GYRODYNE

GY RODY NE
C o m p a ny o f A m e r i c a, In c.
2 0 11
A N N U A L
R E P O R T
TO O U R S H A R E H O L D E R S
Before I get started, I would like to recognize our Board of
Directors for its guidance and support and our dedicated
staff of officers and employees for their continued efforts
toward maximizing shareholder value. Their efficiency,
professionalism and dedication to our strategic plan continues to bear fruit and we look forward to a strong 2013.
™On April 30, 1999, the Company’s stock traded at $13.94 per
share, reflecting a market capitalization of approximately
$15 million.
™T he Company’s cash balance at April 30, 1999 was approximately $1.3 million.
™T he successful completion of a rights offering, which was
oversubscribed by 50% over the maximum offering amount
of $10.2 million.
Much was accomplished under Steve’s leadership and nowhere
is it more evident than in the growth in the Company’s stock and
related market capitalization. On August 16, 2012, Gyrodyne’s
stock closed at $112.23 per share, reflecting a market capitalization of approximately $166 million, approximately 11 times the
market capitalization at the time of his appointment. While corporate officers and directors always strive to achieve the maximum
intrinsic value and believe in the mantra that the intrinsic value
will ultimately be recognized in its share price, I hope all of you
will agree that under Steve’s leadership, the Company exceeded
the most optimistic expectations. Some of the Company’s most
notable achievements are as follows:
™The improvement in funds from operations (FFO) to $(179,490)
in 2011 vs $(233,911) and $(1,892,197) for 2010 and 2009,
respectively.
1999—Decided to develop a luxury age-restricted residential
community with a first in class golf course at the Flowerfield
property in conjunction with Landmark Land Development Corp.
™T he growth in adjusted funds from operations (AFFO), which
the Company defines as FFO excluding condemnation costs,
which was $153,818 for 2011 compared to $(124,557) and
$(585,013) for 2010 and 2009, respectively. This represents
an improvement of $738,831 over 2009 results and marks the
first time in the Company’s history since becoming a REIT,
to generate positive AFFO.
2005—Following the condemnation of the 245 acre Flowerfield
property by the State of New York in November 2005, the Company
established a litigation team comprised of Chief Operating Officer,
Peter Pitsiokos and outside counsel, advisors and expert witnesses to lead the litigation effort in challenging the $26.3 million price initially paid by the State of New York. Gary Fitlin, the
Company’s Chief Financial Officer and Treasurer, joined the team
in late 2009 to further support the Company’s condemnation
rights during the appeals process.
Some of the Company’s more notable achievements for 2011
were as follows:
™T he continued success of enforcing our right to receive just
compensation for the condemnation of part of our Flowerfield
property, which was first granted at the trial court level in
2010 when the judge awarded us a judgment of $125 million
plus interest and reimbursement of legal fees.
™T he reduction in general and administrative costs in 2011 to
approximately $1.9 million from $2.3 million and $2.8 million
in 2010 and 2009, respectively, reflecting a reduction of
approximately 32% from 2009.
™The REIT industry continued to experience negative absorption rates during 2011, which directly impacts resale value.
Gyrodyne’s reduction in average occupancy rates for its
medical properties from 95% to 88% was accompanied by a
reduction in the overall rent roll to $4.5 million from $4.8
million. However, the December 2011 results reflected that
the Company had maintained its long term lease commitments at approximately $10 million, which is a strong metric
for measuring resale value.
Many of our long term shareholders know Gyrodyne’s history
under the leadership of our prior CEO and President, Steve
Maroney. With Steve’s recent retirement on August 16, 2012, it is
important to look at the base line from where we started when
Steve first joined the Company:
On March 14th, 1999, after working for two years as a consultant
for the Company, Steve was appointed CEO, President and
Treasurer. At that time:
™T he Company owned primarily one operating asset, the
Flowerfield Industrial Park, which was comprised of
approximately 202,000 rentable square feet on approximately 326 acres.
2006—Elected REIT status, which positions the Company to avoid
corporate level taxes.
2007 through 2009—Completed the reinvestment of the advance
payment received from the State of New York in REIT-qualified
medical office facilities.
2009—After the completion of the trial proceeding to determine
the fair market value of the condemned Flowerfield property, in
October, the Company hired a full time Chief Financial Officer
and Treasurer with a dual mandate of positioning Gyrodyne to
maximize shareholder value through one or more tax efficient
liquidity events as well as maximizing its intrinsic value. The
market capitalization of the Company as of December 31, 2009
was $54.03 million and the share price on that date was $41.885
and the cash balance of the Company, including investments,
was $1,072,000.
2010—Received the opinion of the trial court that the fair market
value of the condemned Flowerfield property was $125 million.
2010—Procured a new debt facility of $4 million in an illiquid market.
2011—Executed a rights offering, which was approximately 50%
over-subscribed, resulting in the Company raising approximately
$10.2 million. The rights offering did not include the traditional
assistance of an underwriter which ultimately saved the Company
in excess of $500,000 and simultaneously successfully fortified
the Company’s balance sheet.
2012—Successfully challenged various attempts by New York
State to overturn the 2010 judgment, culminating in the State’s
payment to the Company of approximately $167 million in July
2012. The market cap of the Company as of September 30, 2012
was $161.06 million and the share price on that date was $108.63
and the cash balance of the Company, including investments was
$176.78 million.
2011 was a great year and we are equally optimistic and encouraged by 2012. Throughout 2012 and into the future, the Company
remains committed to the following:
1. Enhancing our existing real estate portfolio to maximize
resale value rather than FFO. This strategic shift aligns our
operating strategy with the strategic plan of maximizing
shareholder value through one or more liquidity events.
2. Engaging investment bankers and transaction counsel to
assist management in the execution of the last phase of its
strategic plan—the execution of one or more tax efficient
liquidity events.
I am happy to say that we have retained investment bankers and
transaction counsel to assist the Company in exploring its strategic alternatives. In addition, we continue to take positive steps to
enhance our real estate portfolio. We continue to sign additional
lease commitments at longer average terms, a variable that we
expect to drive an increase in the value of our real estate portfolio. Furthermore, we no longer have any tenants with material
leases in default.
The below table reflects FFO from 2009 through September 30, 2012,
Company wide
FFO(1)
Company wide
AFFO(2)
2009
$(1,892,197)
$(585,013)
2010
(233,911)
(124,557)
2011
(179,490)
153,818
January–September 2012
(345,742)
(45,742)
(1) FFO excludes depreciation and amortization. Amortization of capitalized leasing costs
and income tax benefit from condemnation.
(2) AFFO is defined as FFO excluding condemnation income and expense and advisory
fees in pursuit of our strategic alternatives.
(3) See Exhibit 1 for a reconciliation of Net Income (Loss) to FFO and AFFO.
As you can see, we grew FFO and AFFO year over year from 2009
through and inclusive of 2011. The reduction in FFO and AFFO for
the nine months ending September 30, 2012 was the result of
approximately $300,000 in advisory fees incurred in pursuit of
our strategic alternatives supplemented by four significant tenant
terminations, three of which were recently replaced. Two of those
tenants were re-tenanted with multi-year commitments (vs one
year commitments), a variable that we expect to drive an increase
in the value of the subject property despite its reduction in occupancy rates. One tenant was in default and was replaced with a
new long term lease early in the fourth quarter. We are optimistic
that our continued aggressive approach will result in further
increases in property level FFO and higher resale values for
most of our properties.
Lastly, our optimism regarding the value of our medical office
space has never been stronger. Our public filings speak to the
risks and challenges posed by the Patient Protection and Affordable Care Act, but make no mistake: the healthcare industry is
growing and changing rapidly. The healthcare sector accounted
for approximately 7.6% of GDP in 2011, up from 6.6% in 2006, the
year prior to our first investment in medical space.
Most recently, the Dow Jones Industrial Average added another
member to the healthcare sector, resulting in the healthcare sector comprising approximately 10% of the index as of September 13,
2012, vs 7.9% prior to the addition. We are optimistic that growth
in the healthcare sector will continue, which we would expect
only further supports the opportunity to generate value for our
shareholders.
In addition to enhancing our medical properties, we are evaluating
our undeveloped land in Flowerfield to determine whether positioning it for an age restricted community or a yet to be identified
alternative option will create the best value for our shareholders.
We will continue to pursue the goal of creating the highest value
for our shareholders in determining the best use for this property.
We are working hard with our investment bankers and legal
counsel to identify one or more potential liquidity events, which
might include a merger, sale or other corporate transaction. At
this time, we can provide no assurances as to what form a potential transaction might take or indeed if a transaction will occur at
all. The fiscal cliff (defined as higher tax rates and lower government spending) has created an environment occupied with risk
and uncertainty comparable to levels not seen since the 2008
financial crisis. This environment has not distracted us from
investigating and measuring the shareholder benefits of our
strategic alternatives. However, in light of these challenges, the
Company is taking steps to position itself to maximize the value
of the Company in 2013 and beyond.
We look forward to seeing you at our annual meeting and to
answering your questions regarding the future of the Company.
With best wishes,
Very truly yours,
Gary Fitlin
President and Chief Executive Officer
EXHIBIT 1—Reconciliation of Net Income (Loss) to FFO and AFFO
The following schedule provides a reconcilement of the Company’s calculation of AFFO, a non-GAAP financial measure, to Net Income
or Loss for the nine months ended September 30, 2012 and the years ended December 31, 2011, 2010 and 2009:
Nine Months Ended
September 30,
2012
Realized gains (losses) on marketable securities
which are included in net income (loss)
$
Net income (loss)*
Depreciation and amortization*
Amortization of capitalized leasing costs*
Condemnation income, net*
Income tax expense (benefit) on condemnation*
—
Year Ended
December 31,
2011
$
—
Year Ended
December 31,
2010
$
—
$
159,805
104,692,318
(1,124,665)
(1,081,465)
1,522,890
672,985
876,101
803,725
690,676
41,523
69,074
43,829
35,237
(167,401,568)
—
—
61,649,000
Funds from Operations(1)
Year Ended
December 31,
2009
(4,141,000)
(345,742)
(179,490)
(233,911)
(1,892,197)
Condemnation costs incurred prior to recording
of the final award*
—
333,308
109,354
1,307,184
Professional advisory fees incurred in pursuit of
strategic alternatives
300,000
153,818
$ (124,557)
$ (585,013)
AFFO
$
(45,742)
$
*The 2011, 2010 and 2009 amounts were derived from the audited consolidated financial statements for the years ended December 31, 2011, 2010 and 2009.
(1) The Company calculates funds from operations (“FFO”) in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT (National Association of Real Estate
Investment Trusts) excluding the FFO adjustment for impairment charges. NAREIT recently approved the adjustment to FFO for impairment charges, however the Securities and
Exchange Commission did not approve such adjustment. As a result, the Company does not exclude impairment charges from FFO. The white paper defines FFO as net income or loss
calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses attributable to the sale of depreciable operating property, plus real estate
related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures.
We believe that FFO is a useful supplemental measure of our operating performance. The exclusion of gains and losses on the sale of real estate allows investors and analysts to identify the
operating results of the assets that reflect the core of our activity and assists in comparing the results of that activity across reporting periods. Additionally, FFO is the recognized
industry standard for reporting the operations of a REIT. As a result, providing FFO data facilitates comparison of operating performance with other REITs.
Historical cost accounting under GAAP measures, implies that real estate asset values diminish over time. Since real estate assets have historically risen or fallen with market conditions,
many investors and analysts consider presentation of operating results utilizing historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of
real estate assets, we believe reporting FFO along with the required GAAP presentation provides a more complete measurement of our performance relative to our competitors. However,
our FFO includes a material cost for condemnation litigation which other REITs may not incur. Condemnation is not an extraordinary item as defined by GAAP, therefore such costs
were included in the computation of FFO. We disclose separately our condemnation costs to enable the investors and analysts to compute the impact of condemnation costs on FFO.
FFO should not be viewed as an alternative measure of our operating performance since it does not reflect either depreciation and amortization costs or the capital expenditures and
capitalized leasing costs necessary to maintain the operating performance of our properties. Such capital expenditures are significant economic costs and can materially impact results of
operations and net cash flow provided or used between reporting periods.
Noncash adjustments to arrive at FFO included depreciation and amortization and the tax benefit under Section 1033 of the Internal Revenue Code. The tax benefit is from the rollover of
the advance payment from condemnation of 245 acres. Under the definition of FFO, gain or loss from property transactions are excluded from FFO. There were no other NAREIT
defined FFO adjustments contained in the operating results.
B o a rd of D i re ctor s
O f f icer s
Naveen Bhatia
Peter Pitsiokos
M a n a g i n g D i re c t o r,
4 0 No r t h In d u s t r i e s L L C
C h i e f O p e ra t i n g O f f i c e r,
Chief Compliance Of f icer
a n d S e c re t a r y o f t h e C o m p a ny
Paul L. Lamb
C h a i r m a n o f t h e B o a rd o f D i re c t o r s a n d
Pa r t n e r o f L a m b & B a r n o s k y, L L P
Gar y J. Fitlin
P re s i d e n t a n d C h i e f Ex e c u t i v e O f f i c e r,
C h i e f Fi n a n c i a l O f f i c e r a n d Tre a s u re r
Elliot H. Levine
CPA a n d S e n i o r M e m b e r o f
L e v i n e & S e l t ze r, L L P
Ronald J. Macklin
Vi c e P re s i d e n t a n d D e p u t y Ge n e ra l C o u n s e l,
Na t i o n a l G r i d
Aud itor s
Holtz Rubenstein Reminick LLP
125 Baylis Road
Melville, New York 11747
Philip F. Palmedo
Pre s i d e n t o f
Pa l m e d o A s s o c i a t e s
Nader G. Salour
Pr i n c i p a l, Cy p re s s R e a l t y o f F l o r i d a, L L C
Richard B. Smith
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
Vi c e Pre s i d e n t, C o m m e r c i a l B a n k i n g D i v i s i o n,
Fi r s t Na t i o n a l B a n k o f L o n g Isl a n d
Tr a n sfer A gent a nd Re g i st r a r
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
GY RODY NE
C o m p a ny o f A m e r i c a, In c.
One Flowerfield, Saint James, NY 11780
Tel: 631.584.5400 / Fax: 631.584.7075 / www.gyrodyne.com