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FUR > SEC Filings for FUR > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for WINTHROP REALTY TRUST

Form 10-K for WINTHROP REALTY TRUST


17-Mar-2014

Annual Report


ITEM 7 - 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 Annual Report on Form 10-K. 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 under "Forward Looking Statements" and "Item 1A - Risk Factors," as well as our other filings with the SEC. 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.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. This section should be read in conjunction with the financial statements, footnotes thereto and other items contained elsewhere in this report.

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 market conditions both with respect to business segment and capital structure. We will continue to invest in opportunities which we believe will yield superior risk adjusted returns. These investments have in the past had, and may in the future have returns weighted towards the back end of the invested life which negatively impact current earnings and funds from operations.

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.

As value investors we focus and aggressively pursue our investment activity in the real estate investment segments 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 market conditions both with respect to business segment and capital structure. While we made significant new investments in 2013, most notably the portfolio acquisition of four luxury residential multifamily high rises and our election to participate in the hotel portion of our 701 Times Square investment, we have observed very competitive pricing for quality real estate resulting from a low interest rate environment and increasing capital seeking real estate and real estate related investments. We expect that during 2014, absent a change in the macroeconomic environment, new opportunities that meet our asset quality and investment return requirements may be limited. Nevertheless, we will continue to seek new investments and we will continue to look to our existing portfolio for follow-on investment opportunities. Consequently, we have evaluated our stabilized assets with a view towards selling those assets to take advantage of rising prices and have begun executing on such sales. In addition, subject only to the disposition restrictions under the Internal Revenue Code in order to maintain our REIT status, we will continue to realize returns on those investments that we believe have matured in value and recycle the proceeds for new investments and/or corporate reserves.

During 2013 we (i) invested $284,408,000 in new operating property assets and $51,437,000 in new loan assets. (see Item 8 - Financial Statements and Supplementary Data, Note 4 for a description of our acquisitions), (ii) sold operating properties and loan assets for aggregate proceeds of $77,953,000;
(iii) received $76,477,000 in loan repayments and returns of our capital investment from our equity investments and (iv) received net proceeds of $30,021,000 from the issuance of 2,750,000 common shares of beneficial interest which we refer to as our Common Shares.


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We often 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.

With respect to our operating results for 2013, net income attributable to Common Shares was $17,325,000 or $0.51 per Common Share as compared with net income in 2012 of $15,346,000 or $0.46 per Common Share. Funds From Operations attributable to Common Shares was $45,817,000 or $1.36 per Common Share for 2013 as compared to Funds From Operations of $46,449,000 or $1.40 per Common Share in 2012. See "Results of Operations" below.

Loan Assets

During 2013 we (i) received repayment in full on four loans receivable and partial repayment on one loan receivable for a total repayment of $56,088,000,
(ii) had three loans held in equity investments that were fully repaid resulting in return of capital distributions to us totaling $13,844,000, (iii) sold two loans receivable for net proceeds of $19,319,000, (iv) sold loan assets held in an equity investment resulting in a return of capital distribution to us of $774,000, and (v) invested approximately $51,437,000 in new loan assets consisting of a mezzanine loan and a secured financing receivable. As a result of our loan investments, operating income from loan assets increased by $2,306,000 to $35,661,000 for the year ended December 31, 2013 compared to $33,355,000 for the year ended December 31, 2012. For a description of our loan assets acquired during 2013 see Item 8. Financial Statements, Note 4.

With the exception of our $1,500,000 mezzanine loan collateralized by a flex warehouse property located in Shirley, New York which was recently vacated by its tenant and is in default, all of our loan assets are performing in accordance with their terms.

When making new loan investments, we 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.

Operating Properties

During 2013 we (i) acquired five new consolidated operating properties,
(ii) made an equity investment in one new operating property, (iii) sold five consolidated operating properties and (iv) lost through foreclosure two of our Sealy equity investments, which we carried at $0. For details of our 2013 operating property transactions see Item 8 - Financial Statements, Note 4.

