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FUR > SEC Filings for FUR > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for WINTHROP REALTY TRUST

Form 10-Q for WINTHROP REALTY TRUST


8-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as "approximates," "believes," "expects," "anticipates," "intends," "plans," "would," "may" or similar expressions in this Quarterly Report on Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, but are not limited to, those set forth in our Annual Report on Form 10-K for the year ended December 31, 2011 under "Forward Looking Statements" and "Item 1A - Risk Factors," as well as our other filings with the Securities and Exchange Commission. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on forward-looking statements, which are based on information, judgments and estimates at the time they are made, to anticipate future results or trends.

Management's Discussion and Analysis of Financial Condition and Results of Operations include a discussion of our unaudited consolidated financial statements and footnotes thereto for the three and nine months ended September 30, 2012 as compared with the three and nine months ended September 30, 2011. These unaudited financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Overview

As a diversified REIT, we operate in three strategic segments: (i) operating properties; (ii) loan assets; and (iii) REIT securities. As such, we seek to focus our investing in the segment we believe will generate the greater overall return to us given market conditions at the time. In prior years we have demonstrated our ability to adjust our business plan to capitalize on evolving marketing conditions both with respect to business segment and capital structure. During 2012 we have and expect to continue to execute an investment strategy that focuses on a current yield and long term appreciation by pursuing value opportunities in accretive real estate assets throughout the capital stack which includes investments in the acquisition of distressed debt and fulcrum securities, as well as new loan originations, operating properties, control transactions and publicly traded securities. As opportunistic investors, we will continue to invest in value opportunity plays which we believe will yield superior risk adjusted returns. These investments may have returns weighted towards the back end of the invested life which may negatively impact current earnings. We will mine our existing portfolio for follow-on opportunities and will seek to timely realize returns on such investments subject only to any limitations imposed in order to maintain our REIT status. Complex and difficult investments have frequently been the basis for our best returns.

We believe that the economic recovery while slow will continue throughout 2012 and 2013 with gradually increasing rental demand across most asset classes in most major markets. We also believe that lenders will continue to take advantage of their improved balance sheets by accelerating the disposition of their real estate related assets, both debt and real property. Accordingly, we anticipate no diminishment in value opportunities for investing in 2012 and 2013, and we believe that new investments in loan assets as well as preferred equity will continue to provide the most opportunity.

Additionally, to the extent we believe that our Common Share price is not reflective of value, we will seek to repurchase our Common Shares pursuant to a share repurchase program approved by our Board of Trustees which authorizes the repurchase of up to 1,500,000 Common Shares.

During the third quarter of 2012 we invested $31,730,000. See Item 1, Note 4 for a description of our acquisitions. In light of the favorable investing environment, we supplemented our cash reserves with $77,715,000 of net proceeds from our offering of 9.25% Series D Cumulative Redeemable Preferred Shares, which we refer to as our Series D Preferred Shares, in March 2012, and with $83,228,000 in net proceeds from our issuance of 7.75% Senior Notes Payable. Additionally, during the third quarter of 2012 we received $52,551,000 from loan repayments and return of capital distributions from our equity investments. See additional details in our "Liquidity and Capital Resources" section below.


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WINTHROP REALTY TRUST

FORM 10-Q SEPTEMBER 30, 2012

We often acquire assets through joint ventures which allow us to employ third party co-investment capital to maximize diversification of risk and reduce capital concentration while our joint venture partners are able draw on the experienced skill sets we bring to bear on debt restructuring. Our most notable joint venture investments made in 2012 include our investment in the Sullivan Center property in Chicago, Illinois and our recently completed venture with respect to 701 Seventh Avenue in the Times Square area of New York City.

Loan Assets

Our investment strategy in 2012 has and will continue to focus heavily on our loan asset segment which we believe in the current environment will generate the greatest overall return to us.

All of our loans are currently performing in accordance with their terms. During the quarter ended September 30, 2012 we invested approximately $31,730,000 in new loan acquisitions. For a description of our loan assets acquired during the quarter see Item 1. Financial Statements, Note 4.

