Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended:  September 30, 2010
Or

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____to ____

Commission File Number 1-6249

WINTHROP REALTY TRUST
(Exact name of Registrant as specified in its certificate of incorporation)

Ohio
 
34-6513657
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
     
7 Bulfinch Place, Suite 500, Boston, Massachusetts
 
02114
(Address of principal executive offices)
 
(Zip Code)

(617) 570-4614
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ¨  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer    ¨
Accelerated filer   x
Non-accelerated filer      ¨
Smaller reporting company    ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule12b-2). Yes ¨  No x

As of November 1, 2010 there were 27,030,286 Common Shares of Beneficial Interest outstanding.

 

 

INDEX

       
Page
           
Part I.
 
Financial Information
     
           
Item 1.
 
Financial Statements (Unaudited):
     
           
   
Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009
 
3
 
           
   
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2010 and September 30, 2009
 
4
 
           
   
Consolidated Statements of Equity for the Nine Months Ended September 30, 2010 and September 30, 2009
 
5
 
           
   
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and September 30, 2009
 
6
 
           
   
Notes to Consolidated Financial Statements
 
8
 
           
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
34
 
           
Item 3.
 
Quantitative and Qualitative Disclosure about Market Risk
 
48
 
           
Item 4.
 
Controls and Procedures
 
49
 
           
Part II.
 
Other Information
     
           
Item 6.
 
Exhibits
 
50
 
           
Signatures
     
50
 
           
Exhibit Index
  
 
  
51
 

 
2

 

Item 1. Financial Information
WINTHROP REALTY TRUST
FORM 10-Q – SEPTEMBER 30, 2010
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
ASSETS
           
Investments in real estate, at cost
           
Land
  $ 21,460     $ 20,659  
Buildings and improvements
    236,500       228,419  
      257,960       249,078  
Less: accumulated depreciation
    (34,416 )     (31,269 )
Investments in real estate, net
    223,544       217,809  
                 
Cash and cash equivalents
    102,919       66,493  
Restricted cash held in escrows
    8,889       9,505  
Loans receivable, net
    77,964       26,101  
Accounts receivable, net of allowances of $293 and $565, respectively
    12,560       14,559  
Securities carried at fair value
    29,893       52,394  
Loan securities carried at fair value
    6,454       1,661  
Available for sale securities, net
    -       203  
Preferred equity investment
    3,972       4,012  
Equity investments
    92,691       73,207  
Lease intangibles, net
    24,496       22,666  
Deferred financing costs, net
    1,217       1,495  
Assets held for sale
    3,096       3,087  
TOTAL ASSETS
  $ 587,695     $ 493,192  
                 
LIABILITIES
               
Mortgage loans payable
  $ 211,773     $ 216,767  
Series B-1 Cumulative Convertible Redeemable Preferred Shares, $25 per share liquidation preference; 852,000 shares authorized and outstanding at September 30, 2010  and December 31, 2009
    21,300       21,300  
Revolving line of credit
    25,450       -  
Accounts payable and accrued liabilities
    9,852       7,401  
Dividends payable
    4,424       3,458  
Deferred income
    33       48  
Below market lease intangibles, net
    2,348       2,849  
TOTAL LIABILITIES
    275,180       251,823  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
NON-CONTROLLING REDEEMABLE PREFERRED INTEREST
               
Series C Cumulative Convertible Redeemable Preferred Shares, $25 per share liquidation preference, 144,000 and 544,000 shares authorized and outstanding at September 30, 2010  and December 31, 2009, respectively
    3,221       12,169  
Total non-controlling redeemable preferred interest
    3,221       12,169  
                 
EQUITY
               
Winthrop Realty Trust Shareholders’ Equity:
               
Common Shares, $1 par, unlimited shares authorized;  26,981,888 and 20,375,483 issued and outstanding at September 30, 2010 and December 31, 2009, respectively
               
      26,982       20,375  
Additional paid-in capital
    569,121       498,118  
Accumulated distributions in excess of net income
    (300,219 )     (301,317 )
Accumulated other comprehensive loss
    (93 )     (87 )
Total Winthrop Realty Trust Shareholders’ Equity
    295,791       217,089  
Non-controlling interests
    13,503       12,111  
Total Equity
    309,294       229,200  
TOTAL LIABILITIES AND EQUITY
  $ 587,695     $ 493,192  

See Notes to Consolidated Financial Statements and refer to Note 18 for information regarding variable interest entities (VIEs) including VIEs for which the Trust is the primary beneficiary.

