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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, 2002 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to
__________.
Commission File Number 001-12917
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WELLSFORD REAL PROPERTIES, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 13-3926898
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(State of organization) (I.R.S. employer identification number)
535 MADISON AVENUE, NEW YORK, NY 10022
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 838-3400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock $.02 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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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 |_|
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 shares held by non-affiliates of the
registrant was approximately $124,232,000 based on the closing price on the
American Stock Exchange for such shares on June 28, 2002.
THE NUMBER OF THE REGISTRANT'S SHARES OF COMMON STOCK OUTSTANDING WAS 6,452,092
AS OF MARCH 25, 2003 (INCLUDING 169,903 SHARES OF CLASS A-1 COMMON STOCK).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Annual Shareholders' Meeting
to be held on June 9, 2003 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.
1
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TABLE OF CONTENTS
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FORM
10-K
ITEM REPORT
NO. PAGE
--- ----
PART I
1. Business................................................................3
2. Properties..............................................................17
3. Legal Proceedings.......................................................21
4. Submission of Matters to a Vote of Security Holders.....................21
PART II
5. Market for Registrant's Common Equity and Related
Shareholder Matters .................................................22
6. Selected Consolidated Financial Data....................................23
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...............................................24
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
PART III
10. Directors and Executive Officers of the Registrant......................44
11. Executive Compensation..................................................44
12. Security Ownership of Certain Beneficial Owners and Management..........44
13. Certain Relationships and Related Transactions..........................44
14. Controls and Procedures.................................................44
PART IV
15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........45
FINANCIAL STATEMENTS
15a. Consolidated Balance Sheets as of December 31, 2002 and 2001............F-4
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001 and 2000.................................F-5
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000.....................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000.................................F-7
Notes to Consolidated Financial Statements..............................F-9
Wellsford/Whitehall Group, L.L.C. Consolidated Financial
Statements and Notes............................................F-51
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.
2
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 (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'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, 2002 includes:
Commercial Property Operations--Wellsford/Whitehall Group, L.L.C.
A 32.59% interest in a private joint venture that owned and operated
34 properties (substantially all office properties) at December 31,
2002 totaling approximately 3,874,000 square feet (including
approximately 546,000 square feet under renovation), primarily located
in New Jersey, Massachusetts and Maryland.
Debt and Equity Activities--Wellsford Capital
o Approximately $28,612,000 of direct debt investments which bore
interest at a weighted average annual yield of 11.69% during 2002 and
had an average remaining term to maturity of 4.2 years at December 31,
2002;
o Approximately $31,797,000 of equity investments in companies which
were organized to invest in debt instruments including $28,166,000 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;
o Approximately $6,792,000 invested in Reis, Inc. ("Reis"), a real
estate information and database company; and
o Two commercial properties totaling approximately 175,000 square feet
located in Salem, New Hampshire and Philadelphia, Pennsylvania.
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 a rental property. A 264 unit fourth
phase is being converted into condominiums. The Company has sold 153
units as of December 31, 2002 and 40 of the unsold units are available
for rent and included in operations until the sales inventory has to
be replenished. The land for the remaining approximate 352 unit fifth
phase is being held for possible future development or sale.
See the accompanying consolidated financial statements for certain financial
information regarding the Company's industry segments.
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
3
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'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 17
employees as of December 31, 2002.
COMMERCIAL PROPERTY OPERATIONS - WELLSFORD/WHITEHALL
- ----------------------------------------------------
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, 2002. The
manager of the joint venture is a Whitehall affiliate. At December 31, 2002,
Wellsford/Whitehall owned and operated 34 properties, including ten properties
held for sale (substantially all office properties) totaling approximately
3,874,000 square feet (including approximately 546,000 square feet under
renovation), primarily located in New Jersey, Massachusetts and Maryland.
Subsequent to February 28, 2003, after the completion of certain sales,
Wellsford/Whitehall owned 27 properties totaling approximately 2,908,000 square
feet.
Wellsford/Whitehall leases and re-leases space, performs construction for tenant
improvements, expands buildings, re-develops 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 future.
The Company's investment in Wellsford/Whitehall, which is accounted for on the
equity method, was approximately $55,592,000 and $57,790,000 at December 31,
2002 and 2001, respectively. The Company's share of (loss) income from
Wellsford/Whitehall was approximately $(1,292,000), $4,367,000 and $1,675,000
for the years ended December 31, 2002, 2001 and 2000, respectively.
Wellsford/Whitehall was formed in August 1997 as a private real estate operating
company. The Company contributed six properties and Whitehall contributed four
properties upon formation of Wellsford/Whitehall. Initial capital aggregating
$150,000,000 was committed by the partners including the net amount of
contributed properties, net of assumed debt. Prior to December 31, 2000, the
Company managed Wellsford/Whitehall on a day-to-day basis.
In June 1999, the capital commitment requirements of Wellsford/Whitehall were
modified from an aggregate of $150,000,000 ($75,000,000 by each partner) 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 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 Commercial"), the new management company, which is owned by
affiliates of Whitehall and senior management of WP Commercial. WP Commercial
provides management,
4
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.
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 $5,826,000 and $6,422,000 for the years ended December 31, 2002
and 2001, respectively.
Wellsford/Whitehall, pursuant to the terms of the Amendments, discontinued
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 disposed of 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 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,
--------------------------------
2002 2001
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Asset disposition fees....... $ 7,000 $365,000
Asset acquisition fees....... 22,000 23,000
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Total fees................... $ 29,000 $388,000
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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. The Amendments included a buy/sell agreement of equity interests
between the Company and Whitehall effective after December 31, 2003 with respect
to the venture (the "Buy/Sell Agreement").
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.
5
During the years ended December 31, 2002, 2001 and 2000, Wellsford/Whitehall
participated in the following transactions:
(amounts in millions, except square feet and per square foot amounts)
2002 ACTIVITY
Sales:
Gross Leasable Sales Price per
Square Number of Sales Square Gain
Month Location Feet Properties Price Foot (Loss)
----- -------- ---- ---------- ----- ---- ------
June ......... Owings Mills, MD 31,732 1 $ 2.9 $ 91.39 $ (0.3)
====== = ======== ========== ========
2001 ACTIVITY
Purchases (1):
Gross Leasable Purchase Price per
Square Number of Purchase Square
Month Location Feet Properties Price Foot Occupancy
----- -------- ---- ---------- ----- ---- ---------
April ........ Various 54,000 5 $ 18.7 $ 342.20 100%
October ...... Decatur, GA 10,000 1 2.3 231.51 100%
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64,000 6 $ 21.0 324.91 100%
====== = ========
Sales:
Gross Leasable Sales Price per
Square Number of Sales Square Gain
Month Location Feet Properties Price Foot (Loss)
----- -------- ---- ---------- ----- ---- ------
February ..... Newton, MA 102,000 5 $ 18.0 $ 176.47 $ 3.5
April ........ Portland, ME 24,000 1 1.6 66.67 --
May .......... Parsippany, NJ 257,000 1 61.5 239.30 17.9
August ....... Andover, MA 63,000 1 9.2 146.03 1.5
September .... Wayne, NJ (Pointview) 564,000 1 35.5 62.94 -- (2)
November ..... Wayne, NJ 56,000 1 8.2 146.43 2.4
November ..... Chatham, NJ 63,000 1 12.0 190.48 2.0
--------- -- -------- --------
1,129,000 11 $ 146.0 129.32 $ 27.3
========= == ======== ========
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(1) Acquisitions of these six properties completed the purchase requirements
with respect to properties sold in February and April 2001 as part of a
tax-free exchange pursuant to the rules of the Internal Revenue Code.
(2) Loss reflected as part of impairment provision (see below).
2000 ACTIVITY
Purchases:
Purchases that were made during the year ended December 31, 2000, were
transferred to the New Venture, pursuant to the Amendments.
