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, 2001
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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 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 of (IRS Employer Identification Number)
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
------- -------
The number of the Registrant's shares of Common Stock outstanding was 6,334,154
as of November 2, 2001 (including 169,903 shares of Class A-1 Common Stock).
-1-
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TABLE OF CONTENTS
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Page
Number
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PART I. FINANCIAL INFORMATION:
----------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000.......................................3
Consolidated Statements of Income (unaudited) for the
Three and Nine Months Ended September 30, 2001 and 2000.....4
Consolidated Statements of Cash Flows (unaudited) for the
Nine Months Ended September 30, 2001 and 2000...............5
Notes to Consolidated Financial Statements (unaudited)...........6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk......27
PART II. OTHER INFORMATION:
------------------
Item 1. Legal Proceedings...............................................28
Item 6. Exhibits and Reports on Form 8-K................................28
Signatures .............................................................29
-2-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
---- ----
(UNAUDITED)
ASSETS
Real estate assets, at cost:
Land .......................................................................... $ 15,021,701 $ 17,519,701
Buildings and improvements .................................................... 94,485,710 110,405,567
------------- -------------
109,507,411 127,925,268
Less:
Accumulated depreciation ................................................... (9,326,297) (8,248,184)
Impairment reserve relating to assets held for sale ........................ (2,704,613) (4,725,000)
------------- -------------
97,476,501 114,952,084
Residential units available for sale .......................................... 8,055,413 21,849,581
Construction in progress ...................................................... 23,769,506 22,229,368
------------- -------------
129,301,420 159,031,033
Notes receivable ................................................................. 35,397,754 37,824,291
Investment in joint ventures ..................................................... 103,014,632 120,969,017
------------- -------------
Total real estate assets ......................................................... 267,713,806 317,824,341
Cash and cash equivalents ........................................................ 29,816,417 36,368,706
Restricted cash .................................................................. 7,427,850 9,921,506
Prepaid and other assets ......................................................... 10,065,264 11,655,024
------------- -------------
Total assets ..................................................................... $ 315,023,337 $ 375,769,577
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable ........................................................ $ 88,060,839 $ 104,403,970
Credit facility ............................................................... 7,000,000 12,000,000
Accrued expenses and other liabilities ........................................ 11,428,169 15,152,759
------------- -------------
Total liabilities ................................................................ 106,489,008 131,556,729
------------- -------------
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 ................................................................ 3,443,984 3,230,499
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 -
6,163,191 and 8,180,475 shares issued and outstanding ....................... 123,264 163,610
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 ........................................ 159,726,514 196,282,360
Retained earnings ............................................................. 26,828,332 26,714,120
Accumulated other comprehensive income (loss); share of unrealized loss on
interest rate protection contract purchased by joint venture investment, net
of income tax benefit ...................................................... (264,947) --
Deferred compensation ......................................................... (933,082) (1,788,005)
Treasury stock, 257,935 and 257,935 shares .................................... (5,393,134) (5,393,134)
------------- -------------
Total shareholders' equity ....................................................... 180,090,345 215,982,349
------------- -------------
Total liabilities and shareholders' equity ....................................... $ 315,023,337 $ 375,769,577
============= =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-3-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Rental revenue .......................................... $ 3,337,914 $ 4,706,509 $ 10,610,284 $ 13,696,091
Revenue from sales of residential units ................. 3,904,750 -- 18,477,550 --
Interest revenue ........................................ 1,180,366 1,677,951 4,068,670 4,584,140
Fee revenue ............................................. 183,762 150,000 482,404 450,000
------------ ------------ ------------ ------------
Total revenues ....................................... 8,606,792 6,534,460 33,638,908 18,730,231
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of sales of residential units ...................... 3,514,233 -- 16,324,229 --
Property operating and maintenance ...................... 871,668 1,140,135 2,789,067 3,093,300
Real estate taxes ....................................... 312,050 404,890 996,172 1,243,179
Depreciation and amortization ........................... 1,189,348 1,401,481 4,083,800 3,541,307
Property management ..................................... 130,480 188,211 431,549 575,388
Interest ................................................ 1,125,425 1,684,988 3,345,246 5,039,998
General and administrative .............................. 1,914,666 1,926,437 5,832,398 5,438,412
------------ ------------ ------------ ------------
Total costs and expenses ............................. 9,057,870 6,746,142 33,802,461 18,931,584
------------ ------------ ------------ ------------
Income (loss) from joint ventures .......................... (763,377) 1,551,955 1,941,497 3,617,628
------------ ------------ ------------ ------------
Income (loss) before minority interest, income tax
expense and accrued distributions and amortization of
costs on Convertible Trust Preferred Securities ......... (1,214,455) 1,340,273 1,777,944 3,416,275
Minority interest .......................................... (44,570) (8,338) (229,871) (17,435)
------------ ------------ ------------ ------------
Income (loss) before taxes and accrued distributions and
amortization of costs on Convertible Trust Preferred
Securities .............................................. (1,259,025) 1,331,935 1,548,073 3,398,840
Income tax expense ......................................... 122,000 283,000 394,000 673,000
------------ ------------ ------------ ------------
Income (loss) before accrued distributions and
amortization of costs on Convertible Trust Preferred
Securities .............................................. (1,381,025) 1,048,935 1,154,073 2,725,840
Accrued distributions and amortization of costs
on Convertible Trust Preferred Securities, net of income
tax benefit of $178,000, $172,000, $535,000 and $282,000,
respectively ............................................ 346,954 352,507 1,039,861 563,507
------------ ------------ ------------ ------------
Net income (loss) .......................................... $ (1,727,979) $ 696,428 $ 114,212 $ 2,162,333
============ ============ ============ ============
Net income (loss) per common share, basic .................. $ (0.27) $ 0.08 $ 0.02 $ 0.25
============ ============ ============ ============
Net income (loss) per common share, diluted ................ $ (0.27) $ 0.08 $ 0.02 $ 0.25
============ ============ ============ ============
Weighted average number of common shares
outstanding, basic ...................................... 6,333,094 8,296,507 7,508,946 8,572,253
============ ============ ============ ============
Weighted average number of common shares
outstanding, diluted .................................... 6,333,904 8,313,555 7,524,593 8,576,090
============ ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-4-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 114,212 $ 2,162,333
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ............................... 3,928,786 3,547,085
Amortization of deferred compensation ....................... 854,923 680,004
Distributions in excess of joint venture income ............. 989,407 26,933
Undistributed minority interest ............................. 229,871 17,435
Shares issued for director compensation ..................... 60,000 60,000
Changes in assets and liabilities:
Restricted cash .......................................... 2,493,656 (44,809)
Residential units available for sale ..................... 13,794,168 --
Prepaid and other assets ................................. 1,480,107 (150,563)
Accrued expenses and other liabilities ................... (3,736,819) 253,006
------------ ------------
Net cash provided by operating activities ................... 20,208,311 6,551,424
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in real estate assets ................................. (1,964,204) (8,981,298)
Investments in joint ventures:
Capital contributions ........................................ (3,014,862) (6,775,787)
Returns of capital ........................................... 18,113,458 2,584,517
Investments in notes receivable ................................... (500,000) (23,633,000)
Repayments of notes receivable .................................... 2,940,537 15,582,263
Proceeds from sale of real estate assets .......................... 15,680,180 --
------------ ------------
Net cash provided by (used in) investing activities .......... 31,255,109 (21,223,305)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facility ................................... 12,000,000 --
Repayment of credit facility ...................................... (17,000,000) --
Repayment of mortgage notes payable ............................... (16,343,131) (666,465)
Issuance of Convertible Trust Preferred Securities ................ -- 25,000,000
Deferred financing costs .......................................... -- (523,627)
Distribution of minority interest ................................. (16,386) (8,569)
Costs incurred for reverse stock split ............................ -- (44,364)
Cost to repurchase warrants ....................................... (80,000) --
Repurchase of common shares ....................................... (36,576,192) (21,132,674)
------------ ------------
Net cash (used in) provided by financing activities ......... (58,015,709) 2,624,301
------------ ------------
Net decrease in cash and cash equivalents ............................ (6,552,289) (12,047,580)
Cash and cash equivalents, beginning of period ....................... 36,368,706 34,739,866
------------ ------------
Cash and cash equivalents, end of period ............................. $ 29,816,417 $ 22,692,286
============ ============
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest, including amounts
capitalized of $1,356,617 and $1,590,948, respectively .......... $ 4,722,032 $ 6,403,655
============ ============
Cash paid during the period for income taxes, net of tax refunds .. $ 1,582,574 $ 34,582
============ ============
NON-CASH ACTIVITY:
Other comprehensive loss; share of unrealized loss on interest rate
protection contract purchased by joint venture investment,
net of tax benefit ............................................. $ 264,947
============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-5-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
Wellsford Real Properties, Inc. and subsidiaries (collectively the
"Company"), was formed on January 8, 1997, as a Maryland corporation and 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 (the
"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 three strategic business units ("SBUs") within which it
executes its business plan: (i) commercial property operations 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 other equity activities through the
Wellsford Capital SBU; and (iii) property development and land operations
through the Wellsford Development SBU. See Note 3 for additional
information regarding the Company's business segments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION. The
accompanying consolidated financial statements include the accounts of
Wellsford Real Properties, Inc. 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. All
significant intercompany accounts and transactions among and between
Wellsford Real Properties, Inc. 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, 2000, as filed with the Securities and Exchange
Commission. The results of operations and cash flows for the three and nine
months ended September 30, 2001 and 2000 are not necessarily indicative of
a full year's 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.