 
3

 

WINTHROP REALTY TRUST
FORM 10-Q –SEPTEMBER 30, 2010
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Revenue
                       
Rents and reimbursements
  $ 9,298     $ 10,140     $ 28,162     $ 30,609  
Interest and dividends
    4,948       2,496       11,747       6,462  
      14,246       12,636       39,909       37,071  
Expenses
                               
Property operating
    1,812       1,990       5,585       5,492  
Real estate taxes
    952       674       2,012       1,968  
Depreciation and amortization
    2,393       2,598       7,092       7,987  
Interest
    3,809       4,169       11,126       12,745  
Provision for loss on loans receivable
    -       -       -       2,152  
General and administrative
    2,300       1,820       6,123       5,137  
State and local taxes
    7       14       107       211  
      11,273       11,265       32,045       35,692  
Other income (loss)
                               
Earnings (loss) from preferred equity investments
    85       86       253       (2,108 )
Equity in (loss) earnings of equity investments
    (409 )     211       (1,328 )     (100,201 )
Realized gain (loss) on sale of securities carried at fair value
    (185 )     676       588       3,274  
Unrealized gain on securities carried at fair value
    2,490       12,578       4,280       14,010  
Impairment loss on real estate loan available for sale
    -       -       -       (203 )
Gain on extinguishment of debt
    -       445       -       5,682  
Unrealized gain on loan securities carried at fair value
    581       -       3,593       -  
Interest income
    17       31       94       145  
      2,579       14,027       7,480       (79,401 )
                                 
Income (loss) from continuing operations
    5,552       15,398       15,344       (78,022 )
                                 
Discontinued operations
                               
Income (loss) from discontinued operations
    (1,569 )     74       (2,160 )     201  
                                 
Consolidated net income (loss)
    3,983       15,472       13,184       (77,821 )
Income attributable to non-controlling interest
    (175 )     (315 )     (595 )     (651 )
Net income (loss) attributable to Winthrop Realty Trust
    3,808       15,157       12,589       (78,472 )
Income attributable to non-controlling redeemable preferred interest
    (59 )     -       (230 )     -  
Net income (loss) attributable to Common Shares
  $ 3,749     $ 15,157     $ 12,359     $ (78,472 )
                                 
Comprehensive income (loss)
                               
Consolidated net income (loss)
  $ 3,983       15,472     $ 13,184     $ (77,821 )
Change in unrealized gain on available for sale securities
    -       10       2       21  
Change in unrealized gain (loss) on interest rate derivative
    (20 )     141       (8 )     406  
Change in unrealized loss from equity investments
    -       -       -       26,174  
Comprehensive income (loss)
  $ 3,963     $ 15,623     $ 13,178     $ (51,220 )
                                 
Per Common Share data - Basic
                               
Income (loss) from continuing operations
  $ 0.25     $ 0.90     $ 0.69     $ (4.97 )
Income (loss) from discontinued operations
    (0.07 )     -       (0.10 )     0.01  
Net income (loss) attributable to Winthrop Realty Trust
  $ 0.18     $ 0.90     $ 0.59     $ (4.96 )
                                 
Per Common Share data - Diluted
                               
Income (loss) from continuing operations
  $ 0.25     $ 0.90     $ 0.69     $ (4.97 )
Income (loss) from discontinued operations
    (0.07 )     -       (0.10 )     0.01  
Net income (loss) attributable to Winthrop Realty Trust
  $ 0.18     $ 0.90     $ 0.59     $ (4.96 )
                                 
Basic Weighted-Average Common Shares
    21,412       15,855       21,064       15,828  
Diluted Weighted-Average Common Shares
    21,414       15,855       21,499       15,828  

See Notes to Consolidated Financial Statements.

 
4

 

WINTHROP REALTY TRUST
FORM 10-Q – SEPTEMBER 30, 2010
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(in thousands)

                     
Accumulated
   
Accumulated
             
   
Common Shares
   
Additional
   
Distributions
   
Other
             
   
of Beneficial Interest
   
Paid-In
   
In Excess of
   
Comprehensive
   
Non-Controlling
       
   
Shares
   
Amount
   
Capital
   
Net Income
   
Income (Loss)
   
Interests
   
Total
 
                                           
Balance, December 31, 2009
    20,375     $ 20,375     $ 498,118     $ (301,317 )   $ (87 )   $ 12,111     $ 229,200  
                                                         
Net income attributable to Winthrop Realty Trust
    -       -       -       12,589       -       -       12,589  
Net income attributable to non-controlling interests
    -       -       -       -       -       595       595  
Distributions to non-controlling interests
    -       -       -       -       -       (240 )     (240 )
Contributions from non-controlling interests
    -       -       -       -       -       1,037       1,037  
Dividends paid or accrued on Common Shares of Beneficial Interest ($0.4875 per share)
    -       -       -       (11,261 )     -       -       (11,261 )
Dividends paid or accrued on Series C Preferred Shares ($1.21875 per share)
    -       -       -       (230 )     -       -       (230 )
Change in unrealized gain on available for sale securities
    -       -       -       -       2       -       2  
Change in unrealized gain on interest rate derivatives
    -       -       -       -       (8 )     -       (8 )
Conversion of Series C Preferred Shares to Common Shares
    714       714       8,234       -       -       -       8,948  
Stock issued pursuant to dividend reinvestment plan
    143       143       1,652       -       -       -       1,795  
Net proceeds from Common Share offering
    5,750       5,750       61,117       -       -       -       66,867  
                                                         
Balance, September 30, 2010
    26,982     $ 26,982     $ 569,121     $ (300,219 )   $ (93 )   $ 13,503     $ 309,294  