Sale:
Gross Leasable Sales Price per
Square Number of Sales Square
Month Location Feet Properties Price Foot Gain
----- -------- ---- ---------- ----- ---- ----
August ....... Columbia, MD 38,000 1 $ 4.9 $ 128 $ 0.2
====== = ======== ========== ========
6
In February 2003, Wellsford/Whitehall completed the sales of a portfolio of six
properties to one purchaser for an aggregate of $136,800,000 and realized
aggregate net gains of approximately $10,554,000 before income taxes. The
Company's pre-tax income to be realized during the first quarter of 2003 from
these transactions was approximately $2,700,000. The Company will not receive a
distribution related to the sale of these properties as almost all of the
proceeds were used to paydown $129,557,000 of Wellsford/Whitehall debt. In a
separate transaction, Wellsford/Whitehall sold an unencumbered property in
January 2003 for which the Company received a distribution of approximately
$738,000 on January 31, 2003. The following table details the assets sold:
Gross Sales Price
Leasable per
Property Location Square Feet Sales Price Square Foot Gain (Loss)
-------- -------- ----------- ----------- ----------- -----------
Portfolio sale:
Mountain Heights Center #1 Berkeley Hts, NJ 183,000
Mountain Heights Center #2 Berkeley Hts, NJ 123,000
Greenbrook Corporate Center Fairfield, NJ 201,000
180/188 Mt. Airy Road ..... Basking Ridge, NJ 104,000
One Mall North ............ Columbia, MD 97,000
Gateway Tower ............. Rockville, MD 248,000
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Total portfolio sale ......... 956,000 $136,800,000 $ 143 $ 10,554,000
Decatur ...................... Decatur, GA 10,000 2,370,000 234 --
------- ------------ ------------
966,000 $139,170,000 144 $ 10,554,000
======= ============ ============
In anticipation of the sales of the Decatur, GA and two other properties in
Boston, MA, Wellsford/Whitehall recorded impairment provisions aggregating
approximately $1,351,000 at December 31, 2002 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 before a
write-off by the Company in 2002 of related unamortized warrant costs of
$284,000.
During July 2001, Wellsford/Whitehall entered into a contract to sell the
Pointview property, a 194 acre complex with two buildings totaling approximately
564,000 square feet, located in Wayne, New Jersey. This property, which was a
major development project of Wellsford/Whitehall, had been unoccupied since its
purchase in 1997. In anticipation of the consummation of the sale,
Wellsford/Whitehall recorded a $15,561,000 impairment provision at June 30,
2001, of which the Company's allocable share was approximately $5,908,000. This
impairment arose 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 and cost savings during the third and fourth
quarters of 2001, Wellsford/Whitehall recorded an additional net impairment
provision of $178,000, of which the Company's share was $64,000. Aggregate
impairment provisions recorded during 2001, including the Pointview provision
noted above, was $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
("Wellsford/Whitehall GECC Facility") 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 six properties through June 30, 2003, which results are
not expected to be achieved by that time. Accordingly, Wellsford/Whitehall is in
the process of negotiating with GECC for an extension of the June 30, 2003
expiration. The facility bears interest at LIBOR + 2.90% per annum (4.28% at
December 31, 2002) and matures in June 2004 with two 12-month extension options,
subject to meeting certain operating and valuation covenants. Upon the initial
funding, the facility was secured by interests in twenty-four commercial office
properties in the Wellsford/Whitehall portfolio. The Wellsford/Whitehall GECC
Facility replaced the previously existing facility which was due to mature in
December 2001. The outstanding balance of the Wellsford/Whitehall GECC
7
Facility was $264,160,000 and $258,060,000 at December 31, 2002 and 2001,
respectively. Details of the changes to the Wellsford/Whitehall GECC Facility
balance are as follows:
NUMBER OF
SECURING
BALANCE PROPERTIES
------- ----------
June 2001 proceeds .......................... $ 272,912,000 24
2001 asset sales ............................ (14,852,000) (2)
------------- --
Balance at December 31, 2001 ................ 258,060,000 22
2002 asset sales ............................ -- --
Additional asset encumbered by the facility . 6,100,000 1
------------- --
Balance at December 31, 2002, including
$131,811,000 reflected in liabilities held
for sale ................................. $ 264,160,000 23
============= ==
Balance at December 31, 2002, adjusted for
completed sales from January 1, 2003 to
February 28, 2003 ........................ $ 141,976,000 18
============= ==
This financing was arranged by Goldman Sachs, to whom Wellsford/Whitehall paid a
fee of approximately $2,644,500.
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 and $1,089,000 at December 31, 2002 and 2001, respectively. This Cap was
purchased from Goldman Sachs based upon the results of a competitive bidding
process.
The following table summarizes the long-term debt at Wellsford/Whitehall:
BALANCE AT DECEMBER 31,
INITIAL MATURITY STATED INTEREST -----------------------
DEBT/PROJECT DATE RATE 2002 2001
------------ ---- ---- ---- ----
Wellsford/Whitehall GECC Facility.. June 2004 LIBOR + 2.90% $264,160,000 $258,060,000
Nomura Loan (A).................... February 2027 8.03% 65,458,000 66,189,000
Oakland Ridge Loan (B)............. March 2003 LIBOR + 2.00% 6,959,000 4,649,000
Retail properties (C).............. January 2024 7.28% 16,371,000 16,600,000
Other loans on office properties... (D) Various 15,410,000 24,511,000
------------ ------------
$368,358,000 $370,009,000
============ ============
- ----------
(A) In connection with a 1998 transaction, Wellsford/Whitehall assumed a
mortgage loan held by Nomura Asset Capital Corporation with an initial
principal balance of approximately $68,300,000.
(B) The non-recourse loan is secured by the leasehold interest in the Oakland
Ridge office park in Columbia, Maryland. The loan has a twelve-month
extension at Wellsford/Whitehall's option.
(C) Comprised of five mortgages secured by the leasehold interest in five
retail properties.
(D) Includes a property collateralizing the aggregate loan balances outstanding
of $7,373,000 at December 31, 2002, which was sold in February 2003. The
loans were repaid from sales proceeds.
The Company made temporary advances to Wellsford/Whitehall during 2000 which
bore interest at LIBOR + 5.00% per annum. The balance of the advances was repaid
in full by December 31, 2000. The Company earned approximately $703,000 of
interest income during 2000 from such advances.
In July 1998, Wellsford/Whitehall modified the Wellsford/Whitehall Bank Facility
with a predecessor of Fleet National Bank ("Wellsford/Whitehall Fleet
Facility"). Under the terms, $300,000,000 represented a senior secured credit
facility which bore interest at LIBOR + 1.65% per annum and $75,000,000
represented a second mezzanine facility which bore interest at LIBOR + 3.20% per
annum. In June 2001, the Wellsford/Whitehall Fleet Facility was repaid in full,
terminated and replaced with the Wellsford/Whitehall GECC Facility.
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DEBT AND EQUITY ACTIVITIES - WELLSFORD CAPITAL
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The Company, through the Wellsford Capital SBU, makes debt investments directly,
or through joint ventures, predominantly in real estate related senior, junior
or otherwise subordinated debt instruments and also in investment grade rated
commercial mortgage backed securities and other asset-backed securities. The
debt investments may be unsecured or secured by liens on real estate, liens on
equity interests in real estate, pools of mortgage loans, or various other
assets including, but not limited to, leases on aircraft, truck or car fleets,
leases on equipment, consumer receivables, pools of corporate bonds and loans
and sovereign debt, as well as interests in such assets or their economic
benefits. Junior and subordinated loans and investments generally have the
potential for high yields or returns more characteristic of equity ownership.