DERIVATIVE AND HEDGING ACTIVITIES. In June 1998, SFAS No. 133--ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES was issued. In June 1999,
SFAS No. 137--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES--DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133 (AN
AMENDMENT OF FASB STATEMENT NO. 133) was issued. SFAS No. 137 extended the
required date of adoption of SFAS No. 133 to the fiscal year beginning June
15, 2000. The Company and its joint venture investments have adopted SFAS
No. 133 effective January 1, 2001. SFAS No. 133 requires the Company and
its joint venture investments to recognize all derivatives on the balance
sheet at fair value. The Company's derivative investments are currently
made by its joint venture investments and are primarily interest rate
hedges where changes in the fair value of the derivative are offset against
the changes in the fair value of the hedged debt. The ineffective portion
of a derivative's change in fair value is immediately recognized in
earnings, if applicable. The effective portion of the fair value difference
of the derivative is reflected separately in shareholders' equity as
accumulated other comprehensive income (loss), net of income tax benefit
(cost).
The Company's Wellsford/Whitehall joint venture was required to purchase an
interest rate protection contract ("Cap") through the initial maturity of
the loan in June 2004 by the lender in connection with their debt
refinancing completed in June 2001 (See Note 3). As a result of a
significant reduction in LIBOR at September 30, 2001, the market value of
the Cap was approximately $1,238,000 less than the carrying amount at
September 30, 2001. Wellsford/Whitehall reflected such amount as an equity
adjustment. The Company's share of the decrease in market value of
approximately $265,000 (net of deferred income tax benefit) was reflected
separately in shareholders' equity at September 30, 2001.
RECENTLY ISSUED PRONOUNCEMENTS NOT YET ADOPTED. In August 2001, SFAS No.
144--ACCOUNTING FOR THE IMPAIRMENT OF DISPOSAL OR LONG-LIVED ASSETS was
issued. SFAS No. 144 supersedes SFAS No. 121--ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The
provisions of SFAS No. 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001. The Company does not
anticipate that the adoption of SFAS No. 144 will have a material effect on
its results of operations or financial position.
RECLASSIFICATION. Amounts in certain accounts have been reclassified to
conform to the current period presentation.
-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
----------- ----------- ----------- ------ ------------
SEPTEMBER 30, 2001
------------------
Investment properties:
Real estate held for investment, net $ -- $ -- $112,878 $ -- $112,878
Real estate held for sale** ........ -- 8,368 -- -- 8,368
Residential units available for sale -- -- 8,055 -- 8,055
-------- -------- -------- -------- --------
Real estate, net ...................... -- 8,368 120,933 -- 129,301
Notes receivable ...................... -- 35,398 -- -- 35,398
Investment in joint ventures .......... 64,998 38,017 -- -- 103,015
Cash and cash equivalents ............. 922 5,716 293 22,885 29,816
Restricted cash and other assets ...... -- 9,910 2,092 5,491 17,493
-------- -------- -------- -------- --------
Total assets .......................... $ 65,920 $ 97,409 $123,318 $ 28,376 $315,023
======== ======== ======== ======== ========
Mortgage notes payable ................ $ -- $ -- $ 88,061 $ -- $ 88,061
Credit facility ....................... -- 7,000 -- -- 7,000
Accrued expenses and other liabilities -- 3,880 1,671 5,877 11,428
Convertible Trust Preferred Securities -- -- -- 25,000 25,000
Minority interest ..................... 21 -- 3,423 -- 3,444
Equity*** ............................. 65,899 86,529 30,163 (2,501) 180,090
-------- -------- -------- -------- --------
Total liabilities and equity .......... $ 65,920 $ 97,409 $123,318 $ 28,376 $315,023
======== ======== ======== ======== ========
DECEMBER 31, 2000
-----------------
Investment properties:
Real estate held for investment, net $ -- $ -- $113,598 $ -- $113,598
Real estate held for sale** ........ -- 23,583 -- -- 23,583
Residential units available for sale -- -- 21,850 -- 21,850
-------- -------- -------- -------- --------
Real estate, net ...................... -- 23,583 135,448 -- 159,031
Notes receivable ...................... -- 37,824 -- -- 37,824
Investment in joint ventures .......... 82,820 38,149 -- -- 120,969
Cash and cash equivalents ............. 93 9,830 168 26,278 36,369
Restricted cash and other assets ...... -- 10,882 3,577 7,118 21,577
-------- -------- -------- -------- --------
Total assets .......................... $ 82,913 $120,268 $139,193 $ 33,396 $375,770
======== ======== ======== ======== ========
Mortgage notes payable ................ $ -- $ -- $104,404 $ -- $104,404
Credit facility ....................... -- 12,000 -- -- 12,000
Accrued expenses and other liabilities -- 4,380 2,124 8,649 15,153
Convertible Trust Preferred Securities -- -- -- 25,000 25,000
Minority interest ..................... 37 -- 3,193 -- 3,230
Equity ................................ 82,876 103,888 29,472 (253) 215,983
-------- -------- -------- -------- --------
Total liabilities and equity .......... $ 82,913 $120,268 $139,193 $ 33,396 $375,770
======== ======== ======== ======== ========
<FN>
----------
*Includes corporate cash, other assets, accrued expenses and other liabilities
that have not been allocated to the operating segments.
**Real estate held for sale in the Debt and Equity Investments SBU is net of an
impairment reserve of $2,705 and $4,725 at September 30, 2001 and December 31,
2000, respectively.
***Net of SFAS #133 adjustment of ($265) in the Commercial Property Investments
SBU.