During the quarter ended September 30, 2012, repayments from expiring maturities on loan assets provided cash proceeds of approximately $53,122,000. These included our loan held by our ROIC-Riverside joint venture acquired and repaid at par value and our SoCal joint venture for which we received approximately $38,407,000 with respect to our $29,800,000 investment acquired in November 2011. Additionally, subsequent to the quarter ended September 30, 2012, our Broward Financial Center loan receivable was repaid providing approximately $30,000,000 in cash proceeds received.

Operating Properties

In addition to the opportunities captured in our loan asset segment, we are experiencing growth in our operating properties portfolio. This growth can also be attributed to distressed loans as lenders seek to divest of real estate on which they previously foreclosed or loans which have a maturity default under which we are able to foreclose and take ownership of the property. For instance, our recently acquired Memphis, Tennessee residential property, Waterford Place, was acquired from a lender who had previously foreclosed on the property.

Subsequent to the quarter ended September 30, 2012, we acquired a 284 unit, multi-family property in Greensboro, North Carolina, and the ownership interest in an entity that owns a 187,000 square foot office building in Cerritos, California, and we entered into a joint venture that acquired the property located at 701 Seventh Avenue in New York, New York. These investments are consistent with our strategy to investment in operating properties that we believe are undervalued, present an opportunity to outperform the marketplace while providing recurring current or potentially recurring cash flow, or can provide superior returns through an infusion of capital and/or improved management.

Consolidated Operating Properties

During the third quarter of 2012 we saw increases in our operating income from our operating properties as a result of favorable operating results from same store properties, that is, properties held during both three month periods, complemented by our new store property operating results. As of September 30, 2012 our consolidated properties were approximately 90.7% leased compared to approximately 89.6% leased at September 30, 2011.

Leasing Activity

Crossroads I - On September 5, 2012 we executed a new lease with Hitachi Data Systems at our Crossroads I office property for 53,000 square feet representing 45% of the rentable square footage of the property expiring in 2024. The annual rent is $945,000 commencing in March 2014 increasing 4% annually for five years and increasing 3% annually until its expiration.

Westheimer - On September 17, 2012, 5400 Westheimer Limited Partnership, a partially owned consolidated entity, executed a lease amendment with the existing net lease tenant, Spectra Energy, which leases the entire 614,000 square foot premises. The initial lease was signed in 2004 and was scheduled to expire April 30, 2018. The new lease extends the lease through April 30, 2026. The Westheimer property is encumbered by a mortgage with a maturity date of April 2016. Negotiated annual lease payments on the modified lease remain unchanged through the maturity date of the mortgage debt, then the base rent decreases to $4,260,000 annually, subject to annual increases thereafter.


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WINTHROP REALTY TRUST

FORM 10-Q SEPTEMBER 30, 2012

Amherst - In September 2012, we entered into a letter of intent with Ingram Micro, our tenant occupying 200,000 square feet of office space in Amherst, New York, to extend their lease through 2023 upon expiration of their existing net lease. The extension terms are in the process of being finalized.

Disposition Activity

We sold our Memphis, Tennessee retail property and our Circle Tower property during the quarter ended September 30, 2012. Results of operations for these properties were classified as discontinued operations for all periods presented. Inclusive of gains and impairment adjustments we recognized a loss of $188,000 and $59,000 for the three and nine months ended September 30, 2012, respectively.

We continue to review our portfolio to divest investments as they mature in value to the point where we may be unlikely to achieve better than market returns and redeploy capital to what we believe to be higher yielding opportunities.

Equity Investments

Vintage Housing - During the three and nine months ended September 30, 2012, the Trust recorded net income from its investment in Vintage Housing of $1,391,000 and $2,326,000, respectively and received cash distributions of $1,452,000 and $4,159,000, respectively. The Vintage properties were 96% occupied at August 31, 2012. The Trust has elected a one month lag period in which it recognizes the equity earnings in arrears.

Sullivan Center - During the first quarter of 2012 we increased our equity investment operating property portfolio with our investment in Sullivan Center, a 942,000 square foot, office and retail property in downtown Chicago. Our contribution of $24,201,000 represents a 50% interest in (i) a $47,458,000 mezzanine loan collateralized by the borrower's equity in the property and
(ii) a 65% future profits participation. The Sullivan Center was 83% leased at August 31, 2012.

