estate ................ $ 580,146,000 32% $ 587,358,000 33%
Corporate debt ............. 444,953,000 25% 462,041,000 26%
Consumer/trade receivables . 125,000,000 7% 125,000,000 7%
Bank deposits .............. 105,000,000 6% 105,000,000 6%
Sovereign debt ............. 100,960,000 6% 100,960,000 6%
Aircraft loans and leases .. 95,000,000 5% 80,000,000 4%
Fuel/oil receivables ....... 35,000,000 2% 35,000,000 2%
Other asset-backed
securities ............... 304,473,000 17% 290,399,000 16%
-------------- ----------- -------------- ----------
Total (B) .................. $1,790,532,000 100% $1,785,758,000 100%
============== =========== ============== ==========
Standard & Poor's
Ratings of Investments
- -----------------------------
AAA ........................ $1,281,330,000 72% $1,267,616,000 71%
AA+ ........................ 25,253,000 1% 35,000,000 2%
AA ......................... 237,304,000 13% 163,581,000 9%
AA- ........................ 114,223,000 6% 164,223,000 9%
A+ ......................... 24,922,000 1% 24,922,000 1%
A .......................... 80,500,000 5% 97,092,000 6%
A- ......................... 27,000,000 2% 33,324,000 2%
-------------- ----------- -------------- ----------
Total (B) .................. $1,790,532,000 100% $1,785,758,000 100%
============== =========== ============== ==========
<fn>
- -----------------------------
(A) Investments may be secured by the assets or interests in such assets or
their respective economic benefit.
(B) Investments are variable rate based at a weighted average annual interest
rate of 2.05% and 2.21% at March 31, 2003 and December 31, 2002,
respectively.
</FN>
Second Holding utilizes funds from the issuance of bonds, medium term notes and
commercial paper to make investments. Second Holding had total debt of
approximately $1,841,084,000 and $1,722,933,000 at March 31, 2003 and December
31, 2002, respectively, including junior subordinated bonds due in April 2010 of
22
$100,000,000 and $150,000,000 at March 31, 2003 and December 31, 2002,
respectively. Second Holding debt had a weighted average annual interest rate of
1.49% and 1.69% at March 31, 2003 and December 31, 2002, respectively, after the
effect of swaps on fixed rate debt to a floating rate. One of the partners of
Second Holding has provided credit enhancement, through the issuance of an
insurance policy by one of its affiliates, for the payment of principal and
interest of the junior subordinated bonds through maturity in 2010. The parent
company of this partner has announced that its subsidiary (the partner of Second
Holding) will no longer write new credit enhancement business, while it will
continue to support its existing book of credit enhancement business. The
Company does not believe that this decision will impact the business and
operations of Second Holding.
Palomino Park
In January 2003, the Company's board of directors approved a plan for the
Company to seek institutional investors to purchase an interest in the
residential rental phases at Palomino Park. There can be no assurance that the
Company will be able to find suitable investors or that such a transaction will
be completed.
Silver Mesa Condominium Sales and Rental Operations
During the three months ended March 31, 2003, the Company sold five Silver Mesa
units and received net proceeds of approximately $111,000 after the repayment of
principal on the Silver Mesa Conversion Loan of approximately $990,000 and
selling costs. Net proceeds received by the Company from the above sales are
available for working capital purposes.
The following table details operating information related to the Silver Mesa
units being rented. As the Company continues to sell units, future rental
revenues and corresponding operating expenses will diminish.
For the Three Months Ended March 31,
------------------------------------
2003 2002
---- ----
Rental revenue.............. $ 274,000 $ 435,000
Net operating income (A).... $ 197,000 $ 258,000
-----------
(A) Net operating income is defined as rental revenue, less property
operating and maintenance expenses, real estate taxes and property
management fees.
Green River Mortgage
In February 2003, the Company obtained a $40,000,000 permanent loan secured by a
first mortgage on Green River (the "Green River Mortgage"). The Green River
Mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per
annum. Principal payments are based on a 30-year amortization schedule. Proceeds
were used to repay maturing construction debt of approximately $37,107,000, with
excess proceeds available for working capital purposes.