Consolidated Operating Properties

During 2013 we have seen increases in our operating income from our operating properties as a result of favorable operating results from same store properties, that is, properties held for all 12 months of both 2013 and 2012, complemented by our new store property operating results, that is, properties not held during both complete 12 month periods. The full impact of the improvement is not reflected in continuing operations as certain of our properties with improved operating results were sold or are held for sale and are classified as discontinued operations. See our Results of Operations section below for details of our consolidated properties net income. As of December 31, 2013 our consolidated properties were approximately 90.0% leased compared to approximately 89.9% leased at December 31, 2012.

Tenant Concentration - At December 31, 2013, we had two tenants, Spectra Energy and Siemens Real Estate, which represented approximately 12.1% and 7.4%, respectively, of our annualized base rental revenues from consolidated commercial operating properties and 7.0% and 4.3%, respectively, of total revenue.

1515 Market Street - On February 1, 2013 we entered into a loan modification agreement which extended the maturity date to February 1, 2016, increased the loan balance to $71,629,000, from $70,000,000, and changed the interest rate to be the greater of 7.5% or LIBOR plus 6.5%.

Simultaneously with the modification of the loan, we acquired, for $10,000, an indirect 49% equity interest, including the 0.1% general partner interest, in the entity ("1515 Market Owner") that owns the property located at 1515 Market Street, Philadelphia, Pennsylvania. We have consolidated this property as of February 1, 2013. For segment reporting purposes, this property will be classified within the operating properties segment as of February 1, 2013. Prior to consolidation, this investment was part of the loan assets segment.


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On April 25, 2013 1515 Market Owner obtained a $43,000,000 non-recourse first mortgage loan (the "1515 First Mortgage") from an unaffiliated third party. The 1515 First Mortgage bears interest at LIBOR plus 2.0% per annum, requires monthly payments of interest only and matures on May 1, 2016. On the same date, the 1515 Market Owner entered into an interest rate swap agreement which effectively fixes LIBOR at 0.50% for the term of the 1515 First Mortgage. We received $38,472,000 of loan proceeds from the 1515 First Mortgage financing which reduced the balance on the mortgage loan we hold to $33,157,000. The loan balance can be increased through future funding advances up to an aggregate of $6,000,000 to cover tenant improvements, capital expenditures and leasing commissions. For each $500,000 of future advances, the interest rate increases by 0.10%. At December 31, 2013 we had advanced an additional $1,500,000 resulting in a 0.3% increase in the interest rate. The loan modification also provides the lender with a 40% participation interest in the case of a capital event At December 31, 2013 the loan we hold had a balance of $36,171,000, inclusive of accrued interest, and entitles us to interest in an amount equal to a rate of 14.3% (subject to increase by 0.10% for each additional $500,000 we advance). At December 31, 2013 our investment in this loan was $21,098,000 resulting in an effective interest rate on our cash investment in this asset of 19.6%.

Summit Pointe Apartments - On October 25, 2013 we contributed $4,962,000 for an 80% equity interest in a newly formed venture. On the same date, the venture acquired a 184 unit garden apartment complex known as Summit Pointe Apartments located in Oklahoma City, Oklahoma for a gross purchase price of $14,500,000. In connection with the acquisition, the venture assumed an existing $9,248,000 first mortgage loan. The loan bears interest at a rate of 5.7% per annum, requires monthly payments of principal and interest and matures in February 2021. Pursuant to the terms of the venture agreement, we hold an equity interest which entitles us to an 8% priority return from cash flow and, upon disposition of the property, a minimum priority return equal to a 12% internal rate of return ("IRR").

