Realty Finance Corporation Provides Company Update and Financial Statements for Years Ended December 31, 2011 and 2010

NEEDHAM, Mass. April 3, 2012 /PRNewswire/ -- Realty Finance Corporation (Other OTC: RTYFZ.PK) today reported net income for the year ended December 31, 2011 of $1.1 million, or $0.04 per diluted common share. As previously reported, the Company had a net loss for the year ended December 31, 2010 of ($126.6) million, or ($4.11) per diluted common share.

For the 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, 2011, the Company had $4.5 million of unrestricted cash, or approximately $0.14 per share, as compared to $3.0 million of unrestricted cash, or $0.10 per share, as of December 31, 2010. 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") and (ii) advancing  agent fees from its interest in its 2007 CDO ("CDO II"). 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 $0.8 million as of December 31, 2011 as compared to $1.2 million as of December 31, 2010. 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 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 February 21, 2012, there was $253.2 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 as of December 31, 2011.  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 December 30, 2011, there was $691.7 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

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 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 its 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.

The Company reported losses for the year ended December 31, 2010 on its remaining investment in the CDO as a loss from discontinued operations.   For clarification purposes the following is a schedule of changes in Stockholders' Equity (in thousands).

(1) The 2009 consolidated financial statements reported accumulated other comprehensive losses, or AOCL, of approximately $28 million.  The AOCL was created solely by hedge transactions of the CDOs.  As a result of no longer consolidating the assets, liabilities, revenues or expenses of the CDOs in the Company's consolidated financial statements, the AOCL was reduced to $0 as of December 31, 2010.  The loss from discontinued operations for the year ended December 31, 2010 is increased by the AOCL of approximately $28 million, resulting in no net change to total Stockholders' Equity.

Joint Venture Investments

As of December 31, 2011 and 2010, the Company had remaining equity investments in three joint ventures.  Two of 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 subsequent to December 31, 2011, 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 defendant.  However, there can be no assurance of any recovery whatsoever from either judgment, or the timing of any such recovery.

The Company invested $16.5 million in the third joint venture (the 1515 Market Street joint venture).  The $70.0 million mortgage on this property was current but matured in January 2012.  Given current market conditions, management believes that the value of this property is significantly below the amount owed to the lender and, as such, it is unlikely that the Company will recover all of its investment.  As of December 31, 2010, the Company had taken impairment charges totaling $14.3 million. No additional impairment charge has been taken for the year ended December 31, 2011.  The Company along with its operating partner have been negotiating with the lender to restructure the loan to allow for a write down of the principal balance in an effort to recoup a portion of the original equity investment and retain ownership of the asset.  As part of these negotiations, the joint venture has sought out an additional equity partner to provide necessary capital for leasing and capital costs.  Should a viable loan structure be agreed to with the lender, the proposed new equity partner will receive a preferred return along with a significant ownership stake in the property.  There can be no assurance that the Company will be able to successfully negotiate the loan restructure with the lender and the proposed new equity partner, or at all, nor what the terms or timing of any such restructuring or equity investment would be.   

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 payable (See "Liquidity" section above for more details). During the year ended December 31, 2011, the Company received $0.945 million and made payments on the promissary note in the amount of $0.473 million including interest.  During the year ended December 31, 2010, receipts and payment on the promissory note totaled $1.051 million and $0.526 million, respectively.  The Company believes that no further impairment or revenue recognition is warranted at this time; however, the Company expects distributions from the 1515 Market Street joint venture to be minimal if any during 2012, given the lender is sweeping all of the joint venture's available cash flow.

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

The Company previously 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 currently considering its options in pursuing collection under the developer's guarantee of the loans. However, at this time the Company does not expect to recover any of its $9.8 million investment.

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.  On October 24, 2011, the plaintiff in the class action lawsuit chose not to pursue its right for further appeals.

The Company was awarded a $22.6 million judgment by the United States District Court for the District of Maryland against Brian A. McCormick and Charles W. Moore, guarantors of two mezzanine loans for residential development projects in Maryland.  All appeals have been exhausted. The Company received $150,000 in July 2011 pursuant to a settlement with Mr. Moore.  The Company is pursuing collection efforts against Mr. McCormick.  However, there can be no guarantee of any recovery of this judgment, or the timing of any such recovery.

Strategic Direction of the Company

For the past several years, the Company has had very limited opportunities to pursue strategic alternatives due to the existence of the class action lawsuit discussed above.  As a result, the Company's efforts in exploring strategic alternatives to maximize stockholder value were hampered.  While the Company continues to focus on controlling operating expenses while effectively managing its investments (including CDO I) and increasing its cash position, 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.  These activities have been more active since the resolution of the class action lawsuit.  The Board's goal remains to maximize shareholder 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.

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. Doublas 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.  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.  For additional details, see the  Company's press release dated February 2, 2011.

On April 3, 2012, the Company issued 450,000 restricted shares of the Company's common stock, with a value of $27,000 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.  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.

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 and 2011 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.

SOURCE Realty Finance Corporation