Restructuring Charge
The Company recorded a non-recurring charge of approximately $3,527,000 during
the fourth quarter of 2001 related to the retirement of the Company's former
President and Chief Executive Officer and other personnel changes. The Company
made payments of approximately $2,767,000 during the year ended December 31,
2002, reducing the accrual balance from $3,466,000 at December 31, 2001 to
approximately $699,000 at December 31, 2002. The remaining balance of such
obligations were paid by March 31, 2003. The Company utilized available cash for
payments made in 2002 and 2003.
23
Cash Flows
- ----------
For the three months ended March 31, 2003
Cash flow provided by operating activities of $1,501,000 primarily consists of
net income of $833,000 and (i) depreciation and amortization of $2,293,000, (ii)
a decrease in the balance of residential units available for sale of $891,000,
(iii) a decrease in the balance of prepaid and other assets of $863,000, (iv)
amortization of deferred compensation of $88,000, (v) a decrease in the balance
of restricted cash and investments of $34,000, (vi) shares issued for director
compensation of $24,000 and (vii) undistributed minority interest of $5,000,
partially offset by (viii) undistributed joint venture income of $2,298,000 and
(ix) a decrease in the balance of accrued expenses and other liabilities of
$1,232,000.
Cash flow provided by investing activities of $512,000 consists of repayments of
notes receivable of $516,000, offset by additional investments in real estate
assets of $4,000.
Cash flow provided by financing activities of $1,318,000 consists of borrowings
from mortgage notes payable of $40,000,000, offset by principal payments of
mortgage notes payable of $38,355,000 (including $37,111,000 for a maturing
construction loan on the Green River property and $990,000 for the Silver Mesa
Conversion Loan) and deferred financing costs of $327,000 on the new Green River
loan.
For the three months ended March 31, 2002
Cash flow used in operating activities of $2,443,000 primarily consists of a net
loss of $1,076,000 and (i) a decrease in accrued expenses and other liabilities
of $3,631,000, (ii) an increase in restricted cash and investments of
$1,720,000, (iii) undistributed joint venture income of $331,000 and (iv)
undistributed minority interest benefit of $45,000, offset by (v) a net decrease
in residential units available for sale of $1,433,000, (vi) a decrease in
prepaid and other assets of $1,326,000, (vii) depreciation and amortization of
$1,270,000, (viii) amortization of deferred compensation of $311,000 and (ix)
shares issued for director compensation of $20,000.
Cash flow provided by investing activities of $1,136,000 consists of repayments
of notes receivable of $1,216,000, offset by additional investments in real
estate assets of $80,000.
Cash flow used in financing activities of $1,572,000 consists of principal
payments of mortgage notes payable of $1,942,000 (including $1,741,000 for the
Silver Mesa Conversion Loan) and distributions of minority interests of $15,000,
offset by interest funded by a construction loan of $334,000 and proceeds
received upon the exercise of options of $51,000.
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-3 (file No. 333-73874) filed with the
Securities and Exchange Commission ("SEC") on December 14, 2001, as may be
amended, which is incorporated herein by reference: general and local 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 and cost of financing;
ability to find suitable investments; competition; risks of real estate
acquisition, development, construction and renovation including construction
delays and cost overruns; ability to comply with zoning and other laws;
vacancies at commercial and multifamily properties; dependence on rental
24
income from real property; the risk of inflation in operating expenses,
including, but not limited to, energy, water and insurance; the availability of
insurance coverages; adverse consequences of debt financing including, without
limitation, the necessity of future financings to repay maturing debt
obligations; inability to meet financial and valuation covenants contained in
loan agreements; inability to repay financings; risks of investments in debt
instruments, including possible payment defaults and reductions in the value of
collateral; uncertainties pertaining to debt investments, including, but not
limited to the WTC Certificates, including scheduled interest payments, the
ultimate repayment of principal, adequate insurance coverages, the ability of
insurers to pay claims and effects of changes in ratings from rating agencies;
risks of subordinate loans; risks of leverage; risks associated with equity
investments in and with third parties; availability and cost of financing;
interest rate risks; demand by prospective buyers of condominium and commercial
properties; inability to realize gains from the real estate assets held for
sale; lower than anticipated sales prices; inability to close on sales of
properties under contract; illiquidity of real estate investments; environmental
risks; 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.
