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Realty Finance Corporation Provides Company Update And Financial Statements For Years Ended December 31, 2012 And 2011

Friday, February 8, 2013 4:15 PM


NEEDHAM, Mass., Feb. 8, 2013 /PRNewswire/ -- Realty Finance Corporation (Other OTC: RTYFZ.PK) today reported a net loss for the year ended December 31, 2012 of $(207,000), or $(0.0066) per diluted common share.  The loss for the year ended December 31, 2012 included a loss on an impairment of a joint venture in the amount of $(226,000) or $(0.007) per diluted common share.  As previously reported, the Company had net income for the year ended December 31, 2011 of $1.1 million, or $0.037 per diluted common share.

Liquidity

As of December 31, 2012, the Company had $4.4 million of unrestricted cash, or approximately $0.138 per share, as compared to $4.5 million of unrestricted cash, or $0.145 per share, as of December 31, 2011.  For the years ended December 31, 2012 and 2011 the Company's primary sources of cash flow consisted of (i) servicing fees, advancing agent fees and the senior collateral management fee from its 2006 CDO ("CDO I") and (ii) advancing agent fees from its interest in its 2007 CDO ("CDO II" and, together with CDO I, the "CDOs"). The Company covers any operating cash shortfalls with its unrestricted cash reserves.

The Company has no recourse debt obligations and limited liabilities in the form of accounts payable.  The Company has a non-recourse promissory note obligation with an outstanding balance of approximately $.2 million as of December 31, 2012 as compared to $.8 million as of December 31, 2011.

Incoming cash flows have been sufficient to cover the Company's current operations; however, there is no guarantee that the Company's future cash flows and remaining cash will be sufficient to permit the Company to continue its operations for an extended period of time.

Given the current state of the Company's investments, there can be no assurance of any future distributions to stockholders.

Collateralized Debt Obligations

The Company has invested in the junior most bonds and equity in the CDOs.  The CDO bonds are non-recourse to the Company.  The CDO bonds contain interest coverage and asset over-collateralization covenants that must be met in order for the Company to receive cash flow distributions on its bonds and equity as well as a portion of its collateral management fee.  As previously announced, both CDOs have failed the over-collateralization tests.  As a result of these failures, net cash flows (other than the senior collateral management, advancing agent and special servicing fees from CDO I) from both CDOs continues to be diverted to pay down principal of the senior-most bondholders.  With both CDOs out of compliance with the over-collateralization covenants, the Company has minimal cash flows from its primary business.  The Company continues to act as the collateral manager for CDO I and therefore continues to receive the senior collateral management, advancing agent and special servicing fees associated with CDO I.  As was previously announced, in July 2009, the Company was removed as the collateral manager for CDO II by MBIA, the controlling class of CDO II bondholders.  For details regarding the Company's removal as the collateral manager for CDO II, see the Company's press release on May 18, 2009.

The Company's investment in CDO I at the time of its formation was $91.5 million.  As of December 31, 2012, there was approximately $149 million of outstanding third party debt within CDO I, which is senior to the Company's investment.  Such debt exceeds the market value as determined by the Company of the CDO's underlying assets.  This CDO has realized losses totaling approximately $72 million as of December 31, 2012.  Several of the Company's remaining investments within this CDO are either in default or the Company has reasonable expectations that they will go into default.  As a result, the Company does not expect to recover any of its $91.5 million investment in CDO I.

The Company's investment in CDO II at the time of its formation was $120 million.  As of December 31, 2012, there was $519 million of outstanding third party debt within CDO II which is senior to the Company's investment.  Such debt exceeds the market value as determined by the Company of the CDO's underlying assets.   This CDO has realized losses well in excess of the Company's investment and the Company does not expect to recover any of its $120 million investment in CDO II.

Financial Reporting

Prior to the year ended December 31, 2010, the Company consolidated the CDOs into its financial statements.  However, based on the guidance provided by the Consolidations Topic (Topic 810) of the Financial Accounting Standards Board Accounting Standards Codifications, when an entity that was previously consolidated as a variable interest entity, or VIE, has events which potentially change the primary beneficiary, the Company needs to evaluate whether or not the entity is still a VIE and therefore whether the entity should be shown as part of the Company's consolidated financial statements.  As of December 31, 2010 and as of the date hereof, the Company had and continues to have no reasonable prospect or right to recover any of its investment in either CDO nor is it obligated to absorb any further CDO losses beyond its initial investment.  As such, the Company no longer had the risks or rewards typically associated with ownership. Therefore, beginning as of December 2010, the Company was no longer the primary beneficiary of either CDO and does not include either the CDO's assets, liabilities, revenues or expenses, as part of its financial statements.  As a result, the accompanying consolidated financial statements do not consolidate the assets, liabilities, revenues or expenses of the CDOs, but rather present the Company's interest in the CDOs as an unconsolidated equity interest.  In years prior to 2010, the Company's consolidated financial statements included the assets, liabilities, revenues or expenses of the CDOs.

Joint Venture Investments

The Company invested $16.5 million in the 1515 Market Street joint venture.  The $70.0 million mortgage on this property was current but matured in January 2012.   As of December 31, 2012 the Company has taken impairment charges totaling $15.1 million. For the year ended December 31, 2012, the Company took an impairment charge of $.8 million in connection with this investment.  No impairment charges were taken for the year ended December 31, 2011.  The $70.0 million mortgage on this property was current but matured in January 2012 and negotiations with the lender to restructure the debt were unsuccessful.  The lender subsequently sold the loan to a non-related third party.  Subsequent to December 31, 2012, the Company received a restructuring fee of $.45 million from the note holder in exchange for the Company's cooperation in facilitating the transfer of the Company's interest in the property.

The Company is obligated, among other things, to pay one-half of any cash received from the 1515 Market Street joint venture in satisfaction of its non-recourse promissory note; however, the Company has taken the position and provided notice to the note holder informing them that the restructuring fee is not a distribution or payment from the 1515 Market Street joint venture, and therefore not subject to the obligation to pay a portion to the note holder.  As of December 31, 2012, the balance of this obligation was adjusted to reflect the  payment that would be due under terms of the non-recourse note due to the receipt of the restructuring fee  should the company not be correct in it interpretation of the terms of the note. Accordingly, the obligation was written down to approximately $.2 million and the Company recognized debt forgiveness income of $.6 million.  For financial statement purposes, this debt forgiveness income was recorded as a reduction of the impairment charge recorded for the 1515 Market Street Joint venture investment.  During the years ended December 31, 2011 and 2012, the Company received distributions in the amount of $0.945 million and $0 respectively and made payments on the promissory note in the amount of $0.473 million (including interest) and $0 respectively.

In December 2012, the Company acquired through a special purpose entity, an indirect minority interest in a hotel.  In connection with the transaction, the Company entered into an Incentive Fee Agreement and Asset Management Agreement.  Under these agreements, the Company will perform certain asset management duties in exchange for an asset management fee, and has the ability to earn a promote should the hotel's performance meet or exceed expectations.  There can be no assurances that the Company will continue to receive such asset management fee in the future.   Furthermore, given the historical performance of the asset and the significant amount of other debt secured by the asset, there can be no assurances that any amounts will be paid pursuant to the Incentive Fee Agreement.

As of December 31, 2011, the Company had additional equity investments in two joint ventures.  These joint ventures, the KS-RFC Shiraz ("Shiraz") joint venture and the KS-RFC GS ("GS") joint venture have been fully reserved for.  The mortgages on the properties owned by the GS and Shiraz joint ventures were in default and during the year ended December 31, 2012 all of the properties were foreclosed upon by their respective lenders. In September 2011, the Company was awarded a judgment in Massachusetts Superior Court totaling $5.5 million against certain affiliates of KS Partners, LLC relating to defaults on mezzanine loans involving two real estate portfolios.  The defendants have filed a notice of appeal.  The Company is pursuing collection efforts against the defendants.  However, there can be no assurance of any recovery whatsoever from either judgment, or the timing of any such recovery.

Other Assets

The Company previously invested $9.8 million in two land development loans with the same developer.  Both projects had experienced significant delays and the inability to obtain financing.  Both of these investments have been fully reserved for. The Company entered into a settlement arrangement with the developer's guarantor whereby a series of payments would be made during 2012 through 2014.   As of December 31, 2012, the guarantor has made $100,000 in payments with additional amounts due of $50,000 in January and June 2013, $75,000 in November 2013 and $75,000 in June 2014.  The guarantor has the ability to pre-pay all remaining payments before June 2013 for an aggregate discount of $50,000.  While the guarantor has made the initial payments, including the January 2013 payment, it is uncertain if the remaining ones will be satisfied.  In the event of a default on the payment schedule, the claims against the guarantor remain in place. During the year ended December 31, 2012, the company recorded this transaction as income in the amount of $300,000.  The outstanding receivable balance of $200,000 as of December 31, 2012 assumes the guarantor will take advantage of the pre-payment discount.

Strategic Direction of the Company

The Company continues to focus on controlling operating expenses while effectively managing its investments (including CDO I) and increasing its cash position.  In connection with this, as of January 1, 2013, the company renegotiated its agreement with Waldron Rand and reduced its fees by approximately 40% to reflect the lower workload associated with the legacy portfolio.   The Company's Board of Directors (the "Board") has also been actively seeking and evaluating a wide range of strategic alternatives, including but not limited to entering into partnerships with capital partners to pursue new transactions, making new investments that it believes would generate accretive returns for stockholders, restructuring the Company's investments, raising capital, consummating a sale of the Company or its assets, business combinations, liquidation and other similar transactions in order to maximize stockholder value.  The Board's goal remains to maximize stockholder value and, to that end, it has, and is continuing to expend significant time on structuring, reviewing and analyzing strategic alternatives. All strategic alternatives identified by the Company are thoroughly investigated by conducting significant due diligence to determine their viability and to permit the Board to make informed decisions as to the merits of such alternatives. The Board believes it will strive to complete a transaction in 2013 if it finds a transaction that it believes maximizes value beyond a liquidation of the company, thus preserving some of its assets that would yield no value in liquidation, such as the Net Operating Losses and others.

While the Board continues to explore various strategic options for the Company, there is no guarantee that any alternative can be realized or as to the timing or terms of any such event. In addition, the Company may, upon evaluation, ultimately determine to liquidate the Company by winding down the affairs of its business and distributing remaining cash, if any, to its stockholders.

Dividends

As previously announced, the Company suspended dividends since the fourth quarter of 2008 and the dividends are expected to continue to be suspended in the foreseeable future.

Management Discussion

In February 2011, Mr. Daniel Farr resigned as Chief Financial Officer and Treasurer of the Company and the Company's other two employees resigned.  Simultaneously, the Company engaged Waldron H. Rand & Company, P.C. to provide certain day-to-day corporate, finance, asset management and tax services to the Company.  Kenneth J. Witkin was appointed Treasurer of the company effective upon Mr. Farr's resignation. 

In June 2011, Mr. Douglas C. Eby resigned as Chairman of the Board, Chief Executive Officer and President and as a member of the Board.  Ricardo Koenigsberger was appointed interim Chief Executive Officer and President effective on May 20, 2011.  The Board determined not to appoint another director to fill the vacancy on the Board.  No severance payments were made in connection with Messrs. Farr's and Eby's resignations.  As previously announced, the Company relocated its offices in conjunction with entering into a servicing agreement with Waldron H. Rand and Company, P.C.  For additional details, see the Company's press release dated February 2, 2011.

In June 2012, the Company issued restricted shares of the Company's common stock, with a fair value of $40,500 as of the date of the award, to each of Messrs. Koenigsberger and Witkin, in connection with their services as directors and officers of the Company. At the time of the issuance the shares were valued at $.09 per share.  The resulting stock-based compensation is included in general and administrative expenses in the accompanying financial statements. The restricted shares were issued pursuant to the Company's Amended and Restated 2005 Equity Incentive Plan and immediately vested.  In addition, the Company awarded each of Messrs. Koenigsberger and Witkin with a cash payment in the amount of their respective tax liabilities incurred as a result of the restricted share awards.  The Company may grant additional restricted shares to Messrs. Koenigsberger and Witkin in the future from time to time, either under the Company's Amended and Restated 2005 Equity Incentive Plan or outside of it, and in each case subject to such vesting and related terms as the Company deems appropriate as of the date of any such grants.

Financial Statements

The Company can give no assurance that the financial statements included in this press release have been prepared in accordance with GAAP and such financial statements will not be audited and were not reviewed by any third party accounting firm.

About Realty Finance Corporation

Realty Finance Corporation is a commercial real estate specialty finance company primarily focused on managing a diversified portfolio of commercial real estate-related loans and securities.  For more information on the Company, please visit the Company's website at http://www.realtyfinancecorp.com.

The Company's common stock is currently quoted on the OTC Markets Group, or OTC Markets.  While not a requirement, the OTC Markets encourages companies having their securities quoted thereon to provide adequate current information in accordance with its disclosure guidelines.  The Company will evaluate the need to issue press releases containing information similar to such information disclosed herein.  There is no assurance that the Company will provide timely periodic disclosures or at all.

The Company has elected to qualify to be taxed as a real estate investment trust, or REIT, for U. S. federal income tax purposes commencing with the taxable year ended December 31, 2005. As a REIT, the Company generally will not be subject to U. S. federal income tax on that portion of income that is distributed to stockholders if at least 90% of its REIT taxable income is distributed to its stockholders. The Company conducts its operations so as to not be regulated as an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act.   The Company has not had any taxable income in 2008, 2009, 2010, 2011 and 2012 and does not expect to have any taxable income in the foreseeable future.

Forward-Looking Information

This press release contains forward-looking statements based upon the Company's beliefs, assumptions and expectations of its future performance, taking into account all information currently available. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company or are within its control. If a change occurs, the Company's business, financial condition, liquidity and results of operations may vary materially from those expressed in its forward-looking statements. The factors that could cause actual results to vary from the Company's forward-looking statements include: the Company's ability to continue to cover its operating cash requirements; the risk factors included as part of the Company's Annual Report on Form 10-K for the period December 31, 2008 filed on March 16, 2009; the Company's future operating results; its business operations and prospects; whether the Company can execute a strategic alternative; general volatility of the securities market in which the Company invests and the market prices of its common stock; the effect of trading on the OTC Markets; availability, terms and deployment of short-term and long-term capital; availability of qualified personnel and directors; changes in the industry; interest rates; the debt securities, credit and capital markets, the general economy or the commercial finance and real estate markets specifically; performance and financial condition of borrowers and corporate customers; any future litigation that may arise; the ultimate resolution of the Company's numerous defaulted loans; the state of the Company's joint venture investments; the ability to continue as a going concern; availability of liquidity; and other factors, which are beyond the Company's control. The Company undertakes no obligation to publicly update or revise any of the forward-looking statements.  For further information, please refer to the Company's previous periodic filings with the Securities and Exchange Commission.  However, the Company is no longer a Securities and Exchange Commission reporting company as of March 16, 2009 and therefore, such information is not current and circumstances have changed significantly since the date of such filings.

 

Realty Finance Corporation

Consolidated Balance Sheets

 (Amounts in thousands, except per share and share data)

December 31, 2012 and 2011

(Unaudited)














2012


2011

Assets:




   Cash & cash equivalents

$                   4,370


$               4,478

   Investment in joint ventures 

521


1,255

   Prepaid expenses

149


230

   Other receivables

225


51





      Total assets

$                   5,265


$               6,014





Liabilities and Stockholders' Equity:








Liabilities:




   Note payable 

$                      220


$                  809

   Accounts payable and accrued expenses

45


79

      Total liabilities

265


888





Stockholders' Equity:




   Preferred stock, par value $.01 per share: 50,000 shares authorized;




      no shares issued or outstanding at December 31, 2012 and 2011

-


-

   Common stock, par value $.01 per share: 100,000,000 shares authorized; 




      31,836,000 and 30,936,000 shares issued and outstanding 




      at December 31, 2012 and 2011, respectively

318


309

   Additional paid-in capital

423,145


423,073

   Accumulated deficit

(418,463)


(418,256)

     Total stockholders' equity

5,000


5,126





     Total Liabilities and Stockholders' Equity

$                   5,265


$               6,014









Financial statements not reviewed by independent auditors.






Realty Finance Corporation

Consolidated Statements of Income and Accumulated Deficit

(Amounts in thousands, except per share and share data)

For the years ended December 31, 2012 and 2011

(Unaudited)








2012


2011

Revenues:





   Fee income


$                  2,110


$               3,513

   Recovery of impaired loans


300


150

      Total revenues


2,410


3,663






Expenses:





   Interest expense


-


82

   Impairment of joint venture


226


-

   General and administrative 


2,391


2,438

      Total expenses


2,617


2,520






      Net income (loss)


(207)


1,143






Accumulated deficit at beginning of year


(418,256)


(419,399)






Accumulated deficit at end of year


$             (418,463)


$          (418,256)






Weighted-average shares of common stock outstanding:





     Basic weighted-average common shares outstanding


31,461,000


30,936,000

     Diluted weighted-average common shares and common share


31,461,000


30,936,000

     equivalents outstanding





Basic earnings per share:





     Income (loss) from continuing operations


$               (0.0066)


$              0.0369

Diluted earnings per share:





     Income (loss) from continuing operations


$               (0.0066)


$              0.0369

Dividends per common share


$                           -


$                        -











Financial statements not reviewed by independent auditors.

 






Realty Finance Corporation

Consolidated Statement of Cash Flows

(Amounts in thousands, except per share and share data)

For the years ended December 31, 2012 and 2011

(Unaudited)








2012


2011

Cash Flows from Operating Activities: 





   Net income (loss)


$                   (207)


$                  1,143

Adjustments to reconcile net income (loss) to net cash provided by 





    (used in) operating activities:





  Stock-based compensation expense


81



  Distributions received from joint ventures


-


945

  Impairment of joint venture


226


-

(Increase) decrease in assets





   Prepaid expenses


81


(80)

   Other receivables


(174)


(52)

Increase (decrease) in liabilities





   Accounts payable and accrued expenses


(34)


(109)

      Net cash provided by (used in) operating activities


(27)


1,847






Cash Flows from Investing Activities: 





   Cash paid for investment in joint venture


(81)


-

      Net cash used in investing activities


(81)


-






Cash Flows from Financing Activities: 





   Principal payments on mortgage note payable 


-


(391)

      Net cash used in financing activities


-


(391)






      Net increase (decrease) in cash


(108)


1,456






Cash & cash equivalents at beginning of year


4,478


3,022






Cash & cash equivalents at end of year


$                  4,370


$                  4,478











Financial statements not reviewed by independent auditors.

SOURCE Realty Finance Corporation

(Source: PR Newswire )
(Source: Quotemedia)

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