</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 SEPTEMBER 30, 2001
------------------------
Rental revenue ........................... $ -- $ 374 $ 2,964 $ -- $ 3,338
Revenue from sales of residential units .. -- -- 3,905 -- 3,905
Interest revenue ......................... -- 1,019 -- 162 1,181
Fee revenue .............................. -- 99 (28) 112 183
------- ------- ------- ------- -------
Total revenues ........................... -- 1,492 6,841 274 8,607
------- ------- ------- ------- -------
Cost of sales of residential units ....... -- -- 3,514 -- 3,514
Operating expenses ....................... -- 210 1,104 -- 1,314
Depreciation and amortization ............ 396 1 766 27 1,190
Interest ................................. -- 156 956 13 1,125
General and administrative ............... -- 14 -- 1,901 1,915
------- ------- ------- ------- -------
Total costs and expenses ................. 396 381 6,340 1,941 9,058
------- ------- ------- ------- -------
Income (loss) from joint ventures ........ (854) 91 -- -- (763)
Minority interest ........................ -- -- (45) -- (45)
------- ------- ------- ------- -------
Income (loss) before taxes and
Convertible Trust Preferred Securities $(1,250) $ 1,202 $ 456 $(1,667) $(1,259)
======= ======= ======= ======= =======
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2000
------------------------
Rental revenue ........................... $ -- $ 1,536 $ 3,170 $ -- $ 4,706
Interest revenue ......................... -- 1,109 -- 569 1,678
Fee revenue .............................. -- -- -- 150 150
------- ------- ------- ------- -------
Total revenues ........................... -- 2,645 3,170 719 6,534
------- ------- ------- ------- -------
Operating expenses ....................... -- 690 1,043 -- 1,733
Depreciation and amortization ............ 178 448 751 25 1,402
Interest ................................. -- 766 1,377 (458) 1,685
General and administrative ............... -- 257 -- 1,669 1,926
------- ------- ------- ------- -------
Total expenses ........................... 178 2,161 3,171 1,236 6,746
------- ------- ------- ------- -------
Income from joint ventures ............... 1,062 490 -- -- 1,552
Minority interest ........................ -- -- (8) -- (8)
------- ------- ------- ------- -------
Income (loss) before taxes and
Convertible Trust Preferred Securities $ 884 $ 974 $ (9) $ (517) $ 1,332
======= ======= ======= ======= =======
<FN>
----------
*Includes general and administrative expenses, interest income and interest
expense 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)
(amounts in thousands)
COMMERCIAL DEBT AND DEVELOPMENT
PROPERTY EQUITY AND LAND
INVESTMENTS INVESTMENTS INVESTMENTS OTHER* CONSOLIDATED
----------- ----------- ----------- ------ ------------
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2001
------------------------
Rental revenue ........................... $ -- $ 1,637 $ 8,973 $ -- $ 10,610
Revenue from sales of residential units .. -- -- 18,478 -- 18,478
Interest revenue ......................... -- 3,143 -- 926 4,069
Fee revenue .............................. -- 185 (41) 338 482
-------- -------- -------- -------- --------
Total revenues ........................... -- 4,965 27,410 1,264 33,639
-------- -------- -------- -------- --------
Cost of sales of residential units ....... -- -- 16,324 -- 16,324
Operating expenses ....................... -- 1,099 3,118 -- 4,217
Depreciation and amortization ............ 1,704 5 2,296 79 4,084
Interest ................................. -- 254 3,089 2 3,345
General and administrative ............... -- 54 -- 5,778 5,832
-------- -------- -------- -------- --------
Total costs and expenses ................. 1,704 1,412 24,827 5,859 33,802
-------- -------- -------- -------- --------
Income from joint ventures ............... 1,835 106 -- -- 1,941
Minority interest ........................ -- -- (230) -- (230)
-------- -------- -------- -------- --------
Income (loss) before taxes and
Convertible Trust Preferred Securities $ 131 $ 3,659 $ 2,353 $ (4,595) $ 1,548
======== ======== ======== ======== ========
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000
------------------------
Rental revenue ........................... $ -- $ 4,613 $ 9,083 $ -- $ 13,696
Interest revenue ......................... -- 3,591 -- 993 4,584
Fee revenue .............................. -- -- -- 450 450
-------- -------- -------- -------- --------
Total revenues ........................... -- 8,204 9,083 1,443 18,730
-------- -------- -------- -------- --------
Operating expenses ....................... -- 1,944 2,968 -- 4,912
Depreciation and amortization ............ 269 938 2,252 82 3,541
Interest ................................. -- 2,117 3,803 (880) 5,040
General and administrative ............... -- 761 -- 4,678 5,439
-------- -------- -------- -------- --------
Total expenses ........................... 269 5,760 9,023 3,880 18,932
-------- -------- -------- -------- --------
Income from joint ventures ............... 2,109 1,509 -- -- 3,618
Minority interest ........................ -- -- (17) -- (17)
-------- -------- -------- -------- --------
Income (loss) before taxes and
Convertible Trust Preferred Securities $ 1,840 $ 3,953 $ 43 $ (2,437) $ 3,399
======== ======== ======== ======== ========
<FN>
----------
*Includes general and administrative expenses, interest income and interest
expense that have not been allocated to the operating segments.
</FN>
-10-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
COMMERCIAL PROPERTY OPERATIONS--WELLSFORD/WHITEHALL
---------------------------------------------------
The Company's commercial property operations segment consists of
Wellsford/Whitehall, which is accounted for on the equity method. In August
1997, the Company, in a joint venture with WHWEL Real Estate Limited
Partnership ("Whitehall"), an affiliate of The Goldman Sachs Group Inc.,
formed a private real estate operating company, Wellsford/Whitehall. The
Company had a 35.68% interest in Wellsford/Whitehall at September 30, 2001.
Such interest is after the impact of a 2.28% reduction resulting from the
conversion by the holders of preferred equity interests in
Wellsford/Whitehall to common equity interests on September 7, 2001.
In December 2000, the Company and Whitehall executed definitive agreements
modifying the terms of their joint venture effective January 1, 2001 (the
"Amendments"), which, among other items, provided for the Company and
Whitehall to extend their existing capital commitments to
Wellsford/Whitehall for one year to December 31, 2001 and to provide an
aggregate of $10,000,000 of additional financing or preferred equity to
Wellsford/Whitehall through December 2003, if required. As a result of the
Amendments, an affiliate of Whitehall replaced the Company as the managing
member of Wellsford/Whitehall. All employees working on Wellsford/Whitehall
business were transferred from the Company to WP Commercial, L.L.C. ("WP"),
the new management company, which is owned by affiliates of Whitehall and
senior management of WP. WP will provide management, construction,
development and leasing services to Wellsford/Whitehall based on an agreed
upon fee schedule. WP will also provide similar services to a new venture
formed by Whitehall (the "New Venture"), as well as third parties.
The Amendments provide for Wellsford/Whitehall to discontinue payment of a
$600,000 annual administrative fee to the Company as of December 31, 2000;
however, 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
$112,000 and $338,000 under the new arrangements during the three and nine
months ended September 30, 2001, respectively. Also, as part of the
Amendments, warrants to purchase 2,128,099 of the Company's common stock,
which had previously been issued to Whitehall, were returned and cancelled.
Under the terms of the Amendments, it is expected that Wellsford/Whitehall
will not purchase any new real estate assets, except in limited cases, to
replace certain assets being sold or acquisitions that compliment presently
owned real estate assets. The Amendments provide for an orderly disposal of
the Wellsford/Whitehall's assets and the Company and Whitehall agreed to a
buy/sell agreement effective after December 31, 2003 with respect to any
remaining assets.
-11-
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 SEPTEMBER 30, 2001 DECEMBER 31, 2000
---------------------------- ------------------ -----------------
Real estate, net................... $ 519,003 $ 589,154
Cash and cash equivalents.......... 42,359 6,161
Other assets (A)................... 26,221 26,821
Total assets....................... 587,583 622,136
Mortgage notes payable............. 112,197 136,490
Credit facility.................... 272,912 244,250
Preferred equity................... -- 18,323
Common equity...................... 185,719 201,044
Other comprehensive income......... (1,238) --
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
CONDENSED OPERATING DATA 2001 2000 2001 2000
------------------------ ---- ---- ---- ----
Rental revenue (B) ........... $ 18,122 $ 19,366 $ 58,939 $ 58,148
Interest and other income (C) 329 2,112 1,083 3,396
Operating expenses ........... 8,200 7,275 23,327 20,788
Depreciation and amortization 4,356 3,301 12,458 9,719
Interest ..................... 7,522 6,463 20,420 19,402
Total expenses ............... 23,743 19,002 61,459 55,991
Gain on sale of real estate .. 1,497 401 22,707 401
Impairment provision ......... (332) -- (15,893) --
Income (loss) before preferred
equity distributions ...... (2,126) 2,877 5,378 5,954
<FN>
----------
(A) Includes the marked to market value of interest rate protection
contract of $377 at September 30, 2001.
(B) Includes a reduction in income of $128 and an increase in income of
$558 from the straight-lining of tenant rents for the three months
ended September 30, 2001 and 2000, respectively and a reduction in
income of $348 and an increase in income of $971 for the nine months
ended September 30, 2001 and 2000, respectively.
(C) Includes lease cancellation income of $2,056 for the three months
ended September 30, 2000 and $312 and $2,887 for the nine months ended
September 30, 2001 and 2000, respectively.
