Realty Finance Corporation Provides Company Update and 2009 Financial Statements

ROCKY HILL, Conn., May 24 /PRNewswire-FirstCall/ -- Realty Finance Corporation (Pink Sheets: RTYFZ) today reported a net loss for the full year 2009 of ($125.6) million, or ($4.09) per diluted common share.

Adjusted funds from operations ("AFFO") for the full year 2009, which exclude the results of discontinued operations and any impact from the application of ASC 825-10, was ($198.7) million, or ($6.45) per diluted common share, after recording a $177.0 million provision for loan losses.  The provision for loan losses is made up of $107.4 million with respect to whole loans and $69.6 million with respect to mezzanine loans and B-Notes.  

Liquidity

As of December 31, 2009, the Company had $3.5 million of unresticted cash.  The Company's sources of cash flow consist of (i) distributions and the collateral management fee from its 2006 collateralized debt obligation ("CDO I"), (ii) distributions from its interest in its 2007 collateralized debt obligation ("CDO II"), and (iii) distributions from its joint venture assets.  However, the Company is only currently receiving cash flows from its collateral management fee on CDO I.  These cash flows do not fulfill the Company's working capital requirements in the short and long term.  The Company covers its operating cash shortfall with its unrestricted cash reserves.  As of the date hereof, the Company has $3.0 million of unrestricted cash (or approximately $0.10 per share).  

As of December 31, 2009, the $40.4 million of restricted cash is comprised primarily of $31.7 million of escrow reserve requirements related to tenant improvements and leasing reserves on a number of the Company's first mortgage loans and $8.5 million of cash available within its collateralized debt obligations ("CDOs").  The Company will not have access to this cash for working capital purposes.

As a result of significant personnel downsizing and the Company's focus on expense reduction, on November 30, 2009, the Company entered into an early buy-out of its $2.8 million ten-year office lease obligation for $0.6 million.  The Company moved to a new location in January 2010 and entered into a month-to-month lease agreement with the landlord.  

The Company has no recourse debt obligations.  The Company's $50.0 million of trust preferred securities was retired in July 2009 for $9.0 million and a $1.5 million non-recourse promissory note.  The promissory note is solely payable from a portion of any future distributions arising from the Company's interest in the 1515 Market Street joint venture property.

With minimal incoming cash flows, the Company's remaining cash may not 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, the Company's negative operating cash flows and the class action lawsuit, there can be no assurance of any future distributions to stockholders.

Collateralized Debt Obligations

Over 90% of the Company's investments are pledged as collateral for its CDOs.  The CDO bonds are non-recourse to the Company.  The Company has invested in the junior most bonds and equity in the CDOs.  The Company's CDO bonds contain interest coverage and asset over-collateralization covenants that must be met in order for the Company to receive cash flow distributions and a portion of its collateral management fee.  As was previously announced, the Company has failed the over-collateralization tests in both of its CDOs in 2009.  As a result of these failures, net cash flows (other than the senior collateral management fee from CDO I) from both CDOs continue 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 fee and special servicing fees associated with the 2006 CDO.  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 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 April 20, 2010, there was $437.4 million of outstanding third party debt within CDO I which is senior to the Company's investment.  This CDO has realized losses totaling approximately $27.0 million to date.  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.

The Company's investment in CDO II at the time of its formation was  $120.0 million.  As of March 31, 2010, there was $816.0 million of outstanding third party debt within CDO II which is senior to the Company's investment   This CDO has realized losses totaling approximately $67.2 million to date.  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 $120.0 million investment.

Joint Venture Investments

As of December 31, 2009, the Company has equity investments in six joint ventures.  Five of these joint ventures have been fully reserved for.  The mortgage on each of these five properties is in default.  The Company's expectation is that these properties will either be sold or transferred to its respective lender. The Company does not expect to recover any of the $54.2 million it invested in these five properties.  

In the sixth joint venture, the Company has invested $16.5 million.  The $70.0 million mortgage on this property is current and matures in January 2012.  The Company is in dispute with its operating partner.  Given the decline in commercial real estate values and the upcoming maturity of the mortgage, it is unclear what recovery, if any, will be on this investment, or what the timing of such recovery is.  

Other Assets

As of December 31, 2009, the Company invested $9.8 million in two land development loans with the same developer.  Both projects have experienced significant delays and the inability to obtain financing.  Both of these investments have been fully reserved for.  The Company does not expect to recover any of its $9.8 million investment.

Stockholders' Equity

Stockholders equity was $102.3 million at December 31, 2009.  The $102.3 million reflects the impact under Generally Accepted Accounting Principles ("GAAP") for mark-to-market accounting on the Company's CDO bonds, CMBS investments and derivatives.  Excluding the impact of mark-to-market accounting, the Company's stockholders' equity would have an accumulated deficit.  The accumulated deficit is a result of significant realized losses recognized to date as well as reserves and impairments recorded to date on the Company's investment portfolio.

Strategic Alternatives

In light of the recent financial and credit crises in the real estate, credit and structured finance marketplaces, the Company's board of directors (the "Board") has solicited, evaluated and engaged in discussions with respect to a wide range of strategic alternatives over the past two years.  It has investigated each proposal in light of the circumstances surrounding the Company at the time, and will continue to do so in the future in the event the Board receives new or modified proposals.  The strategic alternatives that the Board has received and investigated to date have either been determined not to have been viable or lacked sufficient information or credibility to enable the Board to make informed decisions as to the merits of such alternatives or to proceed with such action.  

While the Board continues to explore various strategic options for the Company, there is no guarantee that any agreement could be reached.  In addition, the Company has been evaluating a liquidation of the Company, including filing a Chapter 7 bankruptcy, and may ultimately determine to wind down the affairs of its business and distribute remaining cash, if any, to its stockholders due to, among other things, the Company's inability to complete a strategic transaction, the significant reduction in the value of the Company's platform,  the Company's inability to execute its business plan, the Company's inability to obtain new capital, the Company's lack of future sources of cash flow, the Company's operating cash shortfalls, the Company's ability to operate as a going concern, the numerous defaulted investments in the Company's portfolio, the significant reduction of Company personnel and the continuing volatility of real estate and real estate credit markets.

The Company continues to focus on controlling operating expenses while effectively managing its investments, including CDO I.  Despite the difficult commercial real estate environment and the disappointing financial results, the Company remains committed to maximizing stockholder value.

Legal Proceedings

A putative class action lawsuit was filed on October 30, 2007 in the United States District Court for the District of Connecticut alleging that the offering materials in connection with the Company's initial public offering were materially misleading.  The suit alleged violations of the Securities Act of 1933, as amended, and sought unspecified damages on behalf of persons who purchased shares of the Company's stock in the Company's initial public offering and through August 6, 2007. The Company and the individual defendants filed a motion to dismiss the second amended complaint, and on July 29, 2009, the court issued its decision granting the motion to dismiss.  On August 12, 2009, the plaintiffs filed a motion seeking reconsideration of the July 29, 2009 decision or, alternatively, leave to file a third amended complaint.  The defendants opposed the motion, and on March 25, 2010, the court denied the motion in all respects.  On April 23, 2010, the plaintiffs filed a notice of appeal, indicating their intent to appeal the district court's dismissal of the case to the United States Court of Appeals for the Second Circuit.

An adverse resolution of the class action lawsuit could have a material adverse effect on the Company's financial condition and results of operations.  The Company continues to vigorously defend this action. However, the Company is not presently able to estimate potential damages, if any, related to this lawsuit.

The Company was awarded a $22.6 million summary judgment on a guarantee claim against the borrowers of two mezzanine loans. To date, the Company has not been able to collect on such judgment.  It continues to pursue collection efforts.  However, there can be no guarantee of any recovery of this judgment, or the timing of any such recovery, if any.  The defendant appealed the judgment on January 28, 2010.

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 Change

On May 23, 2010, Vincent J. Costantini resigned as Interim Chief Executive Officer and President of the Company and a member of the Board for family-related reasons, effective immediately.  Douglas C. Eby, Chairman of the Board, has been appointed Chief Executive Officer and President.  Mr. Eby has been a member of the Board since July 2005 and Chairman of the Board since September 2009.  In connection with Mr. Costantini's resignation, the Board reduced the number of directors from four to three, which three directors consist of Messrs. Douglas C. Eby, Kenneth J. Witkin and Ricardo Koenigsberger.

2010 Annual Meeting of Stockholders

The 2010 annual meeting of stockholders of the Company will be held on Wednesday, July 14, 2010 at 10:00AM, local time, at Clifford Chance LLP's New York office, located at 31 West 52nd Street, New York, New York 10019. At the 2010 annual meeting, stockholders will vote upon the following proposals:

• To elect our board of directors to serve until the 2011 annual meeting of stockholders and until their successors are duly elected and qualify; and
• To act upon any other matters that may properly be brought before the annual meeting or at any adjournments or postponements thereof.

The Board has fixed the close of business on Friday, June 4, 2010, as the record date for determining the stockholders entitled to notice of, and to vote at, the 2010 annual meeting, and at any adjournments or postponements thereof.  

Financial Statements

The Company can give no assurance that the 2009 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 Pink OTC Markets, or Pink Sheets.  While not a requirement, the Pink Sheets 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 the 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 and 2009 and does not expect to have any taxable income in the 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 shortfall; 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; 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 Pink Sheets; availability, terms and deployment of short-term and long-term capital; availability of qualified personnel; 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; the status of the appeal of the class action lawsuit; 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.

SOURCE Realty Finance Corporation