                     
Accumulated
   
Accumulated
             
   
Common Shares
   
Additional
   
Distributions
   
Other
             
   
of Beneficial Interest
   
Paid-In
   
In Excess of
   
Comprehensive
   
Non-Controlling
       
   
Shares
   
Amount
   
Capital
   
Net Income
   
Income
   
Interests
   
Total
 
                                           
Balance, December 31, 2008
    15,754     $ 15,754     $ 460,956     $ (213,284 )   $ (15,176 )   $ 10,958     $ 259,208  
                                                         
Net loss attributable to Winthrop Realty Trust
    -       -       -       (78,472 )     -       -       (78,472 )
Cumulative effect, change in accounting principle
    -       -       -       11,647       (11,647 )     -       -  
Net income attributable to non-controlling interests
    -       -       -       -       -       651       651  
Distributions to non-controlling interests
    -       -       -       -       -       (743 )     (743 )
Contributions from non-controlling interests
    -       -       -       -       -       723       723  
Dividends paid or accrued on Common Shares of Beneficial Interest ($0.75 per share)
    -       -       -       (11,875 )     -       -       (11,875 )
Change in unrealized gain on available for sale securities
    -       -       -       -       21       -       21  
Change in unrealized gain on interest rate derivatives
    -       -       -       -       406       -       406  
Change in unrealized loss from equity investments
    -       -       -       -       26,174       -       26,174  
Stock issued pursuant to dividend reinvestment plan
    107       107       940       -       -       -       1,047  
                                                         
Balance, September 30, 2009
    15,861     $ 15,861     $ 461,896     $ (291,984 )   $ (222 )   $ 11,589     $ 197,140  

See Notes to Consolidated Financial Statements.

 
5

 

WINTHROP REALTY TRUST
FORM 10-Q – SEPTEMBER 30, 2010
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
Cash flows from operating activities
           
Net income (loss)
  $ 13,184     $ (77,821 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization (including amortization of deferred financing costs)
    5,026       5,562  
Amortization of lease intangibles
    2,064       3,647  
Straight-lining of rental income
    378       (514 )
(Earnings) loss of preferred equity investments
    (253 )     2,843  
Distributions from preferred equity investments
    293       2,291  
Loss of equity investments
    1,328       100,201  
Distributions from equity investments
    3,793       1,596  
Restricted cash held in escrows
    1,207       (1,009 )
Gain on sale of securities carried at fair value
    (588 )     (3,274 )
Unrealized gain on securities carried at fair value
    (4,280 )     (14,010 )
Unrealized gain on loan securities carried at fair value
    (3,593 )     -  
Impairment loss on real estate loan available for sale
    -       203  
Impairment loss on real estate held for sale
    2,720       -  
Gain on extinguishment of debt
    -       (5,682 )
Provision for loss on loan receivable
    -       2,152  
Tenant leasing costs
    (2,477 )     (2,081 )
Bad debt recovery
    (612 )     (73 )
Net change in interest receivable
    (236 )     (171 )
Net change in accounts receivable
    1,844       1,110  
Loan discount accretion
    (6,087 )     (406 )
Net change in accounts payable and accrued liabilities
    771       (653 )
Net cash provided by operating activities
    14,482       13,911  
                 
Cash flows from investing activities
               
Issuance and acquisition of loans receivable
    (83,572 )     (15,501 )
Investments in real estate
    (3,003 )     (1,301 )
Investment in equity investments
    (24,605 )     (2,007 )
Investment in real estate loan available for sale
    -       (35,000 )
Purchase of securities carried at fair value
    (3,056 )     (30,552 )
Proceeds from preferred equity investments
    -       60  
Proceeds from sale of real estate loan available for sale
    -       34,797  
Proceeds from sale of securities carried at fair value
    29,565       22,866  
Proceeds from sale of available for sale securities
    205       -  
Proceeds from sale of loans receivable
    12,876       -  
Restricted cash held in escrows
    (2,073 )     2,647  
Collection of loans receivable
    14,900       10,980  
Net cash used in investing activities
    (58,763 )     (13,011 )

(Continued on next page)
See Notes to Consolidated Financial Statements.

 
6

 

WINTHROP REALTY TRUST
FORM 10-Q – SEPTEMBER 30, 2010
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands, continued)

   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
Cash flows from financing activities
           
Proceeds from mortgage loans payable
  $ -     $ 49  
Proceeds from loan payable
    -       19,818  
Payment of loan payable
    -       (19,818 )
Proceeds from revolving line of credit
    25,450       35,000  
Payment of revolving line of credit
    -       (35,000 )
Principal payments of mortgage loans payable
    (4,994 )     (4,332 )
Restricted cash held in escrows
    1,482       3,970  
Payments of note payable
    -       (9,800 )
Deferred financing costs
    (165 )     (61 )
Contribution from non-controlling interest
    1,037       723  
Distribution to non-controlling interest
    (240 )     (743 )
Issuance of Common Shares under Dividend Reinvestment Plan
    1,795       1,047  
Issuance of Common Shares through offering
    66,867       -  
Dividend paid on Common Shares
    (10,187 )     (13,844 )
Dividend paid on Series C Preferred Shares
    (338 )     -  
Redemption of Series B-1 Preferred Shares
    -       (2,000 )
Net cash provided by (used in) financing activities
    80,707       (24,991 )
                 