</FN>
As of September 30, 2001, Wellsford/Whitehall owned 36 office properties
totaling approximately 4,015,000 square feet (including approximately
598,000 square feet under renovation), located primarily in New Jersey,
Massachusetts and Maryland. The following sale transactions were completed
during the nine months ended September 30, 2001:
GROSS LEASABLE NUMBER OF SALES PRICE PER
MONTH LOCATION SQUARE FEET PROPERTIES SALES PRICE SQUARE FOOT GAIN (LOSS)
----- -------- ----------- ---------- ----------- ----------- -----------
February Newton, MA 102,000 5 $ 18,000,000 $ 176.47 $ 3,379,000
April Portland, ME 24,000 1 1,600,000 66.67 --
May Parsippany, NJ 257,000 1 61,500,000 239.30 17,831,000
August Andover, MA 63,000 1 9,100,000 144.44 1,497,000
September Wayne, NJ 564,000 1 35,500,000 62.94 (15,893,000)
--------- - ------------ ------------
1,010,000 9 $125,700,000 124.46 $ 6,814,000
========= = ============ ============
-12-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
During July 2001, Wellsford/Whitehall entered into a contract to sell the
Pointview property, a 194 acre complex with two buildings totaling 564,000
square feet, located in Wayne, New Jersey. This property, which was a major
development project of Wellsford/Whitehall, has been unoccupied since its
purchase in 1997. In anticipation of the formal completion of the terms of
the sale, Wellsford/Whitehall recorded a $15,561,000 impairment provision
in its June financial statements, of which the Company's allocable share is
approximately $5,908,000. This impairment arises from the change in the
intended mixed-use of the property from office space, a conference center
and residential development to an available for sale headquarters complex.
The sale was completed in September 2001. As a result of a sales price
adjustment negotiated with the buyer subsequent to the initial contract,
Wellsford/Whitehall recorded an additional impairment provision of $332,000
during the three months ended September 30, 2001, of which the Company's
share was $119,000.
During the nine months ended September 30, 2001, Wellsford/Whitehall, in a
single transaction, purchased the following single tenant retail properties
as part of the completion of a tax free exchange related to the sale of the
five Newton, MA properties in February 2001:
GROSS LEASABLE NUMBER OF PURCHASE PRICE PER
MONTH LOCATION SQUARE FEET PROPERTIES PURCHASE PRICE SQUARE FOOT OCCUPANCY
----- -------- ----------- ---------- -------------- ----------- ---------
April Various 55,000 5 $ 18,700,000 $ 341.83 100%
====== = ============ =========== ===
During June 2001, Wellsford/Whitehall obtained a three-year, $353,000,000
revolving credit facility from General Electric Capital Corporation with an
initial funding of approximately $273,000,000 before transaction costs. The
remaining balance will be available to be drawn to fund certain capital
expenditures and upon achieving certain operating results from seven
properties. The facility bears interest at LIBOR + 2.90% per annum (6.48%
at September 30, 2001) and matures in June 2004 with two 12 month extension
options, subject to meeting certain operating and valuation covenants. The
facility is secured by interests in twenty-four commercial office
properties in the Wellsford/Whitehall portfolio. This facility replaces the
previously existing facility which was due to mature in December 2001. The
outstanding balance of this facility was $272,912,000 at September 30,
2001.
In July 2001, Wellsford/Whitehall entered into an interest rate protection
contract at a cost of $1,780,000, which limits Wellsford/Whitehall's LIBOR
exposure to 5.83% until June 2003 and 6.83% for the following year to June
2004 on $285,000,000 of debt. At September 30, 2001 the market value of the
Cap was approximately $377,000.
DEBT AND EQUITY ACTIVITIES--WELLSFORD CAPITAL
---------------------------------------------
At September 30, 2001, the Company had the following investments: (i)
approximately $35,398,000 of direct debt investments which bore interest at
an average yield of approximately 11.30% for the nine months ended
September 30, 2001 and had an average remaining term to maturity of
approximately 4.6 years; (ii) approximately $31,233,000 in companies which
were organized to invest in debt instruments, including $27,863,000 in
Second Holding Company, L.L.C., a company which was organized to purchase
investment and non-investment grade rated real estate debt ("Second
Holding"); and (iii) approximately $6,783,000 in a real estate information
and database company and another real estate-related venture. In addition,
the Company owned and operated three commercial properties totaling
approximately 218,000 square feet located in the Northeastern United States
at September 30, 2001; such properties are being held for sale.
-13-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
The Company has an approximate 51.1% interest in Second Holding at
September 30, 2001. The following table presents condensed balance sheets
and operating data for Second Holding:
(amounts in thousands)
CONDENSED BALANCE SHEET DATA SEPTEMBER 30, 2001 DECEMBER 31, 2000
---------------------------- ------------------ -----------------
Cash and cash equivalents......... $ 151,377 $ 73,136
Investments....................... 653,093 229,003
Other assets (A).................. 29,463 4,795
Total assets...................... 833,933 306,934
Debt.............................. 769,701 244,867
Total equity...................... 54,509 54,492
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
CONDENSED OPERATING DATA 2001 2000 2001 2000
------------------------ ---- ---- ---- ----
Interest ..................... $ 8,274 $1,204 $22,348 $3,276
Interest from Reis ........... -- -- -- 169
------- ------ ------- ------
Total revenue ................ 8,274 1,204 22,348 3,445
------- ------ ------- ------
Interest expense ............. 7,632 206 20,518 206
Fees and other ............... 670 235 1,812 691
------- ------ ------- ------
Total expenses ............... 8,302 441 22,330 897
------- ------ ------- ------
Net (loss) income attributable
to members (B) ........... $ (28) $ 763 $ 18 $2,548
======= ====== ======= ======
----------
(A) Other assets includes an interest rate swap asset with a fair value of
$19,631 at September 30, 2001.
(B) A partner which was admitted in the latter part of 2000 is entitled to
a cumulative preference on earnings; accordingly all fiscal 2001
income is allocable to this partner.
At September 30, 2001, Second Holding had investments of approximately
$653,093,000 which includes a variety of investment-grade collateralized
debt obligations and commercial mortgage backed securities. Second Holding
also had approximately $136,365,000 invested in commercial paper which was
included in cash and cash equivalents in the Condensed Balance Sheet Data.
The investment-grade assets and commercial paper investments are variable
rate based and earned interest at a weighted average annual interest rate
of 4.11%.
Second Holding utilizes funds from the issuance of bonds and medium term
notes to make investments. By September 30, 2001, Second Holding had total
debt of approximately $769,701,000 which is primarily comprised of (i) a
privately placed ten-year $150,000,000 junior subordinated bond issue
maturing April 2010 with a fair value of $169,631,000 at September 30, 2001
and an effective annual interest rate of LIBOR + 0.90% and (ii)
approximately $605,000,000 of medium term notes with a weighted average
annual interest rate of 3.05%, offset by unamortized issuance costs.
-14-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In August 2001, Second Holding purchased an aggregate of $24,825,000 in two
classes of Mortgage Pass-Through Certificates, Series 2001--WTC (the "WTC
Certificates") (the Company's share of which is $12,683,000). The WTC
Certificates, rated AA and A at issuance, were part of a total bond
offering of $563,000,000 which was used to finance the acquisition of the
leasehold interest in Towers 1, 2, 4 and 5 of the World Trade Center in New
York City. Subsequent to the events of September 11, 2001 which resulted in
the destruction of these buildings, the Company has been informed by GMAC
Commercial Mortgage Corporation, the master servicer, that the WTC
Certificates are not in default. The property casualty and business
interruption insurance obtained in connection with the WTC Certificates
does not exclude acts of terrorism and such insurance is from a consortium
of 22 insurers. As of September 30, 2001, the rating agencies reaffirmed
their ratings on the WTC Certificates. The Company believes that the
insurance coverage is sufficient to cover Second Holding's investment and
that an impairment reserve is not required. The Company will continue to
evaluate the ultimate collectibility of the principal and interest.
PROPERTY SALES
During the fourth quarter of 2000, the Company made the strategic decision
to sell the seven assets which were originally acquired as part of the 1998
merger with Value Property Trust ("VLP"). The Company sold one asset in
December 2000 (the Santa Monica, CA property) for a gain of approximately
$4,943,000. The Company determined that the aggregate carrying amount of
four of the six other assets which remained available for sale at December
31, 2000 was more than the amounts expected to be ultimately realized upon
sale, less selling expenses. Accordingly, in the fourth quarter of 2000 the
Company recorded an impairment provision of $4,725,000 as an offset to the
gain on the property sold in December 2000. During January 2001, the
Company sold two other properties (the Piscataway, NJ and West Chester, PA
properties) and in May 2001, the Company sold the Cherry Hill, NJ property.
No gain or loss was recorded on any of the 2001 transactions. The Company
anticipates selling the remaining three properties during the next nine
months. The Company has not recorded depreciation expense in 2001 related
to the unsold assets. The Company believes that the balance of the
provision for impairment is adequate at September 30, 2001.
