Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K/A
(Amendment No. 1)
 
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2006
or
 
o 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)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Exchange on Which Registered
Common Shares of Beneficial Interest, $1.00 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes o Noý
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large Accelerated Filer
o  Accelerated filer   ý  Non-accelerated filer  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No ý
 
As of March 1, 2007 there were 65,548,106 common shares of beneficial interest outstanding.
 
At June 30, 2006 the aggregate market value of the common shares of beneficial interest held by non-affiliates was $188,119,586.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Beneficiaries, which is expected to be filed with the Securities and Exchange Commission within 120 days after the Registrant’s fiscal year ended December 31, 2006, are incorporated by reference into Part III hereof.
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
CROSS REFERENCE SHEET PURSUANT TO ITEM G,
GENERAL INSTRUCTIONS TO FORM 10-K/A
 
 
Item of Form 10-K/A
 
 
Page
 
 
 
PART II
 
 
 
 
 
 
6.
 
 
 
3
 
7.
 
 
 
4
 
8.
 
 
 
18
 
 
 
 
 
 
 
 
 
 
 
 
61
 
 
 
 
 
 
 
 
 

2
 

Explanatory Paragraph
 
This Form 10-K/A is being filed for the purpose of restating the Trust’s earnings per Common Share – Basic for 2006 and 2005 and earnings per Common Share-Diluted for 2005 as it relates to the allocation between continuing operations and discontinued operations to apply the provisions of EITF 03-06, “Participating Securities and the Two Class Method under FASB Statement No. 128 Earnings Per Share.” In accordance with Rule 12d-15 under the Securities Exchange Act of 1934, this form 10K/A only includes the sections that were affected by the application of EITF 03-06, namely Item 6. Selected Financial Data, Item 7. Management’s Discussion and Analysis of Financial Condition, and Item 8. Financial Statements and Supplementary Data, the complete text of which are included in this Form 10-K/A. See Note 21 in the notes to the consolidated financial statements for further information relating to the restatement. This Form 10-K/A has not been updated for events or information subsequent to the date of filing of the original Form 10-K except in connection with the foregoing. Accordingly, this Form 10-K/A should be read in conjunction with the Trust’s filings made with the SEC subsequent to the filing of the original Form 10-K..
 
ITEM 6. SELECTED FINANCIAL DATA.
 
These Selected Financial Data should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
 
Operating Results    
2006
2005
2004
2003
2002
 
     
 
 
 
 
 
Revenues     $ 54,487   $ 32,851   $ 5,915   $ 2,427   $ 3,204  
     
 
 
 
 
 
Income (loss) from continuing operations       42,820     23,090     1,943     (6,575 )   (5,397 )
Income from discontinued operations (1)       116     531     1,242     619     365  
Gain on sale of real estate               19,267     54      
     
 
 
 
 
 
Net income (loss)       42,936     23,621     22,452     (5,902 )   (5,032 )
Preferred dividends           (2,064 )   (2,064 )   (2,064 )   (2,067 )
     
 
 
 
 
 
Net income (loss) applicable to Common Shares    
   of Beneficial Interest     $ 42,936   $ 21,557   $ 20,388   $ (7,966 ) $ (7,099 )
     
 
 
 
 
 
Dividends declared for Common Shares                                  
   of Beneficial Interest     $ 16,069   $ 3,914   $   $   $ 6,962  
     
 
 
 
 
 
Per Common Share of Beneficial Interest, basic (2)    
                                   
Income (loss) from continuing operations, basic     $ 0.74   $ 0.50   $   $ (0.28 ) $ (0.21 )
                                   
Income from discontinued operations, basic (1)           0.02     0.66     0.02   $ 0.01  
     
 
 
 
 
 
Net income (loss) applicable to Common Shares                                  
   of Beneficial Interest, basic     $ 0.74   $ 0.52   $ 0.66   $ (0.26 ) $ (0.20 )
     
 
 
 
 
 
Income (loss) per Common Share of Beneficial    
   Interest, diluted     $ 0.71   $ 0.50   $   $ (0.28 ) $ (0.21 )
Income from discontinued operations, diluted           0.02     0.66     0.02     0.01  
     
 
 
 
 
 
Net income (loss) applicable to Common Shares                                  
   of Beneficial Interest, diluted     $ 0.71   $ 0.52   $ 0.66   $ (0.26 ) $ (0.20 )
     
 
 
 
 
 
Dividends declared per Common Share of    
   Beneficial Interest     $ 0.30   $ 0.11   $   $   $ 0.20  
     
 
 
 
 
 

(1) The results of Imperial Parking Limited, VenTek and Park Plaza properties were classified as discontinued operations for 2002, 2003, 2004, 2005 and 2006. The results of the St. Louis property, which was purchased in November 2004, were classified as discontinued operations for 2004, 2005 and 2006.
(2) As restated for the years ended December 31, 2006 and 2005. See Item 8. Financial Statements and Supplementary Data, Note 21.

 

3


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
The following management’s discussion and analysis gives effect to the restatement discussed in Note 21 to the consolidated financial statements.
 
We are a real estate investment trust (“REIT”) engaged in the business of owning real property and real estate related assets. We operate in three strategic business segments: (i) Operating Properties, (ii) Loans and (iii) Real Estate Securities. We may make investments in each of these segments directly and in strategic alliances and joint ventures with third parties
 
Our business objective is to maximize long-term shareholder value through a total return value approach to real estate investing. We measure our success in meeting this objective by a number of factors, including increases in diluted per share net income, cash returns generated by our investments, increases in shareholder equity and total return to our shareholders. During 2006, 2005 and 2004, our operating results were as follow:
 
      2006   2005   2004
     

 

 

Net income applicable to Common Shares     $ 42,936,000   $ 21,557,000   $ 20,388,000  
     

 

 

Net income per common share, basic     $ 0.74   $ 0.52   $ 0.66  
     

 

 

Net income per common share, diluted     $ 0.71   $ 0.52   $ 0.66  
     

 

 

Net cash provided by operating activities     $ 27,687,000   $ 15,870,000   $ 3,987,000  
     

 

 

Total assets     $ 851,620,000   $ 658,848,000   $ 289,968,000  
     

 

 

With certain self-imposed limitations, we will seek opportunities to invest in or acquire most types of real estate assets or securities. We believe that entering into specific strategic alliances and joint ventures with regional or specialized real estate professionals provides us with a platform to be extremely competitive in markets in which we are not currently located or have a management infrastructure in place. Also, we seek to enter into strategic co-investment joint ventures with institutional and high net worth investors to enhance our total return through acquisitions, asset management and other fees and a promoted economic interest.
 
In view of the foregoing, our near-term investment strategy will be to identify and invest in discrete real estate investments including investments through joint ventures. As market conditions dictate, we will focus our investment activity in one or more of our business segments and aggressively pursue such opportunities. We intend to fund these investments through one or more of the following: cash reserves, borrowings under our credit facility, property loans, issuance of debt and equity on joint ventures with third parties. For the long-term, as investments mature in value to the point where we are unlikely to achieve better than a market return on their then enhanced value, it is likely we will exit the investment and seek to redeploy the capital to higher yielding opportunities. Therefore, non-recurring items are an important part of our overall earnings. Significant investments, dispositions and financing transactions during 2006 included:
 
l acquiring three office properties containing approximately 290,000 square feet;

l acquiring in a joint venture, two loans secured by first priority liens on 241,000 square feet of commercial space, an indoor parking structure, the underlying land and unsold condominiums at a property commonly referred to as River City in Chicago, Illinois;

l forming Concord Debt Holdings LLC (f/k/a 111 Debt Holdings LLC) a joint venture with Lexington and investing $91,342,000 to acquire and originate approximately $450,355,000 in loans and originated a collateral debt obligation pool;

l selling all of our 1,755,600 shares in Sizeler Property Investors Inc. for an aggregate sales price of approximately $25,363,000, representing an aggregate gain excluding dividends of $7,843,000;

l obtaining $89,522,000 in first mortgage indebtedness;

4
 
 


l issuing a total of 19,550,000 Common Shares in November 2006 pursuant to an underwritten public offering for a per share price of $6.00 ($5.70 after underwriters discount) resulting in net proceeds of $110,814,000;

l entering into two joint venture relationships with local partners which hold 12 properties containing approximately 472,000 square feet for an aggregate investment of $5,470,000; and

l modification of our mortgage debt encumbering certain of our net lease properties commonly referred to as the Finova Portfolio.

Other significant events for the year ended December 31, 2006 included:
 
l entered into 18 new leases and renewed 14 leases totaling approximately 576,000 square feet;

l increased average portfolio occupancy to 98%;

l redeeming our Series A Preferred Shares;

l issuing rights to our common and preferred shareholders to subscribe for and purchase up to an aggregate of 5,220,038 of newly-issued Common Shares for a price of $5.25 per common share, which was fully subscribed, raising net proceeds in the second quarter of 2006 of approximately $27,122,000;

l establishing a quarterly dividend of $0.06 per common share retroactive to January 1, 2006; and

l issuing a total of 125,909 Common Shares pursuant to our dividend reinvestment and stock purchase plan for net proceeds of $805,000.

Trends
 
Competition
 
We face substantial competition for our targeted investments. Our ability to execute our business strategy, particularly the growth of our investment portfolio, depends to a significant degree on our ability to implement our investment policy and operating strategies. We compete with numerous other companies for investments, including other REITs, insurance companies, real estate opportunity funds, pension funds and a multitude of private investors. Many of our competitors have greater resources than we do and for this and other reasons, we may not be able to compete successfully for particular investments. We will continue to capitalize on the acquisition and investment opportunities that our advisor brings to us as a result of its acquisition experience as well as our partners in joint ventures which serve as platforms to investments in various geographic areas and particular classes of assets. Through its broad experience, our advisor’s senior management team has established a network of contacts and relationships, including relationships with operators, financiers, commercial real estate brokers, potential tenants and other key industry participants. In addition we believe that our advisor’s significant real estate management infrastructure gives us economies of scale that provides us with a competitive advantage when bidding on investment opportunities.
 
Interest Rate Environment
 
Interest rates can fluctuate. We may utilize a variety of financial instruments, including interest rate swaps, caps, options, floors and other interest rate exchange contracts, in order to limit the potential negative effects of fluctuations in interest rates on our operations. In the past, we entered into the following agreements in order to limit our exposure to interest rate volatility: (i) an interest rate swap with a $40,000,000 notional amount that effectively converted the interest rate on that portion of principal of our note payable to KeyBank, with an outstanding balance at December 31, 2006 of $69,549,000, secured by certain of our net lease properties, from a floating rate equal to LIBOR plus 1.75% to a fixed LIBOR rate of 4.05% plus 1.75% and (ii) an interest rate swap with a balance guaranty on our Repurchase Agreement with respect to our first mortgage residential whole-pool loan certificates, which bears interest at LIBOR minus 0.003%, effectively fixing our rate at 4.045% on that financing. We do not intend to utilize derivatives for speculative purposes but only for interest rate risk management.
 
5
 
 

Liquidity and Capital Resources
 
General
 
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments and other general business needs. We believe that cash flow from operations will continue to provide adequate capital to fund our operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, we anticipate that cash on hand, borrowings under our credit facility and issuance of equity and debt, as well as other alternatives, will provide the necessary capital required for our investment activities. Additionally, to maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income.
 
Our primary sources of funds for liquidity consist of:
 
l cash and cash equivalents;

l operating cash flow derived primarily from rental income received from our Operating Properties;

l debt service received from Loans held;

l dividends received from our ownership of Real Estate Securities; and

l borrowings under our credit facility.

During 2006, we also raised funds through equity offerings and debt financings. We had cash and cash equivalents of $89,463,000 at December 31, 2006, which consisted of $30,795,000 in cash and $58,668,000 in cash equivalents with maturities of less than 90 days. In addition, we had $70,000,000 available under our credit facility. In the future, we may raise additional funds through debt financing and/or equity offerings. Toward that end: (i) in April 2006 we issued 5,220,038 Common Shares in a registered rights offering to our existing holders resulting in net proceeds of $27,122,000; (ii) in August 2006 we instituted a Dividend Reinvestment and Stock Purchase Plan (“DRIP”) pursuant to which holders of our Common Shares can reinvest all or a portion of the dividends paid on the Common Shares as well as invest additional sums in our Common Shares; and (iii) In November 2006 we issued 19,550,000 newly issued Common Shares in an underwritten public offering pursuant to an effective shelf registration statement resulting in net proceeds of $110,814,000.
 
