WELLSFORD REAL PROPERTIES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________.

Commission File Number 001-12917

WELLSFORD REAL PROPERTIES, INC.
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(Exact Name of Registrant as Specified in Its Charter)

Maryland 13-3926898
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

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)

Securities registered pursuant to Section 12(b) of the Act:

Name of Each Exchange
Title of Each Class On Which Registered
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Common Stock $0.02 par value American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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 and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by checkmark whether the Registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2). YES X NO
--- ---

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant was approximately $99,500,000 based on the
closing price on the American Stock Exchange for such shares on June 30, 2003.

The number of the Registrant's shares of Common Stock outstanding was 6,456,850
as of March 9, 2004 (including 169,903 shares of Class A-1 Common Stock).

Documents Incorporated By Reference
Portions of the Definitive Proxy Statement for the 2004 Annual Shareholders'
Meeting are incorporated by reference into Part III. Additionally, the Company's
registration statement on Form S-3 (File No. 333-73874) filed with the
Securities and Exchange Commission on December 14, 2001 is also incorporated by
reference herein.

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TABLE OF CONTENTS
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Item Page
No. No.
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PART I

1. Business..................................................................3
2. Properties...............................................................15
3. Legal Proceedings........................................................19
4. Submission of Matters to a Vote of Security Holders......................19

PART II

5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities......................19
6. Selected Financial Data..................................................21
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................23
7a. Quantitative and Qualitative Disclosures about Market Risk...............42
8. Consolidated Financial Statements and Supplementary Data.................43
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...............................................43
9a. Controls and Procedures..................................................43

PART III

10. Directors and Executive Officers of the Registrant.......................43
11. Executive Compensation...................................................44
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters........................................44
13. Certain Relationships and Related Transactions...........................44
14. Principal Accountant Fees and Services...................................44

PART IV

15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..........44

FINANCIAL STATEMENTS

15a. Consolidated Balance Sheets as of December 31, 2003 and 2002............F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2003, 2002 and 2001......................................F-4
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2003, 2002 and 2001..........................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001......................................F-6
Notes to Consolidated Financial Statements..............................F-8
Wellsford/Whitehall Group, L.L.C. Consolidated Financial
Statements and Notes.................................................F-47
Second Holding Company, LLC Consolidated Financial
Statements and Notes.................................................F-64

FINANCIAL STATEMENT SCHEDULES

III. Real Estate and Accumulated Depreciation................................S-1

All other schedules have been omitted because the required information for such
other schedules is not present, is not present in amounts sufficient to require
submission of the schedule or is included in the consolidated financial
statements.
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PART I

Item 1. Business.

Wellsford Real Properties, Inc. and subsidiaries, (collectively, the "Company")
was formed as a Maryland corporation on January 8, 1997, as a corporate
subsidiary of Wellsford Residential Property Trust (the "Trust"). On May 30,
1997, the Trust merged (the "Merger") with Equity Residential Properties Trust
("EQR"). Immediately prior to the Merger, the Trust contributed certain of its
assets to the Company and the Company assumed certain liabilities of the Trust.
Immediately after the contribution of assets to the Company and immediately
prior to the Merger, the Trust distributed to its common shareholders all of the
outstanding shares of the Company owned by the Trust (the "Spin-off"). On June
2, 1997, the Company sold 6,000,000 shares of its common stock in a private
placement to a group of institutional investors at $20.60 per share, the
Company's then book value per share.

The Company is a real estate merchant banking firm headquartered in New York
City which acquires, develops, finances and operates real properties and
organizes and invests in private and public real estate companies. The Company's
operations are organized into three Strategic Business Units ("SBUs") within
which it executes its business plan. The portfolio of investments held in each
SBU at December 31, 2003 includes:

Commercial Property Operations-Wellsford/Whitehall Group, L.L.C. A 32.59%
interest in a private joint venture that owns and operates 25
properties (including 17 office properties, five net-leased retail
properties and three land parcels) as of December 31, 2003 totaling
approximately 2,808,000 square feet of improvements, primarily located
in New Jersey and Massachusetts. The Company's investment in
Wellsford/Whitehall was approximately $14,616,000 at December 31,
2003.

Debt and Equity Activities-Wellsford Capital
o Direct debt investment of $3,096,000 which bore interest at 8.25% per
annum during 2003 and had a remaining term to maturity of two years at
December 31, 2003;
o Approximately $32,353,000 of equity investments in companies which
were organized to invest in debt instruments including (i)
approximately $29,167,000 in Second Holding Company, LLC, a company
which was organized to purchase investment and non-investment grade
rated real estate debt instruments and investment grade rated other
asset-backed securities ("Second Holding") and (ii) approximately
$3,186,000 in Clairborne Fordham Tower, L.L.C. ("Clairborne Fordham"),
a company initially organized to provide $34,000,000 of mezzanine
financing for a highrise condominium project in Chicago;
o Approximately $6,790,000 invested in Reis, Inc. ("Reis"), a real
estate information and database company;
o A 49,000 square foot commercial property located in Philadelphia,
Pennsylvania with a net book value of approximately $1,973,000; and
o A $330,000 loan to a venture organized to purchase land parcels for
rezoning, subdivision and creation of environmental mitigation
credits.

Property Development and Land Operations-Wellsford Development
An 85.85% interest as managing owner in Palomino Park, a five phase,
1,800 unit multifamily residential development in Highlands Ranch, a
south suburb of Denver, Colorado. Three phases aggregating 1,184 units
are completed and operational as rental property. A 264 unit fourth
phase has been converted into condominiums. Sales commenced in
February 2001 and through December 31, 2003, the Company has sold 209
units. The land for the remaining fifth phase is being held for
possible future development. The Company's equity in Palomino Park is
approximately $16,919,000 at December 31, 2003.

See the accompanying consolidated financial statements for certain financial
information regarding the Company's industry segments.

3

The Company's executive offices are located at 535 Madison Avenue, New York, New
York, 10022; telephone, (212) 838-3400; web address, www.wellsford.com; e-mail,
wrpny@wellsford.com. To access the Company's other documents filed with the
Securities and Exchange Commission, visit www.wellsford.com. The Company has 16
employees as of December 31, 2003.

Commercial Property Operations - Wellsford/Whitehall
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The Company's commercial property operations consist solely of its interest in
Wellsford/Whitehall Group, L.L.C. ("Wellsford/Whitehall"), a joint venture by
and among the Company, various entities affiliated with the Whitehall Funds
("Whitehall"), private real estate funds sponsored by The Goldman Sachs Group,
Inc. ("Goldman Sachs"), as well as a family based in New England. The Company
had a 32.59% interest in Wellsford/Whitehall as of December 31, 2003 and 2002.
The manager of the joint venture is a Goldman Sachs and Whitehall affiliate. At
December 31, 2003, Wellsford/Whitehall owns and operates 25 properties
(including 17 office properties, five net-leased retail properties and three
land parcels), totaling approximately 2,808,000 square feet of improvements,
primarily located in New Jersey and Massachusetts.