Net increase (decrease) in cash and cash equivalents
    36,426       (24,091 )
Cash and cash equivalents at beginning of period
    66,493       59,238  
Cash and cash equivalents at end of period
  $ 102,919     $ 35,147  
                 
Supplemental Disclosure of Cash Flow Information
               
Interest paid
  $ 10,772     $ 12,624  
Taxes paid
  $ 98     $ 124  
                 
Supplemental Disclosure on Non-Cash Investing and  Financing Activities
               
Dividends accrued on Common Shares
  $ 4,385     $ 3,965  
Dividends accrued on Series C Preferred Shares
  $ 39     $ -  
Capital expenditures accrued
  $ 1,643     $ 190  
Redemption of Series B-1 Preferred Shares
  $ -     $ (17,081 )
Deposit on redemption of Series B-1 Preferred Shares
  $ -     $ 17,081  
Transfer of preferred equity investments to equity method investments
  $ -     $ (41,823 )
Transfer of loans to equity method investments
  $ -     $ (15,805 )
Transfer to equity method investments from loans and preferred equity investments
  $ -     $ 57,628  
Transfer of loan assets to investments in real estate
  $ 8,188     $ -  
Transfer of loan assets to investments in lease intangibles
  $ 2,032     $ -  
Transfer to investments in real estate from loan assets
  $ (8,188 )   $ -  
Transfer to lease intangibles from loan assets
  $ (2,032 )   $ -  

See Notes to Consolidated Financial Statements.

 
7

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Winthrop Realty Trust (“Winthrop”) is an unincorporated association in the form of a business trust organized in Ohio under a Declaration of Trust dated August 1, 1961, as amended and restated on May 21, 2009, which has as its stated principal business activity the ownership and management of, and lending to, real property and real estate related assets.

Winthrop conducts its business through WRT Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Winthrop is the sole general partner of, and owns directly and indirectly, 100% of the limited partnership interest in the Operating Partnership.  All references to the “Trust” refer to Winthrop and its consolidated subsidiaries, including the Operating Partnership.

The Trust is engaged in the business of owning real property and real estate related assets which it categorizes into three specific areas:  (i) direct or indirect ownership of wholly and partially owned operating properties (“operating properties”); (ii) origination and acquisition of loans and debt securities secured directly or indirectly by commercial and multi-family real property (collectively “loan assets”), including collateral mortgage-backed securities, and (iii) equity and debt interests in other real estate investment trusts (“REIT securities”).

2.
Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, although management believes that the disclosures presented herein are adequate to make the accompanying unaudited consolidated interim financial statements not misleading. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated annual financial statements and the notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC.  In the opinion of management, all adjustments considered necessary for fair statements have been included, and all such adjustments are of a normal recurring nature. The results of operations for the nine months ended September 30, 2010 are not necessarily indicative of the operating results for the full year.

The accompanying unaudited consolidated financial statements represent the consolidated results of Winthrop, its wholly-owned taxable REIT subsidiary, WRT TRS Management Corp., the Operating Partnership, wholly-owned subsidiaries and certain partially-owned entities in which the Operating Partnership either (i) owns a controlling interest or (ii) is the primary beneficiary of a variable interest entity (“VIE”).  All significant intercompany amounts have been eliminated.  The Trust accounts for its investments in companies in which it has the ability to significantly influence, but does not have a controlling interest, by using the equity method of accounting.

Reclassifications

Certain prior year balances have been reclassified in order to conform to the current year’s presentation.  The Trust’s retail properties in Athens, Georgia; Lafayette, Louisiana; Knoxville, Tennessee; and Sherman, Texas are included in discontinued operations for the three and nine month periods ended September 30, 2010 and 2009.  The Trust’s formerly owned Creekwood Apartments property in Kansas City, Kansas is included in discontinued operations for the three and nine month periods ended September 30, 2009.

 
8

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share

The Trust determines basic earnings per share on the weighted average number of Common Shares of Beneficial Interest (“Common Shares”) outstanding during the period and reflects the impact of participating securities.  The holders of the Trust’s Series B-1 Cumulative Convertible Redeemable Preferred Shares (“Series B-1 Preferred Shares”) and the Series C Cumulative Convertible Redeemable Preferred Shares (“Series C Preferred Shares”) are entitled to receive cumulative preferential dividends on a quarterly basis equal to the greater of (i) $0.40625 per share quarterly (6.5% of the liquidation preference on an annualized basis) or (ii) cash dividends payable on the number of Common Shares into which the Series B-1 Preferred Shares and Series C Preferred Shares (assuming for this purpose that the conversion price of the Series C Preferred Shares equals the conversion price for the Series B-1 Preferred Shares) are convertible.  The Trust computes diluted earnings per share based on the weighted average number of Common Shares outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.