DEVELOPMENT AND LAND OPERATIONS--WELLSFORD DEVELOPMENT
------------------------------------------------------
At September 30, 2001, the Company had an 85.85% interest in a five phase,
1,800 unit Class A multifamily development ("Palomino Park") in Highlands
Ranch, a south suburb of Denver, Colorado. Two phases containing 760 rental
units are completed and operational. The third phase consists of 264 units
which the Company is converting into condominiums, 89 units of which were
sold by September 30, 2001. The 424 unit fourth phase is substantially
completed and operations will be phased in starting January 1, 2002 and the
land for the remaining approximate 352 unit phase is being prepared for
sale or possible future development.
-15-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
SEGMENT INFORMATION (CONTINUED)
In October 2000, the 264 unit third phase, Silver Mesa, was substantially
completed. The Company made the strategic decision to convert Silver Mesa
into condominium units and sell them to individual buyers. In conjunction
with this decision, the Company prepared 128 units to be sold and will
continue to rent the remaining 136 units during the sell-out period until
the initial inventory has been significantly reduced and additional units
are required to be prepared for sale. The sell-out period for all 264 units
is currently expected to be completed by December 31, 2003. In December
2000, the Company obtained a $32,000,000 loan from KeyBank National
Association (the "Silver Mesa Conversion Loan") which bears interest at
LIBOR + 2.00% per annum (5.58% at September 30, 2001), is collateralized by
the unsold units, matures in December 2003 and provides for one six-month
extension at the Company's option. Approximately 90% of net sales proceeds
per unit goes toward principal repayments until the loan is paid in full.
Sales commenced in February 2001 and through September 30, 2001, 89 of the
Silver Mesa units were sold for gross proceeds of approximately
$18,478,000, of which approximately $15,768,000 was used to reduce the
balance on the Silver Mesa Conversion Loan. The Company recorded pre-tax
gains of approximately $390,000 and $2,153,000 for the three and nine
months ended September 30, 2001, respectively, from sales of residential
units.
4. SHAREHOLDERS' EQUITY
In June 2001, the Board of Directors authorized the repurchase of 2,020,784
shares of the Company's common stock at $18.10 per share (aggregating
approximately $36,576,000) from an institutional shareholder. Cash used to
repurchase such shares came from available working capital.
On June 9, 2000, the shareholders of the Company approved a reverse stock
split whereby every two outstanding shares of common stock and class A-1
common stock were converted into one share of outstanding common stock and
class A-1 common stock. The par value of both classes of stock increased
from $0.01 per share to $0.02 per share and the number of authorized shares
was halved from 197,650,000 to 98,825,000 for common shares and from
350,000 to 175,000 for class A-1 common shares. The reverse split was
effective for trading beginning June 12, 2000. Resulting fractional shares
were redeemed for cash. All share and per share amounts in this filing,
including the financial statements and the notes thereto, have been
adjusted for the impact of the split, for all periods presented.
The Company did not declare or distribute any dividends for the three or
nine months ended September 30, 2001 and 2000.
5. INCOME TAXES
The income tax provision for the three and nine months ended September 30,
2001 and 2000 reflects the reduction in the valuation allowance
attributable to the pro-rata annual utilization of, or the currently usable
amount of, available net operating loss carryforwards for Federal income
tax purposes. The 2001 provision has also been reduced by a reversal during
the three months ended March 31, 2001 of previously recorded state income
tax liabilities of $265,000 (before Federal tax cost), as a result of the
availability of net loss carryforwards in one state.
-16-
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
6. 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 common share are based upon
the increased number of common shares that would be outstanding assuming
the exercise of dilutive common share options, warrants and Convertible
Trust Preferred Securities.
The following table details the computation of earnings per share, basic
and diluted:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Numerator for net income (loss) per common
share, basic and diluted .................... $(1,727,979) $ 696,428 $ 114,212 $ 2,162,333
=========== =========== =========== ===========
Denominator:
Denominator for net income per common
share, basic--weighted average common
shares ................................... 6,333,094 8,296,507 7,508,946 8,572,253
Effect of dilutive securities:
Employee stock options ................. -- 17,048 15,647 3,837
Warrants ............................... -- -- -- --
Convertible Trust Preferred Securities . -- -- -- --
----------- ----------- ----------- -----------
Denominator for net income per common
share, diluted--weighted average
common shares ............................ 6,333,094 8,313,555 7,524,593 8,576,090
=========== =========== =========== ===========
Net income (loss) per common share, basic ...... $ (0.27) $ 0.08 $ 0.02 $ 0.25
=========== =========== =========== ===========
Net income (loss) per common share, diluted .... $ (0.27) $ 0.08 $ 0.02 $ 0.25
=========== =========== =========== ===========
7. COMPREHENSIVE INCOME (LOSS)
The following table details the computation of comprehensive income (loss):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) ....................... $(1,727,979) $ 696,428 $ 114,212 $ 2,162,333
Share of unrealized loss on interest rate
protection contract purchased by joint
venture investment, net of tax benefit (264,947) -- (264,947) --
----------- ----------- ----------- -----------
Comprehensive income (loss) ............. $(1,992,926) $ 696,428 $ (150,735) $ 2,162,333
=========== =========== =========== ===========
-17-
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, 2000, as filed with
the Securities and Exchange Commission on March 22, 2001.
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 three strategic business units ("SBUs") within which it executes its
business plan: (i) commercial property operations 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 other equity activities through the Wellsford Capital SBU; and
(iii) property development and land operations through the Wellsford Development
SBU.
COMMERCIAL PROPERTY OPERATIONS--WELLSFORD/WHITEHALL
The Company's commercial property operations segment consists of
Wellsford/Whitehall, which is accounted for on the equity method. In August
1997, the Company, in a joint venture with WHWEL Real Estate Limited Partnership
("Whitehall"), an affiliate of The Goldman Sachs Group Inc., formed a private
real estate operating company, Wellsford/Whitehall. The Company had a 35.68%
interest in Wellsford/Whitehall at September 30, 2001. Such interest is after
the impact of a 2.28% reduction resulting from the conversion by the holders of
preferred equity interests in Wellsford/Whitehall to common equity interests on
September 7, 2001.
In December 2000, the Company and Whitehall executed definitive agreements
modifying the terms of the Wellsford/Whitehall joint venture effective January
1, 2001 (the "Amendments"). The key features of the Amendments provide for the
Company to retain its economic interest in Wellsford/Whitehall, while an
affiliate of Whitehall will become responsible for day-to-day operations. The
Company will maintain its current membership on Wellsford/Whitehall's management
committee and must agree to specified "Major Decisions". Also, as part of the
Amendments, warrants to purchase 2,128,099 of the Company's stock, which had
previously been issued to Whitehall, were returned and cancelled. Whitehall has
also agreed to pay the Company certain specified fees when Wellsford/Whitehall
assets are sold as well as when certain new assets are acquired by Whitehall
affiliates in a newly formed entity. The Company earned fees of approximately
$112,000 and $338,000 under the new arrangements during the three and nine
months ended September 30, 2001, respectively.
As of September 30, 2001, Wellsford/Whitehall owned 36 office properties
totaling approximately 4,015,000 square feet (including approximately 598,000
square feet under renovation), located primarily in New Jersey, Massachusetts
and Maryland.
Wellsford/Whitehall entered into 32 leases during the nine months ended
September 30, 2001 for approximately 480,000 square feet including the following
significant leases:
LEASABLE PERCENTAGE LEASE INITIAL BASE
SQUARE OF COMMENCEMENT LEASE RENT PER
PROPERTY FEET BUILDING DATE EXPIRATION SQUARE FOOT
-------- ---- -------- ---- ---------- -----------
150 Mt. Bethel Road ...... 44,000 34% March 2001 March 2008 $ 17.88
401 North Washington ..... 73,000 31% June 2001 March 2006 $ 27.00
401 North Washington ..... 35,000 15% June 2001 May 2011 $ 27.00
117 Kendrick Street ...... 98,000 47% October 2001 September 2008 $ 35.44
Columbia Technology Center 85,000 59% June 2002 May 2012 $ 19.36
-------
335,000
=======
-18-
DEBT AND EQUITY ACTIVITIES--WELLSFORD CAPITAL
The Company, through the Wellsford Capital SBU, 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, 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, either
directly or through joint venture investments, 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.