They may include debt that is acquired at a discount, mezzanine financing,
commercial mortgage-backed securities, secured and unsecured lines of credit,
distressed loans, tax exempt bonds secured by real estate and loans previously
made by foreign and other financial institutions. The Company believes that
there are opportunities to acquire real estate debt and other debt, especially
in the low or below investment grade tranches, at significant returns as a
result of inefficiencies in pricing in the marketplace, while utilizing both our
and our joint venture partners' expertise to analyze the underlying assets and
thereby effectively minimizing risk.
At December 31, 2002, the Company had the following investments: (i)
approximately $28,612,000 of direct debt investments which bore interest at a
weighted average annual yield of approximately 11.69% during 2002 and had an
average remaining term to maturity of approximately 4.2 years; (ii)
approximately $31,797,000 of equity investments in companies which were
organized to invest in debt instruments, including $28,166,000 in Second Holding
Company, LLC, a company which was organized to purchase investment and
non-investment grade rated real estate debt instruments and investment grade
rated other asset-backed securities ("Second Holding"); and (iii) approximately
$6,792,000 invested in Reis, a real estate information and database company. In
addition, the Company owned and operated two commercial properties with a net
book value of approximately $6,027,000, totaling approximately 175,000 square
feet located in Salem, New Hampshire and Philadelphia, Pennsylvania.
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. The
277 Park Loan is secured primarily by a pledge of the Equity Interests owned by
the borrowers and thus is junior to a 10-year $345,000,000 first mortgage loan
(amortized balance of $314,485,000 at December 31, 2002) (the "REMIC Loan") on
the 277 Park Property.
The 277 Park Loan bears interest at the rate of 12.00% per annum for the first
nine years of its term and at a floating rate during the tenth year equal to
LIBOR + 5.15% per annum or the Fleet National Bank base rate plus 5.15% per
annum, as elected by the borrowers. The principal amount of the 277 Park Loan
and all accrued interest will be payable in May 2007; the REMIC Loan is also due
in May 2007. The Company earned approximately $3,042,000, $3,042,000 and
$3,050,000 per year of interest revenue from the 277 Park Loan during 2002, 2001
and 2000, respectively, or 9.6%, 7.3% and 11.9% of total non-joint venture
revenues during such periods.
PATRIOT LOAN
In September 1999, the Company and Fleet National Bank originated a $10,000,000
second mortgage loan, of which the Company advanced $5,000,000 (its 50% share)
(the "Patriot Loan"). The Patriot Loan was subordinate to a $75,000,000 first
mortgage loan made by Fleet National Bank. During May 2002, the Patriot
9
Loan was paid in full and the Company received its loan balance of approximately
$4,951,000. The loan bore interest at LIBOR + 4.75% per annum with payments of
interest only from origination through August 2001 and, thereafter, principal
and interest based on a 25-year amortization. The Patriot Loan was secured by a
second mortgage lien on a 608,000 square foot mixed-use property in Boston,
Massachusetts. The loan balance due to the Company on December 31, 2001 was
approximately $4,973,000. The Company earned approximately $129,000, $449,000
and $564,000 of interest revenue from the Patriot Loan during 2002, 2001 and
2000, respectively, or 0.4%, 1.1% and 2.2% of total non-joint venture revenues
during such periods.
THE ABBEY COMPANY CREDIT FACILITY
In August 1997, the Company and a predecessor of J.P. Morgan Chase ("JPMC")
originated a $70,000,000 credit facility secured by first mortgages (the "Abbey
Credit Facility") to affiliates of The Abbey Company, Inc. ("Abbey"). In May
1998, the Company and JPMC expanded the Abbey Credit Facility to $120,000,000.
In December 1998, Abbey repaid $20,000,000, thereby reducing the total available
balance to $100,000,000. In September 1999, an additional $83,500,000 was
repaid, thereby reducing the total available balance to $16,500,000. Advances
under the Abbey Credit Facility were made for up to 75% of the value of the
borrowing base collateral which consisted of office, industrial and retail
properties, all cross collateralized, totaling approximately 250,000 square
feet. The Company's portion of the outstanding balance of approximately
$4,300,000 was repaid in August 2000 and the Abbey Credit Facility was
terminated.
The Company was entitled to interest on its advances under the Abbey Credit
Facility at LIBOR + 4.00% per annum. The Company earned approximately $295,000
of interest revenue from the Abbey Credit Facility during 2000, or 1.2% of total
non-joint venture revenues during such period.
SAFEGUARD CREDIT FACILITY
In December 1998, the Company and JPMC originated a $90,000,000 credit facility
cross-collateralized by nine self-storage properties (the "Safeguard Credit
Facility") to Safeguard Capital Fund, L.P. ("Safeguard"). The Safeguard Credit
Facility, which was made available to Safeguard until April 2001, was terminated
on January 30, 2001 when the outstanding balance of $2,900,000 was repaid.
Advances under the facility were made for up to 75% of the value of the
borrowing base collateral which consisted of nine self-storage properties
totaling approximately 608,000 square feet. The Company was entitled to interest
on its advances under the Safeguard Credit Facility at LIBOR + 4.00% per annum.
Approximately $5,900,000 had been advanced by the Company under the Safeguard
Credit Facility at December 31, 1998, with additional advances made of
approximately $2,200,000 through March 1999, at which time, the loan with a
balance of $8,100,000 was contributed to the Company's joint venture investment,
Second Holding. This venture also assumed the first $25,000,000 of the Company's
commitment to fund additional advances under the Safeguard Credit Facility
(including amounts advanced through December 31, 1999). The Company retained the
remaining $20,000,000 commitment, of which $2,900,000 was advanced to Safeguard
in September 1999 and was outstanding at December 31, 2000 and 1999,
respectively. The Safeguard Credit Facility was repaid in full in January 2001.
The Company earned approximately $25,000 and $306,000 of interest revenue from
the Safeguard Credit Facility during 2001 and 2000, respectively, or 0.1% and
1.2% of total non-joint venture revenues during such periods.
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. 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
10
balance of the Guggenheim Loan was $3,612,000 at December 31, 2002 and 2001. The
Company earned approximately $302,000 and $345,000 of interest revenue from the
Guggenheim Loan during 2002 and 2001, respectively or 0.9% and 0.8% of total
non-joint venture revenues during the period. On January 2, 2003, the Company
received a payment of approximately $818,000, which included the 2002 interest
payment and the 2002 principal paydown of $516,000.
The following table summarizes interest revenue and its share of consolidated
non-joint venture revenue during such periods for the Wellsford Capital SBU:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
INTEREST INTEREST INTEREST
REVENUE PERCENTAGE REVENUE PERCENTAGE REVENUE PERCENTAGE
------- ---------- ------- ---------- ------- ----------
277 Park Loan .............. $ 3,042,000 9.6% $ 3,042,000 7.3% $ 3,050,000 11.9%
Patriot Loan ............... 129,000 0.4% 449,000 1.1% 564,000 2.2%
Abbey Credit Facility ...... -- 0.0% -- 0.0% 295,000 1.2%
Safeguard Credit Facility .. -- 0.0% 25,000 0.1% 306,000 1.2%
Guggenheim Loan ............ 302,000 0.9% 345,000 0.8% -- 0.0%
Other ...................... 18,000 0.1% 233,000 0.6% 151,000 0.5%
----------- ---- ----------- ---- ----------- ----
Interest revenue from loans 3,491,000 11.0% 4,094,000 9.9% 4,366,000 17.0%
Interest revenue from cash
and cash equivalents .... 5,000 0.0% 72,000 0.2% 70,000 0.3%
----------- ---- ----------- ---- ----------- ----
Total interest revenue ..... $ 3,496,000 11.0% $ 4,166,000 10.1% $ 4,436,000 17.3%
=========== ==== =========== ==== =========== ====
Consolidated non-joint
venture revenue (base
from which percentage
is calculated) .......... $31,718,466 $41,492,999 $25,623,789
=========== =========== ===========
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 contributed approximately $24,200,000 and $4,900,000 in 1999 and
1998, respectively, 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 Company at December 31, 2002 ("Hunt Trust")) who,
together with other entities, own the remaining approximate 39%. The Company's
1999 contribution was comprised of two of the Company's debt investments
totaling $25,700,000, net of $1,500,000 of cash received back from Second
Holding. The other partners contributed their respective shares of their capital
contributions in cash.