Luxury Residential - On October 31, 2013 we acquired through a wholly owned venture four newly constructed luxury apartment buildings for an aggregate purchase price of $246,000,000. The properties are located in Phoenix, Arizona; Stamford, Connecticut; Houston, Texas and San Pedro, California. The properties consist of an aggregate of 761 unsold residential condominium or apartment units and approximately 25,000 square feet of retail space. The acquisition was funded with a $150,000,000 first mortgage loan which is cross collateralized by all four properties. The loan bears interest at a rate of LIBOR plus 2%, requires monthly payments of interest only and matures on October 31, 2016 with two one year extension options. The balance of the purchase was funded from cash on hand. On the same date, the venture entered into an interest rate swap agreement which effectively fixes LIBOR at 0.69% for the initial term of the first mortgage. In addition, the venture acquired two interest rate caps, each with a notional amount of $50,000,000 for an aggregate cost of $390,000. The initial cap is effective for the first one year extension period and caps LIBOR at 4%. The second cap is effective for the second one year extension period and caps LIBOR at 5%.

On November 6, 2013 New Valley LLC ("New Valley") contributed approximately $16,365,000 to the entity that acquired the properties in exchange for an indirect 16.3% interest in the properties. We retained an 83.7% interest in the venture and have the right to make all decisions with respect to each of the properties, other than the Stamford, Connecticut property, subject to obtaining New Valley's consent to certain major decisions. With respect to the Stamford, Connecticut property, prior to November 6, 2016 the consent of New Valley is required on all matters other than those that are administrative in nature. New Valley has the right at any time after November 6, 2015 (or in certain instances prior thereto), but on or prior to November 6, 2016, to have its interest in the venture redeemed for a 50% interest in the Stamford, Connecticut property.

Leasing

Amherst, New York - On July 29, 2013 we executed a lease amendment with the existing tenant, Ingram Micro Inc., which leases the entire 200,000 square foot premises. The initial lease was signed in 1988 and was scheduled to expire October 31, 2013 (subject to two five-year extensions). The new lease extends the term through October 31, 2023 with one ten-year or two five-year renewal options. Lease payments under the amendment remained unchanged through the expiration of the original lease. Annual rents under the original lease were $2,016,000. Annual rents under the amended lease are $1,802,000 for the period November 1, 2013 through October 31, 2018 and $2,002,000 for the period November 1, 2018 through October 31, 2023. The base rent is subject to increase upon the delivery of additional parking area to the tenant, which is expected to be completed during the second quarter of 2014.


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Sales

Andover, Massachusetts - On March 28, 2013 we sold our Andover, Massachusetts office 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. The results of operations have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.

Deer Valley, Arizona - On June 11, 2013 we sold our Deer Valley, Arizona office property to an independent third party for gross sale proceeds of $20,500,000. After costs and pro-rations, we received net proceeds of approximately $19,585,000 and recorded a gain of $6,745,000 on the sale of the property. The results of operations have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.

Denton, Texas - On July 2, 2013 we sold our Denton, Texas property to an independent third party for gross sale proceeds of $1,850,000. After costs and pro-rations, we received net proceeds of approximately $1,703,000. No gain or loss was recorded on the sale of the property. The results of operations have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.

Seabrook, Texas - On August 1, 2013 we sold our Seabrook, Texas property to an independent third party for gross sale proceeds of $3,300,000. After costs and pro-rations, we received net proceeds of approximately $3,202,000 and recorded a gain of $1,428,000 on the sale of the property. The results of operations have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.

Lisle, Illinois - On December 17, 2013 we sold our Lisle, Illinois office property known as 701 Arboretum to an independent third party for gross sale proceeds of $2,500,000. After costs and pro-rations we received net proceeds of approximately $2,351,000 and recorded a gain of $58,000 on the sale of the property. The results of operations have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.

Meriden, Connecticut - On February 26, 2014 we sold our Meriden, Connecticut property to an independent third party for gross sale proceeds of $27,500,000. After costs and pro-rations and a transfer of the mortgage debt, we received net proceeds of approximately $5,106,000 on the sale of the property. This property was under contract to be sold with a $500,000 non-refundable deposit as of December 31, 2013. This property was classified as held for sale as of December 31, 2013 and the results of operations have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.