Sealy - Two of the investment properties are located in Atlanta, Georgia, (Northwest Business Park and Newmarket), which had occupancies, inclusive of leases signed not yet commenced, of 72% and 50% respectively, at September 30, 2012 as compared to occupancy of 77% and 52%, respectively at December 31, 2011. The third Sealy investment is located in Nashville, Tennessee and was 86% and 83% occupied at September 30, 2012 and December 31, 2011, respectively.

The loans secured by the Newmarket property and the Nashville, Tennessee property continue to be in special servicing. We, together with our venture partner, are attempting to negotiate a restructuring of the debt with the special servicers. There can be no assurance that a restructuring of the loans will be accomplished.

Marc Realty - As of September 30, 2012, we held equity interests in five properties with Marc Realty which consist of an aggregate of approximately 894,000 rentable square feet of office and retail space which was 80% occupied at September 30, 2012 as compared to 79% occupied at December 31, 2011.

REIT Securities

On October 18, 2012 we sold 52% of our holding of shares of Cedar Realty Trust in a block sale at a price of $5.28 per share. We now hold 3,000,716 shares of common stock of Cedar Realty Trust Inc.

As of September 30, 2012 our portfolio of REIT securities had a fair value of $37,191,000 compared to an original acquisition cost of $26,775,000.

Liquidity and Capital Resources

At September 30, 2012, we held $159,251,000 in unrestricted cash and cash equivalents. In addition, as of September 30, 2012 we had, subject to covenant compliance, $50,000,000 available to draw on our revolving line of credit and $37,191,000 in REIT securities.

We believe that cash flow from operations will continue to provide adequate capital to fund our operating and administrative expenses, as well as debt service obligations in the short term. As a REIT, we must distribute annually at least 90% of our REIT taxable income. As a result of this dividend requirement, we, like other REITs, are unable to reinvest all of our operating cash flow and are dependent on raising capital through equity and debt issuances or forming ventures with investors to obtain funds with which to expand our business. Accordingly, we anticipate that capital with which to make future investment and financing activities will be provided from return of capital received from proceeds from loan maturities and prepayment, borrowings, the issuance of additional equity and debt securities, as well as proceeds from sales of existing assets.


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WINTHROP REALTY TRUST

FORM 10-Q SEPTEMBER 30, 2012

Our primary sources of funds include:

the use of cash and cash equivalents;

rents and reimbursements received from our operating properties;

payments received under our loan assets;

disposition of REIT securities;

sale of existing assets;

cash distributions from joint ventures;

borrowings under our credit facilities;

asset specific borrowings; and

the issuance of equity and debt securities.

Contractual Obligations

Public Offerings

On March 23, 2012 we executed an underwritten public offering of 3,220,000 shares of 9.25% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value of $1.00 per share. The shares were issued at a price of $25.0385 per share before underwriter's discount and we received net proceeds of approximately $77,715,000 after underwriting discounts, commissions and expenses.

The Series D Preferred Shares rank senior to our Common Shares. Generally, we are not permitted to redeem the Series D Preferred Shares prior to November 28, 2016, except in limited circumstances. On or after November 28, 2016, we may, at our option, redeem the Series D Preferred Shares, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends on such Series D Preferred Shares up to but excluding the redemption date.

On August 15, 2012 we closed on an underwritten public offering of $75,000,000 of our 7.75% Senior Notes due 2022 (the "Notes") at an issue price of 100% of par value. We received net proceeds, after deducting the underwriting discounts and commissions and estimated offering expenses, of approximately $72,315,000. We are required to pay quarterly interest on the Notes commencing November 15, 2012, and we may redeem the Notes, in whole or in part, at any time or from time to time on or after August 15, 2015 at a redemption price in cash equal to 100% of the principal amount redeemed plus accrued and unpaid interest to, but not including, the redemption date.

On August 23, 2012 the underwriters elected to exercise in full the over-allotment option for the Notes. The closing of the issuance of the additional Notes occurred on August 24, 2012, and we received net proceeds of $10,913,000.

Debt Maturities

At September 30, 2012, our balance sheet contains mortgage loans payable of $238,097,000. We have no mortgage debt maturing in 2012, $15,343,000 maturing in 2013 and $34,478,000 maturing in 2014 with the remainder maturing in 2015 or later. In October 2012, we satisfied $15,247,000 of the debt that was scheduled to mature in 2014. We have a $50,000,000 revolving line of credit which matures in March 2014 with an option to extend to March 2015. On September 30, 2012, we had no borrowing outstanding on the line. We continually evaluate our debt maturities and except as noted above on our Sealy equity investments, based on our current assessment, we believe there are viable financing and refinancing alternatives for debts as they mature that will not materially adversely impact our liquidity or our expected financial results.

Net Operating Loss Carry Forwards

The utilization of a majority of our net operating loss carry forward in 2011 will limit our ability to shelter ordinary taxable income in the future which may require us to distribute funds and reduce cash available for reinvestment on a going forward basis. We have capital loss carry forwards of $43,440,000 which expire from 2014 through 2015.

Cash Flows

Our level of liquidity based upon cash and cash equivalents increased by approximately $118,299,000 from $40,952,000 at December 31, 2011 to $159,251,000 at September 30, 2012.


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                             WINTHROP REALTY TRUST

                          FORM 10-Q SEPTEMBER 30, 2012



Our cash flow activities for the nine months ended September 30, 2012 and 2011
are summarized as follows (in thousands):



                                                        For the Nine Months Ended September 30,
                                                          2012                          2011
Net cash flow provided by operating activities     $            37,712           $            29,659
Net cash flow used in investing activities                     (22,205 )                     (10,127 )
Net cash flow provided by financing activities                 102,792                         1,988

Increase in cash and cash equivalents              $           118,299           $            21,520

Operating Activities

For the nine months ended September 30, 2012, our operating activities generated consolidated net income of $26,284,000 and positive cash flow of $37,712,000. Our cash provided by operations reflects our net income adjusted by: (i) a reduction for non-cash items of $17,057,000 representing primarily earnings of equity investments, current period loan discount accretion and unrealized gains on securities carried at fair value offset by adding back depreciation and amortization expenses; (ii) an increase of $14,065,000 for discount accretion received in cash; (iii) $17,194,000 of distributions from non-consolidated interests; and (iv) a net decrease due to changes in other operating assets and liabilities of $2,774,000. See our discussion of "Results of Operations" below for additional details on our operations.

Investing Activities

Cash flow used in investing activities for the nine months ended September 30, 2012 was approximately $22,205,000 as compared to approximately $10,127,000 for the comparable period in 2011. This change of approximately $12,078,000 resulted primarily from investing activity resulting from the favorable investment environment.

Net cash used in investing activities of $22,205,000 for the nine months ended September 30, 2012 was comprised primarily of the following:

$30,000,000 for the acquisition of the Broward loan receivable;

$21,473,000 for the acquisition of our Memphis, Tennessee (Waterford) Property;

$20,696,000 from the acquisition of four B-Notes;

$14,051,000 for investment in our WRT-Elad joint venture;

$11,753,000 for three new loan originations;

$10,915,000 for investment in our 10 Metrotech joint venture;

$8,036,000 for investment in our WRT-Stamford loan joint venture;

$8,502,000 for investment in capital and tenant improvements at our operating properties;

$7,000,000 for the acquisition of Lexington Realty Trust's investment in Concord;

$6,029,000 for investment in our Vintage Housing Holding joint venture;

$5,654,000 for purchases of REIT securities carried at fair value;

$2,521,000 for the acquisition of our Mentor loan receivable; and

$1,289,000 for investment in our Marc Realty equity investments;

These uses of cash flow were offset primarily by:

$72,342,000 in return of capital distributions from our SoCal Office Portfolio Loan equity investment;

$37,126,000 in collection of loans receivable;

$7,800,000 in return of capital distributions from our ROIC-Riverside equity investment;

$7,024,000 in proceeds from the sale of our Circle Tower and Kroger - Memphis real estate investments;

$4,614,000 in proceeds from the sale of securities carried at fair value; and

$2,297,000 in proceeds from the sale of one of our Marc Realty investments and our FII Co-invest investment.


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WINTHROP REALTY TRUST

FORM 10-Q SEPTEMBER 30, 2012

Financing Activities

Cash flow provided by financing activities for the nine months ended September 30, 2012 was approximately $102,792,000 as compared to cash flow provided by financing activities of approximately $1,988,000 for the comparable period in 2011. This change of approximately $100,804,000 resulted primarily from proceeds from the issuance of preferred shares, the issuance of senior debt and lower principal payments of our mortgage loans payable.

Net cash provided by financing activities of $102,792,000 for the nine months ended September 30, 2012 was comprised primarily of the following:

$86,250,000 in proceeds from the issuance of Senior Notes Payable;

$77,572,000 in proceeds from the issuance of Series D Preferred Shares;

$3,500,000 paid to us in exchange for an interest in our consolidated SoCal Office joint venture;

$2,397,000 in advances on our 450 W 14th Street property mortgage loan payable; and

$13,500,000 in proceeds from a new mortgage loan payable on our Memphis, Tennessee property.

These sources of cash flow were offset primarily by:

$40,000,000 for payments on our revolving line of credit;

$16,113,000 for dividend payments on our Common Shares;

$8,740,000 for mortgage loan repayments;

$3,766,000 for deferred financing costs;

$3,712,000 for dividend payments on our Series D Preferred Shares;

$400,000 for the acquisition of non-controlling interests on our Deer Valley property; and

$6,115,000 for distribution to non-controlling interests, primarily for our SoCal office joint venture.

Future Cash Commitments

Future Funding Requirements

We have future funding requirements relating to our 450 W 14th Street property and our Churchill, Pennsylvania property which total approximately $290,000 at September 30, 2012.

Common Share Dividends

In paying dividends we seek to have our quarterly dividends track cash flow from operations. As a result of our emphasis on total return, while we seek to achieve a stable, predictable dividend for our shareholders, we do not select or manage our investments for short-term dividend growth, but rather towards achieving overall superior total return. While we intend to continue paying dividends each quarter, the amount of our dividend will depend on the actual cash flow, financial condition, capital requirements, utilization of available capital losses, distribution requirements for REITs under the Internal Revenue Code, and such other factors as our Board of Trustees deem relevant. Subject to the foregoing, we expect to continue distributing our current cash flow from operations after reserving normal and customary amounts to maintain adequate capital reserves. In addition, when deemed prudent or necessitated by applicable dividend requirements for REITs under the Internal Revenue Code, we may make one or more special dividends during any particular year. However, during a favorable investing environment, we expect that we will utilize our carry forward capital losses to shelter gains from the disposition of our assets so we may use the proceeds for investment. We expect to continue applying these standards with respect to our dividends on a quarterly basis which may cause the dividends to increase or decrease depending on these various factors.

During 2012 we paid a quarterly dividend of $0.1625 per Common Share for each of the first, second and third quarters of 2012. We paid a regular quarterly dividend of $0.578125 per Series D Preferred Share in each of the first, second and third quarters of 2012.


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WINTHROP REALTY TRUST

FORM 10-Q SEPTEMBER 30, 2012

Comparability of Financial Data from Period to Period

The comparability of financial data from period to period is affected by several items including (i) the timing of our property acquisitions and leasing activities; (ii) the purchases and sales of assets and investments; (iii) when material other-than-temporary impairment losses on assets in our portfolio are taken; (iv) fluctuations in the fair value of our securities and loan securities carried at fair value; and (v) the reclassification of assets.

Results of Operations

All per share amounts presented in this section are on a diluted basis. Net income attributable to Common Shares was $20,221,000 or $0.61 per Common Share for the nine months ended September 30, 2012 as compared with net income of $20,596,000 or $0.67 per Common Share for the nine months ended September 30, 2011. Funds From Operations (FFO) attributable to Common Shares was $41,334,000 . . .

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