During the latter part of 2000, an additional partner was admitted to the
venture, who received a share of income, as defined, pursuant to a cumulative
preference on earnings in return for providing an insurance policy for payment
of the long-term debt issued by Second Holding. Effective January 1, 2002, the
partners of Second Holding modified the terms of the agreement with the
additional partner, which eliminated the additional partner's cumulative
preference on earnings. The additional partner is entitled to 35% of net income
as defined by the 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%.
11
The Company's investment in Second Holding, which is accounted for on the equity
method, was approximately $28,166,000 and $27,803,000 at December 31, 2002 and
2001, respectively. The Company's share of income (loss) from Second Holding was
approximately $723,000, $(163,000) and $1,432,000 for the years ended December
31, 2002, 2001 and 2000, 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 $646,000, $217,000 and $(182,000) for the
years ended December 31, 2002, 2001 and 2000, respectively.
At December 31, 2002 and 2001, Second Holding had real estate debt and other
asset-backed securities investments of approximately $1,785,758,000 and
$926,453,000, respectively. The investment-grade assets are variable rate based
and have a weighted average annual interest rate of 2.21% and 2.58% at December
31, 2002 and 2001, respectively.
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 $1,722,933,000 and $962,465,000 at December 31, 2002 and 2001 with
a weighted average annual interest rate of 1.69% and 2.15%, 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. 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 and special 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; such
insurance is from a consortium of 22 insurers. The policies of three of the
insurance companies have been found by the United States District Court,
Southern District of New York, to define the events of September 11, 2001 as a
single occurrence. The owner of the leasehold interests is appealing this
decision. The remaining insurance companies and the owner of the leasehold
interests are in litigation to determine whether the events of September 11,
2001 constitute a single occurrence or a double occurrence. A single occurrence
entitles the beneficiary of the policies to a payment equal to the face amount
of the insurance policies, while a double occurrence entitles the beneficiary to
a payment equal to twice the face amount.
As of December 31, 2002, the rating agencies have not changed their ratings on
the WTC Certificates and all payments of principal and interest were current.
The Company and Second Holding management believe that the insurance coverage,
whether the courts determine that the destruction of the towers was a single or
double occurrence, will be sufficient to cover Second Holding's investment and
that an impairment reserve is not required. Both Second Holding and the Company
will continue to evaluate the ultimate collectibility of the principal and
interest.
REIS, INC.
The Company has direct and indirect investments in a real estate information and
database company, Reis, a leading provider of real estate market information to
institutional investors. At December 31, 2002 and 2001, the Company's aggregate
investment in Reis, which is accounted for under the cost method, was
approximately $6,792,000 and $6,583,000, respectively, or approximately 21.4% 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, Lowenthal and certain directors of the Company
whom have invested directly in Reis, have and will continue to recuse themselves
from any investment decisions made by the Company pertaining to Reis.
12
CREAMER VITALE WELLSFORD/CLAIRBORNE INVESTORS
In January 1998, the Company formed Creamer Vitale Wellsford, L.L.C. ("CVW") in
which it had a 49% interest and acquired the same percentage interest in a
related real estate advisory and consulting firm. CVW, together with Prudential
Real Estate Investors ("PREI"), an affiliate of Prudential Life Insurance
Company, established the Clairborne Investors Mortgage Investment Program
("Clairborne") to make opportunistic investments and to provide liquidity to
lenders and participants in mortgage loan transactions. The parties agreed to
contribute up to $150,000,000 to fund acquisitions approved by the parties, of
which PREI would fund 90% and a subsidiary of the Company would fund 10%. CVW
was to originate, co-invest and manage the investments of the program.
The Company's original investment in the CVW entities was $1,250,000 of cash and
74,000 five-year warrants to purchase the Company's common shares at $30.35 per
share, valued at approximately $750,000 at that time. In September 2000, one of
the two principals of CVW left CVW to pursue other employment, the venture was
terminated and the investment balance was written off. In July 2001, the
warrants issued to the CVW partners were repurchased for $80,000 and cancelled.
FORDHAM TOWER
In October 2000, the Company and PREI organized a new venture 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 fully funded its share
of the loan of $3,400,000. The loan, which matures in October 2003, bears
interest at a fixed rate of 10.50% per annum with provisions for additional
interest to PREI and the Company and fees to the Company and the two former
principals of CVW, based upon certain levels of returns on the project and is
secured by a lien on equity interests in the property. Such additional interest
and fees have not been earned or accrued by the Company. The Company's
investment in the Fordham Tower venture is accounted for on the equity method.
The Company's share of income from Fordham Tower was approximately $361,000,
$361,000 and $85,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Construction is nearing completion and delivery of certain units commenced in
December 2002. As of December 31, 2002, approximately 93% of the units were
under contract and 23 unit sales had closed for gross proceeds of approximately
$11,300,000.
OTHER INVESTMENTS
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. In October 1998, the Company
obtained a $28,000,000 loan, which was cross-collateralized by the seven
retained VLP properties, bore interest at LIBOR + 2.75% per annum and was
scheduled to mature in October 2001.
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 other properties were sold during 2001 for aggregate sales of
approximately $34,217,000. Two unencumbered properties remain unsold at December
31, 2002. 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
13
than the respective carrying amounts on four of the remaining six unsold VLP
properties at December 31, 2000. The Company repaid in full the $28,000,000 loan
in December 2000 and expensed all of the remaining unamortized deferred loan
costs associated with the financing. The net book value after a remaining
impairment reserve of $2,175,000 for the two unsold properties was approximately
$6,027,000 and $5,560,000 at December 31, 2002 and 2001, respectively. The
Company determined that no additional impairment provision was required at
December 31, 2002 and 2001.
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
Presently, the Company's Wellsford Development activities consist solely of an
interest in a five-phase 1,800 unit class A multifamily development ("Palomino
Park") in Highlands Ranch, a south suburb of Denver, Colorado. At December 31,
2002 and 2001, 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. There can be no assurance that the
Company will be able to find suitable investors or that such a transaction will
be completed.
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. 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 2005, replaced an expiring letter of
credit. A subsidiary of EQR has guaranteed Commerzbank AG's letter of credit;
such guarantee also expires in 2005.
In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed
at a cost of approximately $41,500,000. 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 bears interest at LIBOR +
2.00% per annum (3.38% at December 31, 2002), is
14
collateralized by the unsold Silver Mesa units, matures in December 2003 and
provides for one six-month extension at the Company's option. Generally, 90% of
net sales proceeds per unit is applied to principal repayments until the loan is
paid in full. The balance of the Silver Mesa Conversion Loan was $4,318,000 and
$13,352,000 at December 31, 2002 and 2001, respectively.
Sales of condominium units at the Silver Mesa phase of Palomino Park commenced
in February 2001 and 153 units have been sold through December 31, 2002. The
following table provides information regarding sales of Silver Mesa units:
FOR THE YEARS ENDED
DECEMBER 31,
------------------- PROJECT
2002 2001 TOTALS
---- ---- ------
Number of units sold ........... 48 105 153
Gross proceeds ................. $10,635,000 $21,932,000 $32,567,000
Principal paydown on Silver Mesa
Conversion Loan ............. $ 9,034,000 $18,648,000 $27,682,000
The following table details operating information related to the Silver Mesa
units being rented. As the Company continues to sell units, future rental
revenues and corresponding operating expenses will diminish.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2002 2001 2000
---- ---- ----
Rental revenue ......... $1,462,000 $2,224,000 $ 592,000
Net operating income (A) $ 884,000 $1,488,000 $ 379,000
- ----------
(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 $56,400,000. 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 and $36,747,000 at December 31, 2002
and 2001, respectively and bore interest at LIBOR + 1.75% per annum (3.17% at
December 31, 2002).
