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FUR > SEC Filings for FUR > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for WINTHROP REALTY TRUST

Form 10-Q for WINTHROP REALTY TRUST


9-May-2014

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, 2013 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, 2014 as compared with the three months ended March 31, 2013. 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 market conditions both with respect to business segment and capital structure. We have historically invested in opportunities which we believed would 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 sought to acquire assets through joint ventures which allowed 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 have focused and aggressively pursued 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.

On April 28, 2014, our Board of Trustees unanimously adopted a plan of liquidation, the implementation of which is subject to approval by the holders of a majority of our common shares. If approved by our common shareholders, the plan will provide for an orderly liquidation of our assets. We expect that a preliminary proxy statement with respect to the special meeting of shareholders at which the approval of the plan will be sought will be filed with the Securities and Exchange Commission in May with a meeting date expected to be held by not later than August of this year.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2014

The decision to adopt the plan of liquidation followed a lengthy process in which our Board of Trustees explored numerous alternatives including continuing under our current or a revised business plan, acquiring through merger or otherwise the assets of another real estate company, seeking to dispose of its assets through a merger or a portfolio sale, and liquidation. Based on a number of factors, the Board of Trustees determined that a liquidation of our assets at this time was in the best interest of our common shareholders. The factors considered included:

The relative stagnant price of the Common Shares over the past three years.

The continued failure of the Common Share price to approximate the low end of our reported net asset value.

The limited trading volume in the Common Shares that was prevalent prior to our announcement of the adoption of the plan of liquidation and the certainty of liquidity that a liquidation offers at a value that is expected to be not less than the low end of our reported net asset value.

The nature of our business strategy which is to invest in opportunistic real estate investments and the lack of such investments in the current market environment which would be accretive to our shareholders particularly in light of our cost of capital.

The limitation, absent a plan of liquidation, on the number of assets that we can sell in any calendar year due to applicable federal tax law restrictions in order not to be subject to a 100% tax on gain from sales.

Our inability to raise capital through the sale of Common Shares at a price that is not dilutive to existing shareholders.

The inability to obtain an offer for the entire company that our board believed was commensurate with the projected proceeds that could be obtained from a liquidation of our assets.

The overall return to shareholders during the past five years which is both below the Trust's peer group (i.e., REITs with a diversity and other property focus and have a current market value as of January 27, 2014 of less than $750 million) and the MSCI US REIT index.

The expectation that all liquidating distributions will be paid in cash thereby eliminating the uncertainty associated with the receipt of non-cash consideration.

The costs of continuing to operate a public company.

The federal income tax benefits that may be derived from the adoption of a plan of liquidation as all dividends on common shares will be deemed a return of capital until the applicable holder has received dividends totaling its cost basis.

In addition, our Board of Trustees also considered potentially negative factors in their deliberations concerning the liquidation, including the following:

There could be no assurance that the Trust will be successful in disposing of its assets for values equal to or exceeding the low range of our estimate of net asset value or that the dispositions will occur in the time frame expected.

The anticipated expenses and potential for unforeseen expenses that will or may be incurred in connection with the sale of our assets and the continued operation of the Trust.

The inability to take advantage of future changes in market conditions which could provide for presently unforeseen opportunistic investments that satisfy our investment strategy and minimum return parameters.

Depending on their tax basis in their shares, shareholders may recognize taxable gain in connection with the completion of the liquidation.

We may determine to distribute assets to a liquidating trust which may cause our shareholders to recognize taxable gain at the time of such distribution to the liquidating trust which we expect to occur, if at all, two years after the adoption of the plan of liquidation and may have adverse tax consequences on tax-exempt and foreign shareholders.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2014

If the plan is approved and is implemented, shareholders will no longer participate in any future earnings or growth of the Trust's assets or benefit from any increases in their value once such asset is sold.