At September 30, 2001, the Company had the following investments: (i)
approximately $35,398,000 of direct debt investments which bore interest at an
average yield of approximately 11.30% for the nine months ended September 30,
2001 and had an average remaining term to maturity of approximately 4.6 years;
(ii) approximately $31,233,000 in companies which were organized to invest in
debt instruments, including $27,863,000 in Second Holding Company, L.L.C., a
company which was organized to purchase investment and non-investment grade
rated real estate debt ("Second Holding"); and (iii) approximately $6,783,000 in
a real estate information and database company and another real estate-related
venture. In addition, the Company owned and operated three commercial properties
totaling approximately 218,000 square feet located in the Northeastern United
States at September 30, 2001; such properties are being held for sale.
PROPERTY DEVELOPMENT AND LAND OPERATIONS--WELLSFORD DEVELOPMENT
The Company, through the 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 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 issue
tax-exempt bond financing authorized by local governmental authorities which
generally bears interest at rates substantially below rates available from
conventional financing.
At September 30, 2001, the Company had an 85.85% interest in a five phase, 1,800
unit Class A multifamily development ("Palomino Park") in Highlands Ranch, a
south suburb of Denver, Colorado. Two phases containing 760 rental units are
completed and operational. The third phase consists of 264 units which the
Company is converting into condominiums, 89 units of which were sold by
September 30, 2001. The 424 unit fourth phase is substantially completed and
operations will be phased in starting January 1, 2002 and the land for the
remaining approximate 352 unit phase is being prepared for sale or possible
future development.
-19-
OTHER SEGMENT INFORMATION
The following table provides occupancy rates as of each specified date by SBU:
COMMERCIAL PROPERTY DEBT AND EQUITY DEVELOPMENT AND
OPERATIONS* INVESTMENTS** LAND INVESTMENTS
----------- ------------- ----------------
September 30, 2001.... 81% 60% 86%
June 30, 2001......... 82% 60% 86%
March 31, 2001........ 90% 66% 88%
December 31, 2000..... 87% 74% 93%
September 30, 2000.... 89% 79% 97%
June 30, 2000......... 93% 77% 90%
March 31, 2000........ 93% 76% 91%
December 31, 1999..... 92% 76% 89%
----------
*Excludes properties under renovation.
**Occupancy rates for the Value Property Trust ("VLP") assets held in this SBU.
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 SEPTEMBER 30, 2001 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2000
Rental revenue decreased $1,369,000. This decrease is due to the sale of one of
the VLP properties in December 2000, two during January 2001 and the fourth in
May 2001 ($1,162,000), the disposition of the Sonterra at Williams Centre
property ("Sonterra") in the Wellsford Development segment in November of 2000
($669,000) and decreased rental revenues at the Blue Ridge and Red Canyon phases
at Palomino Park ($118,000), partially offset by the operations of the rental
portion of the Silver Mesa phase at Palomino Park which commenced in October
2000 ($580,000). The VLP property operations are included in the Debt and Equity
Investments SBU and the operations of the Blue Ridge, Red Canyon and Silver Mesa
phases of Palomino Park and the disposal of the Sonterra property are included
in the Development and Land Investments SBU.
Revenues from the sale of 19 of residential units and the associated cost of
sales from such units during the three months ended September 30, 2001 were
$3,905,000 and $3,514,000, respectively. Sales commenced in February 2001.
Interest revenue decreased $498,000. This decrease is primarily due to interest
earned on loans outstanding during the third quarter of 2000 and subsequently
repaid in 2000 and 2001 of $413,000, decreased interest earned on cash of
$188,000 from a greater average cash balance during the 2000 period and lower
money market rates during 2001, and a decrease in the underlying base interest
rates on loans of $39,000, offset by interest earned on new loans of $130,000.
Fee revenue increased $34,000. The 2000 period includes $150,000 of fees for the
Company's role as managing member under the prior Wellsford/Whitehall Operating
Agreement, whereas under the Amendments, the Company now earns fees payable by
Whitehall from sales by Wellsford/Whitehall and certain asset purchases by the
New Venture. Such fees were $112,000 during the current period. Additionally,
the Company earned $59,000 of management fees for its role in the Second Holding
investment and $13,000 from fees earned on the modification of the Patriot Loan
in the Wellsford Capital SBU.
Property operating and maintenance expense decreased $268,000. This decrease is
due to the sale of four of the VLP properties as noted above ($297,000) and the
sale of Sonterra ($210,000), offset by the addition of the Silver Mesa rental
phase ($181,000) and additional operating costs at Palomino Park ($58,000).
-20-
Real estate tax expense decreased $93,000. This decrease is due to the sale of
four of the VLP properties as noted above ($133,000) and the sale of Sonterra
($63,000), offset by the rental operations from Silver Mesa ($52,000) and
increases at the other Palomino Park phases ($51,000).
Depreciation and amortization expense decreased $212,000. This decrease is
primarily due to no current year depreciation expense on any of the VLP
properties, as they are held for sale ($276,000) and Sonterra as it was sold
($159,000) and amortization in the prior year attributable to one of the
principals leaving Creamer Vitale Wellsford to pursue other employment and the
subsequent wind-down of the venture ($145,000), offset by additional
amortization of deferred costs attributable to asset sales at
Wellsford/Whitehall ($193,000) and depreciation on the Silver Mesa rental phase
($173,000).
Property management expenses decreased $58,000. This decrease is primarily
attributable to the sale of the four VLP properties ($52,000) and Sonterra
($20,000), partially offset by the addition of the Silver Mesa rental phase
($17,000).
Interest expense decreased $560,000. This decrease is primarily attributable to
the repayment of the $28,000,000 loan which cross-collateralized the VLP
properties ($735,000), the sale of Sonterra ($280,000), reduced interest rates
on the other variable rate based debt ($71,000) and declines in the Blue Ridge
and Red Canyon mortgage interest from lower outstanding debt balances ($13,000),
partially offset by decreased capitalized interest ($273,000), interest incurred
on the Silver Mesa Conversion Loan related to the rental operations ($141,000)
and interest on draws under the Company's line of credit ($125,000).
Income from joint ventures decreased $2,315,000. This decrease is primarily the
result of (i) a current period operating loss at Wellsford/Whitehall of
$1,305,000 which had operating income in the prior period of $898,000 (a net
decrease of $2,203,000), (ii) no current period income from Second Holding which
had income in the prior period of $420,000 (as a partner was admitted into the
venture in the latter part of 2000 whom is entitled to a cumulative preference
on earnings) and (iii) $96,000 of income in the prior period from the investment
in The Liberty Hampshire Company, L.L.C. which the Company sold in December
2000. These decreases were partially offset by net gains on the sale of property
of $450,000 in the current period from Wellsford/Whitehall (the Company's share
of gains of $569,000 is offset by the Company's share of an additional
impairment provision of $119,000) in excess of gains in the prior year's period
of $164,000 at Wellsford/Whitehall and income from the Fordham Tower
Construction loan of $91,000 through the Clairborne Prudential program (with no
corresponding sales or income in the prior period, respectively). The impairment
provision adjustment is the Company's allocable share arising from the change in
intended mixed-use of the property from office space, a conference center and
residential development to an available for sale headquarters complex in June
2001 and its ultimate sale in September 2001. The Wellsford/Whitehall investment
is in the Commercial Property Investments SBU and the other ventures are in the
Debt and Equity Investments SBU.
Minority interest expense increased $36,000 primarily attributable to income
from the sale of residential units at Silver Mesa.
Income tax expense reflected a cost of $122,000 compared to a cost of $283,000
resulting from a pre-tax loss and a reversal of the provision recorded in the
first six months of 2001.
The decrease in net income per share--basic and diluted of $0.35 per share is
attributable to the net loss of $1,728,000 during the quarter and by the effect
of a lower weighted average number of common shares outstanding in the current
period from the repurchase of 1,318,732 shares of common stock during 2000 and
2,020,784 shares of common stock during 2001.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
Rental revenue decreased $3,086,000. This decrease is due to the sale of the
four VLP properties ($2,976,000) and the disposition of Sonterra in November of
2000 ($2,046,000), partially offset by the operations of the rental
-21-
portion of the Silver Mesa phase at Palomino Park which commenced in October
2000 ($1,719,000) and increased rental revenues at the Blue Ridge and Red Canyon
phases at Palomino Park ($217,000).
Revenues from the sale of 89 residential units and the associated cost of sales
from such units during the nine months ended September 30, 2001 were $18,478,000
and $16,324,000, respectively. Sales commenced in February 2001.
Interest revenue decreased $515,000. This decrease is primarily due to interest
earned on loans outstanding during the nine month period in 2000 and
subsequently repaid in 2000 and 2001 of $923,000 and a decrease in the
underlying base interest rates on loans of $62,000, offset by interest earned on
new loans of $393,000 and increased interest earned on cash of $85,000 from a
greater average cash balance during the current period versus the comparable
2000 period (net of any decreases in money market interest rates during 2001).
Fee revenue increased $32,000. The 2000 period includes $450,000 of fees for the
Company's role as managing member under the prior Wellsford/Whitehall Operating
Agreement, whereas under the Amendments, the Company now earns fees payable by
Whitehall from sales by Wellsford/Whitehall and certain asset purchases by the
New Venture. Such fees were $338,000 during the current period. Additionally,
the Company earned $131,000 of management fees for its role in the Second
Holding investment and $13,000 from fees earned on the modification of the
Patriot Loan in the Wellsford Capital SBU.
Property operating and maintenance expense decreased $304,000. This decrease is
due to the sale of Sonterra ($546,000) and four of the VLP properties as noted
above ($418,000), offset by the addition of the Silver Mesa rental phase
($476,000) and additional operating costs at Palomino Park ($184,000).
Real estate tax expense decreased $247,000. This decrease is due to the sale of
four of the VLP properties as noted above ($288,000) and the sale of Sonterra
($198,000), offset by the rental operations from Silver Mesa ($138,000) and
increases at the other Palomino Park phases ($101,000).
Depreciation and amortization expense increased $542,000. This increase is
primarily due to additional amortization of deferred costs attributable to asset
sales at Wellsford/Whitehall ($1,353,000) and depreciation on the Silver Mesa
rental phase ($518,000), offset by no current year depreciation expense on the
VLP properties, as they are held for sale ($712,000) and Sonterra as it was sold
($476,000), and amortization in the prior period attributable to one of the two
principals leaving Creamer Vitale Wellsford to pursue other employment and the
subsequent wind-down of the venture ($145,000).
Property management expenses decreased $144,000. This decrease is primarily
attributable to the sale of the four VLP properties ($140,000) and Sonterra
($61,000), partially offset by the addition of the Silver Mesa rental phase
($52,000).
Interest expense decreased $1,695,000. This decrease is attributable to the
repayment of the $28,000,000 loan which cross-collateralized the VLP properties
($2,107,000), the sale of Sonterra ($842,000), reduced interest rates on the
other variable rate based debt ($157,000) and declines in the Blue Ridge and Red
Canyon mortgage interest from lower outstanding debt balances ($36,000),
partially offset by interest incurred on the Silver Mesa Conversion Loan related
to the rental operations ($1,096,000), decreased capitalized interest ($234,000)
and interest on draws under the Company's line of credit ($117,000).
General and administrative expenses increased $394,000. This increase is due to
amounts accrued for incentive compensation in the current year's nine-month
period which was not accrued in the prior year as a result of current year asset
sales and additional amortization of deferred stock compensation issued in
December 2000.
Income from joint ventures decreased $1,676,000. This decrease is the result of
net gains on the sale of properties of $2,629,000 in the current period from
Wellsford/Whitehall (the Company's share of gains of $8,655,000 is offset by the
Company's share of impairment provisions of $6,026,000) in excess of gains in
the prior year's period of $164,000 at Wellsford/Whitehall and income from the
Fordham Tower construction loan
-22-
of $270,000 through the Clairborne Prudential program (with no corresponding
sales or income in the prior period, respectively) and a prior period loss of
$23,000 from Creamer Vitale Wellsford prior to the unwinding of the venture in
2000. These increases were offset by (i) a current period loss of $164,000 from
Second Holding which had income in the prior period of $1,317,000 (a decrease of
$1,481,000), (ii) $333,000 of income in the prior period from the investment in
The Liberty Hampshire Company, L.L.C. which the Company sold in December 2000
and (iii) a $2,740,000 decrease in income from Wellsford/Whitehall operations.
The impairment provision is the Company's allocable share of a provision
recorded by Wellsford/Whitehall, arising from the change in intended mixed-use
of the property from office space, a conference center and residential
development to an available for sale headquarters complex in June 2001 and its
ultimate sale in September 2001. The Wellsford/Whitehall investment is in the
Commercial Property Investments SBU and the other ventures are in the Debt and
Equity Investments SBU.
Minority interest expense increased $212,000, primarily attributable to income
from the sale of residential units at Silver Mesa.
Income tax expense decreased $279,000 due to a reversal of previously accrued
state income tax liabilities in the aggregate amount of $265,000, as a result of
the net operating loss carry forwards being available in one state, and a
decrease in taxable income.
Accrued distributions and amortization of costs on Convertible Trust Preferred
Securities, net of income tax benefit, increased $476,000, as these securities
were issued in May 2000 and were outstanding for only a partial period in that
year.
The decrease in net income per share--basic and diluted of $0.23 per share is
attributable to lower net income of $2,048,000 and by the effect of a lower
weighted average number of common shares outstanding in the current period from
the repurchase of 1,318,732 shares of common stock during 2000 and 2,020,784
shares of common stock during 2001.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company expects to meet its short-term liquidity requirements generally
through its available cash, sales of properties and distributions of available
cash in the Wellsford/Whitehall SBU, sales of properties in the Wellsford
Capital SBU, sales of residential units in the Wellsford Development SBU, cash
flow provided by operations, repayments of notes receivable and, if available
for use, from draws on the $20,000,000 Wellsford Finance Facility (the Wellsford
Finance Facility expires in January 2002).
The Company expects to meet its long-term liquidity requirements such as
refinancing mortgages, financing acquisitions and development, financing capital
improvements and joint venture capital requirements by long-term borrowings,
through the use of available cash, repayments of notes receivable at maturity,
sales of properties in the Wellsford/Whitehall SBU, 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 liquidity requirements, such as
financing additional renovations to its properties and acquisitions of new
properties, if any, with operating cash flow from its properties, financing
available under its recently completed loan agreement, proceeds from any asset
sales and equity contributions from the principal owners of Wellsford/Whitehall.
At September 30, 2001, the Company's unfunded capital commitment was
approximately $5,551,000 and the Whitehall unfunded capital commitment was
approximately $31,069,000. Cash and cash equivalents were approximately
$42,359,000 at September 30, 2001, of which approximately $41,000,000 is
expected to be distributed during the fourth quarter 2001, principally from
previously closed sales transactions.
Second Holding expects to meet its liquidity requirements for purchases of
investment and non-investment grade rated real estate debt with proceeds from
the issuance of bonds and medium term notes.
-23-
Approximately $1,823,000 of the Company's retained earnings at September 30,
2001 relates to undistributed earnings from Second Holding as such distributions
are limited to 48% of earnings.
WORLD TRADE CENTER INVESTMENT
In August 2001, Second Holding purchased an aggregate of $24,825,000 in two
classes of Mortgage Pass-Through Certificates, Series 2001--WTC (the "WTC
Certificates") (the Company's share of which is $12,683,000). The WTC
Certificates, rated AA and A at issuance, were part of a total bond offering of
$563,000,000 which was used to finance the acquisition of the leasehold interest
in Towers 1, 2, 4 and 5 of the World Trade Center in New York City. Subsequent
to the events of September 11, 2001 which resulted in the destruction of these
buildings, the Company has been informed by GMAC Commercial Mortgage
Corporation, the master servicer, that the WTC Certificates are not in default.
The property casualty and business interruption insurance obtained in connection
with the WTC Certificates does not exclude acts of terrorism and such insurance
is from a consortium of 22 insurers. As of September 30, 2001, the rating
agencies reaffirmed their ratings on the WTC Certificates. The Company believes
that the insurance coverage is sufficient to cover Second Holding's investment
and that an impairment reserve is not required. The Company will continue to
evaluate the ultimate collectibility of the principal and interest.