On February 6, 2003, the Company obtained a $40,000,000 permanent loan secured
by a first mortgage on Green River (the "Green River Mortgage"). The Green River
mortgage matures in March 2013 and bears interest at a fixed rate of 5.45% per
annum. Principal payments are based on a 30-year amortization schedule. Proceeds
were used to repay the Green River Construction Loan and excess proceeds are
generally available for working capital purposes.
Phase V, the improved 29.8 acre parcel of land zoned for up to 352 units, known
as Gold Peak, had a cost basis of approximately $5,411,000 and $5,400,000 at
December 31, 2002 and 2001, respectively. The Company has not determined if it
will construct this phase or sell the improved land.
SONTERRA AT WILLIAMS CENTRE ("SONTERRA")
From the time of the Spin-off through January 1998, the Company held a
$17,800,000 mortgage on, and option to purchase, a 344-unit class A residential
apartment complex located in Tucson, Arizona. In January 1998, the Company
exercised its option and acquired Sonterra for approximately $20,500,000,
including satisfaction of the mortgage. In February 1998, the Company closed on
$16,400,000 of first mortgage financing (the
15
"Sonterra Mortgage") on this property, bearing interest at 6.87% and maturing in
March 2008. Principal payments were based on a 30-year amortization schedule.
In November 2000, the Company sold the Sonterra property for $22,550,000 and
recorded a pre-income tax gain of approximately $3,500,000. The buyer assumed
the Sonterra Mortgage, which had an unamortized balance of approximately
$15,971,000, and paid the balance of the purchase price in cash.
SEGMENT FINANCIAL INFORMATION
See Note 12 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 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.
16
ITEM 2. PROPERTIES.
The following property information is presented by SBU.
WELLSFORD/WHITEHALL
As of December 31, 2002, Wellsford/Whitehall owned and operated 34 properties,
including ten properties held for sale (substantially all office properties),
totaling approximately 3,874,000 square feet. By February 28, 2003, after the
completion of certain sales, Wellsford/Whitehall owned 27 properties totaling
approximately 2,908,000 square feet. The following table sets forth certain
information related to all of these properties at December 31, 2002:
LEASABLE
BUILDING YEAR NUMBER
SQUARE CONSTRUCTED/ OF
PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY
-------- ---- -------- ---- ------------- ------- ---------
OPERATING PROPERTIES - OFFICE
300 Atrium Drive.... Office Somerset, NJ 147,000 1983 5 100%
400 Atrium Drive**.. Office Somerset, NJ 355,000 1985 2 52%
500 Atrium Drive.... Office Somerset, NJ 169,000 1984 4 95%
700 Atrium Drive.... Office Somerset, NJ 181,000 1985 1 100%
Garden State Exhibit
Center........... Flex Somerset, NJ 82,000 1968/1989 N/A N/A
333 Elm Street...... Office Dedham, MA 48,000 1983 7 70%
Dedham Place........ Office Dedham, MA 160,000 1987/2002 6 29%
201 University Avenue Office Westwood, MA 82,000 1982 1 100%
7/57 Wells Avenue.... Office Newton, MA 88,000 1982 14 100%
75/85/95 Wells Avenue Office Newton, MA 242,000 1976/1986 5 83%
105 Challenger Road.. Office Ridgefield 147,000 1992 3 100%
Park, NJ
Oakland Ridge........ Flex Columbia, MD 144,000 1972/2002 2 65%
117 Kendrick Street.. Office Needham, MA 211,000 1963/2000 2 38%
Airport Park......... Office Hanover Twp, NJ 96,000 1979/2002 10 85%
--------- -- ---
SUBTOTAL--OPERATING PROPERTIES - OFFICE ........ 2,152,000 62 74%
--------- -- ---
OPERATING PROPERTIES - RETAIL
Essex................ Retail Essex, MD 10,000 2000 1 100%
Pennsauken........... Retail Pennsauken, NJ 12,000 2001 1 100%
Runnemeade........... Retail Runnemeade, NJ 12,000 2001 1 100%
Wetumpa.............. Retail Wetumpa, AL 10,000 2001 1 100%
Richmond............. Retail Richmond, VA 10,000 2001 1 100%
--------- -- ---
SUBTOTAL--OPERATING PROPERTIES - RETAIL ........ 54,000 5 100%
--------- -- ---
SUBTOTAL--OPERATING PROPERTIES ........ 2,206,000 67 74%
--------- -- ---
PRINCIPAL TENANTS BASE ESCALATED MARKET
--------------------------------- RENT PER RENT PER RENT PER
LEASE SQUARE SQUARE SQUARE
PROPERTY NAME EXPIRATION FOOT FOOT FOOT* ENCUMBRANCE
-------- ---- ---------- ---- ---- ----- -----------
OPERATING PROPERTIES - OFFICE
300 Atrium Drive.... AT&T March 2004 $ 20.69 $ 23.37 $ 21.00 (A)
400 Atrium Drive**.. Merrill Lynch December 2003 22.01 23.61 21.00 (A)
500 Atrium Drive.... AT&T December 2003 20.01 24.40 21.00 (A)
700 Atrium Drive.... Merck June 2005 17.39 20.83 21.00 (A)
Garden State Exhibit
Center........... N/A N/A 25.71 25.71 N/A (A)
333 Elm Street...... RNK, Inc. June 2006 17.13 18.43 24.00 (C)
Dedham Place........ Washington Mutual January 2007 15.97 24.51 27.00 (C)
201 University Avenue RCN Corp. December 2009 18.00 20.33 21.50 (C)
7/57 Wells Avenue.... GEO Centers November 2004 26.79 28.30 27.00 (C)
75/85/95 Wells Avenue Wonderware Corp. April 2005 28.23 28.87 27.00 (C)
105 Challenger Road.. Samsung America, Inc. December 2003 26.74 31.38 26.00 (A)
Oakland Ridge........ Wells Fargo May 2012 15.64 15.90 18.00 (E)
117 Kendrick Street.. MCK Communication March 2007 30.36 32.10 26.00 (A)
Airport Park......... CapGemini January 2006 20.82 24.98 26.00 (E)
----- ----- -----
SUBTOTAL--OPERATING PROPERTIES - OFFICE ........ 22.23 24.99 23.40
----- ----- -----
OPERATING PROPERTIES - RETAIL
Essex................ CVS January 2024 37.00 37.00 37.00 (E)
Pennsauken........... CVS January 2024 24.85 24.85 24.85 (E)
Runnemeade........... CVS January 2024 26.06 26.06 26.06 (E)
Wetumpa.............. CVS January 2024 20.46 20.46 20.46 (E)
Richmond............. CVS January 2024 24.70 24.70 24.70 (E)
----- ----- -----
SUBTOTAL--OPERATING PROPERTIES - RETAIL ........ 26.53 26.53 26.53
----- ----- -----
SUBTOTAL--OPERATING PROPERTIES ........ 22.34 25.03 23.48
----- ----- -----
17
WELLSFORD/WHITEHALL: PROPERTY TABLE - CONTINUED
LEASABLE
BUILDING YEAR NUMBER
SQUARE CONSTRUCTED/ OF
PROPERTY TYPE LOCATION FEET REHABILITATED TENANTS OCCUPANCY
-------- ---- -------- ---- ------------- ------- ---------
PROPERTIES UNDER RENOVATION
600 Atrium Drive........ Land Somerset, NJ N/A N/A (H) --
Airport Park............ Land Hanover Twp, NJ N/A N/A (H) --
150 Mt. Bethel Road..... Office/Flex Warren, NJ 129,000 1981 5 56%
377/379 Campus Drive**.. Office Franklin Twp, NJ 199,000 1984 1 10%
128 Technology Center**. Office Waltham, MA 218,000 1986 -- 0%
--------- --- ---
SUBTOTAL--PROPERTIES UNDER RENOVATION ........ 546,000 6 17%
--------- --- ---
PROPERTIES HELD FOR SALE - OFFICE
Greenbrook Corporate
