Spencer Equity in the First Quarter: Fulton Financing Releases Cash Before AFFO Stabilizes

Spencer Equity entered the first quarter with the same question that framed its annual report: is the value created at Fulton and Harrison II starting to become cash that the group can actually access, or is it still trapped inside assets, trustee accounts, and debt layers. The quarter gives a partial and more constructive answer. The new Fulton financing was completed after the balance-sheet date, should leave the company with about $45 million of net excess cash, and also repaid a $50 million partner loan. That matters because one of the major open issues from the annual analysis has moved from negotiation to actual cash. Still, the operating picture has not stabilized: the quarter ended with a $12.3 million net loss, negative AFFO of $10.2 million, and negative operating cash flow of $15.2 million. Harrison II also delivered a point of relief for Series E, with a 76.6% loan-to-collateral ratio and a $5.3 million deposit into the trustee account, but that cash still goes first to early bond repayment rather than to free group cash. The current read is better financing access, not a fully repaired cash-generating profile. Over the next few quarters, the market will care less about book value itself and more about whether Fulton and Harrison II can start covering their debt cost through actual NOI.

Fulton Financing Closes One Waiting Point

The company is a foreign bond issuer that mainly owns residential income-producing real estate in New York, with a meaningful layer of regulated assets, projects that moved from development into lease-up, and a debt structure that splits cash among several bond series. That means high asset value is not enough. The real question is where the value is created, who touches the cash first, and whether that cash can move up to the company before it is absorbed by repayments, trustee accounts, or stabilization costs.

Fulton is the main event in this quarter. After the balance-sheet date, the project closed a financing package of up to about $765 million, replacing an existing $555 million loan that bore SOFR+4%. The new financing bears SOFR+2.85%, with the SOFR component swapped at 5%, and should leave the company with about $45 million of net excess cash. In addition, the $50 million loan that Spencer had provided to its project partner was fully repaid as part of the refinancing.

This is not a technical detail. The prior annual analysis framed Fulton as one of the two assets that had to prove that accounting value could turn into real liquidity. In the first quarter, Fulton already carried a $1.0405 billion fair value, generated $6.3 million of quarterly NOI, had 581 free-market residential leases out of 770 units, and had leases covering 64,220 square feet of commercial space out of 98,357 square feet. The new financing does not prove the asset is stabilized, but it removes a clear risk: the company is no longer relying only on the old bridge loan and the expectation of future financing.

The loan terms still show that the lender views Fulton as an asset on the way to stabilization, not as one that has fully arrived. A Cash Sweep is active until the project meets, for two consecutive quarters, either a debt-service coverage ratio of at least 1.05 or a debt yield of at least 7.0%. The Carry guarantee expires only after a debt-service coverage ratio of at least 1.10 and a 7.0% debt yield are maintained for two consecutive quarters. In other words, the money has arrived, but the asset still has to prove that recurring NOI can replace guarantees and protective mechanisms.

NOI Is Rising, but Adjusted Profit Still Comes Before Stabilization

The positive number in the quarter is not net profit. It is NOI. Rental and related revenue rose to $20.7 million, compared with $12.3 million in the parallel quarter. NOI rose to $20.8 million, compared with $18.3 million. The increase came mainly from the first-time consolidation of Fulton at the end of 2025, progress at Harrison II Rental, and higher income from real-estate financing loans.

AFFO still tells a weaker story, and that is where the quarter prevents an overly positive read. AFFO under management's approach fell to negative $10.2 million, compared with negative $1.9 million in the parallel quarter. AFFO attributable to shareholders was negative $7.1 million. The two large assets currently in lease-up and stabilization, Harrison II Rental and Fulton, together created about $8 million of negative AFFO, because they already carry the full financing cost but do not yet generate full NOI.

That gap matters because it separates an asset that is starting to operate from an asset that already supports the capital structure. At the income-statement level, profit from ordinary activities rose to $18.9 million, but finance expenses rose to $28.7 million, and the company recorded a $4.5 million foreign-exchange expense instead of a $5.8 million gain in the parallel quarter. The $12.3 million net loss does not contradict the NOI improvement. It shows that the transition from lease-up to adjusted profitability is still expensive.