At December 31, 2006, we had an effective registration statement under which we can offer an aggregate of approximately $228,983,000 of additional equity or debt securities. In addition, our UPREIT structure will also enable us to acquire properties by issuing to sellers, as a form of consideration, limited partnership interests in our operating partnership. Although to date we have not issued limited partnership interests in a transaction, we believe that this structure will facilitate our ability to acquire individual properties and portfolios of properties by enabling us to structure transactions which will defer taxes payable by a seller while preserving our available cash for other purposes, including the possible payment of dividends.
 
6
 
 

Revolving Future Cash Requirements
 
The following table sets forth the timing of our payment obligations related to our off-balance sheet and contractual obligations, including all fixed and variable rate debt obligations, except as otherwise noted, as of December 31, 2006:
 
 
 
 
Payments Due by Period
(In thousands)
 
Contractual Obligations
 
Total
Less than 1 Year
2-3 Years
4-5 Years
After 5 Years






Mortgage Loans Payable     $ 311,684   $ 30,498   $ 100,376   $ 35,004   $ 145,806  
   (principal and interest)    
Revolving Line of Credit                        
   (principal and interest)    
Loans Payable       33,233     2,544     30,689          
   (principal and interest)    
Repurchase Agreements       111,911     111,911              
Ground Lease Obligations (1)                        
Advisors’ Fee (2)       22,999     1,973     10,513     10,513     - (3 )





      $ 479,827   $ 146,926   $ 141,578   $ 45,517   $ 145,806  





Off-Balance Sheet Obligations:    
Commitments (4)    
   Concord     $ 8,658,000   $ 8,658,000              
   Vision     $ 1,000,000   $ 1,000,000              
Capital and Tenant Improvements (5)     $ 3,234,000   $ 3,234,000              

(1) The underlying lease agreements require the tenant to pay the ground rent expense.
(2) Base management fee based upon the terms of the Advisory Agreement and equity and assets in place at December 31, 2006, with no effect given to the additional investments, equity issuances or incentive compensation to FUR Advisors.
(3) No amounts have been included due to the automatic annual renewal provisions of the Advisory Agreement.
(4) Excludes pending acquisitions that are subject to due diligence.
(5) Under the terms of our agreement with Marc Realty, as of December 31, 2006, we were required to loan an additional $3,234,000 to fund capital and tenant improvements.
We carry comprehensive liability and all risk property insurance: (i) fire; (ii) flood; (iii) extended coverage; (iv) “acts of terrorism,” as defined in the Terrorism Risk Insurance Act of 2002; and (v) rental loss insurance with respect to our properties where coverage is not provided by our net lease tenants. Under the terms of the net leases, the tenant is obligated to maintain adequate insurance coverage.
 
Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us) contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage under these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain at reasonable costs, it could adversely affect our ability to finance and/or refinance our properties and expand our portfolio.
 
7
 
 

Cash Flows
 
Our level of liquidity based upon cash and cash equivalents increased by approximately $70,445,000 during the year ended December 31, 2006. The increase resulted from $27,687,000 of cash provided by operating activities and $155,448,000 of cash provided by our financing activities, which was partially offset by $112,690,000 of cash used in our investing activities.
 
Cash provided by operating activities of $27,687,000 was comprised of (i) net income of $42,936,000; (ii) net negative adjustments for non-cash items of $9,974,000, and (iii) a net negative change in operating assets and liabilities of $1,452,000. The adjustments for non-cash items were primarily comprised of increases due to (i) depreciation and amortization of $13,404,000; (ii) minority interest expense of $2,764,000; (iii) distributions in excess of equity in earnings of preferred equity investment of $35,000; (iv) loss on early extinguishment of debt of $126,000 and (v) a decrease in interest receivable on loans of $54,000. The decreases in non-cash items were primarily due to (i) gain on sale of exclusivity rights of $9,500,000; (ii) gain on sale of equity investment of $9,285,000; (iii) net gains on sale of securities available for sale of $8,130,000; (iv) the effect of straight-lining of rental income of $1,920,000; (v) equity in earnings of equity investments in excess of distributions of $170,000; (vi) gain on Winn-Dixie settlement of $1,108,000; (vii) interest earned on restricted cash of $45,000 and (viii) bad debt recoveries of $22,000. See “Our Results of Operations” below for additional details on our operations.
 
Cash provided by investing activities consisted primarily of (i) $34,352,000 of proceeds received from prepayment on whole pool mortgage-backed securities available for sale and (ii) $29,831,000 of proceeds from the sale of various real estate securities owned. The balance related to the $8,589,000 of loans receivable collected and $7,108,000 of proceeds from the sale of preferred equity investments.
 
The significant components of the cash we used for our investing activities during 2006 were as follows: (i) $23,850,000 for purchases of whole pool mortgage-backed securities available for sale; (ii) $1,843,000 for our preferred equity investment in Marc Realty; (iii) the origination or purchase of loans totaling $22,554,000; (iv) $38,749,000 for building acquisitions and capital improvements to our existing operating properties; (v) $3,776,000 increase in restricted cash; (vi) $4,986,000 for purchases of various real estate securities; (vii) $91,342,000 for our investment in Concord and (vii) $5,470,000 for an investment in our limited partnership.
 
Cash provided by financing activities was the result of several transactions including: (i) borrowings under repurchase agreements of $23,070,000; (ii) contributions from minority partners of $3,246,000; (iii) $138,741,000 of net proceeds from the issuance of Common Shares; (iv) $89,522,000 of mortgage loan proceeds; and (v) $77,000,000 of proceeds from our revolving line of credit with KeyBank.
 
We used cash for financing activities including: (i) $516,000 of dividend payments on our Series A Preferred Shares; (ii) $12,139,000 of dividend payments on our Common Shares; (iii) $32,875,000 of repayment of borrowings under repurchase agreements; (iv) $32,281,000 of mortgage loan repayments; (v) $3,486,000 of distributions to minority interests; (vi) $1,813,000 of deferred financing costs; (vii) $93,000,000 of paydowns of our revolving line of credit with KeyBank; and (viii) $21,000 of loan payable repayments.
 
Dividends and Distributions
 
Series A Preferred
 
In December 2005, we declared a dividend of $516,000 ($0.525 per share) on our Series A Preferred Shares which was paid on January 31, 2006.
 
Series B-1 Preferred
 
In December 2005, we declared a dividend of $1,625,000 ($0.40625 per share) on our Series B-1 Preferred Shares which was paid on January 31, 2006.
 
8
 
 

In March 2006 we declared a dividend of $1,621,000 ($0.40625 per share) on our Series B-1 Preferred Shares which was paid on April 28, 2006.
 
In June 2006 we declared a dividend of $1,621,000 ($0.40625 per share) on our Series B-1 Preferred Shares which was paid on July 31, 2006.
 
In September 2006, we declared a dividend of $1,621,000 ($0.40625 per share) on our Series B-1 Preferred Shares which was paid on October 31, 2006.
 
In December 2006, we declared a dividend of $1,621,000 ($0.40625 per share) on our Series B-1 Preferred Shares which was paid on January 31, 2007.
 
In December 2006, we declared a special dividend of $166,000 ($0.04167 per share) on our Series B-1 Preferred Shares which was paid on January 31, 2007.
 
All dividends accrued on the Series B-1 Preferred Shares are treated as interest expense.
 
Common Shares
 
In December 2005, we declared a special dividend of $3,914,000 ($0.11 per share) on our Common Shares which was paid on January 17, 2006 to the holders of record as of December 30, 2005.
 
In July 2006 we declared a dividend of $5,483,000 ($0.12 per share) on our Common Shares which was paid on August 7, 2006 to holders of record as of July 24, 2006.
 
In September 2006, we declared a dividend of $2,742,000 ($0.06 per share) on our Common Shares which was paid on October 15, 2006 to holders of record as of September 30, 2006.
 
In December 2006, we declared a dividend of $3,922,000 ($0.06 per share) on our Common Shares which was paid on January 16, 2007 to holders of record as of December 29, 2006.
 
In December 2006, we declared a special dividend of $3,922,000 ($0.06 per share) on our Common Shares which was paid on January 16, 2007 to holders of record as of December 29, 2006.
 
Results of Operations
 
As discussed earlier, one of the factors used to measure management’s performance is net income. We report our operations by each of our three strategic business segments to provide a measurement of our performance in these segments. In addition to our three business segments, we report our non-segment specific income and expenses under Corporate Activities. (See Business Segments - Note 20 to the consolidated financial statements in Item 8.)
 
9
 
 

Summary of Segment Operating Results
 
The following tables present a summary of revenues and expenses incurred by our Operating Properties, Loans and Real Estate Securities business segments for the years ended December 31, 2006, 2005 and 2004. We include in Corporate Activities interest on cash reserves, general and administrative expenses and other non-segment specific income and expense items. See a discussion of these amounts by segment in the narratives following the tables.
 
Business Segments (In thousands)
 
 
2006
 
 
2005
 
 
2004
 
 
 
 
 
 
 
 
 
 
 
Operating Properties
 
 
 
 
 
 
 
 
 
 
    Rents
 
 
$
 
38,822
 
 
$
 
25,454
 
 
$
 
3,387
 
    Less — operating expenses
 
 
 
4,054
 
 
 
1,205
 
 
 
793
 
    Less — real estate taxes
 
 
 
1,879
 
 
 
220
 
 
 
66
 
    Loss on extinguishment of debt
 
 
 
646
 
 
 
 
 
 
 
   
 
 
 
 
 
32,243
 
 
 
24,029
 
 
 
2,528
 
   
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
 
 
 
 
 
 
 
 
 
    Interest
 
 
 
13,129
 
 
 
3,664
 
 
 
1,292
 
    Equity in earnings of preferred equity investment
 
 
 
6,849
 
 
 
4,066
 
 
 
 
    Equity in earnings of Concord Debt Holdings, LLC
 
 
 
1,340
 
 
 
 
 
 
 
    Loan fee income
 
 
 
 
 
 
75
 
 
 
 
   
 
 
  
 
 
 
21,318
 
 
 
7,805
 
 
 
1,292
 
   
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Securities
 
 
 
 
 
 
 
 
 
 
    Dividends
 
 
 
1,073
 
 
 
1,622
 
 
 
139
 
    Gain on sale of real estate securities
 
 
 
8,130
 
 
 
243
 
 
 
1,153
 
    Assignment of exclusivity agreement – net lease assets    
9,500
 
10,500
 
    Equity in earnings of Newkirk Realty Trust
 
 
 
7,280
 
 
 
304
 
 
 
 
    Gain on exchange of equity investment
 
 
 
9,285
 
 
 
 
 
 
 
 
    Equity in loss of Sealy Northwest Atlanta, L.P.
 
 
 
(51)
 
 
 
 
 
 
 
 
   
 
 
  
 
 
 
35,217
 
 
 
12,669
 
 
 
1,292
 
   
 
 
 
 
 
 
 
 
 
 
 
 
Less — Depreciation and Amortization
 
 
 
11,216
 
 
 
6,994
 
 
 
726
 
 
 
 
 
 
 
 
 
 
 
Less — Interest Expense
 
 
 
 
 
 
 
 
 
 
    Operating properties
 
 
 
14,304
 
 
 
12,475
 
 
 
684
 
    Loans
 
 
 
8,258
 
 
 
2,515
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate Income (Expense)
 
 
 
 
 
 
 
 
 
 
    Interest income
 
 
 
1,463
 
 
 
2,111
 
 
 
1,097
 
    General and administrative
 
 
 
(3,399)
 
 
 
(3,289)
 
 
 
(2,677)
 
    Base management fee
 
 
 
719
 
 
 
(2,660)
 
 
 
(1,420)
 
    Interest expense
 
 
 
(8,495)
 
 
 
(5,912)
 
 
 
(13)
 
    Insurance recoveries
 
 
 
 
 
 
 
 
 
1,254
 
    Legal settlement
 
 
 
 
 
 
11,000
 
 
 
 
    State and local taxes
 
 
 
(234)
 
 
 
(500)
 
 
 
 
    Other
 
 
 
530
 
 
 
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
 
 
 
 
 
 
 
 
 
 
    before minority interest
 
 
 
45,584
 
 
 
23,269
 
 
 
1,943
 
Minority interest
 
 
 
(2,764)
 
 
 
(179)
 
 
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
 
 
 
42,820
 
 
 
23,090
 
 
 
1,943
 
   
 
 

10
 
 

Summary of Segment Operating Results (Continued)
 
Capital Expenditures
 
 
 
 
 
 
 
 
 
 
    Operating Properties
 
 
$
 
1,483
 
 
$
 
684
 
 
$
 
2,018
 
   
 
 
Identifiable Assets
 
 
 
 
 
 
 
 
 
 
    Operating properties
 
 
$
 
271,991
 
 
 
244,902
 
 
$
 
95,540
 
    Loans
 
 
 
363,089
 
 
 
272,094
 
 
 
8,390
 
    Real estate securities
 
 
 
104,392
 
 
 
104,604
 
 
 
14,734
 
    Other*
 
 
 
112,148
 
 
 
37,248
 
 
 
171,304
 
   
 
 
Total Assets
 
 
$
 
851,620
 
 
$
 
658,848
 
 
$
 
289,968
 
   
 
 
*Includes cash and cash equivalents.  
 
2006 Versus 2005
 
 Net Earnings
 
Net income increased by $19,315,000 to $42,936,000 for the year ended December 31, 2006 from $23,621,000 for the year ended December 31, 2005. The increase was due primarily to an increase in revenues of $21,636,000 as a result of our acquisition activity and an increase in other income of $16,029,000. The increase in other income in 2006 was predominantly attributable to the $8,130,000 of gains on the sale of real estate securities, the gain on the exchange of our equity investment in Newkirk of $9,285,000 and an increase in equity in earnings of Newkirk Realty Trust of $6,976,000. These increases were partially offset by an increase in expenses of $15,350,000 primarily from increases in depreciation and amortization expense of $4,222,000, property operating expense of $2,849,000, interest expense of $10,155,000 and real estate taxes of $1,659,000. In 2005, we recognized an $11,000,000 legal settlement.
 
Income from Continuing Operations
 
The income from continuing operations increased by $19,730,000 to $42,820,000 for the year ended December 31, 2006, from income of $23,090,000 for the year ended December 31, 2005. As more fully described below, this increase was primarily attributable to an increase in total revenues of $21,636,000 and an increase in other income of $16,029,000 which were partially offset by an increase in total expenses of $15,350,000 and an increase in minority interest expense of $2,585,000.
 
Operating Properties
 
l Revenues and expenses increased for the year ended December 31, 2006, as compared to the year ended December 31, 2005, primarily as a result of recording a full year of operating activity related to our acquisitions made during 2005 of the Andover, Massachusetts property, the Burlington, Vermont property and the Chicago, Illinois property (Ontario) as well as the operating activities related to the 2006 acquisition of three Lisle, Illinois properties.

l Rental income increased by $13,368,000 to $38,822,000 for the year ended December 31, 2006 from $25,454,000 for the year ended December 31, 2005. The increase was due to (i) $4,464,000 of rental income relating to properties acquired in 2006, (ii) $8,071,000 of increased rental income relating to properties acquired in 2005 and (iii) an increase of $834,000 from properties held for 12 months in each year.

l Operating expenses from our properties increased by $2,849,000 to $4,054,000 for the year ended December 31, 2006, from $1,205,000 for the year ended December 31, 2005. The increase was due primarily to (i) $481,000 of additional expenses associated with our Jacksonville property as a result of Winn-Dixie rejecting the lease in connection with its bankruptcy resulting in the property changing from net lease to multi-tenant property, (ii) $1,385,000 of additional expenses associated with

11
 
 


 
properties acquired in 2006 and (iii) $958,000 of increased expenses relating to properties acquired in 2005.
 

l The $1,659,000 increase in real estate tax expense was due primarily to (i) $688,000 relating to properties acquired in 2006, (ii) $857,000 of additional real estate tax expense relating to properties acquired in 2005 and (iii) $112,000 of real estate tax expense at our Jacksonville property previously paid by Winn-Dixie.

l Interest expense related to our operating properties was $14,304,000 for 2006 compared to $12,475,000 for 2005. The increase of $1,829,000 was due primarily to (i) $1,031,000 relating to 2006 new property financings and (ii) $2,073,000 relating to increased interest expense from 2005 new property financings. The increase was partially offset by decreases of $1,275,000 on previously financed properties.

l Depreciation and amortization expense increased by $4,222,000 to $11,216,000 for the year ended December 31, 2006, compared to $6,994,000 for the year ended December 31, 2005. The increase was primarily due to the depreciation on properties acquired in 2006 of $1,392,000, increases in depreciation on 2005 property acquisitions of $2,284,000, increased depreciation of $321,000 related to leasing costs and tenant improvements at the Jacksonville, Florida property and $237,000 of depreciation on our Sherman, Texas property which was moved from discontinued operations to continuing operations in 2006. The increase was partially offset by a reduction of $12,000 in depreciation expense at our other properties.
Loans
 
Interest income from our loan investments was $13,129,000 for the year ended December 31, 2006, compared to $3,664,000 for the year ended December 31, 2005. The increase was due primarily to our investment in the Toy Building loan which generated $6,434,000 of interest income during the year ended December 31, 2006, and our investment in whole pool agency mortgage-backed securities, which generated interest income of $4,994,000 during this same period. Equity in earnings in preferred equity investments increased by $2,783,000 to $6,849,000 for the year ended December 31, 2006. The increase was due to our April 2005 origination of 24 mezzanine loans and two second mortgage loans, commonly referred to as the “Marc Realty Portfolio” and the sale in 2006 of four of the properties indirectly securing these loans, which generated a gain of approximately $984,000.
 
Real Estate Securities
 
During 2006 we increased income from our investment in real estate securities by $22,548,000, most notably by our investment in Newkirk. The Newkirk investment generated equity earnings from November 7, 2005 through December 31, 2005 of $304,000. During 2006, the Newkirk equity investment generated $7,280,000 of income. In connection with the consummation of the merger of Newkirk into Lexington, shares that were subject to forfeiture and the assignment of the exclusivity rights with respect to net lease assets were vested in Lexington. In addition, as consideration for assignment of our rights with respect to the net lease assets under the exclusivity agreement, we recognized other income of $9,500,000 and $10,500,000 in 2006 and 2005, respectively.
 
Dividends recognized on real estate securities were $1,073,000 during the year ended December 31, 2006. Also during 2006 we recognized gains aggregating $8,130,000 on the sale of our shares of certain real estate securities. Also as a result of the merger with Lexington, we recognized a gain of $9,285,000.
 
Corporate Activities
 
Interest income earned on our cash and cash equivalents during the year ended 2006 was $1,463,000 compared to $2,111,000 for the same period during 2005. The decrease was due primarily to less investment in cash and cash equivalents.
 
General and administrative expenses increased by $110,000 to $3,399,000 for the year ended December 31, 2006 from $3,289,000 for the year ended December 31, 2005. This increase was primarily the result of increases in dues and subscriptions of $187,000, reporting and news releases of $117,000 and legal fees of $89,000. These were
 
12
 
 

substantially offset by a decrease in accounting fees of $277,000. The increases to dues and subscriptions and news and reporting fees were a result of the issuance of new shares through the rights offering and the equity raise. The decrease in accounting fees is primarily the result of a reduction in the cost required to comply with Sarbanes-Oxley.
 
Base management fees increased to $3,681,000 for the year ended December 31, 2006 as compared to $2,660,000 for the year ended December 31, 2005. However, as a result of the $4,400,000 credit we received related to the incentive management fee paid by Newkirk to NKT Advisors, we had a net decrease of $719,000 in base management fee expense.
 
Interest expense increased by $2,583,000 to $8,495,000 for the year ended December 31, 2006 from $5,912,000 for the year ended December 31, 2005. The increase was the result of an increase of $1,566,000 related to the Series B-1 Preferred Shares and an increase in interest expense of $1,006,000 related to our revolving line of credit.
 
State Income Taxes
 
State income taxes of $234,000 for the year ended December 31, 2006, compared to $500,000 for the year ended December 31, 2005. The decrease in state income taxes of $266,000 from the same period in 2005 is due to a larger dividend paid deduction in 2006.
 
Legal Settlement
 
In 2005 we settled litigation with the state of California related to flood damage at our Peachtree Mall property. In connection with this settlement we received $11,000,000 in fiscal year 2005.
 
2005 Versus 2004
 
Income from Continuing Operations
 
Income from continuing operations increased by $21,147,000 to $23,090,000 for the year ended December 31, 2005 from income of $1,943,000 for the year ended December 31, 2004. As more fully described below, the increase is attributable to an increase in total revenues of $26,936,000 and an increase in other income of $23,781,000, which were partially offset by an increase in total expenses of $29,391,000.
 
Operating Properties
 
l Rental income increased by $22,067,000 to $25,454,000 for the year ended December 31, 2005 from $3,387,000 for the year ended December 31, 2004. The increase was primarily due to the acquisition of properties in late 2004 and 2005.

l Operating expenses from our properties increased by $412,000 to $1,205,000 for the year ended December 31, 2005 from $793,000 for the year ended December 31, 2004. The increase was due primarily to expenses associated with the rejection by Winn Dixie of its lease at our Jacksonville property.

l Interest expense related to our operating properties was $12,475,000 for 2005 compared to $684 for 2004 due primarily to the KeyBank financing which was put in place in November 2004.

l Depreciation and amortization expense increased by $6,268,000 to $6,994,000 for the year ended December 31, 2005 compared to $726,000 for the year ended December 31, 2004. The increase was due to the newly acquired net lease properties.

13
 
 

Loans
 
Interest income from our loans was $3,664,000 for the year ended December 31, 2005 compared to $1,292,000 for the year ended December 31, 2004. The increase was due primarily to our investment in whole pool agency mortgage-backed securities, which generated interest income in 2005 of $2,448,000. Equity in earnings in preferred equity increased from $0 in 2004 to $4,066,000 in 2005. The increase was due to our 2005 investment in the Marc Realty loans, which generated equity earnings of $4,066,000 in 2005.
 
Real Estate Securities
 
During 2005 we significantly increased our investment in real estate securities, most notably by our investment in Newkirk. This investment generated equity earnings from November 7, 2005, through December 31, 2005, of $304,000. In addition, as a result of the assignment of our rights with respect to the net lease assets, we recognized other income of $10,500,000. Dividends recognized on other real estate securities were $1,622,000 during the year ended December 31, 2005. Also during 2005, we recognized gains aggregating $243,000 on the sale of our shares of certain real estate securities. During the year ended December 31, 2004, we received dividends of $139,000 and recognized a $1,153,000 gain on sale of securities available for sale.
 
Corporate Activities
 
l Interest income earned on our cash and cash equivalents during the year ended 2005 was $2,111,000 compared to $1,097,000 for the same period in 2004. The increase was due primarily to higher yields on our cash invested.

l General and administrative expenses increased by $1,852,000 to $5,949,000 for the year ended December 31, 2005, from $4,097,000 for the year ended December 31, 2004. The primary cause of this increase was an increase in the advisory fee paid to FUR Advisors of $1,240,000 and expenses of $908,000 incurred in connection with the work performed in order to comply with Sarbanes-Oxley.

l Interest expense represents the amounts accrued on the Series B-1 Preferred Shares.

l The $11,000,000 legal settlement reported in 2005 was received from the State of California in settlement of our claims against the State resulting from the flood at our Peachtree Mall property in 1986.
Discontinued Operations
 
During 2004 we sold the Park Plaza Mall for a sales price of $77,500,000. We recognized a net gain on disposal of this property of $19,267,000. In addition, during 2004 we ceased our VenTek operations. The sale and operations of these assets were recorded as discontinued operations in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The 2004 and 2005 discontinued operations represent rent from the St. Louis, Missouri property as a result of the pending condemnation proceedings by the City of St. Louis.
 
Critical Accounting Policies and Estimates
 
Our most critical accounting policy relates to the evaluation of the carrying value of real estate, loans and our investments in joint ventures.
 
We evaluate the need for an impairment loss on a real estate asset when indicators of impairment are present and the projected undiscounted cash flows from the asset are not sufficient to recover the asset’s carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. The projection of cash flows used in the impairment evaluation involves significant judgment by management.
 
14
 
 

The allocation of the purchase price to Operating Properties upon acquisition also involves significant management judgment and has a significant impact on the amount and timing of depreciation and amortization. Upon acquisition of an Operating Property, the fair value of the real estate, which includes the impact of mark-to-market adjustments for assumed mortgage debt related to the property acquired, is allocated to tangible assets, consisting of land, building and improvements, fixtures and equipment and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and the value of tenant relationships, based in each case on management’s determination of fair value.
 
Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, and identified intangible such as above and below market leases and acquired in-place leases and customer relationships) and acquired liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141: Business Combinations and SFAS No. 142: Goodwill and Other Intangible Assets, and we allocate purchase price based on these assessments. We assess fair value based on estimated cash flow projections and utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. Our properties, including any related intangible assets, are reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable.
 
We also invest in mezzanine loans. In connection with these mezzanine loans, we may also acquire an ownership interest in the borrower that allows us to participate in a percentage of the underlying property’s cash flow from operations as well as proceeds from a sale or refinancing. At the inception of each such investment, management determines whether such investment should be accounted for as a loan, preferred equity, joint venture or as real estate. This requires management to use judgment in evaluating the substance of the investment and impacts the timing and amount of income recognized from the investment. We currently classify all of our mezzanine loans, where we also acquire an ownership interest in the borrower and receive a preferred return, as preferred equity investments.
 
In addition, our loans are periodically evaluated for possible impairment in order to determine whether it is necessary to establish a loan loss reserve. In some instances, if a borrower is experiencing difficulties making loan payments, we may assist the borrower to address the problems, which could include extending the loan term, making additional advances, or reducing required payments. If, in our judgment, it is probable we will not receive all contractually required payments when they are due, the loan is deemed impaired, and a loan loss reserve established. As of December 31, 2006 we have determined that no loan loss reserve is necessary.
 
Our investments in equity and joint venture investments are reviewed for impairment periodically or if events or circumstances change indicating that the carrying amount of our investments may not be recoverable. The ultimate realization of our equity investments is dependent on a number of factors including the performance of each investment and market conditions. We will record an impairment change if we determine that a decline in value of an investment is other than temporary.
 
Finally, estimates are used when accounting for the allowance for contingent liabilities and other commitments. All of the estimates and evaluations are susceptible to change and actual results could differ from the estimates and evaluations.
 
15
 
 

Recently Issued Accounting Standards
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement provides a “Fair Value Option” under which a company may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. This Fair Value Option will be available on a contract-by-contract basis with changes in fair value recognized in earnings as those changes occur. The effective date for this Statement is the beginning of each reporting entity’s first fiscal year end that begins after November 15, 2007. The Statement also allows an entity to early adopt the Statement as of the beginning of an entity’s fiscal year that begins on or before November 15, 2007, provided that the entity also adopts the requirement of SFAS No. 157. The Trust is currently assessing whether it will early adopt SFAS No. 159 as of the first quarter of fiscal 2007 as permitted, and is currently evaluating the impact adoption will have on the consolidated financial statements of the Trust.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or risk inherent in the inputs to the valuation technique. This Statement clarifies that market participant assumptions also include assumptions about the effect of a restriction on the sale or use of an asset. This Statement also clarifies that a fair value measurement for a liability reflects its nonperformance risk. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust is currently evaluating the impact that the adoption of SFAS No. 157 will have on the Trust’s consolidated financial statements.
 
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. This statement (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Trust does not believe that the adoption of SFAS No. 155 will have a material effect on the Trust’s consolidated financial statements.
 
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. This standard on January 1, 2007 did not have a material impact on the Trust’s consolidated financial statements.
 
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The adoption of SAB 108 on December 31, 2006 did not have a material effect on the Trust’s consolidated financial statements.
 
16
 
 

Funds From Operations
 
We compute funds from operations (FFO) as shown in the calculation below. Funds from operations is a non-GAAP financial measure which represents “funds from operations” as defined by NAREIT. NAREIT defines funds from operations as net income, computed in accordance with generally accepted accounting principles or GAAP, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. We consider FFO a useful additional measure of performance because it can facilitate a comparison of current operating performance among REITs. FFO does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income or cash flow from operating activities as a measure of financial performance or liquidity.
 
The following presents a reconciliation of our net income to our funds from operations for the years ended December 31, 2006, December 31, 2005 and December 31, 2004 (in thousands, except per share amounts):
 
     
For the Year Ended
 
     
 
     
2006
2005
2004
 
     
 
 
 
Net income     $ 42,936   $ 23,621   $ 22,452  
Real estate depreciation       5,934     4,386     1,504  
Amortization of capitalized leasing costs       5,235     2,546     121  
Real estate depreciation and amortization    
   of unconsolidated interests       3,550     529      
Less: Minority interest share of depreciation    
    and amortization       (2,921 )   (2,628 )    
Gain on sale of real estate               (19,267 )
Gain on sale of operating property of                      
   unconsolidated interests       (3,446 )        
Gain on exchange of Newkirk Realty Trust       (9,285 )        
     
 
 
 
Funds from operations       42,003     28,454     4,810  
Series A preferred dividend           (2,064 )   (2,064 )
     
 
 
 
Funds from operations applicable to common                      
   shares       42,003     26,390     2,746  
Interest expense on Series B-1 shares       6,635     5,255      
Series A preferred dividend           2,064      
     
 
 
 
Funds from operations applicable to common                      
   shares plus assumed conversions     $ 48,638   $ 33,709   $ 2,746  
     
 
 
 
Basic weighted-average Common Shares       46,639     32,451     31,059  
Convertible Preferred Shares       22,663     22,909      
Stock options       63     48      
     
 
 
 
Diluted weighted-average Common Shares       69,365     55,408     31,059  
     
 
 
 
Funds from operations per share - diluted     $ 0.70   $ 0.61   $ 0.09  
     
 
 
 

17
 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
   
Page
   
Report of Independent Registered Public Accounting Firm  
19
   
Consolidated Balance Sheets as of December 31, 2006 and 2005  
20
   
Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004  
21
   
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004  
23
   
Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004  
24
   
Notes to Consolidated Financial Statements  
26

18
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Trustees
and Shareholders of
Winthrop Realty Trust
Boston, Massachusetts
 
We have audited the accompanying consolidated balance sheets of Winthrop Realty Trust and subsidiaries (the “Trust”) (formerly known as First Union Real Estate Equity and Mortgage Investments) as of December 31, 2006 and 2005, and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the index at Item 15. These financial statements and financial statement schedule are the responsibility of the Trust’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Winthrop Realty Trust and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
 
As discussed in Note 21, the accompanying consolidated financial statements for the years ended December 31, 2006 and 2005 have been restated.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Trust’s internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2007 expressed an unqualified opinion on management’s assessment of the effectiveness of the Trust’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Trust’s internal control over financial reporting.
 
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 16, 2007
(October 2, 2007 as to the restatement discussed in Note 21)
 
19
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)
 
     
December 31,
 
     
2006
2005
 
     
 
 
ASSETS                
Investments in real estate, at cost                
   Land     $ 19,510   $ 12,595  
                 
   Buildings and improvements       227,891     203,323  
     
 
 
        247,401     215,918  
   Less – accumulated depreciation       (12,932 )   (9,267 )
     
 
 
   Investments in real estate, net       234,469     206,651  
                 
   Cash and cash equivalents       89,463     19,018  
                 
   Restricted cash       4,447     626  
                 
   Mortgage-backed securities available for sale pledged under repurchase agreements       115,810     126,163  
   Loans receivable       81,415     67,504  
                 
   Accounts receivable, net of allowance of $1 and $23, respectively       12,412     9,094  
   Real estate securities available for sale       95,148     34,300  
   Preferred equity investment       73,127     78,427  
   Equity investments       98,101     70,304  
   Lease intangibles, net       36,402     36,735  
   Deferred financing costs, net       6,354     6,698  
   Assets of discontinued operations       1,159     1,382  
   Other assets       3,313     1,946  
     
 
 
      TOTAL ASSETS     $ 851,620   $ 658,848  
     
 
 
LIABILITIES                
   Repurchase agreements     $ 111,911   $ 121,716  
   Mortgage loans payable       232,768     175,118  
   Series B-1 Cumulative Convertible Redeemable Preferred Shares of Beneficial                
      Interest, $25 per share liquidating preference, 3,990,000 and 4,000,000                
      shares authorized and outstanding in 2006 and 2005       99,750     100,000  
   Loans payable       30,004     30,025  
   Revolving line of credit           16,000  
   Accounts payable and accrued liabilities       10,306     8,698  
   Dividends payable       7,844     4,430  
   Below market lease intangibles, net       4,572     4,569  
   Deferred income           9,500  
   Liabilities of discontinued operations       828     1,659  
     
 
 
      TOTAL LIABILITIES       497,983     471,715  
     
 
 
COMMITMENTS AND CONTINGENCIES                
MINORITY INTEREST       30,051     27,527  
     
 
 
SHAREHOLDERS’ EQUITY                
   Series A Cumulative Convertible Redeemable Preferred Shares of Beneficial                
      Interest, $25 per share liquidating preference, 2,300,000 shares authorized,                
      0 and 983,082 outstanding in 2006 and 2005           23,131  
   Common shares of beneficial interest, $1 par, unlimited authorized,                
      65,369,734 and 35,581,479 outstanding in 2006 and 2005, respectively       65,370     35,581  
   Additional paid-in capital       353,719     221,386  
   Accumulated other comprehensive income       5,037     6,915  
   Accumulated distributions in excess of net income       (100,540 )   (127,407 )
     
 
 
      Total Shareholders’ Equity       323,586     159,606  
     
 
 
      TOTAL LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY     $ 851,620   $ 658,848  
     
 
 
See Notes to Consolidated Financial Statements.
 
20
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(In thousands, except per share data)
 
     
Years Ended December 31,
 
     
2006
2005
2004
 
     
 
 
 
Revenues                      
   Rents     $ 38,822   $ 25,454   $ 3,387  
   Interest and dividends       15,665     7,397     2,528  
     
 
 
 
          54,487     32,851     5,915  
Expenses                      
   Property operating       4,054     1,205     793  
   Real estate taxes       1,879     220     66  
   Depreciation and amortization       11,216     6,994     726  
   Interest       31,057     20,902     697  
   State and local taxes       234     500      
   General and administrative       3,399     3,289     2,677  
   Base management fee       (719 )   2,660     1,420  
     
 
 
 
        51,120     35,770     6,379  
Other income (loss)                      
   Legal settlement           11,000      
   Assignment of exclusivity agreement – net lease assets       9,500     10,500      
   Equity in earnings of preferred equity investment       6,849     4,066      
   Equity in earnings of equity investments       8,569     304      
   Gain on exchange of equity investment       9,285          
   Other income       530     75      
   Insurance recoveries               1,254  
   Gain on sale of real estate securities available for sale       8,130     243     1,153  
   Loss on early extinguishment of debt       (646 )        
     
 
 
 
        42,217     26,188     2,407  
Income from continuing operations before minority interest       45,584     23,269     1,943  
   Minority interest       2,764     179      
     
 
 
 
Income from continuing operations       42,820     23,090     1,943  
Discontinued operations                      
   Income from discontinued operations       116     531     1,242  
   Gain on sale of real estate               19,267  
     
 
 
 
Income from discontinued operations       116     531     20,509  
     
 
 
 
Net income       42,936     23,621     22,452  
   Preferred dividend           (2,064 )   (2,064 )
     
 
 
 
Net income applicable to Common Shares of Beneficial Interest     $ 42,936   $ 21,557   $ 20,388  
     
 
 
 
Continued on next page.
 
See Notes to Consolidated Financial Statements.
 
21
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME

(In thousands, except per share data)
 
Continued from previous page
 
     
Years Ended December 31,
 
     
2006
2005
2004
 
     
 
 
 
Comprehensive income                      
   Net income     $ 42,936   $ 23,621   $ 22,452  
   Change in unrealized gain on real estate securities available for sale arising during the period          6,115     3,254     4,512  
   Change in unrealized gain (loss) on mortgage-backed securities available for sale arising
     during the period
      406     (1,393 )    
   Change in unrealized gain (loss) on interest rate derivative arising during the period       (269 )   2,263     (325 )
   Less reclassification adjustment from gains included in net income       (8,130 )   (243 )   (1,153 )
     
 
 
 
Comprehensive income     $ 41,058   $ 27,502   $ 25,486  
     
 
 
 
Per Common Share Data – Basic(1):                      
Income from continuing operations     $ 0.74   $ 0.50   $  
Income from discontinued operations           0.02     0.66  
     
 
 
 
Net income     $ 0.74   $ 0.52   $ 0.66  
     
 
 
 
Per Common Share Data – Diluted:                      
Income from continuing operations     $ 0.71   $ 0.50   $  
Income from discontinued operations           0.02     0.66  
     
 
 
 
Net income     $ 0.71   $ 0.52   $ 0.66  
     
 
 
 
Basic Weighted-Average Common Shares       46,639     32,451     31,059  
     
 
 
 
Diluted Weighted-Average Common Shares       69,365     32,499     31,059  
     
 
 
 

(1) As restated for the years ended December 31, 2006 and 2005. See Note 21.

See Notes to Consolidated Financial Statements.
 
22
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 
(In thousands, except per share amounts)
 
       
Series A Preferred Shares of Beneficial Interest
Common Shares of Beneficial Interest
Additional
Paid-In
Capital
Accumulated Distributions in Excess of Net Income
Accumulated Other Comprehensive Income
Total
 
       
Shares
Amount
Shares
Amount
 
       
 
 
 
 
 
 
 
 
Balance, December 31, 2003       983   $ 23,131     31,059   $ 31,059   $ 207,968   $ (165,438 ) $     96,720  
  Net income                           22,452         22,452  
  Dividends paid or accrued on preferred                                                    
    shares ($2.10 per share)                           (2,064 )       (2,064 )
  Change in unrealized gain on real estate                                                    
    securities available for sale, net of                                                    
    reclassification adjustments for                                                    
    amounts included in net income                               3,359     3,359  
  Change in unrealized loss on interest                                                    
    rate derivatives                               (325 )   (325 )
       
 
 
 
 
 
 
 
 
Balance, December 31, 2004       983     23,131     31,059     31,059     207,968     (145,050 )   3,034     120,142  
       
 
 
 
 
 
 
 
 
  Net income                           23,621         23,621  
  Dividends paid or accrued on Series A                                                    
    preferred shares ($2.10 per share)                           (2,064 )       (2,064 )
  Dividends accrued on common shares                                                    
    ($.11 per share)                           (3,914 )       (3,914 )
  Change in unrealized gain on real estate                                                    
    securities available for sale, net of                                                    
    reclassification adjustments for                                                    
    amounts included in net income                               3,011     3,011  
  Change in unrealized loss on mortgage-backed                                                    
    securities available for sale                               (1,393 )   (1,393 )
  Change in unrealized gain on interest                                                    
    rate derivatives                               2,263     2,263  
  Issuance of common shares               4,522     4,522     13,418             17,940  
       
 
 
 
 
 
 
 
 
Balance, December 31, 2005       983     23,131     35,581     35,581     221,386     (127,407 )   6,915     159,606  
  Net income                           42,936         42,936  
  Dividends paid or accrued on common                                                    
    shares of beneficial interest                                                    
    ($0.30 per share)                           (16,069 )       (16,069 )
  Change in unrealized loss on real estate                                                    
    securities available for sale, net of                                                    
     reclassification adjustments for                                                    
    amounts included in net income                               (2,015 )   (2,015 )
  Change in unrealized loss on mortgage                                                    
    backed securities available for sale                               406     406  
  Change in unrealized gain on interest rate                                                    
    derivatives                               (269 )   (269 )
  Redemption of Series A-1 preferred                                                    
    shares for common shares       (983 )   (23,131 )   4,837     4,837     18,294              
  Conversion of Series B-1 preferred                                                    
    shares to common shares               56     56     194             250  
  Issuance of common shares through                                                    
    rights offering               5,220     5,220     21,902             27,122  
  Issuance of common shares               19,550     19,550     91,264             110,814  
  Reinvestment of dividend proceeds               126     126     679             805  
       
 
 
 
 
 
 
 
 
Balance, December 31, 2006         $     65,370   $ 65,370   $ 353,719   $ (100,540 ) $ 5,037   $ 323,586  
       
 
 
 
 
 
 
 
 

See Notes to Consolidated Financial Statements.
 
23
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION REAL ESTATE
EQUITY AND MORTGAGE INVESTMENTS)
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
 
     
Years Ended December 31,
 
     
 
     
2006
2005
2004
 
     
 
 
 
Cash flows from operating activities                      
Net income     $ 42,936   $ 23,621   $ 22,452  
Adjustments to reconcile net income                      
  to net cash provided by operating activities                      
    Depreciation and amortization (including amortization                      
      of deferred financing costs)       7,809     5,598     1,636  
    Amortization of lease intangibles       5,595     2,562     153  
    Straight-lining of rental income       (1,920 )   (1,436 )   (780 )
    Equity in earnings of preferred equity investment in (excess) deficit of distributions       35     (490 )    
    Equity in earnings of equity investments in excess of distributions       (170 )   (304 )    
    Interest earned on restricted cash       (45 )        
    Minority interest       2,764     179      
    Gain on assignment of exclusivity agreement       (9,500 )   (10,500 )    
    Gain on sale of real estate               (19,267 )
    Gain on sale of real estate securities available for sale       (8,130 )   (243 )    
    Gain on sale of equity investment       (9,285 )        
    Winn-Dixie legal settlement income       (1,108 )        
    Loss on early extinguishment of debt       126          
    Decrease in deferred income           (68 )   (359 )
    Bad debt (recovery) expense       (22 )   99     90  
    Interest receivable on loans       54     (806 )    
    Net changes in other operating assets and liabilities       (1,452 )   (2,342 )   62  
     
 
 
 
      Net cash provided by operating activities       27,687     15,870     3,987  
     
 
 
 
Cash flows from investing activities                      
  Investments in real estate       (38,749 )   (67,453 )   (63,944 )
  Purchase of mortgage-backed securities available for sale       (23,850 )   (149,134 )    
  Proceeds from repayments of mortgage-backed securities available for sale       34,352     21,463      
  Investment in equity investments       (96,812 )   (50,000 )    
  Investment in preferred equity investment       (1,843 )   (77,937 )    
  Proceeds from preferred equity investment       7,108          
  Purchase of real estate securities available for sale       (4,986 )   (17,965 )   (23,094 )
  Proceeds from investments held to maturity               68,900  
  Proceeds from sale of real estate securities available for sale       29,831     1,654     11,806  
  Proceeds from sale of real estate               33,635  
  (Increase) decrease in restricted cash       (3,776 )   (626 )   2,818  
  Issuance and acquisition of loans receivable       (22,554 )   (63,888 )   (24,540 )
  Collection of loans receivable       8,589     5,580     16,150  
  Purchase of real estate held for syndication               (7,613 )
  Net proceeds from sale of parking business and other assets               15  
     
 
 
 
  Net cash (used in) provided by investing activities       (112,690 )   (398,306 )   14,133  
     
 
 
 
(Continued on next page)
 
See Notes to Consolidated Financial Statements.
 
24
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION REAL ESTATE
EQUITY AND MORTGAGE INVESTMENTS)
CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Continued)
 
     
Years Ended December 31,
 
     
 
     
2006
2005
2004
 
     
 
 
 
Cash flows from financing activities                      
  Borrowings under repurchase agreements       23,070     144,161      
  Repayment of borrowings under repurchase agreements       (32,875 )   (22,445 )    
  Proceeds from mortgage loans payable       89,522     22,600     53,000  
  Proceeds from loans payable           30,000      
  Payments of loans payable       (21 )   (19 )   (20 )
  Proceeds from revolving line of credit       77,000     16,000      
  Payment of revolving line of credit       (93,000 )        
  Deferred financing costs       (1,813 )   (6,594 )   (1,196 )
  Contribution by minority interests       3,246     27,347      
  Distribution to minority interests       (3,486 )        
  Principal payments of mortgage loans payable       (32,281 )   (8,031 )   (205 )
  Issuance of Common Shares       110,814     17,940      
  Issuance of Common Shares through rights offering       27,122          
  Issuance of Series B-1 Cumulative Convertible Redeemable Preferred Shares           100,000      
  Dividends paid on Series A Preferred Shares       (516 )   (2,064 )   (2,064 )
  Dividends paid on Common Shares       (12,139 )        
  Reinvestment of dividend proceeds       805          
     
 
 
 
    Net cash provided by financing activities       155,448     318,895     49,515  
     
 
 
 
  Net increase (decrease) increase in cash and cash equivalents       70,445     (63,541 )   67,635  
  Cash and cash equivalents at beginning of period       19,018     82,559     14,924  
     
 
 
 
  Cash and cash equivalents at end of period     $ 89,463   $ 19,018   $ 82,559  
     
 
 
 
  Supplemental Disclosure of Cash Flow Information                      
  Interest paid     $ 28,886   $ 19,133   $ 2,043  
     
 
 
 
  Taxes paid     $ 667   $ 162   $ 55  
     
 
 
 
  Supplemental Disclosure on Non-Cash Investing                      
  and Financing Activities                      
  Dividends accrued on Common Shares     $ 7,844   $ 3,914   $  
  Dividends accrued on Preferred Shares           516     516  
  Stock received for assignment of exclusivity rights - net lease assets           (20,000 )    
  Mortgage loan and interest payable assumed in acquisition               32,401  
  Mortgage loan assumed by purchaser of property               (41,313 )
  Liabilities of real estate held for syndication assumed in acquisition               76,762  
  Redemption of Class A-1 Preferred Shares to Common Shares       23,131          

See Notes to Consolidated Financial Statements.
 
25
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. Business
 
Winthrop Realty Trust (formerly known as First Union Real Estate Equity and Mortgage Investments) 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.
 
Effective January 1, 2005, the Trust conducts its business through WRT Realty L.P. (formerly First Union REIT L.P.), a Delaware limited partnership (the “Operating Partnership”). The Trust 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 Trust’s assets and liabilities to the Operating Partnership had no effect on the Trust’s financial statements. All references to the “Trust” refer to Winthrop Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
 
The Trust operates in three business segments: (i) ownership of real estate operating properties, (ii) ownership of loans receivable and (iii) ownership of real estate securities. The Trust makes investments in each of these segments directly and in strategic alliances and joint ventures with third parties. At December 31, 2006, the Trust owned directly or indirectly:
 
l Operating Properties containing 8,209,000 square feet of space including the properties underlying the Sealy and Marc Realty portfolio (see Notes 5 and 7).
l Loans having an aggregate principal amount of $152,140,000 together with a 50% ownership interest in Concord Debt Holdings LLC (see Notes 5 and 8 - Concord Debt Holdings LLC).
l Real Estate Securities with a market value of $95,148,000.
2. Summary of Significant Accounting Policies
 
Consolidation and Basis of Presentation
 
The consolidated financial statements represent the consolidated results of Winthrop Realty Trust, its wholly-owned taxable REIT subsidiary, WRT-TRS Management Corp. (formerly known as First Union Management, Inc.) (“FUMI”), the Operating Partnership, and 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. Under a trust agreement, all of the outstanding shares of stock of FUMI were held for the benefit of the shareholders of the Trust. Effective July 1, 2005, the Trust consummated a business combination with FUMI pursuant to which FUMI became a wholly owned subsidiary of the Trust. FUMI’s sole asset is a 0.2% ownership interest in the Operating Partnership.
 
The consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. The estimates that are particularly susceptible to change relate to management’s estimate of the impairment of real estate, loans and investments in joint ventures and whether there have been other-than-temporary impairments to the value of the Trust’s real estate securities for sale and mortgage-backed securities available for sale. In addition, estimates are used when accounting for the allowance for doubtful accounts. All of the estimates and evaluations are susceptible to change and actual results could differ from the estimates and evaluations.
 
Reclassifications
 
Certain prior year balances have been reclassified in order to conform to the current year presentation due to the reporting of discontinued operations for assets classified as held for sale in accordance with SFAS No. 144.
 
26
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. Summary of Significant Accounting Policies (Continued)
 
Investments in Real Estate
 
Real estate assets are stated at historical cost. Expenditures for repairs and maintenance are expensed as incurred. Significant renovations that extend the useful life of the properties are capitalized. Depreciation for financial reporting purposes is computed using the straight-line method. Buildings are depreciated over their estimated useful lives of 10 to 40 years, based on the property’s age, overall physical condition, type of construction materials and intended use. Improvements to the buildings are depreciated over the shorter of the estimated useful life of the improvement or the remaining useful life of the building at the time the improvement is completed. Tenant improvements are depreciated over the life of the lease of the tenant. The Trust reviews its portfolio of properties for any impairment losses if events or changes in circumstances indicate that the carrying value of the real estate may not be recoverable. The Trust records impairment losses when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the asset’s carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount.
 
Upon the acquisition of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, and identified intangible such as above and below market leases and acquired in-place leases and customer relationships) and acquired liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141: Business Combinations and SFAS No. 142: Goodwill and Other Intangible Assets, and we allocate purchase price based on these assessments. We assess fair value based on estimated cash flow projections and utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. Our properties, including any related intangible assets, are reviewed for impairment if events or circumstances change indicating that the carrying amount of the assets may not be recoverable.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include all highly liquid investments purchased with maturities of three months or less.
 
Restricted Cash
 
Restricted cash in escrow accounts and deposits securing a loan payable includes cash reserves for tenant improvements, leasing commissions, real estate taxes and other expenses pursuant to the loan agreements.
 
27
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. Summary of Significant Accounting Policies (Continued)
 
Mortgage-Backed Securities
 
All of the Trust’s mortgage-backed securities are designated as available-for-sale and are carried at their estimated fair value with unrealized gains and temporary losses excluded from earnings and reported in other comprehensive income or loss, a component of shareholders’ equity. Charges for other than temporary impairments are included in net income.
 
The Trust’s mortgage-backed securities consist of a portfolio of whole pool adjustable rate mortgage-backed securities issued by Federal National Mortgage Association (“Fannie Mae”). All of the Trust’s mortgage-backed securities are pledged as collateral under the Trust’s repurchase agreements.
 
Interest income is accrued based on the outstanding principal balance of the investment securities and their contractual terms. Premiums and discounts associated with the purchase of investment securities are amortized and recorded in interest income over the life of such securities using the effective yield method, adjusted for actual prepayment activity. Realized gains and losses and charges for other than temporary impairments are included in net income. Sales of securities are recorded on the trade date and gains or losses are determined on the specific identification method.
 
Loans Receivable
 
The Trust’s policy is to record loans receivable at cost. The Trust evaluates the collectibility of both interest and principal of each of its loans, if circumstances warrant, to determine whether it is impaired. A loan is considered to be impaired when, based on current information and events, it is probable that the Trust will be unable to collect all amounts due according to the existing contractual terms. When a loan is considered to be impaired, the amount of the loss accrual is calculated by comparing the recorded investment to either the value determined by discounting the expected future cash flows at the loan’s effective interest rate or to the value of the collateral if the loan is collateral dependent. Interest income is recognized on an accrual basis.
 
Accounts Receivable
 
Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Trust’s best estimate of the amount of probable credit losses in the Trust’s existing accounts receivable. The Trust reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Trust does not have any off-balance sheet credit exposure related to its tenants.
 
Real Estate Securities Available for Sale
 
The Trust classifies investments in real estate equity securities with readily determinable fair values on the balance sheet as available for sale because these securities are held principally for investment purposes and not for sale in the short term. Accordingly, the Trust records these investments at fair value and unrealized gains and losses are recognized through shareholders’ equity, as a component of other comprehensive income. Realized gains and losses and charges for other than temporary impairments are included in net income. Sales of securities are recorded on the trade date and gains or losses are determined on the specific identification method.
 
Preferred Equity Investment
 
The Trust invests in mezzanine loans in which the Trust also holds an ownership interest in the borrower that allows the Trust to participate in a percentage of the proceeds from a sale or refinancing of the underlying property. At the inception of each such investment, management must determine whether such investment should be accounted for as a loan, preferred equity, joint venture or as real estate. The Trust classifies all of its current portfolio of mezzanine loans where the Trust acquires an ownership interest in the borrower entity and a preferred return as preferred equity investments and they are accounted for using the equity method because the Trust has the ability to significantly influence, but not control, the entity’s operating and financial policies.
 
28
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. Summary of Significant Accounting Policies (Continued)
 
Equity Investments
 
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. Factors that are considered in determining whether or not the Trust exercises control include (i) the right to remove the general partner in situations where the Trust is the general partner, and (ii) substantive participating rights of partners in significant business decisions including: dispositions and acquisitions of assets, financing, operations and capital budgets and other contractual rights. If the Trust is deemed to control these entities, these entities are consolidated. Determination is made on a case-by-case basis. Under the equity method, the investment, originally recorded at cost, is adjusted to recognize the Trust’s share of net earnings or losses as they occur and for additional contributions made or distributions received. Equity investments are evaluated for other-than-temporary impairment if the fair value of the Trust’s investment declines below its carrying amount.
 
Lease Intangibles
 
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. Below-market lease intangibles are recorded as part of deferred revenue and amortized into rental revenue over the non-cancelable periods of the respective leases. Above-market leases are recorded as part of intangible assets and amortized as a direct charge against rental revenue over the non-cancelable portion of the respective leases.
 
Deferred Financing Costs
 
Direct financing costs are deferred and amortized over the terms of the related agreements as a component of interest expense.
 
Variable Interest Entities
 
Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised) - Consolidation of Variable Interest Entities (“FIN 46R”) requires a variable interest entity (“VIE”) to be consolidated by its primary beneficiary. The primary beneficiary is the party that incurs a majority of the VIE’s anticipated losses and/or a majority of the expected returns.
 
The Trust has evaluated its loans and investments to determine whether they are variable interests in a VIE. This evaluation resulted in the Trust determining that certain of its loans, preferred equity investments and other investments were potentially variable interests in VIEs. For each of these investments, the Trust has evaluated (1) the sufficiency of the applicable entity’s equity investments at risk to absorb expected losses, (2) whether as a group the holders of the equity investments at risk have (a) the direct or indirect ability through voting rights to make decisions about the entity’s significant activities, (b) the obligation to absorb the expected losses of the entity and whether their obligations are protected directly or indirectly, and (c) the right to receive the expected residual return of the entity without a cap on the return, (3) whether the voting rights of these investors are not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of the equity or both, and (4) whether substantially all of the entity’s activities involve or are conducted on behalf of an investor that has disproportionately few voting rights. As of December 31, 2006, the Trust has identified the loan acquired by WRT-Marc RC LLC (See Note 5) to be a variable interest in a VIE. However, the Trust has determined that it is not the primary beneficiary and therefore accounts for this investment as a loan receivable. The Trust’s maximum exposure to loss related to this VIE is limited to the amount of its investment.
 
Fair Value of Financial Instruments
 
Financial instruments held by the Trust include cash and cash equivalents, restricted cash, mortgage-backed securities available for sale, real estate securities available for sale, loans receivable, interest rate swap agreements, accounts receivable, revolving line of credit, accounts payable, long term debt and repurchase agreements. The fair value of the cash and cash equivalents, restricted cash, mortgage-backed securities available for sale, real estate securities available for sale, interest rate swap agreements, accounts receivable, accounts payable and repurchase agreements approximate their current carrying amounts. The fair value of the Trust’s mortgage loans payable, loans payable and revolving line of credit exceeds their current carrying amounts by $1,283,000 and $0 at December 31, 2006 and 2005, respectively.
 
29
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. Summary of Significant Accounting Policies (Continued)
 
Derivative Financial Instruments
 
The Trust accounts for its interest rate swap agreements in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. In accordance with SFAS No. 133, all interest rate swap agreements are carried on the balance sheet at their fair value, as an asset if their fair value is positive, or as a liability if their fair value is negative. Since the Trust’s derivatives are designated as “cash flow hedges,” the change in the fair value of any such derivative is recorded in other comprehensive income or loss for hedges that qualify as effective and the change in the fair value is transferred from other comprehensive income or loss to earnings as the hedged liability affects earnings. The ineffective amount of all interest rate swap agreements, if any, is recognized in earnings each quarter. To date, the Trust has not recognized any change in the value of its interest rate swap agreements in earnings as a result of the hedge or a portion thereof being ineffective. Accordingly, changes in value are recorded through other comprehensive income. The fair value of the Trust’s interest rate swaps are approximately $1,669,000 and $1,938,000 at December 31, 2006 and 2005, respectively, and are included in other assets at December 31, 2006 and 2005. Such fair value estimates are not necessarily indicative of the amounts that would be recognized upon disposition of the Trust’s financial instruments. The Trust estimates that during the year ended December 31, 2007, it will reclassify $504,000 from other comprehensive income to earnings as a decrease in interest expense.
 
Upon entering into hedging transactions, the Trust documents the relationship between the interest rate swap agreements and the hedged liability. The Trust also documents its risk management policies, including objectives and strategies, as they relate to its hedging activities. The Trust assesses, both at inception of a hedge and on an on-going basis, whether or not the hedge is highly “effective,” as defined by SFAS No. 133. The Trust discontinues hedge accounting on a prospective basis with changes in the estimated fair value reflected in earnings when: (i) it is determined that the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it is no longer probable that the forecasted transaction will occur; or (iii) it is determined that designating the derivative as an interest rate swap agreement is no longer appropriate. To date, the Trust has not discontinued hedge accounting for any of its interest rate swap agreements. The Trust utilizes interest rate swap agreements to manage interest rate risk and does not intend to enter into derivative transactions for speculative or trading purposes.
 
Repurchase Agreements
 
The Trust finances the acquisitions of its mortgage-backed securities through the use of repurchase agreements. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which the Trust pledges its securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral, while the Trust retains beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, the Trust is required to repay the loan and concurrently receives back its pledged collateral from the lender or, with the consent of the lender, the Trust may renew such agreement at the then prevailing financing rate. Margin calls, whereby the lender requires the Trust to pledge additional collateral to secure borrowings under its repurchase agreement with the lender, may be experienced by the Trust as the current face value of its mortgage-backed securities declines due to scheduled monthly amortization and prepayments of principal on such mortgage-backed securities. In addition, margin calls may also occur when the fair value of the mortgage-backed securities pledged as collateral declines due to increases in market interest rates or other market conditions.
 
The original term to maturity of the Trust’s repurchase agreements is one month. Should the counterparty decide not to renew a repurchase agreement at maturity, the Trust must either refinance it elsewhere or satisfy the obligation, which might require the Trust to liquidate a portion or all of its investment in mortgage-backed securities.
 
30
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. Summary of Significant Accounting Policies (Continued)
 
Repurchase Agreements (Continued)
 
The FASB has announced plans to re-write SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which may affect the treatment of transactions where mortgage-backed securities purchased from a particular counterparty are financed by a repurchase agreement with the same counterparty. At December 31, 2006 and December 31, 2005, the Trust recorded such assets and the related financing gross on its balance sheet and the corresponding interest income and interest expense gross on its income statement. Any changes in fair value of the security was reported through other comprehensive income under SFAS No. 115, because the security was classified as “available for sale.” However, in a transaction by the Trust where the mortgage-backed securities are acquired from and financed under a purchase agreement with the same counterparty, under the revision being considered by FASB, the acquisition may not qualify as a sale from the seller’s perspective under the provision of SFAS No. 140. In such cases, the seller of the mortgage-backed securities would be required to continue to consolidate the assets sold to the Trust, based on their continuing involvement with such investments. Depending on the ultimate outcome of the FASB re-write of SFAS No. 140, the Trust, to the extent it has securities acquired from and financed with the same counterparty, may be precluded from presenting the asset and liabilities gross on its balance sheet and may instead treat its net investment in such assets as a derivative.
 
This potential change in accounting treatment would not affect the economics of the transactions but would only affect how the transactions would be reported in the Trust’s financial statements. The Trust’s cash flows, its liquidity and its ability to pay dividends would be unchanged. The Trust does not believe its taxable income, REIT status or net equity would be materially affected.
 
Stock Options
 
There were no stock option grants during the years ended December 31, 2006 and 2005 and all previously issued options are fully vested.
 
Revenue Recognition
 
The Trust accounts for its leases with tenants as operating leases with rental revenue recognized on a straight-line basis over the lease term. Accordingly, deferred rental income is recorded from tenants for the amount that is expected to be collected over the lease term rather than currently. When a property is acquired, the term of existing leases is considered to commence as of the acquisition date.
 
Tenant leases that are not net leases generally provide for (i) billings of fixed minimum rental and (ii) billings of certain operating costs. The Trust accrues the recovery of operating costs based on actual costs incurred. These amounts are included in accounts receivable at December 31, 2006 and 2005.
 
Income Taxes
 
The Trust operates in a manner intended to enable it to continue to qualify as a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code. In order to qualify as a REIT, the Trust is generally required each year to distribute to its shareholders at least 90% of its taxable income (excluding any net capital gains). There is also a separate requirement to distribute net capital gains or pay a corporate level tax. The Trust intends to comply with the foregoing minimum distribution requirements.
 
31
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. Summary of Significant Accounting Policies (Continued)
 
Income Taxes (Continued)
 
Effective July 1, 2005, the Trust consummated a business combination with FUMI pursuant to which FUMI became a wholly-owned subsidiary of the Trust. In connection with the business combination, FUMI elected to be treated for Federal income tax purposes as a taxable REIT subsidiary. In order for the Trust to continue to qualify as a REIT, the value of the FUMI stock cannot exceed 20% of the value of the Trust’s total assets. At December 31, 2006, FUMI did not exceed 20% of the value of the Trust’s total assets. The net income of FUMI is taxable at regular corporate tax rates. Current income taxes are recognized during the period in which transactions enter into the determination of financial statement income, with deferred income taxes being provided for temporary differences between the carrying values of assets and liabilities for financial reporting purposes and such values as determined by income tax laws. Changes in deferred income taxes attributable to these temporary differences are included in the determination of income. The Trust and FUMI do not file consolidated tax returns.
 
Earnings Per Share
 
The Trust has calculated earnings per share in accordance with SFAS 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. The reconciliation of shares outstanding for the basic and diluted earnings per share calculation is as follows (in thousands, except per-share data):
 
       
2006
2005
2004
 
     
 
 
 
Basic                      
Income from continuing operations     $ 42,820   $ 23,090   $ 1,943  
Preferred dividend           (2,064 )   (2,064 )
     
 
 
 
Income from continuing operations, net of preferred dividend       42,820     21,026     (121 )
Income from discontinued operations       116     531     20,509  
Allocation of undistributed earnings to Series B-1 Preferred Shares       (8,655 )   (4,837 )    
     
 
 
 
Net income applicable to Common Shares for earnings per share purposes     $ 34,281   $ 16,720   $ 20,388  
     
 
 
 
Basic weighted-average Common Shares       46,639     32,451     31,059  
     
 
 
 
Income from continuing operations, net of preferred dividend(1)     $ 0.74   $ 0.50   $  
Income from discontinued operations           0.02     0.66  
     
 
 
 
Net income per Common Share     $ 0.74   $ 0.52   $ 0.66  
     
 
 
 
Diluted                      
Income from continuing operations     $ 42,820   $ 23,090   $ 1,943  
Preferred dividend of Series A Preferred Shares           (2,064 )   (2,064 )
Preferred dividend of Series B-1 Preferred Shares       6,635        
     
 
 
 
Income from continuing operations, net of preferred dividend       49,455     21,026     (121 )
Allocation of undistributed earnings to Series B-1 Preferred Shares           (4,837 )    
Income from discontinued operations       116     531     20,509  
     
 
 
 
Net income applicable to Common Shares for earnings per share purposes     $ 49,571   $ 16,720   $ 20,388  
     
 
 
 
Basic weighted-average Common Shares       46,639     32,451     31,059  
Convertible Preferred Shares       22,663          
Stock Options       63     48      
     
 
 
 
Diluted weighted-average Common Shares       69,365     32,499     31,059  
     
 
 
 
Income from continuing operations, net of preferred dividend     $ 0.71   $ 0.50   $  
Income from discontinued operations           0.02     0.66  
     
 
 
 
Net income per Common Share     $ 0.71   $ 0.52   $ 0.66  
     
 
 
 

(1) As restated for the years ended December 31, 2006 and 2005.

32
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. Summary of Significant Accounting Policies (Continued)
 
Earnings Per Share (Continued)
 
The Trust’s Series A Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest (“Series A Shares”) and Series B-1 Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest (“Series B-1 Preferred Shares”) are antidilutive for the years ended December 31, 2005 and 2004 and accordingly, are not included in the weighted average shares outstanding for the diluted earnings per share. The Series A Preferred Shares, which were redeemed for the Trust’s common shares of beneficial interest (“Common Shares”) on February 7, 2006, and Series B-1 Preferred Shares were dilutive for the year ended December 31, 2006.
 
Recently Issued Accounting Standards
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. This Statement provides a “Fair Value Option” under which a company may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. This Fair Value Option will be available on a contract-by-contract basis with changes in fair value recognized in earnings as those changes occur. The effective date for this Statement is the beginning of each reporting entity’s first fiscal year end that begins on or before November 15, 2007. The Statement also allows an entity to early adopt the Statement as of the beginning of an entity’s fiscal year that begins after the issuance of this Statement, provided that the entity also adopts the requirement of SFAS No. 157. The Trust is currently assessing whether it will early adopt SFAS No. 159 as of the first quarter of fiscal 2007 as permitted, and is currently evaluating the impact adoption will have on the consolidated financial statements of the Trust.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or risk inherent in the inputs to the valuation technique. This Statement clarifies that market participant assumptions also include assumptions about the effect of a restriction on the sale or use of an asset. This Statement also clarifies that a fair value measurement for a liability reflects its nonperformance risk. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Trust is currently evaluating the impact that the adoption of SFAS No. 157 will have on the Trust’s consolidated financial statements.
 
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140. This statement (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133; (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Trust does not believe that the adoption of SFAS No. 155 will have a material effect on the Trust’s consolidated financial statements.
 
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. This standard adopted on January 1, 2007 did not have a material impact on the Trust’s consolidated financial statements.
 
33
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. Summary of Significant Accounting Policies (Continued)
 
Recently Issued Accounting Standards (Continued)
 
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 to address diversity in practice in quantifying financial statement misstatements and the potential under current practice for the build up of improper amounts on the balance sheet. SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 did not have a material effect on the Trust’s consolidated financial statements as of December 31, 2006.
 
3. Real Estate Investments
 
At December 31, 2006, real estate assets were comprised of 20 net lease retail, office and industrial properties, four multi-tenanted office properties and one warehouse property that had been net leased to Winn-Dixie Stores, Inc. (“Winn-Dixie”) and is now 83% leased as a multi-tenant property. At December 31, 2006, one office property was vacant.
 
In November 2005, Winn-Dixie, the tenant at the Trust’s Jacksonville, Florida property, elected to reject its lease in connection with its proceeding under Chapter 11 of the United States Bankruptcy Code. In December 2006, the Trust settled a claim for past due rent and real estate taxes with Winn-Dixie and received 76,975 common shares of Winn-Dixie which were then valued at approximately $1,108,000. In addition, under the terms of its lease Winn-Dixie was responsible for the remediation of petroleum related contamination encountered in the ground water during its removal of underground storage tanks. Given the extent and nature of the contamination at the Jacksonville property and because a substantial portion of the costs associated with the remediation are covered by a state sponsored plan, the Trust does not believe the costs to be borne by the Trust will be material.
 
Acquisitions
 
Amherst, New York Property
 
On May 25, 2005, the Trust acquired two adjacent office building properties in Amherst, New York that are net leased to and serve as the east coast headquarters of Ingram Micro, Inc. The properties contain an aggregate of 200,000 square feet of office space and were acquired for an aggregate purchase price of $22,055,000.
 
Ontario Property
 
On October 28, 2005, the Trust entered into a joint venture agreement with Marc Ontario LLC, an affiliate of Marc Realty LLC (“Marc Realty”) (see Note 7). FT-Ontario Holdings LLC (“FT-Ontario”), a Delaware limited liability company, was formed for the purpose of acquiring 128,000 square feet of retail and office space consisting of the first six floors in a mixed-use building together with 208 parking spaces located at One East Erie, Chicago, Illinois (the “Ontario Property”). Pursuant to the terms of the joint venture agreement, the Trust and Marc Ontario LLC contributed approximately $5,526,000 and $1,282,000, respectively, to the capital of FT-Ontario. The Ontario Property was acquired for an aggregate purchase price of approximately $26,536,000 including approximately $252,000 in closing costs. The purchase price was funded through the capital contribution made to FT-Ontario, with the balance being provided by a loan from the Trust in the amount of $19,903,000 secured by the Ontario Property. This loan was repaid in February 2006. The Trust is the managing member of FT-Ontario and holds an 80% interest in FT-Ontario. At such time as each of the members of FT-Ontario receives aggregate distributions equal to their invested capital plus a 9% cumulative return thereon, the Trust’s interest in FT-Ontario decreases to 75%.
 
FT-Ontario is consolidated with the Trust at December 31, 2006 and 2005.
 
34
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3. Real Estate Investments (Continued)
 
Acquisitions (Continued)
 
Verizon Properties
 
On December 29, 2005, the Trust acquired (i) an approximately 92,500 square foot office building in Andover, Massachusetts and a leasehold interest in the land on which it is situated for a purchase price of $12,750,000, and (ii) an approximately 56,000 square foot office building located in Burlington, Vermont and a leasehold interest in the land on which it is situated for a purchase price of $5,250,000. These properties are leased by the Trust to Verizon of New England, Inc. (“Verizon”) pursuant to two separate lease agreements on a net basis, whereby, Verizon is responsible for all costs associated with the properties (taxes, insurance, maintenance, etc.) while the applicable lease agreements are in effect.
 
Corporetum Properties
 
On February 16, 2006, the Trust acquired from an unaffiliated third party three office buildings located at 550-650, 701 and 1050 Warrenville Road, Lisle, Illinois, a Chicago suburb. The gross purchase price for the 550-650 and 701 properties (the “Wholly-Owned Properties”) was $31,750,000 and the purchase price for the 1050 property was $3,500,000, which was acquired in a joint venture owned 60% by the Trust and 40% by the principals of Marc Realty, who are not affiliates of the Trust. The Wholly-Owned Properties, which contain approximately 236,000 square feet, are 97% occupied and the 1050 property, which contains approximately 54,000 square feet of office space, is vacant. In January 2007, a lease for 100% of the property was entered into with a tenant commencing in May 2007 and expiring in April 2018.
 
Future Minimum Lease Payments
 
Future minimum lease payments scheduled to be received under non-cancellable operating leases are as follows (amounts in thousands):
 
2007     $ 32,791  
2008       32,594  
2009       31,925  
2010       28,697  
2011       20,018  
Thereafter       132,530  
     
 
           
      $ 278,555  
     
 
Tenant Concentration
 
Three tenants contributed approximately 44% of the base rental revenues of the Trust for the year ended December 31, 2006. Five tenants accounted for approximately 82% of the base rental revenues of the Trust in 2005.
 
35
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
4. Mortgage-Backed Securities Pledged Under Repurchase Agreements
 
At December 31, 2006 and 2005, all of the Trust’s mortgage-backed securities, consisting of Fannie Mae whole pool certificates, were classified as available-for-sale and, as such, were carried at their estimated fair value based on prices obtained from a third party.
 
The following table presents the amortized cost and fair value of the Trust’s whole pool agency mortgage-backed securities at December 31, 2006 and 2005 (in thousands):
 
     
December 31, 2006
December 31, 2005
 
     
 
 
Cost     $ 115,726   $ 126,236  
Unrealized loss       (987 )   (1,393 )
Interest payment receivable       463     455  
Unamortized premium       608     865  
     
 
 
Carrying value/estimated fair value     $ 115,810   $ 126,163  
     
 
 
The unrealized losses are a result of changes in interest rates and principal prepayments subsequent to the acquisition of the securities. The impact of the principal repayments is to accelerate the amortization of the premium. All the securities are performing according to their terms. Although not rated, whole pool agency mortgage-backed securities carry an implied AAA rating and are guaranteed as to principal and interest by Fannie Mae. Furthermore, the Trust intends to, and has the ability to, hold these securities to maturity or at least until such time as the Trust has recovered its investments. Accordingly, although the period of continuous unrealized loss position is more than twelve months, the Trust has determined that these impairments are temporary.
 
The mortgage-backed securities bear interest at a weighted average interest rate of 4.684% based on balances outstanding at December 31, 2006. The mortgage-backed securities have a weighted average life of 30.75 years.
 
5. Loans Receivable
 
On March 29, 2006, the Trust through two consolidated joint ventures, in which the Trust holds a 60% interest and an entity owned by the principals of Marc Realty owns the remaining 40% interest, acquired (i) a loan with a principal balance of $11,750,000 which is secured by a first leasehold mortgage on approximately 241,000 square feet of commercial space and an indoor parking garage with 133 spaces located at 800 South Wells, Chicago, Illinois and commonly referred to as River City (the “Commercial Loan”), and (ii) a loan with a principal balance of $5,915,000 which is secured by a first priority mortgage on both the land underlying the River City property and the unsold residential condominium units at the River City property (the “Land Loan”). The Commercial Loan was in default at the time of acquisition and WRT-Marc RC LLC, the entity that acquired the Commercial Loan, has commenced foreclosure proceedings on the Commercial Loan, and it is expected that the foreclosure sale will occur during the first quarter of 2007. In connection with the acquisition and modification of the Commercial Loan, WRT-Marc RC LLC entered into an option agreement with an unaffiliated third party pursuant to which the third party has an option to acquire the indoor parking structure should WRT-Marc RC LLC acquire title to the commercial space and the indoor parking secured by the Commercial Loan. As consideration for entering into the option agreement, WRT-Marc RC LLC received a deed for the land underlying the River City property, which deed is to be held in escrow until such time, if at all, as WRT-Marc RC LLC acquires title to the commercial space. If exercised, the option price will be equal to $1,900,000 plus 10% interest per annum plus any additional expenses incurred by WRT-Marc RC LLC in connection with acquiring and operating the commercial space less any payments of interest received on account of the Commercial Loan.
 
The Trust has determined that the Commercial Loan is a variable interest in a VIE under FIN 46R. Since the Trust has determined that it is not the primary beneficiary, the Trust accounts for this investment as a loan receivable.
 
36
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5. Loans Receivable (Continued)
 
The maturity date for the Land Loan was April 16, 2005. The entity from which the Land Loan was acquired had previously agreed to forbear from exercising any remedies on the Land Loan until April 16, 2006. WRT-Marc RC Land LLC, the entity that acquired the Land Loan, entered into a modification agreement with the borrowers to extend the forbearance period to December 31, 2007 and reduced the interest rate to 10% per annum.
 
The following table summarizes the Trust’s loans receivable at December 31, 2006 and 2005 (in thousands):
 
Carrying Amount December 31,
 
       
Property
 
Location
 
Interest Rate
 
Maturity
 
2006
 
 
2005
 






 
Toy Building (1)
 
New York , NY
 
LIBOR plus 5.6% (9.72%)
 
April 2008
 
$
59,816
 
 
$
60,250
 
 
River City – Commercial (2)
 
Chicago , IL
 
9.75%
 
February 2006
 
12,082
 
 
 
 
River City – Land (2)
 
Chicago , IL
 
10%
 
December 2007
 
4,117
 
 
 
 
Various (3) (4)
 
Chicago , IL
 
8.5%
 
(3)
 
4,148
 
 
995
 
 
Vision Property Services
 
Partnership Interests
 
15%
 
December 2011
 
1,252
 
 
 
 
Ridgebrook Office Plaza (5)
 
Northbrook , IL
 
Prime (7%)
 
April 2006
 
 
 
3,520
 
 
Wingate Inn (6)
 
Clearwater , FL
 
10%
 
February 2007
 
 
 
2,739
 


TOTAL
 
$
81,415
 
 
$
67,504
 


The carrying amount includes accrued interest of $834 and $888 at December 31, 2006 and 2005, respectively. All of the loans, except River City – Commercial which was in default at the time of acquisition, are performing according to their terms. The Trust believes that the full amount of the non-performing River City - Commercial loan is recoverable and accordingly, no impairment has been recorded.
 
(1) Secured by ownership interests in the property owner. The Trust owns a one-third interest in a joint venture which owns a 99% participating interest in the loan. The joint venture is consolidated with the Trust’s financial statements.
(2) Secured by a first mortgage.
(3) Tenant improvement and capital expenditure loans with respect to certain of the properties in the Marc Realty portfolio which mature from July 2012 to November 2013.
(4) Secured by a subordinate mortgage or the ownership interests in the property owner.
(5) This loan was satisfied on February 21, 2006.
(6) This loan was satisfied on June 19, 2006.
37
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5. Loans Receivable (Continued)
 
Activity related to mortgage loans is as follows (in thousands):
 
     
2006
2005
 
     
 
 
Balance at January 1     $ 67,504   $ 8,390  
Purchases and advances made       22,554     65,493  
Interest (received) accrued, net       (54 )   806  
Repayments       (8,589 )   (7,185 )
     
 
 
Balance at December 31     $ 81,415   $ 67,504  
     
 
 
6. Real Estate Securities Available for Sale
 
Real estate securities available for sale as of December 31, 2006 are as follows (in thousands):
 
Name
Date Purchased
Cost at
December 31, 2006
Unrealized Gain
(Loss) at
December 31, 2006
Balance at December
31, 2006

   
   
 
 
 
America First Apartment Investors, Inc.    
Various
    $ 9,951   $ 4,453   $ 14,404  
     
               
Lexington Realty Trust (1)    
12/31/06
      78,470         78,470  
     
               
Other real estate securities    
12/6/06
      1,264     (29 )   1,235  
                       
Winn-Dixie Stores, Inc.    
12/21/06 (2)
    1,108   (69 ) 1,039  
           
 
 
 
            $ 90,793   $ 4,355   $ 95,148  
           
 
 
 

(1) See Note 8 for description of the Lexington transaction.
(2) Issued in connection with Winn-Dixie’s plan of reorganization (see Note 3).

The detail of real estate securities available for sale as of December 31, 2005 are as follows (in thousands):
 
Name
Date Purchased
Cost at
December 31, 2005
Unrealized Gain at
December 31, 2005
Balance at December
31, 2005

   
   
 
 
 
America First Apartment Investors, Inc.    
Various
    $ 7,576   $ 1,150   $ 8,726  
     
               
Sizeler Property Investor, Inc.    
Various
      17,520     5,039     22,559  
     
               
Other real estate securities    
Various
      2,834     181     3,015  
           
 
 
 
            $ 27,930   $ 6,370   $ 34,300  
           
 
 
 

38
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7. Preferred Equity Investment
 
At December 31, 2006, the Trust held two participating second mortgage loans and 21 convertible mezzanine loans together with an equity investment in each mezzanine borrower in the aggregate amount of approximately $71,560,000. Each of the borrowers is owned primarily by the principals of Marc Realty. Each loan is secured 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 other than with respect to one property, in which the borrower holds a 75% interest in the Property Owner. Each loan bears interest at 7.65%, matures on April 18, 2012 and requires monthly payments of interest only. The amounts advanced under each loan together with the equity investment in the applicable borrower, as described below, was equal to 49% of the difference between the agreed value of the property owned by the applicable Property Owner and the existing debt encumbering such property at the time of each respective loan.
 
In connection with the making of these loans, the Trust acquired an equity interest in each of the borrowers. The equity interest entitles the Trust to participate in capital proceeds derived from the sale or refinancing of the applicable property to the extent such proceeds generate amounts in excess of that required to fully satisfy all of the debt encumbering that property, including the respective loan and a return to the borrower of its deemed equity (the agreed value of the applicable property less all debt encumbering that property including the loan made by us) plus a 7.65% return thereon.
 
During 2006, four of the properties underlying the mezzanine loans were sold and a fifth property underlying a mezzanine loan was sold on February 14, 2007 (see Note 22). Upon the sale of these five properties, exclusive of interest, the Trust received an aggregate of $18,055,000 on its original investment of $12,055,000. The Trust has committed to advance approximately $7,350,000 to cover the costs of tenant improvements and capital expenditures at each of the remaining 23 properties. At December 31, 2006, the Trust had advanced $4,116,000 pursuant to this commitment.
 
39
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7. Preferred Equity Investment (Continued)
 
Summary financial information for the Property Owner entities on a combined basis is as follows (in thousands):
 
     
December 31, 2006
December 31, 2005
 
     
 
 
Condensed Balance Sheets                
   Investment in real estate, net     $ 147,166   $ 151,202  
   Prepaid expenses and deposits in escrow       15,569     5,999  
   Cash and cash equivalents       2,451     3,175  
   Receivables and other assets       27,568     26,186  
     
 
 
    Total Assets     $ 192,754   $ 186,562  
     
 
 
   Nonrecourse mortgage debt     $ 259,547   $ 266,306  
   Other liabilities       23,039     21,272  
     
 
 
   Total liabilities       282,586     287,578  
Partners’ Deficit       (89,832 )   (101,016 )
     
 
 
   Total Liabilities and Partners’ Deficit     $ 192,754   $ 186,562  
     
 
 
On the Trust’s Consolidated Balance Sheet:                
   Preferred Equity Investment (1)     $ 73,127   $ 78,427  
     
 
 

(1) Includes capitalized acquisition costs of $1,169 and $1,192 at December 31, 2006 and 2005.

     
Year Ended
December 31, 2006
The Period
April 20, 2005
(Date of Acquisition)
to
December 31, 2005
 
     
 
 
Condensed Statements of Operations                
   Revenues     $ 68,281   $ 48,610  
   Operating expense       (33,376 )   (21,310 )
   Interest expense       (18,984 )   (12,300 )
   Real estate taxes       (11,640 )   (7,503 )
   Depreciation and amortization       (13,906 )   (9,795 )
   Other expenses, net       (3,000 )   (2,899 )
   Gain on sale of properties       23,939      
     
 
 
   Net income (loss)     $ 11,314   $ (5,197 )
     
 
 
On the Trust’s Consolidated                
   Statement of Operations and Comprehensive Income:                
   Equity in earnings of Preferred equity investment     $ 6,849   $ 4,066  
     
 
 

40
 
 

WINTHROP REALTY TRUST (FORMERLY KNOWN AS FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
8. Equity Investments
 
The Trust’s equity investments at December 31, 2005 and 2006 are summarized as follows (in thousands):
 
Newkirk Realty
Trust
Concord Debt
Holdings, LLC
Sealy Northwest
Atlanta, LP
Total
     
 
 
 
 
Investments     $ 70,000   $   $   $ 70,000  
Equity in earnings       304             304  
     
 
 
 
 
Equity investments at December 31, 2005       70,304             70,304  
Investments           91,342     5,470     96,812  
Distributions received       (8,399 )           (8,399 )
Equity in earnings (loss)       7,280     1,340