Wellsford/Whitehall is a private real estate operating company organized to
lease and re-lease space, perform construction for tenant improvements, expand
buildings, re-develop properties and based on general and local economic
conditions and specific conditions in the real estate industry, may from time to
time sell properties for an appropriate price. It is not expected that
Wellsford/Whitehall will purchase any new assets in the near future.

The Company's investment in Wellsford/Whitehall, which is accounted for on the
equity method, was approximately $14,616,000 and $55,592,000 at December 31,
2003 and 2002, respectively. The Company's share of (loss) income from
Wellsford/Whitehall was approximately $(36,473,000), $(1,292,000) and $4,367,000
for the years ended December 31, 2003, 2002 and 2001, respectively.

Upon formation of Wellsford/Whitehall in August 1997, $150,000,000 was committed
by the partners ($75,000,000 each), including the amount of contributed
properties, net of assumed debt. The capital requirements were modified in June
1999 to an aggregate of $250,000,000. The Company's total portion of $85,000,000
and Whitehall's total portion of $165,000,000 were fully funded as of December
31, 2001.

In December 2000, the Company and Whitehall executed definitive agreements
modifying the terms of the joint venture, effective January 1, 2001 (the
"Amendments"). The Amendments, which, among other items, provided for the
Company and Whitehall to provide an aggregate of $10,000,000 of additional
financing or preferred equity to Wellsford/Whitehall if required. No amounts
were advanced by either partner prior to the expiration of this commitment at
December 31, 2003. Additionally, WP Commercial, L.L.C. ("WP Commercial"),
replaced the Company as the managing member of Wellsford/Whitehall. WP
Commercial is owned by affiliates of Goldman Sachs and Whitehall and senior
management of WP Commercial. WP Commercial provides management, construction,
development and leasing services to Wellsford/Whitehall based upon an agreed fee
schedule. WP Commercial also provides similar services to a new venture formed
by Whitehall (the "New Venture") as well as other affiliates of Whitehall and to
third parties, including tenants of Wellsford/Whitehall and new owners of
properties disposed of by Wellsford/Whitehall.

The Amendments included a buy/sell agreement of equity interests between the
Company and Whitehall which can be exercised by either party after December 31,
2003 with respect to the Wellsford/Whitehall venture (the "Buy/Sell Agreement").
The nature of the Buy/Sell Agreement allows for either the Whitehall funds as a
group or the Company to provide notice that it intends to purchase the
non-initiating partner's interest at a specific price. The non-initiating party
may either accept that offer or instead may reject that offer and become the
purchaser at the initially offered price. The terms of the Wellsford/Whitehall
GECC Facility allow for the continuance of such debt as long as the Company or
Whitehall has ultimate decision-making authority over the management and
operations of Wellsford/Whitehall. As of the date of this report, neither party
has exercised its buy/sell right under the Buy/Sell Agreement.

4

As a condition to the formation of Wellsford/Whitehall in 1997, the Company had
agreed with Whitehall to conduct its business and activities relating to office
properties (but not other types of commercial properties) located in North
America solely through its interest in Wellsford/Whitehall. Whitehall has agreed
to waive this condition in connection with the Amendments.

During the years ended December 31, 2003, 2002 and 2001, Wellsford/Whitehall
completed the following purchase and sale transactions:

Annually, after the preparation of budgets for the following year and as part of
the financial statement closing process, Wellsford/Whitehall performs
evaluations for impairment on all of its real estate assets. As part of this
evaluation, Wellsford/Whitehall recorded an impairment charge of approximately
$114,700,000 related to 12 assets in the portfolio during the fourth quarter of
2003. The provision is not the result of a change in intended use of such
assets, however, it is the result of several factors including, but not limited
to, a continued deterioration of and outlook for the suburban office submarkets
where Wellsford/Whitehall's properties are situated. Specifically, these include
decreasing market rents, slower absorption trends and greater tenant concession
costs. The Company's share of this impairment charge was approximately
$37,377,000 in 2003 and as a result, the Company wrote-off related unamortized
warrant costs on the Company's books of approximately $2,644,000.

At December 31, 2002, in anticipation of the sales of the Decatur, GA and
Boston, MA properties, Wellsford/Whitehall recorded impairment provisions
aggregating approximately $1,351,000 as the expected sale prices net of selling
expenses were less than the carrying amount of the properties. The Company's
share of these impairments was approximately $440,000 in 2002 and as a result,
the Company wrote-off related unamortized warrant costs on the Company's books
of approximately $284,000.

The aggregate impairment provisions recorded during 2001 (primarily relating to
the Pointview property, a 194 acre complex with two buildings totaling
approximately 564,000 square feet, located in Wayne, New Jersey) were
$16,545,000, of which the Company's share was $6,256,000.

During June 2001, Wellsford/Whitehall obtained a three-year, $353,000,000
revolving credit facility from General Electric Capital Corporation ("GECC
Facility") with an initial funding of approximately $273,000,000 before
transaction costs. The facility bore interest at LIBOR + 2.90% per annum (4.02%
at December 31, 2003) and was set to initially mature in June 2004 with two
12-month extension options, subject to meeting certain operating and valuation
covenants. Prior to June 30, 2003 the GECC Facility provided for additional
financing

6

to fund certain capital expenditures related to its properties if certain
operating ratios were met; such ability expired at June 30, 2003 with no funds
being advanced. This financing was arranged by Goldman Sachs, to whom
Wellsford/Whitehall paid a fee of approximately $2,644,500 during 2001.

Wellsford/Whitehall executed a letter agreement with GECC effective January 20,
2004 relating to the modification of the GECC Facility. The modification is
subject to the execution of the final amended agreement documents. The amended
agreement provides for an extension of the loan maturity to December 31, 2006,
interest at LIBOR plus 3.25% per annum, a principal paydown of $1,000,000 and a
$17,000,000 line of credit to fund certain capital improvements through December
31, 2005. Excess cash flow, as defined, from the properties collateralizing the
GECC Facility can only be used for capital expenditures for such properties.
Wellsford/Whitehall is required to establish lock box arrangements for the
deposit of all rent receipts relating to each of the properties collateralizing
the GECC Facility.

In July 2001, Wellsford/Whitehall entered into an interest rate protection
contract at a cost of $1,780,000 (the "Cap"), 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. The market value of the Cap was approximately
$13,000 at December 31, 2002 and had no fair value at December 31, 2003. This
Cap was purchased from Goldman Sachs based upon the results of a competitive
bidding process. The amended GECC Facility requires that a similar cap be
purchased through December 31, 2006.