CAPITAL COMMITMENTS
At September 30, 2001, the Company had capital commitments with respect to
certain joint venture investments. The Company may make additional equity
investments in these joint ventures, subject to Board of Directors approval, if
deemed prudent to do so to protect or enhance its existing investment. At
September 30, 2001, capital commitments are as follows:
COMMITMENT AMOUNT
---------- ------
Wellsford/Whitehall equity....... $ 5,551,000 (A)
Wellsford/Whitehall loan......... 4,000,000 (B)
Clairborne Prudential equity...... 10,208,000 (C)
----------
(A) Whitehall is committed to contribute $31,069,000 at September 30, 2001.
(B) Pursuant to the Amendments, the Company could provide for up to 40% of a
$10,000,000 loan to, or equity investment in, the venture with its joint
venture partner, Whitehall committed to fund the remaining $6,000,000.
(C) Capital calls are subject to the Company's approval of such investments.
WELLSFORD FINANCE FACILITY
On January 1, 2001, the Company had an outstanding balance of $12,000,000 under
the Wellsford Finance Facility. This balance was completely repaid on January 4,
2001. At September 30, 2001, the Company had an outstanding balance of
$7,000,000, which was repaid on October 17, 2001. The Company has the ability to
utilize the entire $20,000,000 available on this facility, until it expires in
January 2002, at which time it may or may not be renewed. There can be no
assurance that the Company will be able to renew this facility, either at all,
or on satisfactory terms.
LETTER OF CREDIT
On October 26, 2001, the Company and Commerzbank AG amended the letter of credit
agreement (whereby Commerzbank AG provides credit enhancement on $12,680,000 of
tax-exempt bonds in the Wellsford Development SBU) to include the $25,000,000 of
Convertible Trust Preferred Securities in shareholders' equity in the
determination of the minimum shareholders' equity covenant. Based upon the
September 30, 2001 financial statements, the Company would have $205,090,000 of
shareholders' equity as defined by the amended letter of credit agreement; the
minimum requirement is $180,000,000.
-24-
PROPERTY SALES
The Company sold three of the VLP properties through September 30, 2001 and
received proceeds, net of selling costs, of $15,680,000. During the nine months
ended September 30, 2001, 89 residential units were sold and the Company
received net proceeds of approximately $1,377,000, after the repayment of
principal on the Silver Mesa Conversion Loan of approximately $15,768,000 and
selling costs. Net proceeds received by the Company from the above sales were
used for working capital purposes.
STOCK REPURCHASE PROGRAM
On April 20, 2000, the Company's Board of Directors authorized the repurchase of
up to 1,000,000 additional shares of its outstanding common stock. The Company
intends to repurchase the shares from time to time by means of open market
purchases depending on availability of shares, the Company's cash position, the
price per share and other corporate matters. No minimum number or value of
shares to be repurchased has been fixed. Pursuant to this program, 29,837 shares
have been repurchased as of September 30, 2001; none during the nine months
ended September 30, 2001. In addition, during June 2001, the Board of Directors
authorized the repurchase of 2,020,784 shares of the Company's common stock at
$18.10 per share (aggregating approximately $36,576,000) from an institutional
shareholder. Cash used to repurchase such shares came from available working
capital.
CASH FLOWS
----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
Cash flow provided by operating activities of $20,208,000 primarily consists of
$114,000 of net income plus (i) a decrease in residential units available for
sale of $13,794,000, (ii) depreciation and amortization of $3,929,000, (iii) a
decrease in restricted cash of $2,494,000, (iv) a decrease in prepaid and other
assets of $1,480,000, (v) undistributed joint venture income of $989,000, (vi)
amortization of deferred compensation of $855,000, (vii) undistributed minority
interest of $230,000 and (viii) shares issued for director compensation of
$60,000, offset by decreases in accrued expenses and other liabilities of
$3,737,000.
Cash flow provided by investing activities of $31,255,000 consists of returns of
capital from joint venture investments of $18,113,000, proceeds from the sale of
real estate assets of $15,680,000 and repayments of notes receivables of
$2,941,000, partially offset by capital contributions to joint ventures of
$3,015,000, investments in real estate assets of $1,964,000 and investments in
notes receivable of $500,000.
Cash flow used in financing activities of $58,016,000 consists of (i) the
repurchase of common shares of $36,576,000, (ii) repayments of the Wellsford
Finance Facility of $17,000,000, (iii) principal payments of mortgage notes
payable of $16,343,000 (including $15,768,000 for the Silver Mesa Conversion
Loan), (iv) costs incurred to repurchase warrants of $80,000 and (v)
distribution of minority interest of $16,000, partially offset by borrowings on
the Wellsford Finance Facility of $12,000,000.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
Cash flow provided by operating activities of $6,551,000 primarily consists of
net income of $2,162,000 plus (i) depreciation and amortization of $3,547,000,
(ii) amortization of deferred compensation of $680,000, (iii) an increase in
accrued expenses and other liabilities of $253,000, (iv) shares issued for
director compensation of $60,000 and (v) distributions in excess of joint
venture income of $27,000, partially offset by an increase in prepaid expenses
and other assets of $151,000 and an increase in restricted cash of $45,000.
Cash flow used in investing activities of $21,223,000 consists of additional
investments in (i) real estate assets of $8,981,000, (ii) notes receivable of
$23,633,000 and (iii) capital contributions to joint ventures of $6,776,000,
-25-
offset by repayments of notes receivable of $15,582,000 and returns of capital
from joint ventures of $2,585,000.
Cash flow provided by financing activities of $2,624,000 primarily consists of
the issuance of $25,000,000 of Convertible Trust Preferred Securities,
substantially offset by (i) the repurchase of common shares of $21,133,000, (ii)
principal payments of mortgage notes payable of $666,000 and (iii) deferred
financing costs principally associated with the issuance of the Convertible
Trust Preferred Securities of $524,000.
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-11 (file No. 333-32445) filed with
the Securities and Exchange Commission ("SEC") on July 30, 1997, 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 income
from real property; adverse consequences of debt financing including, without
limitation, the necessity of future financings to repay debt obligations;
inability to meet financial and valuation covenants; inability to repay
financings; risks of investments in debt instruments, including possible payment
defaults and reductions in the value of collateral; uncertainty pertaining 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 Standard & Poors and Fitch;
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 in the Wellsford/Whitehall portfolio; 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.
-26-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is to changes in interest rates. The
Company manages this risk by offsetting its investments and financing exposures
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:
(amounts in thousands, except per share amounts)
EFFECT OF 1%
BALANCE AT INCREASE IN BASE
SEPTEMBER 30, RATE ON INCOME
2001 (EXPENSE)
---- ---------
Consolidated assets and liabilities:
Notes receivable:
Variable rate ................................. $ 5,070 $ 51
Fixed rate .................................... 30,328 --
--------- ---------
$ 35,398 51
========= ---------
Mortgage notes payable:
Variable rate ................................. $ 35,912 (359)
Fixed rate .................................... 59,149 --
--------- ---------
$ 95,061 (359)
========= ---------
Convertible Trust Preferred Securities:
Fixed rate .................................... $ 25,000 --
========= ---------
Proportionate share of assets and liabilities
from investments in joint ventures:
Second Holding:
Investments:
Variable rate .............................. $ 410,984 4,110
=========
Debt:
Variable rate .............................. $ 385,736 (3,857)
========= ---------
Net effect from Second Holding ................... 253
---------
Wellsford/Whitehall:
Debt:
Variable rate .............................. $ 3,410 (34)
Variable rate, with LIBOR cap at 5.83% (A) . 101,688 (1,017)
Fixed rate ................................. 32,309 --
--------- ---------
$ 137,407
=========
Effect from Wellsford/Whitehall .................. (1,051)
---------
Net decrease in annual income, before income tax
benefit .......................................... (1,106)
Income tax benefit .................................. 442
---------
Net decrease in annual net income ................... $ (664)
=========
Per share, basic and diluted ........................ $ (0.09)
=========
<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
of $101,688 based upon 30-day LIBOR of 3.58% at September 30, 2001.
</FN>
-27-
PART II. OTHER INFORMATION:
------------------
ITEM 1: LEGAL PROCEEDINGS.
Neither the Company nor its equity investments are presently
defendants in any material litigation.
ITEM 2: CHANGES IN SECURITIES.
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:
10.121 October 2001 Amendment to the Letter of Credit Reimbursement
Agreement, dated October 26, 2001 among Palomino Park Public
Improvements Corporation, Wellsford Real Properties, Inc. and
Commerzbank AG.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2001, Wellsford Real
Properties, Inc. filed the following reports on Form 8-K:
None.
-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: November 2, 2001
-29-