Center (B)........... Office Fairfield, NJ 201,000 1987 14 78%
Mountain Heights
Center #1 (B)........ Office Berkeley Hts, NJ 183,000 1968/1986/1998 14 79%
Mountain Heights
Center #2 (B)........ Office Berkeley Hts, NJ 123,000 1968/1998/2000 1 100%
180/188 Mt. Airy Road
(B).................. Office Basking Ridge, NJ 104,000 1980 11 83%
One Mall North (B)...... Office Columbia, MD 97,000 1978/1998 27 61%
401 North Washington (B) Office Rockville, MD 248,000 1972/2002 11 82%
60 Turner Street (D).... Office/Land Waltham, MA 16,000 1970 1 100%
79 Milk Street (D)...... Office Boston, MA 65,000 1920/1998/2001 8 54%
24 Federal Street (D)... Office Boston, MA 75,000 1921/1997/2001 11 73%
--------- --- ---
SUBTOTAL--PROPERTIES HELD FOR SALE - OFFICE ........ 1,112,000 98 79%
--------- --- ---
PROPERTIES HELD FOR SALE - RETAIL
Decatur (B)............. Retail Decatur, GA 10,000 2001 1 100%
--------- --- ---
SUBTOTAL--PROPERTIES HELD FOR SALE - RETAIL ........ 10,000 1 100%
--------- --- ---
SUBTOTAL--PROPERTIES HELD FOR SALE ........ 1,122,000 99 79%
--------- --- ---
TOTAL/PORTFOLIO AVERAGE AT DECEMBER 31, 2002 ........ 3,874,000 172 68%
========= === ===
PRINCIPAL TENANTS BASE ESCALATED MARKET
--------------------------------- RENT PER RENT PER RENT PER
LEASE SQUARE SQUARE SQUARE
PROPERTY NAME EXPIRATION FOOT FOOT FOOT* ENCUMBRANCE
-------- ---- ---------- ---- ---- ----- -----------
PROPERTIES UNDER RENOVATION
600 Atrium Drive..... -- -- -- -- -- (G)
Airport Park......... -- -- -- -- -- (G)
150 Mt. Bethel Road.. GMAC March 2008 18.40 20.15 21.50 (A)
377/379 Campus Drive** Royal Consumer September 2009 9.85 10.41 19.50 (A)
Products
128 Technology Center** -- N/A -- -- 29.00 (C)
-------- ------- -------
SUBTOTAL--PROPERTIES UNDER RENOVATION ........ 7.94 8.55 23.77
-------- ------- -------
PROPERTIES HELD FOR SALE -
Greenbrook Corporate
Center (B)........... Information Resources December 2003 23.36 25.92 22.00 (A)
& 2008
Mountain Heights
Center #1 (B)........ The Santa Cruz Org. September 2006 29.79 32.30 27.00 (A)
Mountain Heights
Center #2 (B)........ Compaq August 2010 28.50 32.15 28.00 (A)
180/188 Mt. Airy Road
(B).................. Avaya Inc. October 2004 25.49 27.92 26.50 (A)
One Mall North (B)...... GSA November 2005 22.21 24.45 22.00 (E)
401 North Washington (B) Automatic Data February 2007 17.13 18.43 26.50 (A)
Processing
60 Turner Street (D).... Brandeis University June 2002 (F) 8.00 8.00 8.00 (A)
79 Milk Street (D)...... International Data February 2009 43.92 46.20 36.50 (A)
Group (IDG)
24 Federal Street (D)... IDG February 2009 46.65 49.55 36.50 (A)
-------- ------- -------
SUBTOTAL--PROPERTIES HELD FOR SALE - OFFICE ........ 26.25 28.57 26.54
-------- ------- -------
PROPERTIES HELD FOR SALE - RETAIL
Decatur (B)............. CVS April 2019 19.75 22.86 23.00 (G)
-------- ------- -------
SUBTOTAL--PROPERTIES HELD FOR SALE - RETAIL ........ 19.75 22.86 23.00
-------- ------- -------
SUBTOTAL--PROPERTIES HELD FOR SALE ........ 26.19 28.52 26.50
-------- ------- -------
TOTAL/PORTFOLIO AVERAGE AT DECEMBER 31, 2002 ........ $ 21.40 $ 23.69 $ 24.41
======== ======= -------
- ----------
(A) Encumbered by the Wellsford/Whitehall GECC Facility.
(B) Property sold by February 28, 2003. Total square feet of sold properties
was 966,000 square feet.
(C) Encumbered by a $65,458,000 mortgage.
(D) Property expected to be sold during second quarter of 2003. The total
square feet of properties expected to be sold is 156,000 square feet.
(E) Encumbered by other mortgages.
(F) Hold over tenant on a month-to-month lease.
(G) Unencumbered.
(H) Land zoned for office development.
* Represents the judgment of WP Commercial as managing member as to specific
property market rent per square foot as of December 31, 2002.
** Wellsford/Whitehall is in the process of converting building from single to
multi-tenant.
18
The following table sets forth historical Wellsford/Whitehall portfolio
information by year:
SQUARE FEET OF OCCUPANCY
TOTAL BUILDING TOTAL PORTFOLIO OPERATING OF OPERATING
AT DECEMBER 31, SQUARE FEET OCCUPANCY PROPERTIES PROPERTIES
--------------- ----------- --------- ---------- ----------
2002 Pro forma (A).... 2,908,000 63% 2,362,000 74%
2002.................. 3,874,000 68% 3,328,000 76%
2001.................. 3,905,000 70% 3,307,000 69%
2000.................. 4,953,000 69% 3,431,000 87%
- ----------
(A) December 31, 2002 adjusted to reflect all sales from January 1, 2003 to
February 28, 2003.
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, 2002 lease expirations for each of the next ten years, assuming
tenants do not exercise any renewal options and excludes properties sold from
January 1, 2003 to February 28, 2003:
LEASABLE ANNUAL BASE RENT OF EXPIRING LEASES
NUMBER OF SQUARE FEET PERCENTAGE OF -----------------------------------
EXPIRING OF EXPIRING TOTAL LEASED PER SQUARE
YEAR LEASES LEASES SQUARE FEET TOTAL FOOT
---- ------ ------ ----------- ----- ----
2003......... 36 494,000 28% $10,424,000 $21.10
2004......... 10 147,000 8% 3,221,000 21.84
2005......... 17 357,000 20% 8,247,000 23.10
2006......... 20 233,000 13% 6,928,000 29.70
2007......... 14 145,000 8% 4,182,000 28.83
2008......... 8 87,000 5% 2,637,000 30.17
2009......... 5 145,000 8% 3,414,000 23.54
2010......... -- -- 0% -- --
2011......... 4 12,000 1% 602,000 48.21
2012......... 3 96,000 5% 2,562,000 26.81
No tenant in the Wellsford/Whitehall portfolio accounted for more than 6% of
rental revenues for assets classified as continuing operations by
Wellsford/Whitehall for the year ended December 31, 2002.
19
WELLSFORD CAPITAL
Wellsford Capital owned the following commercial properties at December 31,
2002; both properties are available for sale:
LEASABLE
BUILDING YEAR
SQUARE CONSTRUCTED/
PROPERTY TYPE LOCATION FEET REHABILITATED
-------- ---- -------- ---- -------------
Chestnut Street .............. Office Philadelphia, PA 49,953 1857/1983/2002
Keewaydin Drive .............. Industrial Salem, NH 125,230 1973
-------
TOTAL/AVERAGE AT DECEMBER 31,
2002 .............................................. 175,183
=======
2001 .............................................. 175,183
=======
2000 .............................................. 482,270
=======
NUMBER
OF PRINCIPAL LEASE
PROPERTY TENANTS OCCUPANCY TENANTS EXPIRATION
-------- ------- --------- ------- ----------
Chestnut Street .............. 3 69% A September 2007
Keewaydin Drive .............. 4 57% B January 2004
-- --
TOTAL/AVERAGE AT DECEMBER 31,
2002 ............. 7 60%
== ==
2001 ............. 9 62%
== ==
2000 ............. 53 74%
== ==
- ----------
(A) Kittredge Donley (14,449 square feet).
(B) Southern New Hampshire College (27,555 square feet).
WELLSFORD DEVELOPMENT
The Company owned the following multifamily properties at December 31, 2002:
YEAR EFFECTIVE RENT
PROPERTY LOCATION UNITS CONSTRUCTED OCCUPANCY PER UNIT ENCUMBRANCE
-------- -------- ----- ----------- --------- -------- -----------
Operational phases:
Blue Ridge ............... Denver, CO 456 1997 95% $ 976 $ 32,447,000 (A)
Red Canyon ............... Denver, CO 304 1998 94% 1,161 25,677,000 (A)
Green River .............. Denver, CO 424 2001 95% 1,035 37,111,000 (A)
----- ------------
Total operational phases .... 1,184 95% 1,045 95,235,000
----- ------------
Future units to be sold:
Silver Mesa (B) .......... Denver, CO 40 2000 N/A 1,689 4,318,000
----- ------------
TOTAL/AVERAGE AT DECEMBER 31,
2002 ..... 1,224 95% $1,107 $ 99,553,000
===== == ====== ============
2001 ..... 1,320 77% (C) $1,267 $109,051,000
===== == ====== ============
2000 ..... 896 93% $1,224 $ 91,724,000
===== == ====== ============
- ----------
(A) Encumbrance balances exclude the Palomino Park Bonds. The balance of the
Palomino Park Bonds was $12,680,000 at December 31, 2002, 2001 and 2000.
The Palomino Park Bond collateral includes the Blue Ridge, Red Canyon and
Green River operational phases, as well as the undeveloped Gold Peak phase
(improved land) (See Below).
(B) The Silver Mesa phase information excludes units which are available for
sale. The occupancy and average rent per unit for the 40 future units to be
sold is excluded. At December 31, 2002, there were 71 units in available
for sale inventory. The encumbrance is on all of the unsold units,
including rentals in the phase (aggregating 111 units at December 31,
2002). As individual units are sold, they are released from the Silver Mesa
Conversion Loan collateral.
(C) Phases in lease-up (Green River during 2001) are not included in the 2001
Average Occupancy.
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 zoned for up to 352 units, known
as Gold Peak, had a cost basis of approximately $5,411,000 and $5,400,000 at
December 31, 2002 and 2001, respectively. The Company has not determined if it
will construct this phase or sell the improved land.
20
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently a defendant in any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
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, 2002 and 2001 are as follows:
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
COMMON SHARES
------------------------------
2001 HIGH LOW DIVIDENDS
---- ---- --- ---------
1st Quarter..... $17.50 $15.50 None
2nd Quarter..... $19.35 $15.80 None
3rd Quarter..... $20.00 $17.90 None
4th Quarter..... $19.60 $18.05 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 3,400 and
1, respectively, as of December 31, 2002.
DIVIDENDS
- ---------
The Company did not declare or distribute any dividends during 2002 or 2001. 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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
- ------------------------------------------------------------------
The following table details information for each of the Company's compensation
plans at December 31, 2002:
NUMBER OF SECURITIES
REMAINING AVAILABLE
FOR FUTURE ISSUANCE
UNDER EQUITY
NUMBER OF SECURITIES WEIGHTED AVERAGE COMPENSATION PLANS
TO BE ISSUED UPON EXERCISE PRICE OF (EXCLUDING SECURITIES
EXERCISE OF OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN (A))
------------------- ------------------- ------------------------
(a) (b) (c)
Equity compensation plans approved by shareholders:
Rollover Stock Option Plan ..................... 372,874 $ 20.46 277,654
1997 Management Incentive Plan ................. 208,687 $ 21.37 633,965
1998 Management Incentive Plan ................. 190,625 $ 17.96 471,074
------- ---------
772,186 $ 20.90 1,382,693
Equity compensation plans not approved by
shareholders ................................... -- $ -- --
------- ---------
Total ............................................. 772,186 $ 20.90 1,382,693
======= =========
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following table sets 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.
SUMMARY CONSOLIDATED STATEMENT OF
OPERATIONS DATA(A) FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------- -----------------------------------------------------------
2002 2001 2000 1999 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER ---- ---- ---- ---- ----
SHARE DATA)
Revenues ............................. $ 31,718 $ 41,493 $ 25,624 $ 30,770 $ 26,316
Costs and expenses (B) ............... (34,845) (46,420) (26,181) (29,526) (17,606)
(Loss) income from joint ventures .... (208) 4,564 3,247 9,622 3,523
Gain on sales of assets, net of
impairment provision of $4,725
in 2000 ........................... -- -- 6,135 -- 139
Minority interest benefit (expense) .. 43 (283) (66) (55) (78)
--------- --------- --------- --------- ---------
(Loss) income before taxes and
Convertible Trust Preferred
Securities ........................ (3,292) (646) 8,759 10,811 12,294
Income tax benefit (expense) ......... 1,300 (699) (1,430) (1,950) (2,850)
Convertible Trust Preferred Securities
distributions, net of tax benefit
of $720, $720 and $510 ............ (1,380) (1,380) (861) -- --
--------- --------- --------- --------- ---------
Net (loss) income .................... $ (3,372) $ (2,725) $ 6,468 $ 8,861 $ 9,444
========= ========= ========= ========= =========
Net (loss) income per common share,
basic ............................. $ (0.52) $ (0.38) $ 0.76 $ 0.86 $ 0.95
========= ========= ========= ========= =========
Net (loss) income per common share,
diluted ........................... $ (0.52) $ (0.38) $ 0.76 $ 0.86 $ 0.93
========= ========= ========= ========= =========
Cash dividends declared per common
share ............................. $ -- $ -- $ -- $ -- $ --
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding, basic ......... 6,437 7,213 8,508 10,321 9,943
========= ========= ========= ========= =========
Weighted average number of common
shares outstanding, diluted ....... 6,437 7,213 8,516 10,329 10,190
========= ========= ========= ========= =========
SUMMARY CONSOLIDATED BALANCE
SHEET DATA FOR THE YEARS ENDED DECEMBER 31,
- -------------------------------------- -----------------------------------------------------------
2002 2001 2000 1999 1998
(AMOUNTS IN THOUSANDS) ---- ---- ---- ---- ----
Real estate, at cost ................. $ 163,400 $ 170,963 $ 167,279 $ 166,166 $ 153,030
Accumulated depreciation ............. (13,531) (9,873) (8,248) (6,584) (2,707)
Notes receivable ..................... 28,612 34,785 37,824 37,260 124,706
Cash and cash equivalents ............ 38,644 36,149 36,369 34,740 10,122
Investment in joint ventures ......... 94,181 95,807 120,969 114,390 80,776
Total assets ......................... 332,775 345,838 375,770 366,331 384,971
Mortgage notes payable ............... 112,233 121,731 104,404 119,315 120,177
Credit facility ...................... -- -- 12,000 -- 17,000
Convertible Trust Preferred Securities 25,000 25,000 25,000 -- --
Shareholders' equity ................. 176,567 178,079 215,982 229,691 231,625
Other balance sheet information:
Common shares outstanding ......... 6,451 6,405 8,350 9,611 10,375
========= ========= ========= ========= =========
Equity per share .................. $ 27.37 $ 27.80 $ 25.86 $ 23.90 $ 22.32
========= ========= ========= ========= =========
- ----------
(A) 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.