The following table summarizes the long-term debt at Wellsford/Whitehall:

During February 2004, Whitehall requested a dialogue with the special servicer
of the Nomura Loan to discuss various forms of debt relief under the terms of
the Nomura Loan. The Nomura Loan is collateralized by six of the Boston area
properties in the Wellsford/Whitehall portfolio. There can be no assurance as to
the outcome of these discussions.

The Company and Whitehall have agreed to provide up to $8,000,000 to
Wellsford/Whitehall through March 31, 2005 (of which the Company's share is
35%), however, there can be no assurance that this amount will be sufficient.

WP Commercial receives an administrative management fee of 93 basis points on a
predetermined value for each asset owned at the time of the Amendments. As
Wellsford/Whitehall sells assets, the basis used to determine the fee is reduced
by the respective asset's predetermined value six months after the completion of
such sales. The fees earned by WP Commercial related to this service were
approximately $4,604,000, $5,826,000 and $6,422,000 for the years ended December
31, 2003, 2002 and 2001, respectively.

Pursuant to the terms of the Amendments, Whitehall has agreed to pay the Company
fees with respect to assets disposed of by Wellsford/Whitehall equal to 25 basis
points of the sales proceeds and up to 60 basis points (30

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basis points are deferred pending certain return on investment thresholds being
reached) for each acquisition of real estate made by certain other affiliates of
Whitehall, until such acquisitions aggregate $400,000,000. The following table
presents fees earned by the Company related to this provision:

For the Years Ended December 31,
---------------------------------------
2003 2002 2001
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Asset disposition fees.......... $430,000 $ 7,000 $365,000
Asset acquisition fees.......... -- 22,000 23,000
-------- ------- --------
Total fees...................... $430,000 $29,000 $388,000
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Debt and Equity Activities - Wellsford Capital
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The Company, through the Debt and Equity Activities-Wellsford Capital SBU,
primarily makes debt investments directly, or through joint ventures,
predominantly in real estate related senior, junior or otherwise subordinated
debt instruments and also in investment grade rated commercial mortgage backed
securities and other asset-backed securities. The debt investments may be
unsecured or secured by liens on real estate, liens on equity interests in real
estate, pools of mortgage loans, or various other assets including, but not
limited to, leases on aircraft, truck or car fleets, leases on equipment,
consumer receivables, pools of corporate bonds and loans and sovereign debt, as
well as interests in such assets or their economic benefits. Junior and
subordinated loans and investments generally have the potential for high yields
or returns more characteristic of equity ownership. They may include debt that
is acquired at a discount, mezzanine financing, commercial mortgage-backed
securities, secured and unsecured lines of credit, distressed loans, tax exempt
bonds secured by real estate and loans previously made by foreign and other
financial institutions. The Company believes that there are opportunities to
acquire real estate debt and other debt, especially in the low or below
investment grade tranches, at significant returns as a result of inefficiencies
in pricing in the marketplace, while utilizing the expertise of both the Company
and its joint venture partners to analyze the underlying assets and thereby
effectively minimizing risk.

At December 31, 2003, the Company had the following investments: (i) a direct
debt investment of $3,096,000 which bore interest at 8.25% per annum during 2003
and had a remaining term to maturity of two years; (ii) approximately
$32,353,000 of equity investments in companies which were organized to invest in
debt instruments, including approximately $29,167,000 in Second Holding, a
company which was organized to purchase investment and non-investment grade
rated real estate debt instruments and investment grade rated other asset-backed
securities, and approximately $3,186,000 in Clairborne Fordham, a company
initially organized to provide $34,000,000 of mezzanine financing for a highrise
condominium project in Chicago; (iii) approximately $6,790,000 invested in Reis,
a real estate information and database company; (iv) a 49,000 square foot
commercial property located in Philadelphia, Pennsylvania with a net book value
of approximately $1,973,000; and (v) a $330,000 loan to a venture organized to
purchase land parcels for rezoning, subdivision and creation of environmental
mitigation credits.

Debt Investments

277 Park Loan

In April 1997, the Company and a predecessor of Fleet National Bank originated
an $80,000,000 loan (the "277 Park Loan") to entities which own substantially
all of the equity interests (the "Equity Interests") in the entity which owns a
1,750,000 square foot office building located in New York City (the "277 Park
Property"). The Company advanced $25,000,000 pursuant to the 277 Park Loan.

During September 2003, the 277 Park Loan was prepaid by the borrowers and
pursuant to the terms of the loan, WRP received a yield maintenance penalty of
$4,368,000 which is included in interest revenue for the year ended December 31,
2003. This note would have provided for $767,000 of interest revenue in the
fourth quarter

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of 2003 and $3,042,000 for future annual periods to May 2006 for both the
Wellsford Capital SBU and the Company's consolidated statement of operations.
The 277 Park Loan bore interest at 12.00% per annum with a stated maturity of
May 2007. The 277 Park Loan was secured primarily by a pledge of the Equity
Interests owned by the borrowers and thus was junior to a first mortgage loan on
the 277 Park Property.

Liberty Hampshire

In July and August 1998, the Company invested a total of approximately
$2,100,000 for an approximate 4.20% equity interest in The Liberty Hampshire
Company, L.L.C. ("Liberty Hampshire"), a venture which structures, establishes
and provides management and services for special purpose finance companies
formed to invest in financial assets, including Second Holding (see below). In
December 2000, the Company sold this interest to the majority owner of Liberty
Hampshire for $5,160,000 and recorded a gain of approximately $2,500,000. The
Company received $1,032,000 of cash and a note for the remaining balance of
$4,128,000 which bears interest at 8.25% per annum, is due in December 2005 and
has scheduled annual principal and interest payments (the "Guggenheim Loan").
The balance of the Guggenheim Loan was $3,096,000 and $3,612,000 at December 31,
2003 and 2002, respectively. On January 5, 2004, the Company received a payment
which included the 2003 principal paydown of $1,032,000 and the 2003 interest.

The following table summarizes interest revenue and its share of consolidated
revenue from continuing operations during such periods for the Wellsford Capital
SBU:

Second Holding

Second Holding, a joint venture special purpose finance company, has been
organized to purchase investment and non-investment grade rated real estate debt
instruments and investment grade rated other asset-backed securities. These
other asset-backed securities that Second Holding may purchase may be secured
by, but not limited to, leases on aircraft, truck or car fleets, bank deposits,
leases on equipment, fuel/oil receivables, consumer receivables, pools of
corporate bonds and loans and sovereign debt. It is Second Holding's intent to
hold all securities to maturity. Many of these securities were obtained through
private placements and current public market pricing is not available.

The Company's net contribution to Second Holding was approximately $24,600,000
to obtain an approximate 51.1% non-controlling interest in Second Holding, with
Liberty Hampshire owning 10% and an affiliate of a significant shareholder of
the Company (the Caroline Hunt Trust Estate, which owns 405,500 shares of the

9

Company at December 31, 2003 and 2002 ("Hunt Trust")) who, together with other
Hunt Trust related entities, own the remaining approximate 39%.

During the latter part of 2000, an additional partner was admitted to the
venture. This partner is committed through April 2010 to provide credit
enhancement, through the issuance of an insurance policy by one of its
affiliates, for the payment of principal and interest of the junior subordinated
bond issue of $150,000,000 initially, which was reduced to $100,000,000 during
January 2003. The parent company of this partner announced during 2003 that its
subsidiary (the partner of Second Holding) will no longer write new credit
enhancement business, however, it will continue to support its existing book of
credit enhancement business. The Company does not believe that this decision
will have a material adverse impact on the business and operations of Second
Holding as a result of that partner's existing commitment to the venture. This
partner is entitled to 35% of net income as defined by agreement, while the
other partners, including the Company, share in the remaining 65%. The Company's
allocation of income is approximately 51.1% of the remaining 65%.

The Company's investment in Second Holding, which is accounted for on the equity
method, was approximately $29,167,000 and $28,166,000 at December 31, 2003 and
2002, respectively. The Company's share of income (loss) from Second Holding was
approximately $1,640,000, $723,000 and $(163,000) for the years ended December
31, 2003, 2002 and 2001, respectively. The Company also earns management fees
for its role in analyzing real estate-related investments for Second Holding.
The net fees earned by the Company, which are based upon total assets of Second
Holding, amounted to approximately $930,000, $646,000 and $217,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.

At December 31, 2003 and 2002, Second Holding had total assets of approximately
$1,903,919,000 and $1,840,096,000, respectively, including real estate debt and
other asset-backed securities investments of approximately $1,744,282,000 and
$1,785,758,000, respectively. The investment-grade assets are variable rate
based and have a weighted average annual interest rate of 1.78% and 2.21% at
December 31, 2003 and 2002, respectively. Approximately 94% of these investments
were rated AAA or AA by Standard & Poor's at December 31, 2003.

Second Holding utilizes funds from the issuance of bonds, medium term notes and
commercial paper to make investments. Second Holding had total debt of
approximately $1,837,701,000 and $1,722,933,000 at December 31, 2003 and 2002,
respectively with a weighted average annual interest rate of 1.22% and 1.69%,
respectively, after the effect of swaps on fixed rate debt to a floating rate.

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 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 interests in towers 1 and 2 and in the office components of
buildings 4 and 5 of the World Trade Center in New York City. As a result of the
events of September 11, 2001, these structures were destroyed. During December
2003, the entire bond offering, including the WTC Certificates, was repaid in
full by the borrower.

Reis, Inc.

The Company has direct and indirect equity investments in a real estate
information and database company, Reis, a leading provider of real estate market
information to institutional investors. At December 31, 2003 and 2002, the
Company's aggregate investment in Reis, which is accounted for under the cost
method, was approximately $6,790,000 or approximately 21.8% of Reis' equity on
an as converted basis. The president and primary common shareholder of Reis is
the brother of Mr. Lynford, the Chairman, President and Chief Executive Officer
of the Company. Mr. Lowenthal, the Company's former President and Chief
Executive Officer, who currently serves on the Company's Board of Directors, has
served on the board of directors of Reis since the third quarter of 2000.
Messrs. Lynford and Lowenthal have and will continue to recuse themselves from
any investment decisions made by the Company pertaining to Reis.

10

Reis' business plan includes expanding the number of real estate markets covered
by its services, moving to an internet-based delivery system to its customers,
increasing marketing of its products to expand its customer base, accelerating
the introduction of its new product line and developing a new product related to
its existing business.

Clairborne Fordham

In October 2000, the Company and Prudential Real Estate Investors ("PREI"), an
affiliate of Prudential Life Insurance Company, organized Clairborne Fordham
which provided an aggregate of $34,000,000 of mezzanine financing for the
construction of Fordham Tower, a 50-story, 244 unit, luxury condominium
apartment project to be built on Chicago's near northside ("Fordham Tower"). The
Company, which has a 10% interest in Clairborne Fordham, fully funded its
$3,400,000 share of the loan. The loan, which matured in October 2003, bore
interest at a fixed rate of 10.50% per annum with provisions for additional
interest to PREI and the Company and was secured by a lien on the equity
interests of the owner of Fordham Tower. The Company may earn fees from PREI's
additional interest based upon certain levels of returns on the project. Such
additional interest and fees had not been accrued by the Company or Clairborne
Fordham through the maturity of the loan. The Company's investment in the
Clairborne Fordham venture is accounted for on the equity method. The Company's
share of income from Clairborne Fordham through the initial maturity of the loan
in October 2003 was approximately $270,000, $361,000 and $361,000 for the years
ended December 31, 2003, 2002 and 2001, respectively.

Construction is complete and delivery of certain units commenced in December
2002. As of December 31, 2003, no units were under contract and 220 units
(including nine penthouses and 211 standard units) had closed for gross proceeds
of approximately $143,800,000. The remaining unsold units consist of five
standard units, 13 penthouses and six townhouses. One penthouse unit was sold in
February 2004 with another penthouse unit and a standard unit under contract. In
addition, the owner of Fordham Tower is seeking to sell the 12,000 square feet
of retail space and a 200 space commercial parking facility, both of which are
part of the project.

The loan was not repaid at maturity and as of October 2003 an amended loan
agreement was executed extending the loan to December 31, 2004. The amended
terms provided for the placement of a first mortgage lien on the project, no
interest to be accrued after September 30, 2003 and for the borrower to add to
the existing principal amount the additional interest due Clairborne Fordham at
September 30, 2003 of approximately $19,240,000. In lieu of interest after
September 30, 2003 Clairborne Fordham will also participate in certain
additional cash flows, as defined, if earned from net sales proceeds of the
Fordham Tower project.

The amended agreement provided for a $3,000,000 additional capital contribution
by the borrower and use of an existing cash collateral account to pay off the
existing construction loan, any unpaid construction costs and to make a
principal payment to Clairborne Fordham in October 2003 of approximately
$4,600,000, of which the Company's share was approximately $460,000. An
additional payment of approximately $554,000 was received by Clairborne Fordham
in December 2003 of which the Company's share was approximately $55,000. The
agreement provides for all proceeds after project costs to be first applied to
payment in full of the loan and the additional interest to Clairborne Fordham
before any sharing of project cash flow with the borrower. An additional
principal payment of approximately $1,277,000 was made in February 2004 (of
which the Company's share was $128,000) as a result of the sale of the penthouse
unit.

