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FUR > SEC Filings for FUR > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for WINTHROP REALTY TRUST


7-May-2013

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, 2012 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 months ended March 31, 2013 as compared with the three months ended March 31, 2012. 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 value investors we focus and aggressively pursue our investment activity 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 the first quarter of 2013 we have, and expect to continue to, execute an investment strategy that focuses on our loan asset segment and to a lesser extent our operating properties segment with a view toward investing in assets that provide a current yield as well as the potential for long term appreciation. We will continue to invest in opportunities 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. Further, we will mine our existing portfolio for follow-on opportunities and will seek to timely realize returns on such investments subject only to the disposition restrictions under the Internal Revenue Code in order to maintain our REIT status.

In connection with our strategy, in certain instances, we seek to acquire assets through joint ventures which allows us to employ third party co-investment capital to maximize diversification of risk and reduce capital concentration and in certain instances, leverage off of our joint venture partner's experience and expertise in specific geographic areas and/or specific asset types.

We believe that the economic recovery, while slow, will continue throughout 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 non-performing real estate related assets, both debt and real property. Accordingly, we anticipate no diminishment in value opportunities for investing in 2013, and we believe that new investments in loan assets as well as preferred equity will continue to provide the most opportunity.

We invested $22,314,000 in new loan assets during the first quarter of 2013. See Item 1, Note 4 for a description of our investments. Additionally, during the first quarter of 2013 we received $11,425,000 in net proceeds from the sale of our Andover, Massachusetts property, $19,318,000 in proceeds from the sale of loan assets, $13,783,000 from loan repayments and $4,451,000 in distributions from our RE CDO Management venture from the sale of certain of its assets. See additional details in our "Liquidity and Capital Resources" section below.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2013

Loan Assets

During 2013 we received repayment in full on two loans receivable for a total repayment of $13,783,000. We also received $10,117,000 in loan repayments on our Queensridge loan receivable from the sale of several condominium units which collateralize the loan, which loan repayments were used to partially satisfy our recourse loan payable secured by the Queensridge loan. During the first quarter we sold our Disney B Note receivable for $9,000,000.

In addition, during the first quarter of 2013 we originated a $20,500,000 mezzanine loan collateralized by a 260,000 square foot office campus in the Los Angeles, California area. The loan bears interest at LIBOR plus 14.25% per annum, with a 0.5% LIBOR floor and matures January 23, 2015. The loan requires payments on interest only at a rate of 8.25% with the remaining interest being accrued and added to principal. In addition, at maturity we are entitled to a participation interest equal to 25% of the net value of the property. On March 1, 2013 we sold a 50% pari passu participation interest in the mezzanine loan.

We intend to continue our loan asset acquisition and origination strategy in 2013 with a focus on loans with underlying collateral value, future income return potential and in certain cases, acquisitions of non-performing loans in the fulcrum position which have a high possibility that our debt position in the capital stack will be converted into equity participation. An example of this strategy is our recent acquisition and restructuring of the first mortgage loan on a 514,000 square foot office building located at 1515 Market Street in Philadelphia, Pennsylvania.

Operating Properties

Acquisition Activity

1515 Market Street - On February 1, 2013 in connection with the restructuring, we acquired an effective 89% equity interest in the property, inclusive of the operating partnership interest. As a result, this property is now accounted for as a consolidated operating property as of the acquisition date.

Disposition Activity

Andover, Massachusetts - On March 28, 2013 we sold our Andover, Massachusetts property to an independent third party for gross sale proceeds of $12,000,000. After costs and pro-rations, we received net proceeds of approximately $11,425,000 and recorded a gain of $2,775,000 on the sale of the property. Results of operations for this property are classified as discontinued operations for all periods presented. The recorded gain was increased by net income of $138,000 and $137,000 for the three months ended March 31, 2013 and 2012, respectively.

Consolidated Operating Properties

During the first quarter of 2013 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. Our same store properties generated increased net operating income of $1,086,000 while our new store properties generated net operating income of $1,947,000 for the quarter ended March 31, 2013. See our Results of Operations section below for details of our consolidated properties net income. As of March 31, 2013 our consolidated properties were approximately 89.3% leased compared to approximately 89.6% leased at December 31, 2012.

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.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2013

Equity Investments

Vintage Housing - During the three months ended March 31, 2013, we recorded net income from our investment in Vintage Housing of $1,921,000 and received cash distributions of $654,000. The Vintage properties were 96% occupied at February 28, 2013. We have elected to recognize our earnings on a one month lag.