(B) Includes a restructuring charge of $3,527 during the year ended December
31, 2001, with no similar charges in other periods presented.
The earnings per share amounts conform with Statement of Financial Accounting
Standards ("SFAS") No. 128 "EARNINGS PER SHARE". For further discussion of
earnings per share and the impact of Statement No. 128, see the notes to the
consolidated financial statements.
23
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.
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.
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.
24
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 cost of each unit is
charged to cost of sales based upon its relative sales value. Sales price
concessions are recognized as a reduction in sales revenues as individual sales
are completed. Advertising costs are expensed as incurred.
MORTGAGE NOTE RECEIVABLE IMPAIRMENT. The Company considers a note impaired if,
based on current information and events, it is probable that all amounts due,
including future interest, payable under the note agreement are not collectable.
Impairment is measured based upon the fair value of the underlying collateral.
REVENUE RECOGNITION. Commercial properties are leased under operating leases.
Rental revenue from office and industrial properties is recognized on a
straight-line basis over the terms of the respective leases. Residential
communities 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. 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.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31,
2001
Rental revenue increased $2,544,000. This increase is due to the commencement of
operations effective January 1, 2002 at the Green River phase at Palomino Park
in the Wellsford Development SBU ($4,466,000), offset by (i) reduced rental
revenue in 2002 from the sale of four of the VLP properties in the Wellsford
Capital SBU during 2001, including two during January 2001, one in May 2001 and
the fourth in December 2001 ($812,000), (ii) reduced rental revenue from the
Silver Mesa phase at Palomino Park from unit sales ($765,000) and (iii)
decreased economic occupancy at the Blue Ridge and Red Canyon phases at Palomino
Park ($345,000).
Revenues from the sale of Silver Mesa residential units and the associated cost
of sales from such units were $10,635,000 and $9,544,000, respectively, from 48
sales during the year ended December 31, 2002 and were $21,932,000 and
$19,364,000, respectively, from 105 sales during the corresponding 2001 period.
The reduction of 2002 sales from 2001 sales is primarily due to the backlog of
contracts which were closed after receipt of final approvals and releases in
February 2001 to begin the condominium sales process and general and local
economic conditions. The decline in gross profit per unit during the 2002 period
results primarily from sales price concessions.
Interest revenue decreased $1,079,000. This decrease is due to reduced interest
income earned on loans of $686,000 from lower average outstanding loan balances
in 2002 as compared to 2001, as well as reduced
25
interest earned on cash of $393,000 from lower interest rates during the current
period versus the comparable 2001 period.
Fee revenue increased $58,000. Such increase resulted from an increase in the
Company's management fees for its role in the Second Holding investment of
$429,000 from increased assets under management in that venture, offset by
reduced transaction fees payable by Whitehall from sales of properties by
Wellsford/Whitehall and certain asset purchases by a related entity as such fees
amounted to $388,000 for the 2001 period, with only $29,000 earned in the
corresponding 2002 period and $12,000 of loan modification fees earned in 2001
with no corresponding amount in 2002. 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 increased $1,662,000. This increase
is the result of (i) the commencement of operations at Green River on January 1,
2002 ($1,127,000), (ii) increased property level payroll, insurance and
significant retenanting costs at all operating phases at Palomino Park (for
Silver Mesa, such increases were in excess of reductions from units sold) plus
the cessation of capitalization of certain costs at Gold Peak commencing January
1, 2002 ($797,000), offset by (iii) reduced operating expenses resulting from
the sale of the four VLP properties during 2001, net of current year
non-capitalizable maintenance expenses ($262,000).
The increase in real estate taxes of $435,000 is primarily due to the
commencement of operations at Green River ($374,000) and the cessation of cost
capitalization on the undeveloped Gold Peak land ($155,000) and increased Silver
Mesa real estate taxes for a higher tax rate from more units being assessed at a
condominium value, which is higher than the assessment for a rental unit
($14,000), offset by a decrease in real estate taxes from the sale of four VLP
properties during 2001 ($110,000).
Depreciation and amortization expense increased $167,000. This increase is
attributable to the commencement of depreciation on the Green River rental phase
($1,573,000), depreciation on the two unsold VLP properties due to a change in
accounting classification by definition, under the application of SFAS No. 144,
effective January 1, 2002, from available for sale to held for use ($210,000)
and fixed asset additions on Blue Ridge and Red Canyon ($83,000), offset by
reduced amortization of joint venture cost as only one property was sold by
Wellsford/Whitehall and one property was subject to an impairment adjustment
during the 2002 period, causing a write-off of the related unamortized warrant
balances by the Company ($758,000) whereas eleven properties were sold in the
prior year's comparable period ($1,950,000), reduced basis from the transfer of
96 units at Silver Mesa during 2002 to replenish sales inventory (as 28 units
became part of sales inventory in January 2002, 30 units in July 2002 and 38
units in October 2002) ($295,000) and reduced depreciation in 2002 of corporate
furniture, fixtures and equipment ($212,000).
Property management expenses decreased $88,000. Such decrease is due to the sale
of the four VLP properties during 2001 and the assumption of certain asset
management duties by the Company in April 2002 (which were previously performed
by an affiliate of Whitehall for the VLP properties) ($147,000), as well as
decreased rental revenues from lower economic occupancy at Blue Ridge and Red
Canyon ($36,000) and Silver Mesa sales ($26,000), partially offset by the
commencement of operations at Green River ($121,000). The Palomino Park property
management expenses were also impacted by the reduction in contractual
management fees during the fourth quarter of 2002 from a 3% annual fee of gross
receipts to a 2% annual fee.
Interest expense increased $1,495,000. This increase is attributable to the
cessation of interest and debt cost capitalization in 2002 at Palomino Park
($1,841,000 was capitalized in the 2001 period for Green River and Gold Peak)
and interest on the Green River Construction Loan ($1,295,000). Such amounts are
offset by reduced expense from a lower outstanding balance and a reduced
interest rate on the Silver Mesa Conversion Loan ($1,166,000), the expiration of
the Wellsford Finance Facility in January 2002 (which had up to $12,000,000 of
outstanding balances for portions of the 2001 period) ($294,000), reduced
interest on the Palomino Park Bonds from a lower base interest rate in 2002
($129,000) and lower interest on the Blue Ridge and Red Canyon fixed rate loans
from lower average outstanding balances due to principal amortization ($52,000).
26
General and administrative expenses decreased $1,900,000. This decrease is
primarily the result of an expense reduction program implemented by management
in 2001 which resulted in reduced salaries and related benefits and lower net
occupancy costs. An analysis of general and administrative expenses follows:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
2002 2001 (DECREASE)
---- ---- ----------
General and administrative expense per Statement of
Operations ............................................. $ 6,567,166 $ 8,466,948 $ (1,899,782)
Less: Non-cash component of general and administrative
expenses for amortization of stock generally issued into
deferred compensation plan ............................. 1,243,332 1,578,009 (334,677)
------------- ------------- -------------
Cash component of general and administrative expenses ..... $ 5,323,834 $ 6,888,939 $ (1,565,105)
============= ============= =============
Percentage (decrease) from prior year on cash component ... (22.7%)
=============
Percentage of Total Assets at each year end on cash
component .............................................. 1.60% 1.99%
============= =============
Total Assets at each year end ............................. $ 332,775,043 $ 345,838,157
============= =============
The restructuring charge in 2001 of $3,527,000 is for costs incurred pursuant to
the early retirement of the Company's former President and other personnel
changes. Such costs are comprised of severance arrangements including the
repurchase of stock options and the write-off of unamortized deferred stock
compensation. Of the expected aggregate cash payments of $3,466,000, the Company
paid approximately $2,800,000 in the first quarter of 2002 with the remaining
accrued balance expected to be paid during the first quarter of 2003.
Income from joint ventures decreased $4,773,000. An