The Company and Clairborne Fordham have (i) concluded that their respective
investment and loan balances are not impaired at December 31, 2003 and (ii)
determined to recognize a portion of the additional interest over the expected
remaining life of the loan. The Company's share of additional interest earned
for the year ended December 31, 2003 was approximately $136,000. The Company did
not recognize any additional interest during 2002 and 2001. The Company's equity
investment, after the effect of the above activity, was $3,186,000 and
$3,631,000 at December 31, 2003 and 2002, respectively.

11

Value Property Trust

In February 1998, the Company completed the merger with Value Property Trust
("VLP") (the "VLP Merger") for total consideration of approximately
$169,000,000, which was accounted for as a purchase. Thirteen of the twenty VLP
properties were under contract and subsequently sold to an affiliate of
Whitehall for an aggregate of approximately $64,000,000. The Company retained
seven of the VLP properties, with an allocated value upon purchase of
approximately $38,300,000, aggregating approximately 597,000 square feet with
one property located in California and the remaining six properties located in
the northeastern United States. VLP had cash of $60,800,000 and other net assets
of $5,900,000 at the close of the transaction.

During the fourth quarter of 2000, the Company made the strategic decision to
sell the seven VLP properties. One of the properties was sold in December 2000
and four properties were sold during 2001 for aggregate sales of approximately
$34,217,000. The Company recorded a gain of approximately $4,943,000 on the
December 2000 transaction which was offset by a provision for impairment of
$4,725,000, also recorded in 2000, attributable to expected sales proceeds being
less than the respective carrying amounts on four of the remaining six unsold
VLP properties at December 31, 2000. There were no additional gains or losses
recorded by the Company as a result of the four property sales during 2001.

In July 2003, the Company sold the Salem, New Hampshire property for a net sales
price of approximately $4,200,000 and the Company utilized $22,000 of the
impairment reserve. The Company is actively marketing the remaining VLP
property, a 49,000 square foot office building located in Philadelphia,
Pennsylvania. The net book value for the unsold properties at December 31, 2003
and 2002 was approximately $1,973,000 and $6,027,000, respectively, after
considering the remaining impairment reserve of $2,153,000 and $2,175,000 at
December 31, 2003 and 2002, respectively.

West Deptford Venture

During November 2003, the Company made a $330,000 loan to a venture organized to
purchase land parcels for rezoning, subdivision and creation of environmental
mitigation credits (the "West Deptford Venture"). At December 31, 2003, the West
Deptford Venture had a leasehold interest in a 154 acre parcel in West Deptford,
New Jersey which included at least 64.5 acres of wetlands and a maximum of 71
acres of developable land. The Company consolidated the West Deptford Venture
during 2003 and its investment is primarily included in land held for
development on the consolidated balance sheet at December 31, 2003. The Company
has committed $366,000 of capital in addition to the loan to the West Deptford
Venture.

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 that could be achieved by
acquiring stabilized properties. As part of its strategy, the Company may seek
to issue tax-exempt bond financing authorized by local governmental authorities
which generally bears interest at rates substantially below rates available from
conventional financing.

Palomino Park

The Company owns a five-phase 1,800 unit class A multifamily development
("Palomino Park") in Highlands Ranch, a south suburb of Denver, Colorado. At
December 31, 2003 and 2002, the Company had an 85.85% interest as the managing
owner in this project and a subsidiary of EQR had the remaining 14.15% interest.

In January 2003, the Company's board of directors approved a plan for the
Company to seek institutional investors to purchase an interest in the
residential rental phases at Palomino Park. As a result of weakness in the
Denver, Colorado economy, fluctuating occupancy, significant concessions and
high leverage ratios (a deterrent

12

to institutional investors), the Company has determined that it would no longer
continue to search for such an investor at this time.

With respect to EQR's 14.15% interest in the corporation that owns Palomino
Park, there exists a put/call option between the Company and EQR related to
one-half of such interest (7.075%) for $1,900,000. A transaction for the
remaining interest would be subject to negotiation between the Company and EQR.

In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds to
fund construction at Palomino Park (the "Palomino Park Bonds"). Initially, all
five phases of Palomino Park were collateral for the Palomino Park Bonds. The
Palomino Park Bonds have an outstanding balance of $12,680,000 at December 31,
2003 and 2002 and are currently collateralized by four phases at Palomino Park,
as Silver Mesa was released from the collateral in November 2000. In June 2000,
the Company obtained a five-year AA rated letter of credit from Commerzbank AG
to provide additional collateral for the Palomino Park Bonds. This letter of
credit, which expires in May 2005, replaced an expiring letter of credit. A
subsidiary of EQR has guaranteed Commerzbank AG's letter of credit; such
guarantee also expires in May 2005.

In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed
at a cost of approximately $41,600,000. At that time, the Company obtained a
$34,500,000 permanent loan (the "Blue Ridge Mortgage") secured by a first
mortgage on Blue Ridge. The Blue Ridge Mortgage matures in December 2007 and
bears interest at a fixed rate of 6.92% per annum. Principal payments are based
on a 30-year amortization schedule.

In November 1998, Phase II, the 304 unit phase known as Red Canyon, was
completed at a cost of approximately $33,900,000. At that time, the Company
acquired the Red Canyon improvements and the related construction loan was
repaid with the proceeds of a $27,000,000 permanent loan (the "Red Canyon
Mortgage") secured by a first mortgage on Red Canyon. The Red Canyon Mortgage
matures in December 2008 and bears interest at a fixed rate of 6.68% per annum.
Principal payments are based on a 30-year amortization schedule.

In October 2000, Phase III, the 264 unit phase known as Silver Mesa was
completed at a cost of approximately $44,200,000. 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
certain units to be sold and continued to rent certain of the remaining unsold
units during the sellout period until the inventory available for sale has been
significantly reduced and additional units are required to be prepared for sale.
In conjunction with this decision, the Company made a payment of $2,075,000 to
reduce the outstanding balance on the tax-exempt bonds in order to obtain the
release of the Silver Mesa phase from the Palomino Park Bond collateral. In
December 2000, the Company obtained a $32,000,000 loan from KeyBank National
Association (the "Silver Mesa Conversion Loan") which bore interest at LIBOR +
2.00% per annum, was collateralized by the unsold Silver Mesa units, matured in
December 2003 and provided for one six-month extension at the Company's option.
Generally, 90% of net sales proceeds per unit were applied to principal
repayments. During May 2003, the Company repaid the remaining unpaid principal
balance of the Silver Mesa Conversion Loan with proceeds from Silver Mesa unit
sales and available cash.

Sales of condominium units at the Silver Mesa phase of Palomino Park commenced
in February 2001 and 209 units have been sold through December 31, 2003. The
following table provides information regarding sales of Silver Mesa units:

13

The following table details operating information related to the Silver Mesa
units being rented. As the Company continues to sell units, rental revenue, the
corresponding operating expenses and cash flow from this activity will diminish.

For the Years Ended December 31,
-----------------------------------------
2003 2002 2001
-------- ---------- ----------

Rental revenue.............. $702,000 $1,462,000 $2,224,000
Net operating income (A).... $431,000 $ 884,000 $1,488,000

- -------------------------------

(A) Net operating income is defined as rental revenue, less property operating
and maintenance expenses, real estate taxes and property management fees.

In December 2001, Phase IV, the 424 unit phase known as Green River, was
completed at a cost of approximately $56,300,000. Effective December 31, 2001,
the Company (i) became obligated for the construction loan, (ii) released the
developer of the economic risks it bore during construction and initial lease-up
as the developer carried the construction loan and a significant portion of the
costs incurred on its balance sheet and (iii) the developer no longer
participated in any positive operating income generated during the period. The
construction loan balance was $37,111,000 at December 31, 2002 and bore interest
at LIBOR + 1.75% per annum (3.17% at December 31, 2002).

In February 2003, the Company obtained a $40,000,000 permanent loan secured by a
first mortgage on Green River (the "Green River Mortgage"). The Green River
Mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per
annum. Principal payments are based on a 30-year amortization schedule. The
proceeds of the Green River Mortgage were used to repay the Green River
Construction Loan, with excess proceeds available for working capital purposes.

Phase V, the improved 29.8 acre parcel of land known as Gold Peak, had a cost
basis of approximately $5,439,000 and $5,411,000 at December 31, 2003 and 2002,
respectively. The Company is holding this land for possible future development.

East Lyme

On March 2, 2004, the Company entered into a contract to acquire a 144 acre
parcel of land in East Lyme, Connecticut. The purchase price for the land is
approximately $6,200,000, including a $200,000 refundable deposit made by the
Company upon entering into the contract. The closing is conditioned upon
obtaining building permits for 100 single family homes. The Company is in the
process of negotiating an agreement with a home builder who would construct
and sell these homes.

Segment Financial Information

See Note 13 to the Company's consolidated financial statements for additional
information regarding the Company's industry segments.

Future Investments

The Company may in the future make debt and equity investments in entities owned
and/or operated by unaffiliated parties which may engage in real estate-related
businesses and activities or businesses that service the real estate industry.
Some of the entities in which the Company may invest, may be start-up companies
or companies in need of additional capital. The Company may also manage and
lease properties owned by it or in which it has an equity or debt investment.
Some investments may be in entities which make investments in non-real estate
assets, such as certain of the debt investments that Second Holding may invest
in.

14

Item 2. Properties.

The following property information is presented by SBU.

Wellsford/Whitehall

As of December 31, 2003, Wellsford/Whitehall owned and operated 25 properties,
including 17 office properties, five net-leased retail properties and three land
parcels, totaling approximately 2,808,000 square feet of improvements. The
following table sets forth certain information related to all of these
properties at December 31, 2003:

15

Wellsford/Whitehall: Property Table - continued

- ----------------------

(A) Encumbered by the Wellsford/Whitehall GECC Facility.
(B) Encumbered by a $64,666,000 mortgage.
(C) Encumbered by other mortgages.
(D) Unencumbered.
(E) Tenant is expected to vacate at lease expiration lowering occupancy to
49% for the property.
(F) Lease expired on December 31, 2003 and the tenant vacated lowering
occupancy to 13% for the property.
(G) AT&T space partially leased to a new tenant on January 1, 2004,
Computer Science Corporation, through December 31, 2008.
(H) Land zoned for office development.
* Represents the judgment of WP Commercial, the managing member, as to
specific property market rent per square foot as of December 31, 2003.
** Wellsford/Whitehall is in the process of converting building from
single to multi-tenant.

16

The following table sets forth historical Wellsford/Whitehall portfolio
information by year:

Leases typically provide for step-ups in base rent periodically over the term of
a lease and pass throughs to tenants of their pro rata share of increases in
certain expenses (real estate taxes and operating expenses) over a base year.
Leases generally provide for improvement allowances for all or a portion of the
tenant's initial construction of its premises. The following table sets forth as
of December 31, 2003 lease expirations for each of the next ten years, assuming
tenants do not exercise any renewal options:

One tenant in the Wellsford/Whitehall portfolio accounted for 12% of rental
revenues of Wellsford/Whitehall for the year ended December 31, 2003. No other
tenant accounted for more than 9% of rental revenues during that year.

17

Wellsford Capital

Wellsford Capital owned the following commercial office property which is held
for sale at December 31, 2003:

The Company, through its investment in the West Deptford Venture, has a
leasehold interest in a 154 acre parcel in West Deptford, New Jersey. The
Company's capital investment in this venture was $330,000 at December 31, 2003.

Wellsford Development

The Company owned the following multifamily properties at December 31, 2003:

- -----------------------------------------

(A) As of December 31, 2003.
(B) Encumbrance balances exclude the Palomino Park Bonds. The balance of the
Palomino Park Bonds was $12,680,000 at December 31, 2003, 2002 and 2001.
The Palomino Park Bond collateral includes the Blue Ridge, Red Canyon and
Green River operational phases, as well as the undeveloped Gold Peak land
(see below).
(C) The Green River phase was in lease-up and not included in the 2001
occupancy, but the amount includes the Silver Mesa phase which was 60%
occupied at December 31, 2001. Occupancy for the Blue Ridge and Red Canyon
phases aggregated 81% at December 31, 2001.

The average lease term of the tenants' leases range from six to fourteen months.
Security deposits are generally required for all leases.

Phase V, the improved 29.8 acre parcel of land known as Gold Peak, had a cost
basis of approximately $5,439,000 and $5,411,000 at December 31, 2003 and 2002,
respectively. The Company is holding this land for possible future development.

18

Item 3. Legal Proceedings.

The Company is not presently a party in any material litigation.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.

Market Information
- ------------------

The Company's common shares are traded on the American Stock Exchange under the
symbol "WRP". The high and low closing sales prices for the common shares on the
American Stock Exchange and the dividends declared for the years ended December
31, 2003 and 2002 are as follows:

Common Shares
------------------------------------------
2003 High Low Dividends
- ----------------------------- ------- ------- ---------

1st Quarter.................. $16.40 $14.52 None
2nd Quarter.................. $16.65 $14.63 None
3rd Quarter.................. $17.31 $15.15 None
4th Quarter.................. $18.69 $17.25 None

Common Shares
------------------------------------------
2002 High Low Dividends
- ----------------------------- ------ ------- ---------

1st Quarter.................. $21.75 $19.00 None
2nd Quarter.................. $22.55 $20.10 None
3rd Quarter.................. $20.75 $17.20 None
4th Quarter.................. $18.64 $15.30 None

Holders
- -------

The approximate number of holders of record of the common shares and class A-1
common shares (collectively, "Common Shares" or "Common Stock") were 3,100 and
1, respectively, as of December 31, 2003.