As opposed to a business combination with a relatively short time frame during which a third party would acquire the Trust, the liquidation process would involve a longer distribution process and will require the Trust to incur potentially larger administrative and other costs.

Certain conflicts of interest could exist for the Trust's management in connection with the liquidation.

The likelihood that the price of the common shares will decrease as we make distributions to shareholders.

The potential loss of key personnel who provide services to the Trust and FUR Advisors.

If the plan of liquidation is approved by the common shareholders, we will then seek to sell all of our assets with a view towards completing the liquidation within a two year period. In order to comply with applicable tax laws, any of our assets not disposed of within such two year period would be transferred into a liquidating trust and the holders of interests in the Trust at such time will be beneficiaries of such liquidating trust. It is impossible at this time to determine the ultimate amount of liquidation proceeds that will actually be distributed to common shareholders or the timing of such payments.

If the plan is not adopted by our shareholders, we will either, continue to operate as we have in the past, modify our investment philosophy or seek other strategic transactions we believe to be in the best interest of our shareholders.

Although we expect that our Common Shares will continue to be traded on the New York Stock Exchange until its assets are either disposed of or transferred to a liquidating trust, under New York Stock Exchange rules it is possible that following the implementation of the plan of liquidation and prior to the disposition of all of the assets that the Common Shares could be delisted. If this were to occur, we expect that we will use all reasonable efforts to have the Common Shares listed on another national stock exchange or on the NASDAQ stock market.

Loan Assets

During the first quarter of 2014 we sold five loan assets for net cash proceeds of $42,917,000 including $5,865,000 of discount accretion, and we received $3,090,000 in loan repayments. In addition, we originated a $15,500,000 loan collateralized by a majority of the limited partnership interests in entities that own Edens Center and Norridge Commons, two retail shopping centers located in Chicago, Illinois. We also increased our Playa Vista mezzanine loan by $1,992,000.

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.

Operating Properties

Acquisition Activity

Norridge Commons - equity acquisition - On March 5, 2014 we acquired for $250,000 all of the issued and outstanding shares of Harlem Properties, Inc. ("Harlem"). Harlem is the entity that ultimately controls the entity that owns Norridge Commons. Through our ownership of Harlem, we have an effective 3.75% interest in the property and control the business of the entity and all decisions affecting the entity, its policy and its management.

Edens Center - equity acquisition - On March 5, 2014 we acquired for $250,000 all of the issued and outstanding shares of Edens Properties, Inc. ("Edens"). Edens is the general partner of a limited partnership that is a general partner of Edens Center Associates, the entity that owns Edens Plaza.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2014

Disposition Activity

Newbury Apartments - property sale - On February 26, 2014 we sold our interest in the Newbury Apartments property located in Meriden, Connecticut to an independent third party for gross sale proceeds of $27,500,000. After transfer of the debt, we received net proceeds of approximately $5,106,000 and recorded a gain of $4,423,000 on the sale of the property which is included in income from discontinued operations.

Consolidated Operating Properties

During the first quarter of 2014 we saw increases in our operating income from our operating properties as a result of positive operating results from our new store properties. Our same store properties generated decreased operating income of $974,000 while our new store properties generated operating income of $4,194,000 for the quarter ended March 31, 2014. See our Results of Operations section below for details of our consolidated properties net income. As of March 31, 2014 our consolidated properties were approximately 92.7% leased compared to approximately 90.0% leased at December 31, 2013.

Equity Investments

Vintage Housing - During the three months ended March 31, 2014, we recorded net income from our investment in Vintage Housing of $1,620,000 and received cash distributions of $1,387,000. The Vintage properties were 97% occupied at February 28, 2014. We have elected to recognize our earnings on a one month lag.

Sullivan Center - We recognized $1,236,000 of income on the investment during the three months ended March 31, 2014 and received cash distributions of $970,000. The Sullivan Center was 83% leased at February 28, 2014. We have elected to recognize our earnings on a one month lag.

701 Seventh Avenue - We invested an additional $38,723,000 to this venture in the first quarter of 2014 bringing our total investment to $92,159,000 at March 31, 2014. During the quarter ended March 31, 2014 we recorded net income from our investment in 701 Seventh Avenue of $1,558,000 and received cash distributions of $368,000. We have elected to recognize our earnings on a three month lag.

Marc Realty - On March 5, 2014 we sold to Marc Realty our interest in 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 price was paid with $1,500,000 cash and a $4,500,000 loan receivable. The loan bears interest at a rate of 6% per annum, increasing to 7% per annum on the first anniversary and to 8% on the second anniversary. The loan requires monthly payments of interest only and matures on March 1, 2017.

We also granted to Marc Realty an option exercisable prior to March 1, 2016 to acquire our interest in the remaining 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.

REIT Securities

There was no significant activity in this segment during the quarter ended March 31, 2014. As of March 31, 2014 we had no REIT securities holdings.

Liquidity and Capital Resources

At March 31, 2014, we held $102,512,000 in unrestricted cash and cash equivalents.

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.

Our primary sources of funds include:

cash and cash equivalents;

rents and reimbursements received from our operating properties;

payments received under our loan assets;


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2014

sale of existing assets;

cash distributions from joint ventures; and

asset specific borrowings.

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 $31,869,000 at March 31, 2014.

Debt Maturities

At March 31, 2014, our balance sheet contains mortgage loans payable of $476,424,000. We have $18,804,000 maturing in 2014, $42,500,000 maturing in 2015, with the remainder maturing in 2016 or later. With respect to our two mortgage loans maturing in 2014, we anticipate exercising our one year extension options which are available on each loan. Our Senior Notes, which have an outstanding balance of $86,250,000 at March 31, 2014, mature on August 15, 2022. Our revolving line of credit had no amounts outstanding and matured in March 2014. We elected not to exercise our one remaining one-year renewal option. We continually evaluate our debt maturities and, 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 decreased by approximately $10,000,000 from $112,512,000 at December 31, 2013 to $102,512,000 at March 31, 2014.

Our cash flow activities for the three months ended March 31, 2014 and 2013 are summarized as follows (in thousands):

                                                       For the Three Months Ended March 31,
                                                         2014                       2013
Net cash flow provided by operating activities     $          12,666          $           9,184
Net cash flow provided by (used in) investing
activities                                                   (11,726 )                   44,158
Net cash flow used in financing activities                   (10,940 )                  (19,576 )

Increase (decrease) in cash and cash
equivalents                                        $         (10,000 )        $          33,766

Operating Activities

For the three months ended March 31, 2014 our operating activities generated a net loss of $802,000 and positive cash flow of $12,666,000. Our cash provided by operations reflects our net income adjusted by: (i) an increase for non-cash items of $7,180,000 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, and $9,200,000 for impairment charges;
(ii) an increase of $5,008,000 for discount accretion received in cash; (iii) an increase of $3,926,000 for distributions from non-consolidated interests; and
(iv) a net decrease due to changes in other operating assets and liabilities of $2,646,000. See our discussion of "Results of Operations" below for additional details on our operations.

Investing Activities

Cash flow used in investing activities for the three months ended March 31, 2014 was approximately $11,726,000 as compared to cash provided by investing activities of approximately $44,158,000 for the comparable period in 2013. Cash is used in investing activities primarily to fund acquisitions, loan originations and net investments in unconsolidated joint ventures.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2014

Net cash used in investing activities of $11,726,000 for the three months ended March 31, 2014 was comprised primarily of the following:

$38,723,000 for an additional capital contribution to our 701 Seventh Avenue equity investment

$15,500,000 for our mezzanine loan origination;

$1,992,000 for an additional advance on our Playa Vista loan receivable; and

$1,482,000 for investment in capital and tenant improvements at our operating properties.

These uses of cash flow were offset primarily by:

$37,177,000 in proceeds, excluding the discount accretion, from the sale of five loans receivable;

$5,610,000 in proceeds from the sale of our Meriden, Connecticut residential property; and

$3,089,000 in collection of loans receivable.

Financing Activities

Cash flow used in financing activities for the three months ended March 31, 2014 was approximately $10,940,000 as compared to approximately $19,576,000 for the comparable period in 2013. This change of approximately $8,636,000 was primarily the result of our repayment of our Queensridge secured financing payable in 2013.

Net cash used in financing activities of $10,940,000 for the three months ended March 31, 2014 was comprised primarily of the following:

$5,819,000 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, 2014; and

$2,450,000 for principal payments on our mortgage loans payable.

These uses of cash flow were partially offset by $149,000 in contributions from non-controlling interests and $91,000 in proceeds from the issuance of Common Shares under our Dividend Reinvestment Plan.

Common and Preferred Share Dividends

As a result of our emphasis on total return, while we have sought to achieve a stable, predictable dividend for our shareholders, we have not selected or managed our investments for short-term dividend growth, but rather towards achieving overall superior total return. The amount of our dividend has depended on the actual cash flow, financial condition, capital requirements, utilization of available capital losses, distribution requirements for REITs under the Internal Revenue Code, limitations imposed by the provisions of our Series D Preferred Shares, and such other factors as our Board of Trustees deemed relevant. For the quarter ended March 31, 2014, 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.

If the plan of liquidation is adopted, as required by the terms of our Series D Preferred Shares, at such time, if at all, as the plan of liquidation is approved by the common shareholders, dividends on our common shares will be suspended until the $120,500,000 liquidation preference on our Series D Preferred Shares is satisfied. In addition, we currently intend to satisfy (or establish a sufficient reserve with which to satisfy) our 7.75% Senior Notes that have an outstanding balance of $86,250,000 before resumption of dividends on our common shares. Thereafter, any dividends payable on our common shares will be dependent on the proceeds received from the sale of our assets and any limitations imposed by agreements to which we are subject. Any such dividends on the common shares after the adoption of the plan of liquidation will be deemed a return of capital until the applicable holder has received dividends totaling its cost basis.

If the plan of liquidation is not adopted by our common shareholders, we expect to continue applying the standards utilized in the past and noted above with respect to our dividends on a quarterly basis which may cause the dividends to increase or decrease depending on these various factors.

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.


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WINTHROP REALTY TRUST

FORM 10-Q MARCH 31, 2014

Results of Operations

All per share amounts presented in this section are on a diluted basis. Net loss attributable to Common Shares was $2,242,000 or $0.06 per Common Share for the three months ended March 31, 2014 as compared with net income of $10,957,000 or $0.33 per Common Share for the three months ended March 31, 2013. Funds From Operations (FFO) attributable to Common Shares was $10,526,000 or $0.29 per Common Share for the three months ended March 31, 2014 as compared to FFO of $15,263,000 or $0.46 per Common Share for the three months ended March 31, 2013.

Our results are discussed below by 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; and

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

Non-segment specific results, which include interest on cash reserves, general and administrative expenses and other non-segment specific income and expense items, are reported under corporate income (expense).

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

                                              March 31,       December 31,
                                                2014              2013

          Operating properties               $   897,195     $      845,698
          Loan assets                             95,279            147,702
          REIT securities                             -                  -
          Corporate
          Cash and cash equivalents              102,512            112,512
          Restricted cash                          3,048                186
          Accounts receivable and prepaids           382                543
          Deferred financing costs                 2,543              2,645
          Assets held for sale                    25,156             23,038

          Total Assets                       $ 1,126,115     $    1,132,324

The increase in operating property assets was due primarily to the consolidation of Norridge Commons and additional contributions to our 701 Seventh Avenue equity investment which were partially offset by the sale of our River City property and the classification of our two Englewood, Colorado properties to discontinued operations.

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