GYRODYNE LLC GYRO
January 05, 2018 - 7:26pm EST by
AltaRocks
2018 2019
Price: 20.50 EPS 0 0
Shares Out. (in M): 1 P/E 0 0
Market Cap (in $M): 30 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 30 TEV/EBIT 0 0

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  • Micro Cap
  • Illiquid
  • Liquidation
  • real estate assets

Description

SUMMARY

Gyrodyne LLC (GYRO) is a thinly-traded, micro-cap liquidation with a twist: Before marketing its last two significant real estate assets, the Company is investing to potentially secure what it believes will be value-enhancing entitlements for the parcels.  If one is optimistic about GYRO’s likelihood of obtaining the zoning and subdivision changes it seeks, the current stock price provides an opportunity for a reasonable return in the medium term.

 

[Note: We started this write-up at year-end with the bid at $20.08. The bid has moved up a little since.]

BACKGROUND

GYRO may be best know as a special situation because of its multi-year litigation against the State of New York [Gyrodyne v. The State of NY, #2010-033-604 Claim No. 112279] over an eminent domain taking of a large portion of GYRO’s property in Smithtown and Brookhaven, NY that abutted SUNY - Stony Brook.  In July 2012, Gyrodyne received $167,530,657 from the State of New York in payment of judgments in Gyrodyne’s favor.  The judgement consisted of $98,685,000 in additional damages, $1,474,940.67 for Gyrodyne’s costs, disbursements and expenses, and $67,370,716 in interest. The $167.5mm payment concluded Gyrodyne’s case, commenced in 2006, for just compensation for the 245.5 acres of its Flowerfield property taken by the State.

 

Upon receiving the judgement from the State of NY, GYRO issued a number of special dividends, commenced its liquidation proceeding and began selling off assets.  As of 9/30/17, the Company retains ownership of two significant properties:  (i) the remaining 68-acre parcel at Flowerfield (Smithtown, NY) and (ii) 12-acre parcel in Cortlandt Manor, NY.  It also owns one medical building in Port Jefferson, NY and a residual interest in a Florida development project.

ASSETS

The Company’s corporate strategy is to pursue zoning and/or entitlement opportunities which are intended to increase the values of its two remaining major properties, Flowerfield and Cortlandt Manor so that they can be sold at higher prices (compared to those achievable under their current entitlements).  The Company believes these land development initiatives will maximize distributions to shareholders during the liquidation process within a reasonable period of time.  The most recent filing indicates the liquidation will be completed by the end of 2018, though we think it may be extended in order to secure the desired subdivision of the Flowerfield property from the town of Smithtown.

 

Gyrodyne Remaining Real Estate Assets:

  • Flowerfield
  • Cortlandt Manor
  • Port Jefferson Medical - 1 building
  • The Grove - Limited partnership interest
  • Flowerfield residentially zoned parcel - 5 acres

Flowerfield (map)

During the condemnation litigation GYRO and the State of NY each produced an appraisal of the entire Flowerfield parcel at trial to establish the value of the 245.5-acre property being “taken” by the State for use at SUNY Stony Brook.  The State’s appraisal postulated that the “highest and best use” for the property was a “light industrial” development, in keeping with the property’s existing zoning.  GYRO’s appraisal suggested that the highest and best use was residential development even though that would require a zoning change in both Smithtown and Brookhaven NY.  GYRO’s appraiser produced an “expected value” based on probabilities of approval of a zoning change in each of the two towns.  

 

Ultimately, the Judge sided with GYRO based largely on the ineffectiveness of the Assistant Attorney General of NY and the expert witnesses he called on the State’s behalf.  The ruling was upheld on appeal.

 

Summary of Condemnation Litigation Appraisals (2005 Valuation Date)

 

GYRO Appraisal

State of NY Appraisal

Highest and Best Use

Multi-residence residential development - PDD (“Planned Development District”)

Light industrial use - office, medical office

Density

3-6 Residential Units per acre or 249-312 Units

Subdivide into 5-10 acre lots

Zoning change required

YES.  