Harrison II Dropped Below the Trigger, but It Still Has Not Released Surplus Cash

The second area of progress is Harrison II Rental. At the end of 2025, the story was more strained: Series E was close to its LTV ceiling, and the amended deed allowed sales of pledged assets only if all net proceeds were deposited into the trustee account and used for early repayment. In the first quarter, the company completed the sale of a commercial condo unit for about $7 million. Of that amount, $1.47 million is designated for improvements in the sold asset, and about $5.3 million was deposited into the Series E trustee account.

The important number is the loan-to-collateral ratio: 76.6% at the end of March, below the 77.5% interest-step-up trigger and below the 80% financial covenant. That is real relief compared with the starting point earlier in the year. But it still does not turn Harrison II Rental into a free cash source. The proceeds from the commercial unit are intended for early repayment, and the Series E route still works first through the trustee account.

The attached appraisal sharpens the same gap. The As Is fair value of the rental portion of Harrison II was $142 million, with another $13.7 million attributed to commercial condo units under contract, bringing the total to $156 million. But the appraiser's stabilized NOI assumption is about $4.8 million a year, while the asset generated only $822 thousand of NOI in the first quarter, with 0% average residential occupancy and 68.92% commercial occupancy. The value depends on lease-up and tax benefits, not on current cash flow that is already stabilized.

On the condo side, Series F looks more comfortable, but the quarterly pace still matters. From the start of the project through near the report date, 101 condo units had been delivered for total consideration of about $170 million, of which about $156 million had been released to the property company or used for early repayment and interest payments. That is a clearer route to debt reduction. On the other hand, only 3 apartments were delivered in the first quarter for about $6 million, and no additional condo deliveries occurred from early April through near the report date. The 12 additional sale agreements, totaling $22.6 million, are the next proof point, not cash certainty.

Cash After All Uses Still Defines the Year

The relevant cash frame here is all-in cash flexibility, meaning cash left after operating cash flow, investments, repayments, and distributions. In the first quarter, that frame is still negative: operating cash flow was negative $15.2 million, investing activity used $34.2 million, and financing activity used $14.9 million, mainly due to $23.4 million of bond repayments. Consolidated cash fell from $154.2 million at the end of 2025 to $90.9 million at the end of March.

At the solo-company level, the gap is sharper. The company itself had $1.0 million of cash against $60.1 million of current liabilities, mainly current bond maturities. Management points to $72.7 million of cash held by Spencer Equity Group LLC, the subsidiary that owns the property companies, and presents positive solo working capital of $13.7 million after taking that cash into account. This distinction matters: there is no official liquidity warning sign, but a meaningful part of liquidity depends on the subsidiary layer and on moving value up the structure.

The Fulton financing meaningfully improves the starting point for the second quarter. About $45 million of excess cash and the repayment of a $50 million partner loan are real changes compared with the end-March balance sheet. But they do not, by themselves, solve cash quality. The next quarters need to show three things: Fulton NOI rising with continued lease-up, Harrison II Rental beginning to generate residential rent rather than only commercial sales that go to the trustee account, and Series F condo sales returning to a pace that reduces debt without getting stuck in inventory.

The current conclusion is that the first quarter improved access to cash more than it improved adjusted profitability. This was a quarter of moving from pending financing to signed financing, not yet a quarter of clean operating cash flow. The counter-thesis is strong: if Fulton continues to raise occupancy and the new financing remains manageable, the adjusted loss in this quarter may later look like a short transition cost. What would weaken that view is continued negative AFFO alongside slow Harrison II condo deliveries or more Harrison II Rental monetizations that do not release surplus cash. Over the next 2-4 quarters, the market is likely to focus less on the valuation headline and more on a simpler question: how much of the new cash and new NOI actually reaches the layers that serve all creditors and equity holders.