CEO 2004 Letter to Shareholders

To Our Shareholders:

2004 was a transitional year for First Union as we endeavored to address unresolved matters that had beset former management, position the Company’s remaining assets in a fashion that would maximize value, and begin to implement our business plan of opportunistic value real estate investing. I am pleased to report that we have been able to accomplish many of these goals.

After more than twenty years of litigation, our claim against the State of California for the losses suffered in the 1986 flood of our former Peachtree Mall property is nearly concluded. Subject only to the State legislature funding appropriation, which is expected to be incorporated in the State’s 2005/06 fiscal budget, we will receive approximately $11,000,000 in excess of insurer subrogation claims. This year we also settled the class action litigation relating to the aborted Gotham transaction. The successful resolution of this matter enabled our insurers to process reimbursements for associated legal costs. We have received approximately $700,000 to date and look forward to receiving an additional $500,000. We also satisfied this year all contract and warranty obligations of VenTek International, Inc. at no cost, thereby eliminating related contingent liabilities of $300,000 as well as enabling us to strategically dispose of this non-core business segment. Finally, the pending claim against us under the indemnity given to Imperial Parking for the claim made by Oracle Credit Corporation was settled in January 2005 for $800,000, which amount had been fully reserved on our 2004 balance sheet.

This year we made significant progress towards maximizing the value of the Company’s existing assets. When we assumed our management of the Company, it had two real estate assets, its Little Rock, Arkansas, Park Plaza Mall property and its Indianapolis, Indiana, Circle Tower office property. In June, taking advantage of the successful resolution of local opposition to a competing mall project as well as strong investor demand for mall properties, we sold our Park Plaza Mall property for $77,500,000, generating net proceeds of approximately $33,500,000. In addition, we also completed the acquisition of 100% of the land underlying Circle Tower. This acquisition places us in a much better position to maximize this property’s full value in the future.

The balance of our efforts this past year were occupied with commencing our program of opportunistic real estate investing. In view of the atmospheric pricing levels for most individual real estate offerings, we chose to concentrate our efforts toward real estate related debt, undervalued publicly traded equity securities, and portfolio real estate purchases. We originated three first mortgage loans and one mezzanine loan during the year. Two of these loans have been repaid generating investment yields in excess of 12%. We will continue to actively pursue financing opportunities in the development of this business segment.

Similarly, we will continue to invest in publicly traded small cap real estate investment trusts (“small cap REITs”) as the returns have been rewarding to date. For a number of market related reasons, small cap REITs often trade at a discount to underlying net asset value. For example, our investment in Atlantic Realty Trust yielded more than a 25% return over its five month holding period. These investments provide us with a variety of opportunities, including the opportunity to engage in joint venture investing with our small cap REIT brethren. In instances where we believe, however, that management is behaving in a fashion antithetical to our interests as a shareholder as well as its shareholder base, we will not hesitate to take those steps necessary to maximize shareholder value.

The Finova portfolio transaction, which was consummated in November, is representative of the type of real estate portfolio acquisition we pursue. We purchased a 2,500,000 square foot portfolio of 16 properties for approximately $91,000,000 of which $31,000,000 consisted of the assumption of existing debt and the balance of $60,000,000 was sourced from Company funds including proceeds from the sale of the Park Plaza Mall pursuant to a “like-kind” exchange transaction. In so doing, we deferred the recognition of any taxable gain relating to the sale of the Park Plaza Mall enabling us to reinvest all of the sale proceeds. Subsequent to the acquisition, we were able to place additional financing on the assets of $53,000,000, reducing our net cash investment in the portfolio to approximately $8,000,000. The properties, of which 78% are leased to investment grade tenants, will generate strong and predictable cash flow over the primary terms of the existing leases yielding a projected current return to our equity of approximately 18%. In addition, the rental payments due under the existing leases during the primary terms (which expire in 2010 and 2011) will reduce the outstanding debt from approximately $84 million to $39 million during the primary term of the leases.

We also entered into a joint venture transaction with respect to a 614,000 square foot Class A office building and six level parking structure located in Houston, Texas. The property is leased to, and serves as a corporate office of, Duke Capital LLC. We hold the general partner interest in the joint venture as well as an additional 7% limited partnership interest. In addition, we made 12% interest bearing short term loans to certain of the limited partners of the joint venture that are secured by an aggregate 25% interest in the joint venture.

We recently entered into an agreement to provide convertible debt of approximately $80,000,000 to a portfolio of 26 well-leased class B and C office properties located throughout the greater Chicago metropolitan market comprising approximately 3,800,000 square feet of office space. We are pleased with the opportunity because we see limited downside risk as these assets are presently well leased to small tenant users who tend to occupy these types of buildings regardless of fluctuations in the economy. While predicting marketing turnarounds is always risky, we believe the Chicago urban and suburban office markets may have bottomed out. We are hopeful that together with the portfolio’s owners we will add additional assets to this portfolio in the future.

In February 2005, we raised approximately $87,000,000 through the sale of 3,640,000 shares of Series B-1 Cumulative Convertible Redeemable Preferred Shares (the “Series B-1 Shares”) to five institutional investors and $4,000,000 through the sale of 1,000,000 shares of our common shares to Kimco Realty Corporation. The Series B-1 Shares entitle the holders thereof to a 6.5% annual dividend (payable quarterly) and the right to elect one trustee. In addition, the Series B-1 Shares are convertible into common shares at a rate of 5.55 common shares per Series B-1 Share ($4.50 per share). The funds provided by this transaction will allow us to continue our strategic growth of the Company.

We are pleased with our progress this year and the value created for First Union shareholders. In so doing, net book value per common share increased by 31.6% for the year from $2.37 to $3.12. Income from continuing operations improved from a loss of ($6,575,000) for 2003 to a profit of $1,936,000 for 2004. In addition, income from discontinued operations improved dramatically from $673,000 for 2003 to $20,516,000 for 2004 principally from the sale of the Park Plaza mall property. As we predicted, 2004 was a challenging investment environment. Fortunately, we were able to identify and consummate transactions that are consistent with our investment strategy. As a result, we increased the amount of square feet in which the Company has an equity interest from 380,000 square feet as of January 1, 2004 to approximately 3,200,000 square feet (exclusive of the Chicago portfolio) as of March 1, 2005. Nevertheless, we expect that 2005 will also be difficult in view of continued low historical interest rates and strong investor demand for real estate assets.

The success we enjoyed in 2004 was the result of the combined efforts of our entire management team and our astute Board of Trustees. As talent drives success, I remain optimistic concerning our future and our ability to source desirable investment opportunities.

I look forward to meeting with you at our annual meeting and addressing any questions that you may have.

Sincerely,
Michael L. Ashner
Chief Executive Officer