The Trust has calculated earnings per share in accordance with relevant accounting guidance for participating securities and the two class method.  The reconciliation of earnings attributable to Common Shares outstanding for the basic and diluted earnings per share calculation is as follows (in thousands, except per share data):

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Basic
                       
Income (loss) from continuing operations
  $ 5,552     $ 15,398     $ 15,344     $ (78,022 )
Allocation of undistributed earnings to Series B-1 Preferred Shares
    -       (839 )     -       -  
Income attributable to non-controlling interest
    (175 )     (315 )     (595 )     (651 )
Preferred dividend of Series C Preferred Shares
    (59 )     -       (230 )     -  
Income (loss) from continuing operations applicable to Common Shares
    5,318       14,244       14,519       (78,673 )
Income (loss) from discontinued operations
    (1,569 )     74       (2,160 )     201  
Net income (loss) applicable to Common Shares for earnings per share purposes
  $ 3,749     $ 14,318     $ 12,359     $ (78,472 )
                                 
Basic weighted-average Common Shares
    21,412       15,855       21,064       15,828  
                                 
Income (loss) from continuing operations
  $ 0.25     $ 0.90     $ 0.69     $ (4.97 )
Income (loss) from discontinued operations
    (0.07 )     -       (0.10 )     0.01  
Net income (loss) per Common Share
  $ 0.18     $ 0.90     $ 0.59     $ (4.96 )
Diluted
                               
Income (loss) from continuing operations
  $ 5,552     $ 15,398     $ 15,344     $ (78,022 )
Allocation of undistributed earnings to Series B-1 Preferred Shares
    -       (839 )     -       -  
Income attributable to non-controlling interest
    (175 )     (315 )     (595 )     (651 )
Preferred dividend of Series C Preferred Shares
    (59 )     -       -       -  
Income (loss) from continuing operations applicable to Common Shares
    5,318       14,244       14,749       (78,673 )
Income (loss) from discontinued operations
    (1,569 )     74       (2,160 )     201  
Net income (loss) applicable to Common Shares for earnings per share purposes
  $ 3,749     $ 14,318     $ 12,589     $ (78,472 )
                                 
Basic weighted-average Common Shares
    21,412       15,855       21,064       15,828  
Series B-1 Preferred Shares (1)
    -       -       -       -  
Series C Preferred Shares (2)
    -       -       433       -  
Stock options (3)
    2       -       2       -  
Diluted weighted-average Common Shares
    21,414       15,855       21,499       15,828  
                                 
Income (loss) from continuing operations
  $ 0.25     $ 0.90     $ 0.69     $ (4.97 )
Income (loss) from discontinued operations
    (0.07 )     -       (0.10 )     0.01  
Net income (loss) per Common Share
  $ 0.18     $ 0.90     $ 0.59     $ (4.96 )

 
9

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(1)
The Series B-1 Preferred Shares were anti-dilutive for the three and nine months ended September 30, 2010 and 2009 and are not included in the weighted-average shares outstanding for the calculation of diluted earnings per Common Share.
(2)
The Series C Preferred Shares were issued November 1, 2009, were anti-dilutive for the three months ended September 30, 2010 and were dilutive for the nine months ended September 30, 2010.
(3)
The Trust’s outstanding stock options are dilutive for the three and nine months ended September 30, 2010.  The stock options were anti-dilutive for the three and nine months ended September 30, 2009 and are not included in the weighted average shares outstanding for the calculation of diluted earnings per Common Share for 2009.

Recently Issued Accounting Standards

In July 2010 an amendment was issued to the accounting and disclosure requirements which outlines specific disclosures that will be required for the allowance for credit losses and all finance receivables. Finance receivables include loans, lease receivables and other arrangements with a contractual right to receive money on demand or on fixed or determinable dates. The new guidance will require companies to provide detailed disclosures by portfolio segment and class to enable users of the financial statement to understand the nature of credit risk, how the risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period.  Certain disclosures as of the end of the reporting period required under these provisions will be effective for the Trust’s December 31, 2010 annual reporting period. Additional disclosure rules about activity that occurs during a reporting period will be effective for the Trust’s March 31, 2011 interim reporting period. The Trust is currently evaluating the required disclosures which are not expected to have a material impact on its consolidated financial statements.

In January 2010 an amendment was issued to the accounting and disclosure requirements for fair value measurements. This amendment requires more robust disclosure of valuation techniques and inputs into fair value measurements and requires amounts and reasons for significant transfers between levels in the fair value hierarchy to be reported along with disclosure of a company’s policy for recognizing such transfers. This amendment is effective for the Trust beginning on January 1, 2010, except for Level 3 sensitivity disclosures, which are effective for the Trust beginning in fiscal 2011. The Trust has adopted this standard which did not have a material impact on its consolidated financial statements.