Sullivan Center - All cash flow at the Sullivan Center property is trapped by the first mortgage lender. As a result, the Sullivan Center property is currently unable to meet its debt service payments on the mezzanine loan held by our venture, WRT-Elad Lender LP. The first mortgage is not prepayable until October 2013. WRT-Elad Equity LP, our venture which holds an indirect future ownership interest in the property, and WRT-Elad Lender LP, collectively our Sullivan JV, have entered into a forbearance agreement with the borrower and non-controlling interest owner at our Sullivan Center property. As a result, the Sullivan JV increased its indirect future ownership interest in the property from 65% to 70%. In addition, the Sullivan JV is entitled to receive a $1,400,000 modification fee in November 2013. If the payment is not paid, the Sullivan JV's indirect future ownership interest will increase to 76%. We recognized $443,000 of income on the investment during the three months ended March 31, 2013. The Sullivan Center was 83% leased at February 28, 2013. We have elected to recognize our earnings on a one month lag.

701 Seventh Avenue - In October 2012 we entered into a joint venture to acquire and redevelop a 120,000 square foot property and associated air rights located at 701 Seventh Avenue, New York, New York. We made an initial investment of $28,971,000 in the venture. During the quarter ended March 31, 2013 we recorded net income from our investment in 701 Seventh Avenue of $697,000 and received cash distributions of $394,000. We have elected to recognize our earnings on a three month lag.

WRT-Fenway Wateridge - On December 21, 2012 we entered into a venture pursuant to which the venture acquired for $9,200,000 a 62,152 square foot class B office building located in Sorrento Mesa (San Diego), California. We contributed a total of $7,522,000 of which $6,000,000 is a preferred equity investment which entitles us to a 12% priority return to be paid 8% currently from operating cash flow with the remaining 4% deferred. During the quarter ended March 31, 2013 we recorded net income from the investment of $238,000 and received cash distributions of $94,000. We have elected to recognize our earnings on a one month lag.

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 71% and 52% respectively, at March 31, 2013 as compared to occupancy of 70% and 50%, respectively at December 31, 2012. The third Sealy investment is located in Nashville, Tennessee and was 81% and 84% occupied at March 31, 2013 and December 31, 2012, 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 March 31, 2013, we held equity interests in four properties with Marc Realty which consist of an aggregate of approximately 665,000 rentable square feet of office and retail space which was 79% occupied at March 31, 2013 as compared to 78% occupied at December 31, 2012.

REIT Securities

During the quarter ended March 31, 2013, we sold securities with an original acquisition cost of $6,956,000 for net proceeds of $9,090,000.

As of March 31, 2013 our portfolio of REIT securities had a fair value of $12,220,000 compared to an original acquisition cost of $8,920,000.

Liquidity and Capital Resources

At March 31, 2013, we held $131,448,000 in unrestricted cash and cash equivalents. In addition, as of March 31, 2013 we had, subject to the value of the assets included in the borrowing base, $50,000,000 available to draw on our revolving line of credit and $12,220,000 in REIT securities.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2013

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 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 to the extent the taxable gain on such sales is able to be sheltered through the use of capital loss carry forwards. We have capital loss carry forwards of $31,174,000 which expire from 2014 through 2015.

Our primary sources of funds include:

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

Future Funding Requirements

We have future funding requirements relating to our 450 W 14th Street property, our 701 Seventh Avenue investment and our 1515 Market Street loan which total approximately $45,104,000 at March 31, 2013.

Debt Maturities

At March 31, 2013, our balance sheet contains mortgage loans payable of $278,824,000. We have $15,104,000 maturing in 2013 and $19,089,000 maturing in 2014 with the remainder maturing in 2015 or later. We have a $14,000,000 secured financing which matures in October 2013. The financing is collateralized by a loan receivable which also matures in October 2013. This loan receivable and secured financing both have a one-year extension option. We have a $50,000,000 revolving line of credit which matures in March 2014 with an option to extend to March 2015. On March 31, 2013, 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.

Cash Flows

Our level of liquidity based upon cash and cash equivalents increased by approximately $33,766,000 from $97,682,000 at December 31, 2012 to $131,448,000 at March 31, 2013.

Our cash flow activities for the three months ended March 31, 2013 and 2012 are summarized as follows (in thousands):

                                                       For the Three Months Ended March 31,
                                                          2013                      2012
Net cash flow provided by operating activities      $           9,184          $         2,373
Net cash flow provided by investing activities                 44,158                    5,575
Net cash flow (used in) provided by financing
activities                                                    (19,576 )                 30,626

Increase in cash and cash equivalents               $          33,766          $        38,574


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2013

Operating Activities

For the three months ended March 31, 2013 our operating activities generated consolidated net income of $12,951,000 and positive cash flow of $9,184,000. Our cash provided by operations reflects our net income adjusted by: (i) a reduction for non-cash items of $7,771,000 representing primarily earnings of equity investments, gains on sales of real estate investments, current period loan discount accretion and unrealized gains on securities carried at fair value offset by adding back depreciation and amortization expenses; (ii) $7,916,000 of distributions from non-consolidated interests; and (iii) a net decrease due to changes in other operating assets and liabilities of $3,912,000. See our discussion of "Results of Operations" below for additional details on our operations.

Investing Activities

Cash flow provided by investing activities for the three months ended March 31, 2013 was approximately $44,158,000 as compared to approximately $5,575,000 for the comparable period in 2012. This change of approximately $38,583,000 resulted primarily from increased proceeds from the sale of investments in real estate and securities in 2013 and fewer investments made in 2013.

Net cash provided by investing activities of $44,158,000 for the three months ended March 31, 2013 was comprised primarily of the following:

$24,287,000 in collection of loans receivable;

$19,318,000 in proceeds from the sale of two loans receivable;

$11,425,000 in proceeds from the sale of our Andover, Massachusetts real estate investment; and

$9,090,000 in proceeds from the sale of securities carried at fair value.

These sources of cash flow were offset primarily by:

$20,569,000 for our mezzanine loan origination;

$936,000 of advances on our 1515 Market Street loan receivable; and

$396,000 for investment in capital and tenant improvements at our operating properties.

Financing Activities

Cash flow used in financing activities for the three months ended March 31, 2013 was approximately $19,576,000 as compared to cash flow provided by financing activities of approximately $30,626,000 for the comparable period in 2012. This change of approximately $50,202,000 resulted primarily from preferred share offerings in 2012 offset by lower principal payments on our debt in 2013.

Net cash used in financing activities of $19,576,000 for the three months ended March 31, 2013 was comprised primarily of the following:

$10,117,000 for payments on our recourse secured financing;

$5,366,000 for dividend payments on our Common Shares;

$2,787,000 placed in escrow to fund dividends on our Series D Preferred Shares payable April 1, 2013;

$1,643,000 for principal payments on our mortgage loans payable;

$228,000 for deferred financing costs; and

$75,000 for the acquisition of non-controlling interests on our Houston, Texas property.

These uses of cash flow were offset primarily by:

$535,000 in contributions from non-controlling interests at our New York, New York property.

Common and Preferred Share Dividends

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.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2013

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.

For the quarter ended March 31, 2013, we paid a regular quarterly dividend of $0.1625 per Common Share and a regular quarterly dividend of $0.578125 per Series D Preferred Share.

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 $10,957,000 or $0.33 per Common Share for the three months ended March 31, 2013 as compared with net income of $7,328,000 or $0.22 per Common Share for the three months ended March 31, 2012. Funds From Operations (FFO) attributable to Common Shares was $15,912,000 or $0.48 per Common Share for the three months ended March 31, 2013 as compared to FFO of $14,023,000 or $0.42 per Common Share for the three months ended March 31, 2012.

Our results are discussed below by business segment:

Operating Properties - our wholly and partially owned operating properties;

Loan Assets - our loans receivable, loan securities carried at fair value, and equity investments in loan assets;

REIT Securities - our ownership of equity and debt securities in other real estate investment trusts; and

Corporate - non-segment specific results which includes interest on cash reserves, general and administrative expenses and other non-segment specific income and expense items.

The following table summarizes our assets by business segment (in thousands):

                                              March 31,       December 31,
                                                 2013             2012
           Operating properties               $  611,962     $      562,822
           Loan assets                           157,248            239,534
           REIT securities                        12,220             19,694
           Corporate
           Cash and cash equivalents             131,448             97,682
           Restricted cash                         2,786                 -
           Accounts receivable and prepaids          431                336
           Deferred financing costs                2,982              3,095

           Total Assets                       $  919,077     $      923,163


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2013

The increase in operating property assets was due primarily to the conversion of our 1515 Market Street property from a loan asset to an operating property as a result of our acquisition of a 49% equity interest in the property.

The decrease in loan assets was due primarily to the conversion of our 1515 Market Street property, the sale of our Disney B Note at par and the payoffs at par on our 127 West 25th Street and 180 North Michigan loans receivable.

The decrease in REIT securities assets was primarily the result of the sale of securities which was partially offset by an increase in the fair market value of our remaining Cedar shares.

Comparison of Three Months ended March 31, 2013 versus Three Months ended March 31, 2012

The following table summarizes our results from continuing operations by reportable segment for the three months ended March 31, 2013 and 2012 (in thousands):

                                                   2013          2012
             Operating properties                $  3,614      $   (608 )
             Loan assets                            9,537         5,724
             REIT securities                        1,766         5,244
             Corporate expenses                    (4,879 )      (3,223 )

             Income from continuing operations   $ 10,038      $  7,137

Operating Properties

The following table summarizes our results from continuing operations for our
operating properties segment for the three months ended March 31, 2013 and 2012
(in thousands):



                                                       2013          2012
         Rents and reimbursements                    $ 15,179      $ 11,793
         Operating expenses                            (4,930 )      (4,331 )
         Real estate taxes                               (946 )      (1,192 )
         Equity in loss of Marc Realty investments        (60 )        (347 )
         Equity in loss of Sealy Northwest Atlanta       (146 )         (56 )
         Equity in loss of Sealy Newmarket                 -           (722 )
         Equity in income of 701 7th WRT Investors        697            -
         Equity in income of WRT-Fenway Wateridge         238            -
. . .
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