Equity Investments

Vintage Housing - During the years ended December 31, 2013 and 2012, we recorded net income from our investment in Vintage Housing of $9,174,000 and $4,603,000, respectively, and received cash distributions of $5,555,000 and $6,023,000, respectively. The Vintage properties were 97% occupied at November 30, 2013. We have elected to recognize our earnings on a one month lag.

WRT-Elad Lender/Equity - Sullivan Center - On August 21, 2013 we acquired from an affiliate of Elad Canada Inc. ("Elad"), our joint venture partner, its 50% joint venture interest (the "Elad Interest") in WRT-Elad One South State ("Lender LP") for $30,000,000 ("Acquisition Price"). The mezzanine loan had an outstanding balance of principal and accrued interest of approximately $56,150,000 at the time the Elad Interest was acquired. Concurrently with the acquisition of the Elad Interest, we entered into an option agreement (the "Elad Option") which grants Elad the option, but not the obligation, to repurchase its interest in Lender LP for the Acquisition Price adjusted for the pro-rata portion of any accrued and unpaid interest and principal payments made by the borrower. Per the terms of the agreements, the Elad Interest and Elad Option cannot be transferred to parties other than us and Elad. The term of the Elad Option corresponds with Lender LP's mezzanine loan.

On October 18, 2013, the owner of the Sullivan Center property obtained a new $113,500,000 first mortgage loan. The loan bears interest at a rate of 3.95% per annum, requires monthly payments of interest only and matures on November 6, 2018. The proceeds from the loan were used to repay the existing $110,550,000 first mortgage loan which bore interest at a rate of 11.0% per annum. The new loan eliminates the requirement for the cash trap with the lender and the property owner re-commenced making payments on the mezzanine loan on November 9, 2013 in accordance with the terms of the forbearance agreement.


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In February 2013, our joint venture which holds an indirect future interest in Sullivan Center increased its future ownership interest from 65% to 70%, which interest was further increased to 76% in November 2013. The increases were in exchange for a forbearance by Lender LP with respect to the failure by the borrower to make required debt service payments from January 2013 through October 2013.

During the years ended December 31, 2013 and 2012, we recorded net income on our equity investments in Sullivan Center of $1,315,000 and $903,000, respectively, and received cash distributions of $5,116,000 and $0, respectively. The Sullivan Center was 83% leased at November 30, 2013. We have elected to recognize our earnings on a one month lag.

701 Seventh Avenue, New York, New York - During 2013, with respect to the joint venture that indirectly owns the property located at 701 Seventh Avenue, New York, New York we elected to participate in the future hotel development and during 2013, we made additional cash contributions to the venture totaling $24,465,000. We have contributed an additional $33,419,000 in 2014 bringing our total capital contributed at such date to $86,855,000 against our $125,000,000 commitment. The contribution was made concurrently with the refinancing of the property's existing indebtedness with a new $237,500,000 mortgage loan and $315,000,000 mezzanine loan of which $346,500,000 was advanced at closing with the balance to be advanced for constructions costs of the approximately 80,000 square feet of retail space which will include an approximately 120 foot high, 20,000 square foot state of the art LED sign. Both the mortgage loan and mezzanine loan bear interest at LIBOR plus 8% per annum, require payments of interest only and mature January 31, 2017, subject to two-one year extension terms. These loans refinanced the then existing mortgage and mezzanine loans that bore interest at LIBOR plus 11% per annum.

In addition, the venture also entered into two additional loan agreements providing for supplemental loans totalling $262,500,000, which agreements are held in escrow and only become effective upon the satisfaction of certain conditions. At such time as such loan agreements are released from escrow, if at all, the venture will be permitted to draw on such loans to provide additional construction financing in order to develop a 452 room hotel which will be constructed above the retail component. If fully funded, the maximum aggregate debt among the various loans funded would be $815,000,000.

During the years ended December 31, 2013 and 2012, we recorded net income from our investment in 701 Seventh Avenue of $3,424,000 and $0, respectively and received cash distributions of $2,813,000 and $290,000, respectively. We have elected to recognize our earnings on a three month lag.

Atrium Mall LLC - On June 20, 2013 we, through a newly formed 50-50 joint venture with Marc Realty, acquired a non-performing $10,650,000 mortgage loan for $6,625,000. In addition, the joint venture paid $1,137,000 to fund escrows at the closing. We invested a total of $3,935,000 in this joint venture during 2013. The loan was in maturity default at the time of acquisition and was acquired with the intention of foreclosing or working out a consensual assignment with the borrower. The loan was collateralized by a leasehold interest in the Atrium Mall in Chicago, Illinois. The leasehold interest is for 71,000 square feet of commercial/retail space that comprises the bottom three floors of an office building known as the James R. Thompson building of which the lease expires in September 2014 with six automatic five-year extensions which are exercisable at the lessee's option. The building is owned by the State of Illinois.

On July 26, 2013 the joint venture entered into an agreement with the borrower pursuant to which the borrower conveyed the leasehold interest to the venture in lieu of foreclosure. Accordingly, the venture now holds the leasehold interest in the property.

WRT-Fenway Wateridge - On October 15, 2013, our venture that holds this property obtained a $7,000,000 first mortgage loan on its San Diego, California property. The loan bears interest at the greater of 6%, or LIBOR plus 4.5% per annum, requires monthly payments of interest only and matures on November 1, 2016. The venture purchased an interest rate cap which caps LIBOR at 2.5%. In connection with the financing, we received a distribution of $6,255,000 in partial redemption of our preferred equity investment. Subsequent to the distribution, our preferred equity balance is $229,000. We retain the balance of our preferred equity interest as well as a 50% equity interest in the venture.

Sealy Airpark - Nashville, Tennessee - On October 7, 2013 the lender foreclosed on the loan that was collateralized by this property. We held our interest in this property through a venture that was managed by our partner and had previously written down our investment to zero. Accordingly, for financial reporting purposes we did not recognize a gain or loss in connection with the foreclosure.

Sealy Newmarket - Atlanta, Georgia - On December 2, 2013 the lender foreclosed on the loan that was collateralized by this property. We held our interest in this property through a venture that was managed by our partner and had previously written down our investment to zero. Accordingly, for financial reporting purposes we did not recognize a gain or loss in connection with the foreclosure.


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Marc Realty - In February 2014 we entered into a letter agreement with Marc Realty to sell our interest in the three suburban Chicago, Illinois properties and our interest in the River City, Chicago, Illinois consolidated property for a gross sales price of $6,000,000. The sale of these assets occurred on March 5, 2014. See Results of Operations for additional discussion on the other-than-temporary impairment charges totaling $6,235,000 on our investments in the three suburban properties at December 31, 2013. These impairment charges are reflected in equity in earnings for the year ended December 31, 2013. See Results of Operations for additional discussion on these impairments.

We also granted to Marc Realty an option exercisable within two years to acquire our interest in the property located at 223 W. Jackson, Chicago, Illinois for a purchase price, depending on adjustments and timing, expected to be not less than $5,800,000. See Results of Operations for additional discussion on the other-than-temporary impairment charge of $1,452,000 at December 31, 2013 on our equity investment in this property. This impairment charge is reflected in equity in earnings for the year ended December 31, 2013.

REIT Securities

During 2013 we liquidated all of our holdings of REIT securities. In particular, we sold 3,000,716 shares of common stock in Cedar Realty Trust, Inc. ("Cedar") which we had acquired for an aggregate cost of $12,891,000 for aggregate sales proceeds of $16,292,000. We also sold 1,250,000 shares of MPG Office Trust Inc. which we had acquired for an aggregate cost of $2,984,000 for aggregate sale proceeds of $3,626,000.

Liquidity and Capital Resources

At December 31, 2013, we held $112,512,000 in unrestricted cash and cash equivalents.

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