3.
Fair Value Measurement

Cash and cash equivalents, restricted cash in escrows, derivative financial instruments, and certain securities are reported at fair value.  The fair value measurements are determined based on the assumptions that market participants would use in pricing the applicable asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 
10

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The table below presents the Trust’s assets and liabilities which are measured at fair value on a recurring basis as of September 30, 2010, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

Recurring Basis
 
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant Other
Unobservable
Inputs
(Level 3)
   
Total
 
                         
Assets
                       
Cash and cash equivalents
  $ 102,919     $ -     $ -     $ 102,919  
Restricted cash held in escrows
    8,889       -       -       8,889  
Securities carried at fair value
    29,893       -       -       29,893  
Loan securities carried at fair value
    -       -       6,454       6,454  
    $ 141,701     $ -     $ 6,454     $ 148,155  
Liabilities
                               
Derivative liabilities
  $ -     $ 93     $ -     $ 93  

The table below presents the Trust’s assets and liabilities which are measured at fair value on a recurring basis as of December 31, 2009, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

Recurring Basis
 
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant Other
Unobservable
Inputs
(Level 3)
   
Total
 
                         
Assets
                       
Cash and cash equivalents
  $ 66,493     $ -     $ -     $ 66,493  
Restricted cash held in escrow
    9,505       -       -       9,505  
Available for sale securities
    203       -       -       203  
Securities carried at fair value
    51,702       -       692       52,394  
Loan securities carried at fair value
    -       -       1,661       1,661  
    $ 127,903     $ -     $ 2,353     $ 130,256  
Liabilities
                               
Derivative liabilities
  $ -     $ 84     $ -     $ 84  

The table below includes a roll forward (in thousands) of the balance sheet amounts from January 1, 2010 to September 30, 2010, including the change in fair value, for financial instruments classified by the Trust within Level 3 of the valuation hierarchy.  When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, it is based upon the significance of the unobservable factors to the overall fair value measurement.

Nine Months Ended September 30, 2010
 
Securities Carried at
Fair Value
   
Loan Securities
Carried at Fair Value
 
             
Fair value, January 1, 2010
  $ 692     $ 1,661  
Purchases, issuances and settlements, net
    (692 )     1,200  
Unrealized gain, net
    -       3,593  
Fair value,  September 30, 2010
  $ -     $ 6,454  

 
11

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Non-recurring Measurements

The table below presents as of September 30, 2010 the Trust’s assets and liabilities which are measured at fair value as events dictate (non-recurring measurements) according to the level in the fair value hierarchy within which those measurements fall (in thousands):

Non-Recurring Basis
 
Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
   
Significant Other
Observable
Inputs
(Level 2)
   
Significant Other
Unobservable
Inputs
(Level 3)
   
Total
 
                         
Assets held for sale
  $ -     $ -     $ 3,007     $ 3,007  
    $ -     $ -     $ 3,007     $ 3,007  

Fair Value Option

The current accounting guidance for fair value measurement provides a fair value option election that allows companies to irrevocably elect fair value as the measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made are recognized in earnings on a quarterly basis based on the then market price regardless of whether such assets or liabilities have been disposed of at such time.  The fair value option guidance permits the fair value option election to be made on an instrument by instrument basis when it is initially recorded or upon an event that gives rise to a new basis of accounting for that asset or liability.  The Trust elected the fair value option for all loan securities and REIT securities acquired subsequent to September 30, 2008.

The Trust recognized a net unrealized gain of $3,071,000 and $7,873,000 for the three and nine months ended September 30, 2010, respectively, and a net unrealized gain of $12,578,000 and $14,010,000 for the three and nine months ended September 30, 2009 respectively, as a result of the change in fair value of the securities for which the fair value option was elected, which is recorded as an unrealized gain or loss in the Trust’s statements of operations.  Income related to securities carried at fair value is recorded as interest and dividend income.

The following table presents as of September 30, 2010 and December 31, 2009 the Trust's financial assets for which the fair value option was elected (in thousands):

Financial Instruments at Fair Value
 
September 30, 2010
   
December 31, 2009
 
             
Assets
           
Securities carried at fair value:
           
REIT Debentures
  $ -     $ 18,794  
REIT Preferred shares
    28,252       23,950  
REIT Common shares
    1,641       9,650  
                 
Loan securities carried at fair value
    6,454       1,661  
    $ 36,347     $ 54,055  

 
12

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The table below presents as of September 30, 2010 the difference between fair values and the aggregate contractual amounts due for which the fair value option has been elected (in thousands):

   
Fair Value at
September 30, 2010
   
Amount Due
Upon Maturity
   
Difference
 
                   
Assets
                 
                   
Loan securities carried at fair value
  $ 6,454     $ 9,767     $ 3,313  
    $ 6,454     $ 9,767     $ 3,313  

The table below presents as of December 31, 2009 the difference between fair values and the aggregate contractual amounts due for which the fair value option has been elected (in thousands):

   
Fair Value at
December 31, 2009
   
Amount Due
Upon Maturity
   
Difference
 
                   
Assets
                 
Securities carried at fair value:
                 
REIT Debentures
  $ 18,794     $ 21,191     $ 2,397  
                         
Loan securities carried at fair value
    1,661       7,494       5,833  
    $ 20,455     $ 28,685     $ 8,230  

4.
Acquisitions, Dispositions, and Other Activity

Public Offering

On September 27, 2010 the Trust closed a public offering of 5,750,000 Common Shares at a price of $12.25 per share before underwriter discounts and received net proceeds of approximately $67,000,000.