25
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's primary market risk exposure is to changes in interest rates. The
Company and its joint venture investments manage this risk by offsetting its
investments and financing exposures to the extent possible as well as by
strategically timing and structuring its transactions. The following table
presents the effect of a 1.00% increase in the base rates on all variable rate
notes receivable and debt and its impact on annual net income:
<table>
<caption>
(amounts in thousands, except per share amounts)
Effect of 1%
Balance at Increase in Base
March 31, Rate on Income
2003 (Expense)
-------------- ----------------
Consolidated assets and liabilities:
Notes receivable:
Fixed rate.............................. $ 28,096 $ --
============ --------------
Mortgage notes payable:
Variable rate........................... $ 16,008 (160)
Fixed rate.............................. 97,870 --
------------ --------------
$ 113,878 (160)
============ --------------
Convertible Trust Preferred Securities:
Fixed rate.............................. $ 25,000 --
============ --------------
Proportionate share of assets and liabilities
from investments in joint ventures:
Second Holding:
Investments:
Variable rate........................ $ 914,799 9,148
============
Debt:
Variable rate........................ $ 932,409 (9,324)
============ --------------
Net effect from Second Holding.......... (176)
--------------
Wellsford/Whitehall:
Debt:
Variable rate, with LIBOR cap (A).... $ 50,938 (509)
Fixed rate........................... 26,578 --
------------ --------------
$ 77,516
============
Effect from Wellsford/Whitehall......... (509)
--------------
Fordham Tower:
Fixed rate.............................. $ 3,400 --
============ --------------
Net decrease in annual income, before minority
interest and income tax benefit............ (845)
Minority interest............................. 23
Income tax benefit............................ 329
--------------
Net decrease in annual net income............. $ (493)
==============
Per share, basic and diluted.................. $ (0.08)
==============
<FN>
- -----------
(A) In July 2001, Wellsford/Whitehall entered into an interest rate
protection contract for a notional amount of $285,000, which limits
Wellsford/Whitehall's LIBOR exposure to 5.83% until June 2003 and
6.83% for the following year to June 2004. The above calculation
assumes exposure of 1.00% on the Company's proportionate share of debt
based upon the in-effect 30-day LIBOR contract of 1.34% at March 31,
2003.
</FN>
26
<Page>
Item 4. Controls and Procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
on this evaluation, the Company's chief executive officer and chief financial
officer concluded that the disclosure controls and procedures are effective in
timely alerting them to material information required to be included in the
Company's periodic reports filed with the Securities and Exchange Commission.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date the Company carried out its last evaluation.
27
Part II. Other Information:
-----------------
Item 1: Legal Proceedings.
The Company is not presently a defendant in any material
litigation.
Item 2: Changes in Securities and Use of Proceeds.
None.
Item 3: Defaults upon Senior Securities.
None.
Item 4: Submission of Matters to a Vote of Security Holders.
None.
Item 5: Other Information.
None.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits filed with this Form 10-Q:
99.1 Chief Executive Officer and Chief Financial Officer
Certifications pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002.
(b) Reports on Form 8-K.
During the quarter ended March 31, 2003, Wellsford Real
Properties, Inc. filed the following reports on Form 8-K:
Date of Report
(Date of Earliest Event) Items Reported Date Filed
------------------------ -------------- ----------
March 24, 2003 The Company furnished March 24, 2003
(March 24, 2003) under Item 9, a copy of
the press release
reporting results for the
fourth quarter and year
ended December 31, 2002.
28
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.
WELLSFORD REAL PROPERTIES, INC.
By: /s/ James J. Burns
----------------------------------------------
James J. Burns
Senior Vice President, Chief Financial Officer
By: /s/ Mark P. Cantaluppi
----------------------------------------------
Mark P. Cantaluppi
Vice President, Chief Accounting Officer
Dated: May 7, 2003
29
CERTIFICATION
I, Jeffrey H. Lynford, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wellsford Real
Properties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ Jeffrey H. Lynford
----------------------
Jeffrey H. Lynford
Chief Executive Officer
30
CERTIFICATION
I, James J. Burns, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Wellsford Real
Properties, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 7, 2003
/s/ James J. Burns
-------------------
James J. Burns
Chief Financial Officer
31