Dividends
- ---------

The Company did not declare or distribute any dividends during 2003 or 2002. The
Company does not plan to distribute dividends for the foreseeable future, which
will permit it to accumulate, for reinvestment, cash flow from investments,
disposition of investments and other business activities.

19

Securities Authorized for Issuance Under Equity Compensation Plans
- ------------------------------------------------------------------

The following table details information for each of the Company's compensation
plans at December 31, 2003:

Issuer Purchases of Equity Securities
- -------------------------------------

In April 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 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 including, but not limited to, a
minimum shareholders' equity covenant as required by Commerzbank AG's letter of
credit agreement for the Palomino Park Bonds. 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 December 31, 2003; none during the year ended
December 31, 2003.

20

Item 6. Selected Financial Data.

The following tables set forth selected consolidated financial data for the
Company and should be read in conjunction with the consolidated financial
statements included elsewhere in this Form 10-K.

21

Selected Financial Data (continued)

- -----------------------------------------

(A) All share and per share amounts have been adjusted for all periods
presented in this table for the impact of the June 9, 2000 stockholder
approved two for one reverse stock split.
(B) See Item 7. - Management's Discussion and Analysis of Financial Condition
and Results of Operations for significant changes in revenues and expenses
of the Company.
(C) Includes a restructuring charge of $3,527 during the year ended December
31, 2001, with no similar charges in other periods presented.
(D) During the fourth quarter of 2003, Wellsford/Whitehall recorded an
impairment charge of approximately $114,700 related to 12 assets in the
portfolio. The Company's share of this impairment charge was approximately
$37,377 in 2003 and as a result, the Company wrote-off related unamortized
warrant costs on the Company's books of approximately $2,644 related to
Wellsford/Whitehall and determined that it was not appropriate to carry the
balance of the net deferred tax asset attributable to NOL carryforwards and
recorded a valuation allowance of $6,680 in the fourth quarter of 2003.
(E) Relates to the classification of two properties in the Wellsford Capital
SBU as a discontinued operation effective as of June 30, 2003.

22

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

Overview
- --------

The following discussion should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Form 10-K.

Selected Significant Accounting Policies
- ----------------------------------------

Management has selected the following accounting policies which it believes are
significant in order to understand the Company's activities, financial position
and operating results.

Principles of Consolidation and Financial Statement Presentation. The
consolidated financial statements include the accounts of the Company and its
majority-owned and controlled subsidiaries. All significant inter-company
accounts and transactions among the Company and its subsidiaries have been
eliminated in consolidation.

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. Specifically, the Company's investment in Wellsford/Whitehall
is accounted for under the equity method as it is a minority owner with a 32.59%
interest and does not have unilateral control over its board. Additionally, the
Company owns an approximate 51.1% interest in Second Holding (after a special
class partner shares in 35% of net income as defined) which interest is
represented by two of eight board seats with one-quarter of the vote on any
major business decisions.

Investments in entities where the Company does not have the ability to exercise
significant influence are accounted for under the cost method. The Company
accounts for its investment in Reis under the cost method as its ownership
interest is in non-voting preferred shares and the Company's interests are
represented by one member of Reis' seven member board.

A Variable Interest Entity ("VIE") is created when (i) the equity investment at
risk is not sufficient to permit the entity from financing its activities
without additional subordinated financial support from other parties or (ii)
equity holders either (a) lack direct or indirect ability to make decisions
about the entity, (b) are not obligated to absorb expected losses of the entity
or (c) do not have the right to receive expected residual returns of the entity
if they occur. If an entity is deemed to be a VIE, an enterprise that absorbs a
majority of the expected losses of the VIE or receives a majority of the
residual returns is considered the primary beneficiary and must consolidate the
VIE. The Company has two variable interest entities, Reis, which is not being
consolidated, and the West Deptford Venture, which is consolidated at December
31, 2003. In addition, based on the provisions of FIN 46, the Company will be
required to deconsolidate the entity which issued the Convertible Trust
Preferred Securities during the quarter ending March 31, 2004. The Company is
currently assessing the impact to the display changes for the financial
statements, but believes that there will be no material impact to financial
position, results of operations or cash flows upon adoption.

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.

Investment in U.S. Government Securities. Investments in U.S. Government
securities are classified as held-to-maturity and are carried at amortized cost.

23

Real Estate, Other Investments, Depreciation, Amortization and Impairment. Costs
directly related to the acquisition, development and improvement of real estate
are capitalized, including interest and other costs incurred during the
construction period. Costs incurred for significant repairs and maintenance that
extend the usable life of the asset or have a determinable useful life are
capitalized. Ordinary repairs and maintenance are expensed as incurred. The
Company expenses all lease turnover costs for its residential units, such as
painting, cleaning, carpet replacement and other turnover costs, as such costs
are incurred.

Tenant improvements and leasing commissions related to commercial properties are
capitalized and amortized over the terms of the related leases. Costs incurred
to acquire investments in joint ventures are capitalized and amortized over the
expected life of the related investment. Additional amortization is charged as
specified assets are sold in cases where the joint venture would cease to exist
when all assets are sold or otherwise disposed of or where impairment provisions
are recorded at the joint venture. Depreciation is computed over the expected
useful lives of depreciable property on a straight-line basis, principally 27.5
years for residential buildings and improvements, 40 years for commercial
properties and two to twelve years for furnishings and equipment.

The Company reviews its real estate assets, investments in joint ventures and
other investments for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.

Real Estate - Residential Units Available for Sale. The Company's residential
units available for sale are recorded at the lower of historical cost or market
value based upon current conditions. As units are sold, the Company records cost
of sales based upon relative sales values. Sales price concessions are
recognized as a reduction in sales revenues as individual units are sold.
Advertising costs are expensed as incurred.

Revenue Recognition. Commercial properties are leased under operating leases.
Rental revenue from office properties is recognized on a straight-line basis
over the terms of the respective leases. Residential units are leased under
operating leases with terms of generally six to fourteen months and such rental
revenue is recognized monthly as tenants are billed. Interest revenue is
recorded on an accrual basis over the life of the loan. Prepayment penalties on
mortgages receivable are recorded as interest revenue in the period that such
fees are earned. Fee revenues are recorded in the period earned, based upon
formulas as defined by agreement for management services or upon asset sales and
purchases by certain joint venture investments. Sales of real estate assets are
recognized at closing, subject to receipt of down payments and other
requirements in accordance with applicable accounting guidelines.

Income Taxes. The Company accounts for income taxes under SFAS No. 109
"Accounting for Income Taxes." Deferred income tax assets and liabilities are
determined based upon differences between financial reporting and the tax basis
of assets and liabilities and are measured using the enacted tax rates and laws
that are estimated to be in effect when the differences are expected to reverse.
Valuation allowances with respect to deferred income tax assets are recorded
when deemed appropriate and adjusted based upon periodic evaluations.