Loan Asset Acquisitions

1701 E. Woodfield Road, Schaumburg, Illinois – First Mortgage Loan - On July 1, 2010 the Trust acquired for $8,200,000 a $10,408,000 performing first mortgage loan collateralized by a 174,400 square foot office building located at 1701 E. Woodfield Road, Schaumburg, Illinois, a suburb of Chicago. The property is currently owned in a joint venture with Marc Realty. Simultaneously with the acquisition of this loan, the venture made a principal payment on the loan of $3,200,000 (50% of which was contributed by each of the Trust and Marc Realty) and the loan was modified to reduce the principal balance to $5,000,000 bearing interest at 8% per annum. On September 28, 2010 the borrower repaid the Trust’s outstanding $5,000,000 balance of the loan and all accrued interest from proceeds of a new first mortgage loan.

500-512 Seventh Avenue, New York, New York – B Note - On July 9, 2010 the Trust acquired for $19,825,000 a $23,499,000 performing B Note (the “B Note”) in a first mortgage loan which is subordinate to a $253,679,000 A note in the mortgage loan. The A Note and B Note are collateralized by a 1,188,000 square foot office building located at 500-512 Seventh Avenue, New York, New York.  The B Note bears interest at 7.19% and matures on July 11, 2016. On August 4, 2010, the Trust sold a 50% pari passu participation interest in the B Note (the “B-2 Participation”) for a purchase price of $9,859,000 which represented one-half of the purchase price paid for the B Note less one-half of any principal payments received prior to the sale of the B-2 Participation.

San Marbeya Apartments, Tempe, Arizona-First Mortgage Loan - On July 23, 2010 the Trust acquired for $26,990,000 a $31,106,000 performing first mortgage loan.  The loan is collateralized by a 276 unit apartment complex referred to as San Marbeya Apartments located in Tempe, Arizona.  The loan has a blended interest rate of 5.88% and matures on January 1, 2015.

 
13

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Rockwell – Shirley, New YorkMezzanine Loan - On August 31, 2010 the Trust acquired from Concord Debt Holdings, LLC (“Concord”) for $235,000 a $1,497,000 performing mezzanine loan. The loan is collateralized by a 129,660 square foot industrial/warehouse complex in Shirley, New York. The loan is subordinate to $17,045,000 of senior debt, has an interest rate of 12% and matures on May 1, 2016.

Newbury Apartments, Meriden, Connecticut - Mezzanine Loan - On September 2, 2010 the Trust acquired from Concord for $550,000 a non-performing mezzanine loan with a face amount of $3,500,000, which bears interest at 12% per annum and matures on February 1, 2012. The loan is collateralized by a 180 unit multi-family apartment complex located in Meriden, Connecticut.  The loan is subordinate to a non-performing mortgage loan with a principal balance of approximately $23,875,000.  On October 29, 2010, the Trust foreclosed on the equity interests in the property owner resulting in the Trust becoming the owner of the property subject to the mortgage loan.  The Trust is currently negotiating with the mortgage lender with respect to the current defaults on the mortgage loan.
 
Loan Asset Repayment on a Non-Performing Loan

Driver Building, San Diego, California - On August 27, 2010, the Trust received $6,540,000 in full repayment on a first mortgage loan collateralized by an office building located in San Diego, California.

Loan Foreclosure

Deer Valley Medical Center, Deer Valley, Arizona - On August 6, 2010 WRT-DV LLC (“WRT-DV”) foreclosed on an 85,597 square foot, Class A medical office building known as the Deer Valley Professional Center located in Phoenix, Arizona in which WRT-DV held a first mortgage loan with a carrying amount of $10,257,000. The loan investment balance was transferred to land, building, tenant improvements, deferred lease cost for the in-place leases and to intangibles for the value of the above market leases. The Trust amortizes the value allocated to the in-place leases over the remaining lease term. The value allocated to the above market leases are amortized over the remaining lease term as an adjustment to rental income.  The property’s operating results are now included in the Trust’s operating properties business segment.

Loan Securities Acquisition

Scripps Center, Costa Mesa, CaliforniaRake Bonds - On July 16, 2010 the Trust acquired from Concord for $1,200,000 two rake bonds with an aggregate face amount of $2,273,000.  The rake bonds are subordinate to $17,715,000 of senior debt all of which is collateralized by a 229,000 square foot office complex referred to as the Scripps Center located in Costa Mesa, California. The bonds bear interest at rates ranging from Libor plus 1.39% to Libor plus 1.59% and mature on December 1, 2010.
 
Investments in Joint Ventures
 
Deer Valley Medical Center - On July 21, 2010, prior to the Deer Valley loan foreclosure, the Trust admitted Fenway VI LLC (“Fenway”), an unrelated third party, as a non-controlling member in WRT-DV, the entity which holds the Deer Valley assets, in exchange for a capital contribution of $157,000. Pursuant to the terms of the operating agreement, the Trust receives a priority return on $7,900,000 of our invested capital, with the balance of the capital being allocated 96.5% to the Trust and 3.5% to Fenway.

Peter Cooper Village/Stuyvesant Town (“PCVST”) Investment - On August 6, 2010 the Trust and affiliates of Pershing Square Capital Management, L.P. (“Pershing Square”) formed a joint venture, PSW NYC LLC (“PSW NYC”), for which the Trust invested an initial capital contribution of $10,125,000.   Concurrent with its formation, PSW NYC, which is owned 22.5% by the Trust and 77.5% by Pershing Square, acquired 100% of the $300,000,000 face amount of certain Mezzanine Loans (the “Mezz Loans”) for a purchase price of $45,000,000. The Mezz Loans are indirectly collateralized by PCVST, an 11,227 unit apartment complex in New York City. The Mezz loans represent the senior-most mezzanine loan interests in the property and along with the $3,000,000,000 first mortgage loan secured by the property, are currently in default.

 
14

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

PSW NYC initiated foreclosure on the equity interests in the property’s owner. However, on September 16, 2010, based on a lawsuit initiated by the first mortgage lenders against PSW NYC, the New York State Supreme Court (the “Trial Court”) ordered an injunction which precluded PSW NYC from foreclosing. PSW NYC has appealed the decision to the Appellate Division of the New York Supreme Court.  The Appellate Division denied PSW NYC’s request that the first mortgage lender be stayed from foreclosing on the property pending the appeal.  Accordingly, if the first mortgage lender were to have foreclosed, PSW NYC would have been left with only a damage claim.  On October 27, 2010, PSW NYC and the first mortgage lender agreed to settle the dispute and PSW NYC sold its interest in the Mezz Loans to an affiliate of the first mortgage lender for $45,000,000 and the matter was voluntarily dismissed.

Lex-Win Concord LLC (“Lex-Win”) and Concord Reorganization - On August 26, 2010 the Trust finalized a settlement agreement which triggered simultaneous transactions that changed the organizational structure, economics, and governance of the Trust’s equity investment in Lex-Win and Lex-Win’s wholly owned subsidiary Concord. The settlement agreement was implemented to resolve a legal action against Concord filed in May 2009 by a wholly-owned subsidiary of Inland American Real Estate Trust, Inc. (“Inland”).

As a result of the reorganization, Lex-Win was dissolved and transferred 100% of its interest in Concord to its members, the Trust and Lexington Realty Trust (“Lexington”). The underlying business assets of the former Lex-Win were separated into two distinct legal investment entities with identical ownership structures which are the reorganized Concord and a newly formed entity, CDH CDO LLC (“CDH CDO”). The Trust now holds 33.3% common member interests in each joint venture together with Lexington, and Inland.

Terms of the reorganization included a subsidiary of Concord selling 100% of the stock of Concord Debt Funding Trust (“CDFT”) to the newly formed CDH CDO for $9,500,000. The consideration was funded by Inland’s initial capital contribution to CDH CDO and was used by the subsidiary to partially repay its lenders.

There was no financial statement impact to the Trust as a result of the reorganization since the investment has been written down to zero as of June 30, 2009, the Trust has made no additional contributions and it has not recognized any additional income or loss as a result of the reorganization. In addition, Concord remains in violation of certain debt covenants to its lenders at September 30, 2010. Concord’s debt is non-recourse to the Trust and Concord’s lenders’ sole recourse with respect to defaults is limited to the value of Concord’s assets.

Operating Properties – Other Activities

On July 25, 2010, the River City property experienced flooding in its basement level and the parking garage due to the Chicago River overflowing the seawall protecting the property. The flooding caused substantial damage to the property’s mechanical and electrical systems resulting in the tenants in the commercial space being without power for several days. The property’s insurance carrier was immediately notified. The Trust has accrued approximately $225,000 to cover the costs associated with the damage and a claim is in process.

Acquisitions & Dispositions of REIT Securities

During the quarter ended September 30, 2010 the Trust sold REIT securities and received net proceeds of approximately $16,391,000. The Trust previously recognized unrealized gains on the securities of $4,868,000 and as a result recognized a loss on the sale of these securities of approximately $185,000 exclusive of any interest or dividends earned.

 
15

 

WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5.
Loans Receivable

The following table summarizes the Trust’s loans receivable at September 30, 2010 and December 31, 2009 (in thousands):

                 
Carrying Amount
 
Property
 
Location
 
Interest Rate
   
Maturity
 
September 30,
2010
   
December 31,
2009
 
                           
Metropolitan Tower (1)
 
New York, NY
 
Libor + 1.5
 
Nov 2010
  $ 9,216     $ 6,638  
Beverly Hilton (1)
 
Beverly Hills, CA
 
Libor + 1.74
 
Aug 2011
    7,163       5,384  
Newbury Apartments (1) (4)
 
Meriden, CT
    12.00 %  
Feb 2012
    550       -  
160 Spear
 
San Francisco, CA
    (2 )  
Jun 2012
    5,898       4,281  
160 Spear – Mezzanine
 
San Francisco, CA
    15.00 %  
Jun 2012
    3,028       1,212  
Siete Square
 
Phoenix, AZ
    (3 )  
Jun 2012
    2,486       5,505  
Crossroads (1) (5)