In two towns:

Brookhaven AND Smithtown, NY

NO

Value as of November 2005 of “Remaining Property”

i.e. property that was not taken by SUNY

Total Value: $25.7mm - $30.1mm

Vacant Land: $4.4mm

Existing Buildings: $11mm


Total value: $15.4mm

Note that land value includes all sales and development expenses.  Therefore not apples to apples comparison to valuation shown below

Value per residential unit or per acre

$125k per residential unit (adjusted for probability of zoning change)

Land (gross value): $195k/acre

Buildings: DCF

 

Notwithstanding the opinion of the Company’s appraiser in the condemnation proceeding, GYRO is currently pursuing a modified “light industrial” development at Flowerfield as the State’s appraiser suggested.  Based on our visit to the property, discussions with knowledgeable parties and a review of the Smithtown budget and zoning regulations, we believe this course of action is logical.

Current Gyrodyne Subdivision Proposal for Flowerfield

The critical open question with respect to the Flowerfield parcel is will the requested subdivision be approved and over what time frame?  Smithtown has a history of lengthy development approvals.

 

After nearly two years of preliminary work, GYRO has recently filed an application with the town of Smithtown seeking an 8-lot subdivision of the parcel for mixed-use development.  None of the property in the proposal is in the town of Brookhaven.  GYRO maintains that it can pursue all of the following uses for the property “as of right” given the existing Light Industrial zoning of the parcel.  Importantly, the proposed density is considerably below permitted density in a nod to surrounding uses and the Town’s desire to maintain open space.  

 

Proposed development on subdivided parcels (excludes residential zoned parcel):

 

Subdivision Lot

Lot Size (Acres)

Potential/Proposed Use

1

18

Existing industrial uses

2

12

“Celebrations” - existing catering/event facility.  This property was sold in 2002 and is not owned by GYRO. The “subdivision” of this parcel needs to be formalized.

3

6

Hotel with restaurant, conference space and spa

4

4

Medical/R+D Office

5

6

Medical/R+D Office

6

2

Assisted Living facility

7

3

Assisted Living facility

8

23

Common area/open space

With wastewater treatment facility

 

Note: the parcel numbers on the map don’t all match the above table from the GYRO 10Q

 

  • Demand for proposed uses:
    • Growing 75+ population nationally and in the St. James/Stony Brook Area
    • Proposed growth at SUNY Stony Brook medical center (nearly doubling by 2020) increasing demand for medical related office space
    • Strong demand at existing hotel on other side of SUNY campus

 

  • Economic Impact to Smithtown (based on GYRO consultant)
    • $3.5mm in new net property taxes
    • $90mm in direct economic output
    • 900 jobs
    • No increase in school enrollment anticipated

 

  • Status of Subdivision Application
    • The Suffolk County Planning Commission approved unanimously (11-0) without conditions on 8/2/17.  As a result, only a majority of the 5-member Smithtown Town Council is required for approval.  Had Suffolk County applied conditions, a Super-Majority would have been required.  Subdivision application now referred back to Town of Smithtown Planning Board which is reviewing the traffic impact study and environmental matters.  View video of GYRO presentation to Planning Board on 11/15/17 - here.  Public concern expressed was overwhelmingly related to potential traffic impact.

 

  • Likely Smithtown concerns/considerations in assessing subdivision application
    • Town Budget

GYRO claims the proposed subdivision, when fully built-out, will deliver an additional $3.5mm in annual property tax revenue.  In 2016 Smithtown Real Property Tax Revenue was $55mm thus the potential GYRO impact would be a 6% increase in property tax revenue.

Smithtown has a significant budget challenge.  Like many other municipalities, Smithtown’s budget has a ticking time bomb in the form of OPEB or “Other Post-Employment Benefits” related to health care.  The problem is caused by an ongoing, very generous (for long-serving retirees) split of 90% of cost borne by the Town and 10% by the retiree.  For reference, some municipalities (at least in MA) are now 50/50, which is still expensive, but materially better than 90/10.  From 2016 Audited Smithtown Financials - $79mm OPEB obligation and growing each year: