Realty Finance Corporation Provides Company Update and Financial Statements for Year Ended December 31, 2010 and for the Six Months Ended June 30, 2011

NEEDHAM, Mass., Oct. 7, 2011 /PRNewswire/ -- Realty Finance Corporation (Other OTC: RTYFZ) today reported a net loss for the year ended December 31, 2010 of ($126.6) million, or ($4.11) per diluted common share and a net profit for the six-months ended June 30, 2011, of $42 thousand, or $.001 per diluted common share.

For year ended December 31, 2010, approximately $120 million of the losses are from the Company's investments in its two sponsored collateral debt obligations, or the CDOs.  Losses in the Company's CDOs exceed the Company's investment in the CDOs. Recovery of any of the Company's investments in the CDOs is not likely or expected.  

Liquidity

As of December 31, 2010, the Company had $3.0 million of unrestricted cash, or approximately $0.10 per share. As of June 30, 2011 the Company had $2.8 million of unrestricted cash, or $.09 per share. The Company's primary sources of cash flow consist of (i) servicing fees, advancing agent fees and the senior collateral management fee from its 2006 CDO ("CDO I"), (ii) advancing  agent fees  from its interest in its 2007 CDO ("CDO II"), and (iii) distributions from its 1515 Market Street joint venture property. The Company covers any operating cash shortfalls with its unrestricted cash reserves. The Company's unrestricted cash balance at September 30, 2011 amounted to $3.1 million.

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 $1.0 million as of June 30, 2011. This note was issued in connection with the retirement of its trust preferred securities in July 2009, and is solely payable from a portion of any future distributions arising from the Company's interest in the 1515 Market Street joint venture property.

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 and 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 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 June 21, 2011, there was $376.0 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 $51.4 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 June 22, 2011, there was $760.9 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.

Financial Reporting

The Company has historically 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.   The Company has 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 has the risks or rewards typically associated with ownership. Therefore, as of December 2010, the Company is no longer the primary beneficiary of either CDO and should 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 its interest in the CDOs as an unconsolidated equity interest.  In prior years, the Company's consolidated financial statements included the  assets, liabilities, revenues or expenses of the CDOs.  Accordingly, the Company is not showing comparative financial statements.

The Company is reporting the CDO losses for the year ended December 31, 2010 as a loss from discontinued operations.  

For clarification purposes the following is a schedule of changes in Shareholders' Equity (in thousands).

Joint Venture Investments

As of December 31, 2010 and June 30, 2011, the Company has remaining equity investments in three joint ventures.  Two of these joint ventures have been fully reserved for.  The mortgage on each of these two 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 $26.7 million it invested in these two properties.  

In the third joint venture, the Company has invested $16.5 million.  The $70.0 million mortgage on this property is current but matures in January 2012.   Management believes that the market value of the property is significantly below the property's mortgage and such value is unlikely to recover prior to the upcoming mortgage maturity.  It is therefore unlikely that the Company will recover all of its investment, and therefore has taken impairment charges totaling $14.3 million.

In 2010, the Company transferred, by foreclosure proceedings or other transfer, its equity investments in three joint ventures, Loche Raven Village Apartments, Belcrest Office, and Springhouse, to the respective lenders of the ventures.

Other Assets

As of December 31, 2010, 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 is continuing to work with the developer in an attempt to recoup a portion of its investment. However, at this time the Company does not expect to recover any of its $9.8 million investment.

Strategic Alternatives

In light of the current position of the Company, 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 three 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.  The strategic alternatives that the Board has received and investigated in years prior to 2011 have either been determined not to have been viable, 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 or were terminated by the counterparty.  

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. On July 26, 2011, the Second Circuit Court of Appeals affirmed the district court decision that dismissed the class action case against the Company and the individual defendants.  Whether the plaintiffs will pursue additional legal actions is not known.   The deadline for the plaintiffs to petition the U.S. Supreme Court for certiorari is on October 24, 2011. 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. In July 2011, the Company reached a settlement for $150,000 with one of the borrower's and will continue to pursue collection efforts against the other borrower.  However, there can be no guarantee of any recovery of this judgment, or the timing of any such recovery.

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 at such time, was appointed Chief Executive Officer and President.

In February 2011, 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. 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.  Mr. Witkin and Mr. Koenigsberger do not receive any compensation for their service as executives of the Company, although they do receive various director fees.  No severance payments were made in connection with Messrs. Costantini's, 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.  (See press release dated February 2, 2011).

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 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 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 and 2010 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; 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 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; 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