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.

24

Results of Operations
- ---------------------

Comparison of the year ended December 31, 2003 to the year ended December 31,
2002

The change in net loss per share, basic and diluted of $6.59 per share from a
loss in 2002 of $(0.52) per share to a loss in 2003 of $(7.11) per share, is
attributable to a current period loss of $(45,859,000), whereas in the 2002
period, the loss was $(3,372,000). The 2003 loss includes charges aggregating
$(46,701,000) attributable to an impairment provision by the Wellsford/Whitehall
venture and related charges during the fourth quarter of 2003. Annually, after
the preparation of budgets for the following year and as part of the financial
statement closing process, Wellsford/Whitehall performs evaluations for
impairment on all of its real estate assets. As part of this evaluation,
Wellsford/Whitehall recorded an impairment charge of approximately $114,700,000
related to 12 assets in the portfolio during the fourth quarter of 2003. The
provision is not the result of a change in intended use of such assets, however,
it is the result of several factors including, but not limited to, a continued
deterioration of and outlook for the suburban office submarkets where
Wellsford/Whitehall's properties are situated. Specifically, these include
decreasing market rents, slower absorption trends and greater tenant concession
costs. The Company's share of this impairment charge was approximately
$37,377,000 in 2003. Additionally, as a result of the Wellsford/Whitehall
charge, the Company wrote-off the balance of unamortized warrant costs of
$2,644,000 related to Wellsford/Whitehall and determined that it was not
appropriate to carry the balance of the net deferred tax asset attributable to
net operating loss ("NOL") carryforwards and recorded a valuation allowance of
$6,680,000 in the fourth quarter of 2003.

Rental revenue decreased $849,000. This decrease is due to the impact of rent
concessions in excess of the 2002 period at all phases of Palomino Park in the
Wellsford Development SBU ($1,510,000) and reduced rental operations at the
Silver Mesa phase resulting from unit sales and fewer units being rented in the
2003 period as compared to the 2002 period ($762,000), offset by commenced
operations at the Green River phase at Palomino Park effective January 1, 2002
as such revenues in the fiscal 2003 period are in excess of the 2002 period
($975,000) and increased average physical occupancy and other tenant fee
increases at the Blue Ridge and Red Canyon phases at Palomino Park ($448,000).

Revenues from sales of residential units and the associated cost of sales from
such units were $12,535,000 and $10,708,000, respectively, from 56 sales during
2003 and were $10,635,000 and $9,544,000, respectively, from 48 sales during the
2002 period. The average pre-tax income from 2003 unit sales was approximately
$9,900 greater per unit than in the corresponding 2002 period as a result of
sales of higher priced and larger units, a reduced commission rate on the units
sold and declining interest costs included in cost of sales as the average
outstanding debt balance was being reduced over the periods until its ultimate
repayment in May 2003.

Interest revenue increased $3,355,000. This increase is due to the receipt of a
yield maintenance penalty of $4,368,000 from the prepayment of the 277 Park Loan
at September 30, 2003, offset by reduced interest of $948,000 earned on loans
from lower average outstanding loan balances in the 2003 period as compared to
the 2002 period (including $767,000 related to the loss of revenue during the
fourth quarter of 2003 from the 277 Park Loan), as well as reduced interest
earned on cash and securities of $65,000 from the net effect of lower base
interest rates and a higher average outstanding investable cash and securities
balance during the current period versus the comparable 2002 period.

Fee revenue increased $684,000. Asset disposition fees payable by Whitehall
derived from Wellsford/Whitehall sales amounted to $430,000 during 2003, with
only $29,000 earned in the 2002 period. Additionally, the Company's management
fees for its role in the Second Holding investment increased $283,000 from the
growth of assets under management in that venture. Fee revenue will be impacted
in the future by increases in assets under management by Second Holding and the
ability to sell assets by Wellsford/Whitehall.

Property operating and maintenance expense decreased $80,000. This decrease is
primarily the result of refunds for water charges by the municipality for
Palomino Park coupled with the Company absorbing lower utility costs in 2003
because of a 90% average physical occupancy compared to 86% in the 2002 period
and payroll

25

reductions from a smaller property operating staff, offset in part by additional
tenant replacement and advertising costs and rising insurance premiums.

The increase in real estate taxes of $6,000 is primarily attributable to higher
assessments and rates in the 2003 period as compared to the 2002 period for the
Blue Ridge, Red Canyon and Green River phases at Palomino Park ($73,000), offset
by reduced taxes on the Gold Peak land from a lower 2003 assessment ($44,000)
and reduced taxes from the sale of Silver Mesa units ($23,000).

Depreciation and amortization expense increased $3,273,000. This increase is
attributable to the Company expensing $4,021,000 of unamortized warrant costs in
2003, including the write-off of the remaining $2,644,000 balance relating to
the Wellsford/Whitehall venture as a result of an impairment charge taken by
Wellsford/Whitehall during the fourth quarter of 2003, whereas in 2002 the
expense was $758,000 including an impairment related adjustment of $284,000 in
that period, additional Green River depreciation as the final sections of this
phase were put in service during the 2002 period ($194,000) and fixed asset
additions for the other Palomino Park phases and corporate office assets
($101,000), offset by a declining depreciation basis resulting from the transfer
of Silver Mesa units from operations to residential units available for sale
during both periods ($285,000).

Property management expenses decreased $127,000. Such decrease is primarily due
to the reduction in contractual management fees beginning October 1, 2002 from a
3% annual fee of gross receipts to a 2% annual fee for the Palomino Park
operational phases, in addition to a decrease in net rental revenues in the 2003
period (see above rental revenue discussion). If the fee had remained at 3% for
the comparable 2003 period, the decrease would have been $109,000 less.

Interest expense increased $733,000. This increase is primarily attributable to
the Green River phase as the 2003 period includes interest at a higher fixed
rate from February 2003 on permanent financing, whereas in the 2002 period, the
variable interest rate and the average outstanding balance on the construction
financing were both lower than the 2003 amounts ($855,000). In addition there
was a higher average base interest rate on the Palomino Park Bonds in the 2003
period as compared to the 2002 period ($14,000). These increases were partially
offset by reduced interest expense from a lower average outstanding principal
balance and a lower base interest rate on the Silver Mesa Conversion Loan, which
was fully repaid in May 2003 ($71,000) and lower average outstanding principal
balances with respect to the other Palomino Park phases ($56,000).

General and administrative expenses decreased $976,000 as described below:

_____________________________________________
(A) The principal reason for the decline in the cash component of general and
administrative expenses is lower payroll and payroll related costs.

26

The Company realized a loss aggregating $(34,429,000) in 2003 from its joint
venture investments as compared to a loss of $(209,000) in 2002. An analysis of
the decrease follows: