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:  March 31, 2009
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 ý No o

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 o No o

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 o No ý

As of May 1, 2009 there were 15,823,250 Common Shares of Beneficial Interest outstanding.
 
 


 
INDEX

   
Page
     
Financial Information
     
Item 1.
Financial Statements (Unaudited):
 
     
 
Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008
3
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three Months Ended March 31, 2009 and March 31, 2008
4
     
 
Consolidated Statements of Equity for the Three Months Ended March 31, 2009 and March 31, 2008
5
     
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and March 31, 2008
6
     
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
     
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
45
     
Item 4.
Controls and Procedures
46
     
Part II.
Other Information
 
     
Item 6.
Exhibits
47
     
Signatures
 
48
     
Exhibit Index
 
49
 
 
 
2

 

Item 1. Financial Information

WINTHROP REALTY TRUST
FORM 10-Q - MARCH 31, 2009

CONSOLIDATED BALANCE SHEETS

(Unaudited)
(In thousands, except share and per share data)

   
March 31, 2009
   
December 31, 2008
 
         
(as adjusted)
 
ASSETS
           
             
Investments in real estate, at cost
           
Land
  $ 21,344     $ 21,344  
Buildings and improvements
    246,292       246,362  
      267,636       267,706  
Less - accumulated depreciation
    (27,227 )     (25,901 )
Investments in real estate, net
    240,409       241,805  
                 
Cash and cash equivalents
    41,070       59,238  
Restricted cash held in escrows
    5,711       14,353  
Loans receivable, net of reserve of $2,873 and $2,445, respectively
    18,740       22,876  
Accounts receivable, net of reserve of $290 and $225, respectively
    14,370       14,028  
Securities carried at fair value
    43,982       36,516  
Available for sale securities, net
    186       184  
Preferred equity investment
    50,579       50,624  
Equity investments
    73,499       92,202  
Lease intangibles, net
    24,786       25,929  
Deferred financing costs, net
    2,408       3,218  
Deposit for purchase of Series B-1 Preferred Shares
          17,081  
Other assets
    40       40  
TOTAL ASSETS
  $ 515,780     $ 578,094  
                 
LIABILITIES
               
                 
Mortgage loans payable
  $ 228,300     $ 229,737  
Series B-1 Cumulative Convertible Redeemable Preferred Shares, $25 per share liquidation preference; 1,496,000 and 2,413,105 shares authorized and outstanding at March 31, 2009 and December 31, 2008, respectively
    37,400       60,328  
Note payable
          9,800  
Accounts payable and accrued liabilities
    8,386       8,596  
Dividends payable
    3,971       5,934  
Deferred income
    795       795  
Below market lease intangibles, net
    3,412       3,696  
TOTAL LIABILITIES
    282,264       318,886  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
EQUITY
               
                 
Winthrop Realty Trust Shareholders' Equity:
               
                 
Common Shares, $1 par, unlimited shares authorized; 15,815,787 and 15,754,495 outstanding at March 31, 2009 and December 31, 2008, respectively
    15,816       15,754  
                 
Additional paid-in capital
    461,559       460,956  
                 
Accumulated distributions in excess of net income
    (239,688 )     (213,284 )
                 
Accumulated other comprehensive loss
    (15,233 )     (15,176 )
                 
Total Winthrop Realty Trust Shareholders' Equity
    222,454       248,250  
                 
Non-controlling interests
    11,062       10,958  
                 
Total Equity
    233,516       259,208  
                 
TOTAL LIABILITIES AND EQUITY
  $ 515,780     $ 578,094  

See Notes to Consolidated Financial Statements.

 
3

 

         WINTHROP REALTY TRUST
FORM 10-Q - MARCH 31, 2009

CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands, except per share data)

   
For the Three Months Ended
 
   
March 31,
 
   
2009
   
2008
 
             
Revenue
           
Rents and reimbursements
  $ 10,985     $ 10,667  
Interest and dividends
    1,752       533  
      12,737       11,200  
                 
Expenses
               
Property operating
    2,001       1,867  
Real estate taxes
    703       739  
Depreciation and amortization
    2,899       3,058  
Interest
    4,398       5,831  
Impairment loss on available for sale securities
          100  
Provision for loss on loan receivable
    428        
General and administrative
    1,446       2,071  
State and local taxes
    50       124  
      11,925       13,790  
Other income
               
Earnings from preferred equity investments
    1,015       2,330  
Equity in earnings (loss) of equity investments
    (18,163 )     3,812  
Gain on sale of available for sale securities
          2,029  
Loss on sale of securities carried at fair value
    (87 )      
Gain on sale of mortgage-backed securities  available for sale
          454  
Unrealized loss on securities carried at fair value
    (11,148 )      
Gain on early extinguishment of debt
    5,237        
Interest income
    72       228  
      (23,074 )     8,853  
Consolidated (loss) income from continuing operations
    (22,262 )     6,263  
                 
Income from discontinued operations
          49  
Consolidated net (loss) income
    (22,262 )     6,312  
                 
Income attributable to non-controlling interests
    (171 )      
Net (loss) income attributable to Winthrop Realty Trust
  $ (22,433 )   $ 6,312  
                 
Comprehensive income (loss)
               
Net income (loss)
  $ (22,262 )   $ 6,312  
Change in unrealized loss on available for sale securities arising during the period
    2       2,023  
Change in unrealized gain on mortgage-backed securities available for sale arising during the period
          190  
Change in unrealized gain (loss) on interest rate derivatives arising during the period
    138       (651 )
Change in unrealized loss from equity investments
    (197 )     (9,635 )
Less reclassification adjustment from (gains) losses included in net income
          (2,483 )
                 
Comprehensive income (loss)
  $ (22,319 )   $ (4,244 )
                 
Per Common Share data - Basic
               
Income (loss) from continuing operations attributable to  Winthrop Realty Trust
  $ (1.42 )   $ 0.45  
Income from discontinued operations attributable to Winthrop Realty Trust
           
Net income (loss) attributable to Winthrop Realty Trust
  $ (1.42 )   $ 0.45  
                 
Per Common Share data - Diluted
               
Income (loss) from continuing operations attributable to Winthrop Realty Trust
  $ (1.42 )   $ 0.44  
Income from discontinued operations attributable to Winthrop Realty Trust
           
Net income (loss) attributable to Winthrop Realty Trust
  $ (1.42 )   $ 0.44  
                 
Basic Weighted-Average Common Shares
    15,806       13,416  
Diluted Weighted-Average Common Shares
    15,806       13,428  
                 
Amounts attributable to Winthrop Realty Trust Common Shareholders
               
Income (loss) from continuing operations
  $ (22,433 )   $ 6,263  
Income from discontinued operations
          49  
Net income (loss)
  $ (22,433 )   $ 6,312  
 
See Notes to Consolidated Financial Statements.

 
4

 

WINTHROP REALTY TRUST
FORM 10-Q - MARCH 31, 2009

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, 2008
    15,754     $ 15,754     $ 460,956     $ (213,284 )   $ (15,176 )   $ 10,958     $ 259,208  
                                                         
Net loss attributable to Winthrop Realty Trust
                      (22,433 )                 (22,433 )
Net income attributable to non-controlling interests
                                  171       171  
Distributions to non-controlling interests
                                  (130 )     (130 )
Contributions from non-controlling interests
                                  63       63  
Dividends paid or accrued on Common Shares of beneficial interest ($0.25 per share)
                      (3,971 )                 (3,971 )
Change in unrealized gain on available for sale securities, net of reclassification adjustment for amounts included in net income
                            2             2  
Change in unrealized loss on interest rate derivatives
                            138             138  
Change in unrealized loss from equity investments
                            (197 )           (197 )
Stock issued pursuant to dividend reinvestment plan
    62       62       603                         665  
                                                         
Balance, March 31, 2009
    15,816     $ 15,816     $ 461,559     $ (239,688 )   $ (15,233 )   $ 11,062     $ 233,516  
 
                     
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, 2007
    66,292     $ 66,292     $ 358,145     $ (134,531 )   $ (8,090 )   $ 9,978     $ 291,794  
                                                         
Net loss attributable to Winthrop Realty Trust
                      6,312                   6,312  
Net income attributable to non-controlling interests
                                         
Distributions to non-controlling interests
                                         
Contributions from non-controlling interests
                                         
Dividends paid or accrued on Common Shares of beneficial interest ($0.065 per share)
                      (4,417 )                 (4,417 )
Change in unrealized gain on available for sale securities, net of reclassification adjustment for amounts included in net income
                            (6 )           (6 )
Change in unrealized gain on mortgage-backed securities held for sale, net of reclassification adjustment for amounts included in net income
                            (264 )           (264 )
Change in unrealized loss on interest rate derivatives
                            (651 )           (651 )
Change in unrealized loss from equity investments
                            (9,635 )           (9,635 )
Stock issued pursuant to dividend reinvestment plan
    322       322       1,309                         1,631  
Conversion of Series B-1 Preferred Shares to Common Shares
    1,333       1,333       4,463                         5,796  
                                                         
Balance, March 31, 2008
    67,947     $ 67,947     $ 363,917     $ (132,636 )   $ (18,646 )   $ 9,978     $ 290,560  
 
See Notes to Consolidated Financial Statements.

 
5

 

WINTHROP REALTY TRUST
FORM 10-Q - MARCH 31, 2009

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

   
For the Three Months Ended
 
   
March 31,
 
   
2009
   
2008
 
Cash flows from operating activities
           
Net income (loss)
  $ (22,262 )   $ 6,312  
Adjustments to reconcile net income (loss) to net cash provided by  operating activities
               
Depreciation and amortization (including amortization of deferred  financing costs)
    1,892       2,021  
Amortization of lease intangibles
    1,313       1,473  
Straight-lining of rental income
    324       225  
Earnings of preferred equity investments less than (in excess of) distributions
    45       116  
Earnings of equity investments less than (in excess of) distributions
    18,506       (2,596 )
Restricted cash held in escrows
    714       840  
Gain on sale of mortgage-backed securities available for sale
          (454 )
Loss on sale of securities carried at fair value
    87        
Gain on sale of available for sale securities
          (2,029 )
Unrealized loss on securities carried at fair value
    11,148        
Gain on early extinguishment of debt
    (5,237 )      
Impairment loss
          100  
Provision for loss on loan receivable
    428        
Bad debt expense (recovery)
    65       (2 )
Interest receivable on loans
    4       (41 )
Net change in accounts receivable
    (731 )     8,745  
Net change in accounts payable and accrued liabilities
    127       (3,359 )
Net change in other assets
          (71 )
                 
Net cash provided by operating activities
    6,423       11,280  
                 
Cash flows from investing activities
               
Investments in real estate
    (949 )     (1,065 )
Proceeds from repayments of mortgage-backed securities available for sale
          78,318  
Investment in equity investments
          (5,087 )
Investment in real estate loans
    (1,596 )      
Proceeds from preferred equity investments
          18,416  
Purchase of securities carried at fair value
    (25,668 )      
Purchase of available for sale securities
          (4,850 )
Proceeds from sale of securities carried at fair value
    6,967        
Proceeds from sale of available for sale securities
          57,699  
Decrease (increase) in restricted cash held in escrows
    2,635       (107 )
Issuance and acquisition of loans receivable
          (2,465 )
Collection of loans receivable
    5,300       133  
                 
 Net cash (used in) provided by investing activities
    (13,311 )     140,992  

(Continued on next page)

See Notes to Consolidated Financial Statements.

 
6

 

WINTHROP REALTY TRUST
FORM 10-Q - MARCH 31, 2009

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
(Continued from previous page)

   
For the Three Months Ended
 
   
March 31,
 
   
2009
   
2008
 
             
Cash flows from financing activities
           
Repayment of borrowings under repurchase agreements
  $     $ (75,175 )
Proceeds from mortgage loans payable
    49       161  
Restricted cash held in escrows
    5,293       30  
Principal payments of mortgage loans payable
    (1,486 )     (1,235 )
Payments of note payable
    (9,800 )      
Deferred financing costs
          (24 )
Dividends paid on Common Shares
    (5,934 )     (16,242 )
Issuance of Common Shares under dividend reinvestment plan
    665       1,631  
Contribution from non-controlling interest
    63        
Distribution to non-controlling interest
    (130 )      
                 
 Net cash used in financing activities
    (11,280 )     (90,854 )
                 
Net increase (decrease) in cash and cash equivalents
    (18,168 )     61,418  
Cash and cash equivalents at beginning of period
    59,238       36,654  
Cash and cash equivalents at end of period
  $ 41,070     $ 98,072  
                 
Supplemental Disclosure of Cash Flow Information
               
                 
 Interest paid
  $ 4,593     $ 9,237  
               
Taxes paid
  $ 30     $ 39  
                 
Supplemental Disclosure of Non-Cash Investing and Financing Activities
               
                 
Dividends accrued on Common Shares
  $ 3,971     $ 4,417  
                 
Capital expenditures accrued
  $ 158     $ 254  
                 
Conversion of Series B-1 Preferred Shares into Common Shares
  $     $ 5,796  
                 
Redemption of Series B-1 Preferred Shares
  $ (17,081 )   $  
                 
Deposit on redemption of Series B-1 Preferred Shares
  $ 17,081     $  

See Notes to Consolidated Financial Statements.

 
7

 

WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Winthrop Realty Trust  (the “REIT”) 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 December 31, 2005, which has as its stated principal business activity the ownership and management of, and lending to, real estate and related investments.

The REIT conducts its business through WRT Realty L.P., a Delaware limited partnership (the “Operating Partnership”). The REIT is the sole general partner of, and owns directly and indirectly, 100% of the limited partnership interest in the Operating Partnership. The transfer of the REIT’s assets and liabilities to the Operating Partnership had no effect on the REIT’s financial statements.  All references to the “Trust” refer to the REIT 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 operating properties (“operating properties”); (ii) origination and acquisition of loans and debt securities secured directly or indirectly by commercial real property (“loan assets and loan securities”), including collateral mortgage-backed securities and collateral debt obligation securities; and (iii) equity and debt interests in other REITs (“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 presented 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 REIT’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC.  In the opinion of management, all adjustments (which include only normal recurring adjustments) considered necessary for fair statements have been included.  The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the operating results for the full year.

The accompanying unaudited consolidated financial statements represent the consolidated results of the REIT, 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 owns either (i) a controlling interest or (ii) is the primary beneficiary.  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.

Reverse Stock Split

In November 2008 the Trust effected a 1-for-5 reverse stock split (the "Reverse Split") of its Common Shares of Beneficial Interest (“Common Shares”) pursuant to which each five Common Shares issued and outstanding as of the close of the market on November 28, 2008 were automatically combined into one Common Share, subject to the elimination of fractional shares.  All references to Common Shares outstanding, per Common Share amounts and stock option data have been restated to reflect the effect of the Reverse Split for all periods presented.

Reclassifications

Certain prior year balances have been reclassified in order to conform to the current year’s presentation.  Discontinued operations for the three month period ended March 31, 2008 include the Trust’s property in Biloxi, Mississippi.  Also during the quarter ended March 31, 2008, the Trust placed its St. Louis, Missouri property back into continuing operations.

 
8

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Variable Interest Entities

The Trust has evaluated its investments to determine whether they constitute a variable interest in a variable interest entity (“VIE”).  FIN 46 requires a VIE to be consolidated by its primary beneficiary (“PB”).  The PB is the party that absorbs a majority of the VIE’s anticipated losses and/or a majority of the expected returns.

In December 2008 the Trust adopted FASB Staff Position FAS 140-4 (“FSP FAS 140-4”) and FIN 46(R)-8 (“FIN 46R-8”), Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. Among other things FSP FAS 140-4 and FIN 46(R)-8 require enhanced disclosure with respect to variable interest entities to provide financial statements users with an understanding of the significant judgments and assumptions made by the Trust in its determination of whether it must consolidate variable interest entities.

At March 31, 2009 the Trust has identified five convertible mezzanine loans related to the Marc Realty portfolio to be variable interests in a VIE.  The Trust has determined that it is the primary beneficiary of the underlying borrowing entity of one of these mezzanine loans and consolidates this investment.  The Trust has determined that it is not the primary beneficiary of the underlying borrowing entities of the other four mezzanine loans as it does not anticipate absorbing a majority of the expected losses due to its preferred return position.  These loans, with a carrying value of $3,923,000 net of other-than-temporary impairment charges of $3,331,000, are accounted for as preferred equity in the Trust’s consolidated balance sheet.

Earnings Per Share

The Trust has calculated earnings per share in accordance with SFAS No.128, “Earnings Per Share,” and EITF 03-06 Participating Securities and the Two Class Method Under FASB Statement No. 128 Earnings Per Share.”  SFAS No.128 requires that Common Share equivalents be excluded from the weighted-average shares outstanding for the calculation of basic earnings per share.  EITF 03-06 requires that computation of earnings per share reflect the impact of participating securities.  The holders of the Series B-1 Cumulative Convertible Redeemable Preferred Shares (“Series B-1 Preferred Shares”) are entitled to receive cumulative preferential dividends equal to the greater of (i) 6.5% of the liquidation preference or (ii) cash dividends paid on the Common Shares.

The reconciliation of Common Shares outstanding for the basic and diluted earnings per share calculation is as follows (in thousands, except per share data):

   
Three Months Ended
March 31,
 
   
2009
   
2008
 
Basic
           
Income (loss) from continuing operations attributable to Winthrop Realty Trust
  $ (22,433 )   $ 6,263  
Allocation of undistributed earnings to Series B-1 Preferred Shares
          (339 )
Income from discontinued operations attributable to Winthrop Realty Trust
     —        49  
Net income (loss) attributable to Winthrop Realty Trust applicable to Common Shares for earnings per share purposes
  $ (22,433 )   $  5,973  
                 
Basic weighted-average Common Shares
    15,806       13,416  
                 
Income (loss) from continuing operations attributable to Winthrop Realty Trust
  $ (1.42 )   $  0.45  
Income from discontinued operations attributable to Winthrop Realty Trust
       —          —  
Net income (loss) attributable to Winthrop Realty Trust per Common Share
  $ (1.42 )   $ 0.45  
                 
Diluted
               
Income (loss) from continuing operations attributable to Winthrop Realty Trust
  $ (22,433 )   $ 6,263  
Allocation of undistributed earnings to Series B-1 Preferred Shares
     —       (339 )
Income from discontinued operations attributable to Winthrop Realty Trust
     —        49  
Net income (loss) attributable to Winthrop Realty Trust applicable to Common Shares for earnings per share purposes
  $ (22,433 )   $  5,973  
                 
Basic weighted-average Common Shares
    15,806       13,416  
Series B-1 Preferred Shares (1)
           
Stock options (2)
          12  
Diluted weighted-average Common Shares
    15,806        13,428  
                 
Income (loss) from continuing operations attributable to Winthrop Realty Trust
  $ (1.42 )   $ 0.44  
Income from discontinued operations attributable to Winthrop Realty Trust
     —        —  
Net income (loss) attributable to Winthrop Realty Trust per Common Share
  $ (1.42 )   $ 0.44  
 
 
9

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
(1)
The Trust’s Series B-1 Preferred Shares were anti-dilutive for the three months ended March 31, 2009 and 2008 and are not included in the weighted-average shares outstanding for the calculation of diluted earnings per Common Share.
(2)
The Trust’s outstanding stock options were anti-dilutive for the three months ended March 31, 2009 and are not included in the weighted average shares outstanding for the calculation of diluted earnings per Common Share.

Recently Issued Accounting Standards
 
In November 2008, EITF Issue No. 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”), was ratified.  EITF 08-6 addresses questions about the potential effect of FASB Statement No. 141R, “Business Combinations,” and FASB Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51, on Equity Method Accounting Under APB 18.”  EITF 08-6 generally continues existing practices under APB 18, including the use of a cost-accumulation approach to initial measurement of the investment.  EITF 08-6 does not require the investor to perform a separate impairment test on the underlying assets of an equity method investment.  However, an equity method investor is required to recognize its proportionate share of impairment charges recognized by the investee, adjusted for basis differences, if any, between the investee’s carrying amount for the impaired assets and the cost allocated to such assets by the investor.  The investor is also required to perform an overall other-than-temporary impairment test of its investment in accordance with APB 18.  EITF 08-6 was effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years, and is applied prospectively.  The implementation of EITF 08-6 on January 1, 2009 did not have a material impact on the Trust’s consolidated financial statements.
 
In June 2008 FASB Staff Position No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities" ( "FSP EITF 03-6-1" ) was issued which states that share-based payment awards which entitle their holders to receive non-forfeitable dividends before vesting should be considered participating securities. As participating securities, these instruments should be included in the calculation of basic earnings per share.  FAS EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years.  The Trust has adopted FSP EITF 03-6-1 which had no impact on the Trust’s calculation of basic earnings per share.
 
In June 2008 EITF Issue 07-5, “Determining Whether an Instrument (or embedded Feature) is Indexed to an Entity’s Own Stock” (“FSP EITF 07-5”) was ratified.  Paragraph 11(a) of SFAS 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the company’s own stock and (b) classified in shareholder’s equity in the statement of financial position would not be considered a derivative financial instrument.  FSP EITF 07-5 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus be able to qualify for the SFAS 133 paragraph 11(a) scope exception.  FSP EITF 07-5 is effective on January 1, 2009.  The Trust has adopted FSP EITF 07-5 which had no impact on its consolidated financial statements.
 
In May 2008 FASB Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Settlement)" ("FSP APB 14-1"), was issued which clarifies that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Trust has adopted FSP APB 14-1 which had no impact on its consolidated financial statements.

 
10

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
In March 2008 Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”), was issued which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance and cash flows. This statement is effective for fiscal years beginning on or after November 15, 2008.  The Trust has adopted SFAS 161 which did not have a material impact on its consolidated financial statements.

In February 2008 FASB Staff Position (“FSP”) on “Accounting Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP FAS 140-3.”), was issued which addresses the issue of whether or not repurchase financing transactions should be viewed as two separate transactions or as one “linked” transaction. FSP FAS 140-3 is effective for fiscal years beginning after November 15, 2008 and applies only to original transfers made after that date; early adoption is not allowed. The Trust has adopted FSP FAS 140-3 which had no impact on its consolidated financial statements.

In December 2007 Statement No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), was issued. The objective of SFAS 141(R) is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. To accomplish that, SFAS 141(R) establishes principles and requirements for how the acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination and (iv) provides that transaction costs will be expensed. This statement applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after December 15, 2008; early adoption is not allowed.  The Trust has adopted SFAS 141(R) which had no impact on its consolidated financial statements.

In December 2007 Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51” (“SFAS 160”), was issued which establishes and expands accounting and reporting standards for entities that have outstanding minority interests, which are re-characterized as non-controlling interests, in a subsidiary. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest.  Previously, net income attributable to the non-controlling interest generally was reported as an expense in arriving at consolidated net income. SFAS 160 results in more transparent reporting of the net income attributable to non-controlling interests and is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The effective date of this Statement is the same as that of the related Statement 141(R); early adoption is not allowed. The adoption of SFAS 160 on January 1, 2009 resulted in (i) the reclassification of minority interests in consolidated subsidiaries to non-controlling interests in consolidated subsidiaries, a component of permanent equity on our consolidated balance sheets, (ii) the reclassification of minority interest expense to net income attributable to non-controlling interests on our consolidated statements of operations, and (iii) additional disclosures, including a consolidated statement of changes in partners’ equity in quarterly reporting periods.
 
In April 2009 FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2” and “FAS 124-2”) was issued.  This FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt securities. It requires a more detailed, risk-oriented breakdown of major security types and related information currently required by SFAS No. 115. In addition, FSP 115-2 and 124-2 requires that the annual disclosures in SFAS No. 115 and FSP FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” be made for interim periods (including the aging of securities with unrealized losses). This FSP also requires new disclosures to help users of financial statements understand the significant inputs used in determining a credit loss, as well as a rollforward of that amount each period. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The Trust did not elect early adoption and is evaluating the impact of the adoption of FSP FAS 115-2 and FAS 124-2 on its consolidated financial statements.


 
11

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In April 2009 FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”) was issued.  This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 includes guidance on identifying circumstances that indicate a transaction is not orderly.  This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same – that is, the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Accordingly, this FSP does not apply to quoted prices for an identical asset or liability in an active market (that is, a Level 1 input). This FSP is effective for interim and annual reporting periods ending after June 15, 2009, early adoption is permitted for periods ending after March 15, 2009. The Trust did not elect early adoption and is evaluating the impact of the adoption of FSP FAS 157-4 on its consolidated financial statements.

In April 2009, FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), was issued.  This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.  FSP FAS 107-1 and APB 28-1 applies to all financial instruments within the scope of SFAS No. 107 held by publicly traded companies.  FSP FAS 107-1 and APB 28-1 require disclosure in interim reporting periods and annual reporting periods of the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required under SFAS No. 107, including disclosure of the method(s) and significant assumptions used to estimate the fair value of financial instruments, including any changes therein.  This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 and does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption, this FSP requires comparative disclosures only for periods ending after initial adoption.  The Trust did not elect early adoption and is evaluating the impact of the adoption of FSP FAS 107-1 and APB 28-1 on its consolidated financial statements.

3.
Fair Value Measurement

On January 1, 2008 the Trust adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. Accordingly, the standard does not require any new fair value measurements of reported balances.  Cash equivalents, derivative financial instruments, available for sale securities, and securities carried at fair value are reported at fair value.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes 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).

Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability other than quoted prices, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Trust’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

 
12

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Level 1 securities include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain derivative financial instruments. In cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 include, for example, residual interests in securitizations and other less liquid securities.

In October 2008 FASB Staff Position FAS 157-3 ("FSP FAS 157-3"), “Determining the Fair Value of a Financial Asset When the Market For That Asset is Not Active,” was adopted which provides clarification that determination of fair value in an inactive market depends on facts and circumstances and may require the use of significant judgment to determine whether certain individual transactions are forced liquidations or distressed sales. In cases where the volume and level of trading activity for an asset has declined significantly, the available prices vary significantly over time or among market participants, or the prices are not current, observable inputs might not be relevant and could require significant adjustment. In addition, FSP FAS 157-3 also clarifies that broker or pricing service quotes may be appropriate inputs when measuring fair value, but are not necessarily determinative if an active market does not exist for the financial asset. Regardless of the valuation techniques used, FSP FAS 157-3 requires that an entity include appropriate risk adjustments that market participants would make for nonperformance and liquidity risks. The Trust has always considered nonperformance and liquidity risks in its analysis of loan and collateral underlying its securities and does not believe the adoption of FSP FAS 157-3 had a material impact on its consolidated financial statements.

The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Recurring Measurements

Cash Equivalents

The Trust’s cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The types of instruments that are valued based on quoted market prices in active markets include most U.S. government treasury bills with original maturities of less than 90 days and money market securities acquired through overnight sweeps.

Available for Sale Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. At March 31, 2009 all of the Trust’s available for sale securities are classified within Level 1 of the valuation hierarchy.
 
Securities Carried at Fair Value

At March 31, 2009 all of the Trust’s securities carried at fair value are classified within Level 1 of the fair value hierarchy.

Derivative Financial Instruments

The Trust uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using both quantitative and qualitative valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative as well as potential credit risks with the swap counterparty. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

 
13

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
To comply with the provisions of SFAS No. 157, the Trust incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Trust has considered the impact of netting as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Trust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2009, the Trust assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Trust has determined that the derivative valuations in their entirety should be classified in Level 2 of the fair value hierarchy.

The table below presents the Trust’s assets and liabilities as of March 31, 2009,  measured at fair value, aggregated by 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
Unobservable
Inputs (Level 3)
   
 
Total
 
                         
Assets
                       
    Cash equivalents (1)
  $ 15,000     $     $     $ 15,000  
    Available for sale securities
    186                   186  
    Securities carried at fair value
     43,982        —        —       43,982  
    $ 59,168     $     $     $ 59,168  
Liabilities
                               
     Derivative liabilities
  $     $ 589     $     $ 589  

(1)
Does not include cash on hand of approximately $26,070 at March 31, 2009.

The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2008, aggregated by 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
Unobservable
Inputs (Level 3)
   
 
Total
 
                         
Assets
                       
    Cash equivalents (1)
  $ 43,272     $     $     $ 43,272  
    Available for sale securities
    184                   184  
    Securities carried at fair value
     36,516        —        —       36,516  
    $ 79,972     $     $     $ 79,972  
Liabilities
                               
     Derivative liabilities
  $     $ 765     $     $ 765  

(1)
Does not include cash on hand of approximately $15,966 at December 31, 2008.

 
14

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Non-Recurring Measurements

Preferred Equity and Equity Investments

The valuation of preferred equity and equity investments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each asset as well as the income capitalization approach considering prevailing market capitalization rates.  The Trust reviews each investment based on the highest and best use of the investment and market participation assumptions.  The significant assumptions include the discount rate used in the income capitalization valuation and interest rate volatility.  The Trust has determined that the significant inputs used to value its equity investments with a fair value of $55,183,000 at March 31, 2009 fall within Level 3.  The Trust determined that there were no valuation adjustments on these assets during the first quarter of 2009. The Trust has determined that the significant inputs used to value certain of its preferred equity investments with a fair value of $0 at March 31, 2009 fall within Level 3.  The Trust had no valuation adjustments on these assets during the first quarter of 2009.

As of December 31, 2008, the table below presents the Trust’s assets and liabilities measured at fair value as events dictate, aggregated by 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
Unobservable
Inputs (Level 3)
   
 
 
Total
 
                         
Equity investments
  $     $     $ 73,061     $ 73,061  
Preferred equity investments
     —        —        —        
    $     $     $ 73,061     $ 73,061  

Fair Value Option

SFAS No. 159, “The Fair Value Option For Financial Assets and Financial Liabilities,”(“SFAS 159”) provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be 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.  SFAS 159 permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.  The Trust has elected the fair value option for all securities acquired subsequent to September 30, 2008.

For the three months ended March 31, 2009, the Trust recognized a net unrealized loss of $11,148,000 as a result of the change in fair value of the financial assets for which the fair value option was elected, which is recorded as an unrealized loss in the Trust’s statement of operations.  Income related to securities carried at fair value are recorded as interest and dividend income.

The following table presents the Trust's financial instruments for which the fair value option was elected (in thousands):

Financial instruments, at fair value
 
March 31, 2009
 
       
Assets
     
Securities carried at fair value:
     
    Senior debentures
  $ 20,994  
    Preferred shares
    13,729  
    Common shares
    9,259  
    $ 43,982  
 
 
15

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table presents the difference between fair values and the aggregate contractual amounts due (senior debentures) for which the fair value option has been elected (in thousands):

   
Fair Value at
March 31, 2009
   
Amount Due
Upon Maturity
   
Difference
 
Assets
                 
Securities carried at fair value:
                 
     Senior debentures
  $ 20,994     $ 31,341     $ 10,347  

4.
Acquisitions, Loan Originations, Dispositions and Financings

Preferred Stock

In January 2009 the Trust acquired for $17,081,000 917,105 Series B-1 Preferred Shares at a discount from their liquidation value of $25 per share.  The Trust determined that the repurchase of the Series B-1 Preferred Shares qualified as extinguishment of debt pursuant to the guidance of FAS 140, “Accounting For the Transfer and Servicing of Financial Assets and Liabilities,” (“FAS 140”) and recorded a gain from the early extinguishment of debt pursuant to APB 26 of approximately $5,237,000, net of unamortized issuance costs of $609,000.  As of March 31, 2009, there are 1,496,000 Series B-1 Preferred Shares outstanding.

Acquisitions & Dispositions of REIT securities

During the three months ended March 31, 2009 the Trust acquired senior debentures with a face value of approximately $25,401,000 at a cost of approximately $16,433,000, preferred shares at a cost of approximately $8,947,000 and common shares at a cost of approximately $288,000.

During the three months ended March 31, 2009 the Trust sold senior debentures with an original cost basis of $4,324,000 and a fair value of $4,560,000 and received net proceeds of approximately $4,538,000, preferred shares with an original cost basis of $1,644,000 and a fair value of $1,857,000 for net proceeds of approximately $1,792,000 and common shares with an original cost basis of $410,000 and a fair value of $637,000 for net proceeds of approximately $637,000.  The difference between the original cost basis and the fair value represents the unrealized gain or loss recognized pursuant to SFAS 159 during the holding period of the securities.  The Trust recognized a net loss on the sale of these securities of approximately $87,000, exclusive of any interest or dividends earned.

River City

The Trust received a one-year extension of its mortgage loan of $9,500,000 on its River City property.  The terms of the extension require monthly payments of interest only at a fixed rate of 6% with a new maturity of March 28, 2010.  The renewal was subject to a $200,000 principal payment which was made in April.

Note Payable Payoff

At December 31, 2008 the Trust had a $9,800,000 loan payable to Citibank, which bore interest at LIBOR plus 2.5% and matured in December 2011.  The loan was made in connection with the Trust’s purchase during 2008 of 3,500,000 common shares of Lexington Realty Trust (“Lexington”).  The loan required monthly payments of interest only and was subject to margin calls if the loan balance compared to the fair value of the common shares exceeded 57.5%.  The Trust paid the loan off in full in March 2009.

5.
Loans Receivable

All of the Trust’s loans identified as being impaired under the provisions of SFAS No. 114 are collateral dependent loans and are evaluated for impairment by comparing the fair value of the underlying collateral less costs to sell to the carrying value of each loan.  Due to the unique nature of each individual property collateralizing the Trust’s loans, the Trust uses the income approach through internally developed valuation models to estimate the fair value of the collateral.  This approach requires the Trust to make significant judgments with respect to discount rates and the timing and amounts of estimated future cash flows that are considered Level 3 inputs in accordance with SFAS No. 157.  These cash flows include costs of completion, operating costs and lot and unit sale prices.

 
16

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
The following table summarizes the Trust’s loans receivable at March 31, 2009 and December 31, 2008 (in thousands):

                     
Carrying Amount (6)
 
               
 
   
March 31,
   
December 31,
 
Property
 
Location
   
Interest Rate
   
Maturity
   
2009
   
2008
 
                               
Marc Realty – Various (1) (2)
 
Chicago, IL
      8.5 %     (1 )   $ 18,839     $ 17,547  
Loan loss reserve
                          (1,607 )     (1,179 )
Lex-Win Concord LLC (3)
 
Various
         
Dec 2009
            5,000  
600 West Jackson LLC (4)
 
Chicago, IL
      6.5 %  
Jun 2009
      1,508       1,508  
Vision Term Loan (5)
          15.0 %  
Dec 2011
      1,266       1,266  
Loan loss reserve
                            (1,266 )      (1,266 )
                            $ 18,740     $ 22,876  

(1)
Represents several tenant improvement and capital expenditure loans for properties in the Marc Realty portfolio. These loans mature from July 2012 through March 2016.  During the three months ended March 31, 2009, the Trust recorded a loan loss reserve of $428 related to loans on three properties in the Marc Realty portfolio.
(2)
Collateralized by a subordinate mortgage or the ownership interests in the property owner.
(3)
The Trust made an unsecured working capital loan of $5,000 to Lex-Win Concord in December 2008.  This amount was repaid in January 2009.  In connection with the repayments, we reconsidered Lex-Win Concord’s VIE status and concluded that Lex-Win Concord continues not to be a VIE.
(4)
Represents a second mortgage on the property.
(5)
Due to the uncertainty regarding collectability of this loan, in 2007 the Trust recorded a loan loss reserve of approximately $1,266 representing the loan receivable and accrued interest.
(6)
The carrying amount includes accrued interest of $119 and $123 at March 31, 2009 and December 31, 2008, respectively.

For the three months ended March 31, 2009, the Trust has not recognized any interest income on impaired loans subsequent to the date of their impairment.  Cash payments received on impaired loans are classified as debt recovery.  As of March 31, 2009, the Trust has received $9,000 which has been recorded as a recovery on impaired loans which had a carrying value of $0 at March 31, 2009.

6.
Securities

Securities Carried at Fair Value

Securities carried at fair value represents senior debentures, preferred shares, and common shares for which the Trust has elected the fair value option of SFAS 159.

Securities carried at fair value at March 31, 2009 are summarized in the table below (in thousands):

   
Cost
   
Fair Value
 
             
Senior debentures
  $ 20,330     $ 20,994  
Preferred shares
    14,709       13,729  
Common shares
    20,744       9,259  
    $ 55,783     $ 43,982  
 
 
17

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
For the three months ended March 31, 2009, the Trust recognized an unrealized loss on securities carried at fair value of $11,148,000.

Securities carried at fair value at December 31, 2008 are summarized in the table below (in thousands):

   
Cost
   
Fair Value
 
             
Senior debentures
  $ 8,221     $ 8,631  
Preferred shares
    7,405       8,352  
Common shares
    20,866       19,533  
    $ 36,492     $ 36,516  

For the year ended December 31, 2008, the Trust recognized an unrealized gain on securities carried at fair value of $24,000.

Available for Sale Securities

Available for sale securities represents securities for which the Trust has not elected the fair value option of SFAS 159.  These securities are accounted for pursuant to Statement of Financial Accounting Standards No. 115, “Accounting For Certain Investments in Debt and Equity Securities.”

Available for sale securities at March 31, 2009 are summarized in the table below (in thousands):

   
Cost
   
Fair
Value
 
             
Preferred shares
  $ 204     $ 186  

For the three months ended March 31, 2009, the Trust recognized an unrealized gain in other comprehensive income of $2,000.  As of March 31, 2009, there was a cumulative unrealized loss in other comprehensive income of $18,000 related to these securities.

Available for sale securities at December 31, 2008 are summarized in the table below (in thousands):

   
Cost
   
Fair
Value
 
             
Preferred shares
  $ 204     $ 184  

For the year ended December 31, 2008, the Trust recognized an unrealized loss in other comprehensive income of $20,000.

During the three months ended March 31, 2009 and March 31, 2008, securities were sold for total proceeds of approximately $6,967,000 and $57,699,000, respectively.  The Trust recognized a gross realized loss of $87,000 on the sale of these securities during the three months ended March 31, 2009 and recognized a gross realized gain of $2,029,000 on the sale of securities during the three months ended March 31, 2008.  The Trust utilizes the specific identification method for calculating gain or loss on the sale of securities.

7.
Preferred Equity Investments – Marc Realty

At March 31, 2009, the Marc Realty portfolio consisted of two participating second mortgage loans and 19 convertible mezzanine loans, together with an equity investment in each mezzanine borrower, in the aggregate amount of approximately $49,497,000, net of impairments of $7,513,000.  The second mortgage and mezzanine loans contain conversion rights which may be exercised by either the Trust or Marc Realty.  Each loan is collateralized by the applicable borrower's ownership interest in a limited liability company (each a "Property Owner") that in turn owns an office building or complex primarily in the Chicago business district or suburban area.  Each borrower holds a 100% interest in the applicable Property Owner. Eighteen of the loans bear interest at 7.65%, three of the loans bear interest at 8.5%, all of the loans mature on April 18, 2012 and require monthly payments of interest only.  The Trust recognized earnings from preferred equity investments, exclusive of Class B equity payments, of $1,015,000 and $1,371,000 for the three months ended March 31, 2009 and 2008, respectively.

 
18

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
In connection with the equity interest acquired in each of the borrowers, the Trust is entitled to participate in capital proceeds derived from the sale or refinancing of the applicable property, to the extent that such proceeds exceed all of the debt encumbering the property, including a return to Marc Realty of its deemed equity (i.e. the agreed value of the applicable property at inception of the loans, less all debt encumbering the property, including any loan made by the Trust) plus a 7.65% or 8.5% return thereon, as applicable.

On March 20, 2008, one of the properties in the Marc Realty portfolio, 999 East Touhy, Chicago, in which the Trust held a 7.65% convertible mezzanine loan and a preferred interest, was sold to an unaffiliated third party.  The Trust received $1,706,000, exclusive of interest, on its original investment of $736,000.  The Trust recognized additional equity income of $959,000 with respect to this sale.

 
Summary financial information for the Property Owner entities on a combined basis is as follows (in thousands):

   
As of
March 31, 2009
   
As of
December 31, 2008
 
Condensed Balance Sheets
           
Investment in real estate, net
  $ 167,262     $ 167,386  
Prepaid expenses and deposits
    5,008       7,239  
Cash and cash equivalents
    3,910       3,371  
Receivables and other assets
    30,333       30,485  
Total Assets
  $ 206,513     $ 208,481  
                 
Nonrecourse mortgage debt
  $ 288,837     $ 285,524  
Other liabilities
    21,483       24,481  
                 
Total Liabilities
    310,320       310,005  
                 
Partners’ Deficit
    (103,807 )     (101,524 )
Total Liabilities and Partners’ Deficit
  $ 206,513     $ 208,481  
                 
On the Trust’s Consolidated Balance Sheets:
               
Preferred Equity Investment
  $ 50,579     $ 50,624  

A basis difference exists between the carrying value of the Trust’s preferred equity investment and its share of the Property Owner’s reported net assets as a result of (i) the acquisition of its investment in Marc Realty at the then determined fair value which was different from its share of the net depreciated assets as recorded by the Property Owners on the historical books of the venture and (ii) other-than-temporary impairment charges of $7,513,000.

   
For the Three Months Ended
 
   
March 31, 2009
   
March 31, 2008
 
Condensed Statements of Operations
           
Revenues
  $ 16,020     $ 15,497  
Operating expense
    (7,117 )     (8,119 )
Interest expense
    (4,570 )     (4,266 )
Real estate taxes
    (2,609 )     (2,569 )
Depreciation and amortization
    (3,249 )     (3,033 )
Other expenses, net
    (711 )      (629 )
Loss from continuing operations
    (2,236 )     (3,119 )
                 
Discontinued operations
               
Loss from discontinued operations
          (1,047 )
Gain on sale of property
     —        3,344  
Income from discontinued operations
     —        2,297  
                 
Net loss
  $ (2,236 )   $ (822 )
                 
On the Trust’s Consolidated Statements of Operations and Comprehensive Income:
               
Equity in earnings of Preferred Equity Investment
  $   1,015     $   2,330  
 
 
19

 
 
WINTHROP REALTY TRUST
FORM 10-Q MARCH 31, 2009

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8.
Equity Investments

The Trust’s equity investments at March 31, 2009 and December 31, 2008 are summarized below (in thousands):

   
Lex-Win
Concord
   
Sealy
Northwest
Atlanta
   
Sealy
Airpark
Nashville
   
Sealy
Newmarket
   
Lex-Win
Acquisition
   
 
Total
 
                                     
Balance December 31, 2008
  $ 73,061     $ 3,780     $ 6,510     $ 8,756     $ 95     $ 92,202  
                                                 
Investments
                                   
Distributions/capital returns
          (134 )     (209 )                 (343 )
Equity in other comprehensive loss
    (197 )      —        —        —        —       (197 )