10-K 1 c13978e10vk.htm FORM 10-K Form 10-K
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2010
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, $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 þ
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 No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ
As of March 1, 2011, there were 27,088,347 Common Shares outstanding.
At June 30, 2010, the aggregate market value of the Common Shares held by non-affiliates was $229,464,877.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders, which is expected to be filed with the Securities and Exchange Commission within 120 days after the Registrant’s fiscal year ended December 31, 2010, are incorporated by reference into Part III hereof.
 
 

 

 


 

WINTHROP REALTY TRUST
CROSS REFERENCE SHEET PURSUANT TO ITEM G,
GENERAL INSTRUCTIONS TO FORM 10-K
         
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 Exhibit 10.19
 Exhibit 10.20
 Exhibit 21
 Exhibit 23.1
 Exhibit 23.2
 Exhibit 24
 Exhibit 31
 Exhibit 32
 Exhibit 99.1

 

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CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Any statements included in this prospectus, including any statements in the document that are incorporated by reference herein that are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements contained or incorporated by reference herein should not be relied upon as predictions of future events. Certain such forward-looking statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative thereof or other variations thereof or comparable terminology, or by discussions of strategy, plans, intentions or anticipated or projected events, results or conditions. Such forward-looking statements are dependent on assumptions, data or methods that may be incorrect or imprecise and they may be incapable of being realized. Such forward-looking statements include statements with respect to:
   
the declaration or payment of distributions by us;
   
the ownership, management and operation of properties;
   
potential acquisitions or dispositions of our properties, assets or other businesses;
   
our policies regarding investments, acquisitions, dispositions, financings and other matters;
   
our qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended, which we refer to as the Code;
   
the real estate industry and real estate markets in general;
   
the availability of debt and equity financing;
   
interest rates;
   
general economic conditions;
   
supply of real estate investment opportunities and demand;
   
trends affecting us or our assets;
   
the effect of acquisitions or dispositions on capitalization and financial flexibility;
   
the anticipated performance of our assets and of acquired properties and businesses, including, without limitation, statements regarding anticipated revenues, cash flows, funds from operations, earnings before interest, depreciation and amortization, property net operating income, operating or profit margins and sensitivity to economic downturns or anticipated growth or improvements in any of the foregoing; and
   
our ability, and that of our assets and acquired properties and businesses to grow.
You are cautioned that, while forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance and they involve known and unknown risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained or incorporated by reference in this report and any amendment hereof, including, without limitation, the information set forth in “ITEM 1A- Risk Factors” below or in any risk factors in documents that are incorporated by reference in this report, identifies important factors that could cause such differences. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may reflect any future events or circumstances.
SHARE SPLIT
In November 2008 Winthrop Realty Trust effected a 1-for-5 reverse stock split, which we refer to as the Reverse Split, of its Common Shares of Beneficial Interest, which we refer to as Common Shares, pursuant to which each of five shares of its Common Shares issued and outstanding as of the close of the market on November 28, 2008 were automatically combined into one Common Share, subject to the elimination of fractional shares. All Common Share and per Common Share data included in this Annual Report on Form 10-K and the accompanying Consolidated Financial Statements and Notes thereto have been adjusted to reflect this Reverse Split.

 

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PART I
ITEM 1. BUSINESS
General
Winthrop Realty Trust is a real estate investment trust formed under the laws of the State of Ohio. We conduct our business through our wholly owned operating partnership, WRT Realty L.P., a Delaware limited partnership, which we refer to as the Operating Partnership. All references to the “Trust”, “we”, “us”, “our”, “WRT” or the “Company” refer to Winthrop Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
We are engaged in the business of owning real property and real estate related assets which we categorize into three reportable segments: (i) the ownership of investment properties, including properties in joint ventures consolidated or accounted for on a equity method basis, which we refer to as operating properties; (ii) the origination and acquisition of senior loans, mezzanine loans and debt securities secured directly or indirectly by commercial and multi-family real property, which loans we refer to as loan assets; and (iii) the ownership of equity and debt securities in other real estate investment trusts (REITs), which we refer to as REIT securities.
At December 31, 2010 we held (i) interests in operating properties totaling $373,142,000 and containing approximately 8.5 million square feet of rentable space, (ii) loan assets totaling $134,269,000, (iii) REIT securities with a market value of $33,032,000 and (iv) cash and cash equivalents of $45,257,000.
Our executive offices are located at 7 Bulfinch Place, Suite 500, Boston, Massachusetts 02114 and Two Jericho Plaza, Jericho, NY 11753. Our telephone number is (617) 570-4614 and our web site is located at http://www.winthropreit.com. The information contained on our web site does not constitute part of this Annual Report on Form 10-K. On our web site you can obtain, free of charge, a copy of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, as amended, as soon as reasonably practicable after we file such material electronically with, or furnish it to, the Securities and Exchange Commission, which we refer to as the SEC.
History
We began operations in 1961 under the name First Union Real Estate Equity and Mortgage Investments. Effective December 31, 2003, FUR Investors LLC acquired 32% of our then outstanding Common Shares and FUR Advisors LLC, which we refer to as FUR Advisors or our Advisor, was retained as our external advisor, our Board of Trustees was substantially reconstituted and Michael Ashner was appointed Chief Executive Officer and he entered into an exclusivity agreement with the Trust. Since January 1, 2004, we have been externally managed by FUR Advisors. Both FUR Advisors and FUR Investors LLC are separate entities controlled by Mr. Ashner, owned by our current executive officers and senior management, including Mr. Ashner, and members of senior management of AREA Property Partners, formerly known as Apollo Real Estate Advisors Inc., a New York based real estate investment fund.
Commencing January 1, 2004, we began to seek out more opportunistic investments across the real estate spectrum, whether they be operating properties, loan assets or REIT securities. On January 1, 2005 we elected to form the Operating Partnership and contributed all of our assets to the Operating Partnership in exchange for 100% of the ownership interests in the Operating Partnership. Our Operating Partnership structure, commonly referred to as an umbrella partnership real estate investment trust, provides us with additional flexibility when acquiring properties as it enables us to acquire properties for cash and/or by issuing to sellers, as a form of consideration, limited partnership interests in our operating partnership thereby enabling us to structure transactions which may defer tax gains for a seller while preserving our available cash for other purposes.
Management
Under the terms of the Advisory Agreement between FUR Advisors and us, FUR Advisors administers our affairs including seeking, servicing and managing our investments. For providing these and other services, FUR Advisors receives a base management fee and is entitled to an incentive fee after common shareholders have received a return of a specified amount which is based on a fixed price for Common Shares outstanding at December 31, 2003 plus the issuance price for Common Shares issued thereafter together with a cumulative 7% annual return thereon. See “Employees” below for a description of the fees payable to FUR Advisors.

 

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Pursuant to our bylaws, our executive officers are permitted to acquire or dispose of an investment with an aggregate value of $10,000,000 or less without the consent of our Board of Trustees. However, if such transaction is with (i) our Advisor (and any successor advisor), Michael Ashner, or any of their respective affiliates; (ii) certain stated entities which are, or were, affiliated with us; (iii) a beneficial owner of more than 4.9% of our outstanding Common Shares, either directly or upon the conversion of any of our Series B-1 Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest, which we refer to as our Series B-1 Preferred Shares, or Series C Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest, which we refer to as our Series C Preferred Shares; or (iv) a beneficial owner of more than 4.9% of any other entity in which we hold a 10% or greater interest, then regardless of the amount of the transaction, such transaction must be approved by a majority of our independent trustees, acting in their capacity as members of our Conflicts Committee.
Investment, Operating and Capital Strategy
We are engaged in the business of owning and managing real property and real estate related assets. Our business objective is to maximize long term shareholder value through a total return value approach to real estate investing. As a result of our emphasis on total return, while we seek to achieve a stable, predictable dividend for our shareholders, we do not select or manage our investments for short-term dividend growth, but rather towards achieving overall superior total return. We believe this approach will ultimately result in long term increased share value.
We are a diversified REIT and as such we are able to invest in transactions which a dedicated REIT with narrow investment parameters would be unable to consider resulting in a broad range of investment opportunities. These opportunities include different investment types, sectors, and geographic areas all at varying levels in the capital stack. As such, from time to time the types of real estate investments we will acquire may vary. In addition, because of our size we are able to make investments in transactions that are smaller and would generally be disregarded by larger real estate investors. In this regard, as opportunities present themselves and as market conditions dictate, we will focus our investment activity in one or more of our three business segments (i) operating properties; (ii) loan assets; and (iii) REIT securities, and aggressively pursue such opportunities. That is, subject to economic and credit market conditions, we will seek to:
 
acquire operating properties of specific property types and locations that we believe:
   
are undervalued,
 
   
present an opportunity to outperform the marketplace while providing recurring current or potentially recurring cash flow, or
 
   
can provide superior returns through an infusion of capital and/or improved management;
 
acquire portfolios or interests in portfolios at properties within characteristics similar to the above;
 
 
acquire loan assets using the same criteria for operating properties, as well as consideration of loan assets that may present an opportunity for us to acquire through foreclosure an equity interest in the underlying real estate collateral;
 
 
acquire securities issued by other REITs we believe are undervalued; and
 
 
divest investments as they mature in value to the point where we may be unlikely to achieve better than market returns in order to redeploy capital to what we believe to be higher yielding opportunities. Consistent with our total return approach to investing, it is not possible to predict when we will exit any particular investment.
We acquire assets through direct ownership as well as through strategic alliances and ventures. Our primary sources of income are rental income and tenant recoveries from leases of our operating properties, interest income and discount accretion from our loan assets, and interest and dividend income and appreciation from our investments in REIT securities.
Based on market conditions in 2010, we focused our investment activity in our loan asset segment. We seek to enter into ventures with third parties who have a presence, experience and expertise in specific geographic areas and/or specific asset types. Further, with respect to ventures that we manage we seek to enhance our total return with asset management and other fees, and promoted economic interests and appreciation. We currently expect that our focus on loan assets will continue in 2011. Currently, we expect to concentrate our investment activities in assets that we believe are higher quality office, retail and multi-family properties along with high-end hospitality assets as we expect these will be the first to recover. We generally do not pursue those investments in which there is a significant component of raw land, development risk, specialty real estate or condominiums, unless the condominium project can be converted to a conventional multi-family property.
To enhance our total return, we utilize leverage. We seek to limit risk associated with utilization of leverage by seeking to make our investments through discrete single purpose entities in which we do not guaranty, other than customary environmental and recourse carve-out guarantees, the debt of our single purpose subsidiaries, thereby limiting the risk of loss to that particular investment or joint venture.

 

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As a REIT, we are dependent primarily on external equity and debt financing to fund the growth of our business because of the distribution requirements for a REIT which significantly limits our ability to re-invest cash flow and capital proceeds. We have historically used public equity markets, joint venture equity, and secured financing as our primary sources of capital including raising capital through public offerings as we did in September 2010. We expect to continue to fund our investments through one or a combination of: cash reserves, borrowings under our credit facility, redeployment of capital from timely asset sales, property loans, the issuance of debt or equity securities and the formation of joint ventures. Finally, we maintain a stock purchase and dividend reinvestment plan which enables our existing shareholders to reinvest their dividends as well as purchase additional shares at a discounted price.

 

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Assets
Loan Assets
The following table sets forth certain information relating to our loans receivable, carried at historical cost, and loan securities carried at fair value. All information presented is as of December 31, 2010. Dollars are stated in thousands.
                                                 
    Loan           Stated Interest   Carrying             Maturity     Senior  
Name   Position   Asset Type   Location   Rate (1)   Amount (2)     Par Value     Date (3)     Debt (4)  
Loans Receivable
                                               
Beverly Hilton (10)
  B Note   Hotel   Beverly Hills, CA   Libor + 1.74%   $ 7,899     $ 10,000       08/09/11     $ 166,000  
Metropolitan Tower
  B Note   Office   New York, NY   Libor + 1.51%     10,312       15,000       11/01/11       81,559  
Westwood *
  Whole loan   Office   Phoeniz, AZ   11.00%     3,500       3,500       04/30/12        
Siete Square
  B Participation   Office   Phoeniz, AZ   10.37%     2,488       2,500 (5)     06/09/12       3,000  
Moffett Towers *
  B Note   Office   Sunnyvale, CA   Libor + 6.48%     21,752       21,603       07/31/12       108,786  
160 Spear
  B Note   Office   San Francisco, CA   9.75%     6,674       15,000 (5)     06/09/13       35,000  
160 Spear
  Mezzanine   Office   San Francisco, CA   15.00%     3,029       3,000       06/09/13       50,000  
Legacy Orchard *
  Secured   Corporate Loan   n/a   15.00%     9,750       9,750 (5)     10/31/14        
San Marbeya *
  Whole loan   Multi-Fam   Tempe, AZ   5.88%     26,966       30,930       01/01/15        
Rockwell *
  Mezzanine   Industrial   Shirley, NY   12.00%     255       1,496       05/01/16       17,045  
500-512 7th Ave *
  B Note   Office   New York, NY   7.19%     9,954       11,638       07/11/16       253,673  
180 N. Michigan (6)
  Mezzanine   Office   Chicago, IL   8.50%     1,862       1,862       12/31/16       18,080  
Wellington Tower
  Mezzanine   Mixed use   New York, NY   6.79%     2,456       3,501       07/11/17       22,500  
CDH CDO LLC *
  Unsecured   n/a   n/a   12.00%     3,498       3,498       12/30/15        
 
                                             
 
                  $ 110,395                          
 
                                             
Loan Securities
                                               
WBCMT 2007 WHL8
  CMBS   Hotel   Various   Libor + 1.75%   $ 45       1,130       06/09/12       1,470,264  
Metropolitan Tower*
  Rake Bonds   Office   New York, NY   (7)     6,668       8,748       11/01/11       72,812  
West Olive
  Rake Bonds   Office   Burbank, CA   (8)     4,606       6,364       02/28/13       15,666  
Concord CDO-1 *
  CDO Bonds   Various   Various   Libor + 1.20%     662       662 (5)     12/25/46       288,025  
 
                                             
 
                  $ 11,981                          
 
                                             
Loans in Equity Investment (9)
                                               
Riverside Plaza*
  B Note   Retail   Riverside, CA   12.00%   $ 7,883       7,800       12/01/12       54,400  
 
                                             
     
*  
Loan Asset was acquired by the Trust in 2010. Additional loan asset details are described below.
 
(1)  
Represents contractual interest rates without giving effect to loan discount and accretion. The stated interest rate may be significantly different than the Trust’s effective interest rate on certain loan investments.
 
(2)  
Carrying amount includes all applicable accrued interest and accretion of discount.
 
(3)  
After giving effect to all contractual extensions.
 
(4)  
Debt which is senior to our loan.
 
(5)  
Par Value is presented at the borrowers discounted payoff option (DPO) amount.
 
(6)  
Represents a tenant improvement and capital expenditure loan collateralized by a subordinate mortgage or the ownership interest in the property owner.
 
(7)  
Ranges from Libor + 1.15% to Libor + 1.35%.
 
(8)  
Ranges from Libor + 0.65% to Libor + 1.60%.
 
(9)  
Equity investment amounts are presented based on the Trust’s 50% ownership percentage.
 
(10)  
Under contract to sell at par. Expected closing in July 2011.

 

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Loan Asset Acquisitions
500-512 Seventh Avenue — New York, New York — B Note — On July 9, 2010 we acquired for $19,825,000 a $23,499,000 performing B note in a first mortgage loan which is subordinate to a $253,673,000 A note in the mortgage loan. The A note and B note are collateralized by a 1,188,000 square foot office building located at 500-512 Seventh Avenue New York, New York. The B note bears interest at 7.19% and has a scheduled maturity date of July 11, 2016. In August, 2010 we sold a participation in the B note as described in the “Loan Asset Modifications” section below.
San Marbeya Apartments — Tempe, Arizona — First Mortgage Loan - On July 23, 2010 we acquired for $26,990,000 a $31,106,000 performing first mortgage loan. The loan is collateralized by a 276 unit apartment complex referred to as San Marbeya Apartments located in Tempe, Arizona. The loan bears interest at a blended rate of 5.88% and has a scheduled maturity date of January 1, 2015. In January 2011 we sold a senior participation in this first mortgage loan as described in the “Loan Asset Modifications” section below.
Rockwell — Shirley, New York Mezzanine Loan — On August 31, 2010 we acquired from Concord Debt Holdings, LLC, which we refer to as Concord, for $235,000 a $1,497,000 performing mezzanine loan. The loan is collateralized by a 129,660 square foot industrial/warehouse complex in Shirley, New York. The loan bears interest at 12% and has a scheduled maturity date of May 1, 2016.
Legacy Orchard Corporate Loan - On October 22, 2010 we acquired for $9,750,000 an existing $39,000,000 performing loan made to a private real estate equity fund and then modified the loan to provide for: (i) an interest rate of 15% on the $9,750,000 investment amount; (ii) collateral in the form of a $3,000,000 million letter of credit, a first mortgage on land and a security interest in other assets; (iii) a scheduled maturity date of October 31, 2014 and, (iv) subject to the satisfaction of certain conditions by the borrower a discounted payoff option after one year of $9,750,000.
Westwood Business Park — Phoenix, Arizona — Whole Loan — On October 29, 2010 we acquired for $4,100,000, a first mortgage loan secured by an interest in four class B office buildings, containing 91,100 square feet of office space in Phoenix, Arizona. Upon acquisition of the loan, the borrower made a principal payment of $600,000 and the loan was restructured to reduce the then outstanding principal to $3,500,000 and to provide for a future funding component which allows the borrower to draw up to $400,000 to fund 50% of the tenant improvement and leasing commission costs on new leases. The loan bears interest at 11% and has a scheduled maturity date of October 31, 2011.
Moffett Towers — Sunnyvale, California — B Note - On October 29, 2010 we acquired at par a $21,428,000 senior participation in a B note secured by a first mortgage lien on a 951,000 square foot, recently constructed class A office complex located in Sunnyvale, California. The loan bears interest at Libor plus 6.48% (with a Libor floor of 1.5%) and has a scheduled maturity date of January 31, 2012.
Metropolitan Tower — New York, New York — Rake Bonds — On December 30, 2010, pursuant to a purchase option, we acquired from Concord Debt Funding Trust, which we refer to as CDFT, for $5,250,000 two rake bonds with an aggregate face amount of approximately $8,748,000, a weighted average interest rate of Libor plus 1.30% which have a scheduled maturity date of November 1, 2011. The rake bonds are secured by the 260,000 square feet of office space constituting the office portion of Metropolitan Tower located in New York, New York. On December 30, 2010 in connection with the acquisition of the Metropolitan Tower rake bonds CDFT borrowed $3,498,000 from us in the form of an unsecured loan. The loan bears interest at 12% and has a scheduled maturity date of December 30, 2015.
Loan Asset Modifications
Siete Square — Phoenix, Arizona — B Note Participation — On February 5, 2010, we restructured our loan into a $3,000,000 Sub-Participation A interest which bears interest at 8% and a $4,219,000 Sub-Participation B interest. We sold the Sub-Participation A interest at par to Concord Real Estate CDO-1, Ltd., which was refer to as CDO-1, on the same date.

 

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500-512 Seventh Avenue — New York, New York — B Note Participation — On August 4, 2010, we restructured our loan and sold a 50% pari passu participation interest in the B note for a purchase price of $9,859,000 which represented one-half of our cost basis in the B note.
San Marbeya Apartments, Tempe, Arizona-First Mortgage Loan — On January 14, 2011, we restructured our loan into a $15,150,000 senior participation, which bears interest at 4.85%, and a $15,744,000 junior participation, which bears interest at 6.4%. We concurrently sold the senior participation to CDO-1 at par.
Loan Asset Acquisitions and Conversions to Operating Properties
Crossroads II at Meridian, Englewood Colorado- On June 11, 2010 we acquired for $8,100,000 a $10,031,000 non-performing first mortgage loan collateralized by an 118,000 square foot, class A office building located at 9780 Mount Pyramid Court, Englewood Colorado, known as Crossroads II at Meridian. On November 17, 2010 we foreclosed on the first mortgage loan and acquired the property.
Deer Valley Medical Center, Deer Valley, Arizona — On June 28, 2010 we acquired for $10,257,000 a $20,491,000 non-performing first mortgage loan collateralized by an 86,000 square foot, class A medical office building known as the Deer Valley Professional Center. On August 6, 2010 we foreclosed on the first mortgage loan and acquired the property.
Newbury Apartments — Meriden, Connecticut — On September 2, 2010 we acquired from Concord for $550,000 a non-performing mezzanine loan with a face amount of $3,500,000, which was collateralized by a 180 unit multi-family apartment complex located in Meriden, Connecticut. The loan was subordinate to a non-performing first mortgage loan with a principal balance of approximately $23,875,000. On October 29, 2010 we foreclosed on the equity interest in the property owner resulting in our becoming the indirect owner of the property subject to the first mortgage loan.
In February 2011 we reached an agreement with the first mortgage lender to repay all past due interest and fees of approximately $853,000, to fund escrows of approximately $83,000, to prepay March’s debt service inclusive of escrows of approximately $150,000 and to pay a modification fee of approximately $119,000 (0.5% of the loan balance). In exchange the lender waived all defaulted interest, modified the payments to interest only and extended the maturity date to February 1, 2014.
Loan Asset Acquired and Repaid During the Year
Driver Building — San Diego, California — On May 14, 2010 we acquired at par a non-performing $6,540,000 first mortgage loan. On August 27, 2010 we received full repayment on the outstanding principal, stated and defaulted interest as well as late fees.
1701 E. Woodfield Road — Schaumburg, Illinois — On July 1, 2010 we acquired for $8,200,000 a $10,408,000 performing first mortgage loan collateralized by a 174,400 square foot office building located at 1701 E. Woodfield Road, Schaumburg, Illinois, a suburb of Chicago. The property is owned in a joint venture with Marc Realty. Simultaneously with the acquisition of this loan, the venture made a principal payment on the loan of $3,200,000 (both Marc Realty and us contributed 50% each) and the loan was modified to reduce the balance to $5,000,000, increase the interest rate to 8% per annum and extend its maturity to July 1, 2011. The joint venture subsequently repaid the outstanding principal and interest on September 28, 2010 from the proceeds of a new first mortgage loan.
Scripps Center, Costa Mesa, California Rake Bonds - On July 16, 2010 we acquired from Concord for $1,200,000 two rake bonds with an aggregate face amount of $2,273,000. The bonds were repaid at face on December 1, 2010.
Loan Asset Acquisitions and Other Loan Asset Transaction Activity through our Equity Investments
Riverside Shopping Center, Riverside, California — On June 28, 2010 we formed a 50%-50% joint venture entity which acquired at par a 12% $15,600,000 B participation in a performing $70,000,000 first mortgage loan. The first mortgage loan is collateralized by a 405,000 square foot retail center located in Riverside, California.

 

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Peter Cooper Village/Stuyvesant Town Investments, New York, New York — On August 6, 2010 we formed a joint venture, PSW NYC LLC, which we refer to as PSW NYC, in which we held a 22.5% interest, to acquire 100% of the $300,000,000 face amount of certain mezzanine loans indirectly collateralized by an 11,227 unit apartment complex in New York City for a purchase price of $45,000,000, with the intention of foreclosing on the collateral. As a result of an action brought by the first mortgage lender PSW NYC was prohibited from foreclosing. To settle the matter with the first mortgage lender, PSW NYC agreed to sell to the first mortgage lender the mezzanine loans for the original cost ($45,000,000) paid by PSW NYC.
Concord, CDH CDO and Lex-Win Concord LLC — On August 26, 2010, we, together with our two joint venture partners in Concord, restructured the investment such that each partner now holds a one-third interest in Concord and in a newly formed entity, CDH CDO LLC, which we refer to as CDH CDO. As part of the restructuring, Concord transferred to CDH CDO for $10,635,000 the equity interest in CDFT, the sole equity owner of CDO-1. The purchase price was funded by a capital contribution from one of our joint venture partners which contribution is entitled to a priority return of 10% per annum. Also during 2010 and the first quarter of 2011, Concord satisfied its obligations under its Credit Suisse repurchase agreement and one if its RBS repurchase agreements. As a result, Concord’s sole remaining obligations are with its KeyBank credit facility and its RBS repurchase agreement with respect to its interest in the Sofitel hotel in New York, New York. Although Concord remains in violation of certain debt covenants under both of these remaining obligations, Concord’s debt is non-recourse to us and Concord’s lenders’ sole recourse with respect to defaults is limited to the value of Concord’s assets.
In January 2010, CDFT submitted for cancellation certain bonds issued by CDO-1 and held by CDFT. The trustee for CDO-1 refused to cancel such bonds and CDO-1 brought an action in the Delaware Court of Chancery seeking declaratory relief that such bonds should be cancelled and no longer remained outstanding. Pending the court’s decision, the trustee escrowed all payments on account of the bonds and distributions payable to CDFT from CDO-1’s assets. In addition, the trustee also escrowed any principal payments that could otherwise have been used for reinvestment by CDO-1 in additional or replacement assets. In May 2010 the Delaware Court of Chancery issued a ruling that the bonds submitted for cancellation should be deemed no longer outstanding effective January 2010. The trustee appealed the ruling and on March 4, 2011, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s ruling that the bonds submitted for cancellation should be deemed no longer outstanding effective January 2010. As a result, we expect the trustee to release the funds held in escrow thereby enabling CDO-1 to make all current and past due payments on its remaining bonds as well as to pay distributions to CDFT, which distributions will be used by CDFT to repay the loan of $3,498,000 made by us on December 30, 2010 and the purchase price owed by CDFT to us on account of its purchase of CDO-1 bonds originally purchased by us and which CDFT had an option to acquire. In addition, we expect that the trustee will release the approximately $33,497,000 in principal payments received and held in the CDO-1 reinvestment account which may be used by CDO-1 to acquire new assets for the benefit of CDO-1’s noteholders and CDFT. Furthermore, assuming CDO-1 continues to satisfy its financial tests set forth in its indenture, we expect that CDO-1 will continue to make distributions to CDFT, which in turn will make distributions to its equity holders including us.
Operating Properties
In addition to the loans that were converted to operating properties through foreclosure previously discussed, we made the following acquisitions in 2010:
Operating Property Acquisitions
Crossroads I at Meridian — Englewood, Colorado — On December 22, 2010 we acquired for $8,700,000 an 118,000 square foot, class A office building located at 9800 Mount Pyramid Court, Englewood, Colorado known as Crossroads I at Meridian, which is adjacent to the Crossroads II property we acquired through foreclosure in November 2010.
Land Acquisitions
Kroger Properties — During the first quarter of 2010 we exercised our option to acquire the land underlying six of the properties held in land estates which were scheduled to expire on October 31, 2010 and were leased to the Kroger Company. The acquisition of the six land parcels was consummated on November 1, 2010 at an aggregate purchase price of approximately $4,209,000.

 

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Plantation Florida — On November 22, 2010 we exercised our option and acquired the land underlying the Plantation, Florida property leased to BellSouth Telecommunication, Inc. for a purchase price of $4,000,000.
Andover, Massachusetts —On December 20, 2010 we exercised our option and acquired the land underlying the Andover, Massachusetts property leased to PAETEC Communications, Inc. for a purchase price of $1,200,000.
REIT Securities
At December 31, 2010 our investments in REIT securities consisted of the following (in thousands):
                 
    Cost     Fair Value  
REIT Preferred Shares
  $ 15,757     $ 28,547  
REIT Common Shares
    3,590       4,485  
 
           
 
  $ 19,347     $ 33,032  
 
           
Revolving Line of Credit
For information on our Revolving Line of Credit, see ITEM 8 — Financial Statements and Supplementary Data, Note 10.
Employees
As of December 31, 2010, we had no employees. Our affairs are administered by our Advisor, pursuant to the terms of the Advisory Agreement, which includes providing asset management services and coordinating with our shareholder transfer agent and property managers. Under the Advisory Agreement, during 2009 we paid our Advisor a quarterly base management fee equal to 1.5% of (i) the issuance price of our outstanding equity securities plus (ii) 0.25% of any equity contribution by an unaffiliated third party to a venture managed by us. For purposes of the calculation, the 15,754,495 Common Shares outstanding at January 1, 2009 were valued at $11.00 and with respect to the 1,496,000 Series B-1 Preferred Shares outstanding after giving effect to the repurchases of Series B-1 Preferred Shares during the fourth quarter of 2008 and the first quarter of 2009 were valued at $25.00 per Series B-1 Preferred Share. Any additional future conversions, redemptions or repurchases of the Series B-1 Preferred Shares do not reduce the base equity for purposes of the base management fee calculation.
Effective January 1, 2010, the Advisory Agreement was amended so that the determination of the issuance price of Common Shares reverted back to the pre 2009 definition such that the fee is to be calculated on the actual issuance price of Common Shares instead of a fixed price for Common Shares issued prior to January 1, 2009. This change will result in an increase, without giving effect to any additional shares issuances, to the annual advisory fee payable to FUR Advisors of approximately $2,100,000 over what would have been paid without the amendment, which increase was phased in with 54% of the increase being paid during 2010. The full impact of the increase will be recognized in 2011.
Pursuant to the terms of the Advisory Agreement, in addition to receiving a base management fee, FUR Advisors is entitled to receive an incentive fee for administering the Trust. FUR Advisors, or its affiliate, is also entitled to receive property and construction management fees at commercially reasonable rates, as determined by our independent Trustees. The incentive fee which is equal to 20% of any amounts available for distribution in excess of a threshold amount (as defined) is only payable at such time, if at all, (i) when holders of our Common Shares receive aggregate distributions above a threshold amount or (ii) upon termination of the Advisory Agreement, if the net value of our assets exceeds the threshold amount based on then current market values and appraisals. That is, the incentive fee is not payable annually but only at such time, if at all, as shareholders have received a return of invested capital (based on initial share issuance price) plus a 7% annual return thereon (the threshold amount) or, if the Advisory Agreement is terminated, if the assets of the Trust exceed the threshold amount. At December 31, 2010 the threshold amount was approximately $468,193,000, which was equivalent to $16.58 per diluted Common Share.
Competition
We have competition with respect to our acquisition of operating properties and our acquisition and origination of loan assets with many other companies, including other REITs, insurance companies, commercial banks, private investment funds, hedge funds, specialty finance companies and other investors. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or make different risk assessments, which could allow them to consider a wider variety of investments. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations.

 

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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 ventures. We derive significant benefit from our present advisor structure, where our Advisor’s experienced management team provides us with resources at substantially less cost than if such persons were directly employed by us. Through its broad experience, our Advisor’s senior management team has established a network of contacts and relationships, including relationships with operators, financing sources, investment bankers, commercial real estate brokers, potential tenants and other key industry participants.
Environmental Regulations
Our operations and properties are subject to various federal, state and local laws and regulations concerning the protection of the environment including air and water quality, hazardous or toxic substances and health and safety. These are discussed further under ITEM 1A — Risk Factors.
Segment Data
Business segment data may be found under ITEM 8 — Financial Statements Note 20 and Supplementary Data.
Additional Information
The following materials are available free of charge through our website at www.winthropreit.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC under the Securities Exchange Act of 1934, as amended:
   
our Annual Reports on Form 10-K and all amendments thereto;
   
our quarterly reports on Form 10-Q and all amendments thereto;
   
our current reports on Form 8-K and all amendments thereto;
   
other SEC filings;
   
organizational documents;
   
Audit Committee Charter;
   
Compensation Committee Charter;
   
Conflicts Committee Charter;
   
Nominating and Corporate Governance Committee Charter;
   
Code of Business Conduct and Ethics; and
   
Corporate Governance Guidelines.
We will provide a copy of the foregoing materials without charge to anyone who makes a written request to our Investor Relations Department, c/o FUR Advisors, LLC, 7 Bulfinch Place, Suite 500, P.O. Box 9507, Boston, Massachusetts 02114.
We also intend to promptly disclose on our website any amendments that we make to, or waivers for our Trustees or executive officers that we grant from, the Code of Business Conduct and Ethics.
New York Stock Exchange Certification
As required by applicable New York Stock Exchange listing rules, on June 14, 2010, following our 2010 Annual Meeting of Shareholders, our Chairman and Chief Executive Officer submitted to the New York Stock Exchange a certification that he was not aware of any violation by us of New York Stock Exchange corporate governance listing standards.
ITEM 1A — RISK FACTORS
We, our assets and the entities in which we invest are subject to a number of risks customary for REITs, property owners, loan originators and holders and equity investors as well as a number of risks involved in our investment, operating, and capital strategy policy that not all REITs may have. Material factors that may adversely affect our business operations and financial conditions are summarized below.

 

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Risks incidental to real estate investments.
As a REIT our investments are limited to direct ownership and operation of operating properties, loan assets secured, directly or indirectly, by operating assets, and investments in other REITs. Accordingly, an investment in us depends upon our financial performance and the value of our operating properties held from time to time as well as those securing our loan assets, and those held by the REITs in which we invest, which operating properties are subject to the risks normally associated with the ownership, operation and disposal of real estate properties and real estate related assets, including:
   
adverse changes in general and local economic conditions which affect the demand for real estate assets;
   
competition from other properties;
   
increases in interest rates;
   
reduced availability of financing;
   
the cyclical nature of the real estate industry and possible oversupply of, or reduced demand for, properties in the markets in which our investments are located;
   
the attractiveness of our properties to tenants and purchasers;
   
how well we manage our properties;
   
changes in market rental rates and our ability to rent space on favorable terms;
   
the financial condition of our tenants and borrowers including their becoming insolvent and bankrupt;
   
the need to periodically renovate, repair and re-lease space and the costs thereof;
   
increases in maintenance, insurance and operating costs;
   
civil unrest, armed conflict or acts of terrorism against the United States; and
   
earthquakes floods and other natural disasters or acts of God that may result in uninsured losses.
In addition, changes to applicable federal, state and local regulations, zoning and tax laws and potential liability under environmental and other laws affect real estate values. Further, throughout the period that we own real property, regardless of whether or not a property is producing any income, we must make significant expenditures, including those for property taxes, maintenance, insurance and related charges and debt service. The risks associated with real estate investments may adversely affect our operating results and financial position, and therefore the funds available for distribution to you as dividends.
We may change our investment and operational policies.
We may change our investment and operating strategy either voluntarily or as result of changing economic conditions, including our policies with respect to investments, acquisitions, growth, operations, indebtedness, capitalization and distributions at any time which could result in our making investments that are different from, and possibly riskier than, our current investments. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect our financial condition, results of operations, share price and our ability to make distributions.
We may not be able to invest our cash reserves in suitable investments.
As of December 31, 2010, we had approximately $45,257,000 of cash and cash equivalents available for investment. Our ability to increase entity value is dependent upon our ability to grow our asset base by investing these funds, as well as additional funds which we may raise or borrow, in real estate related assets that will ultimately generate more favorable returns.
We may not be able to obtain capital to make investments.
As a REIT, we are dependent primarily on external financing to fund the growth of our business because one of the requirements for a REIT is that it distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its shareholders. Accordingly, to the extent we are unable to obtain debt or equity financing it will likely have a material adverse affect on our financial condition and results of operations, our stock price and our ability to pay dividends to our shareholders.

 

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We are subject to significant competition and we may not compete successfully.
We have significant competition with respect to our acquisition of operating properties and our acquisition and origination of loan assets with many other companies, including other REITs, insurance companies, commercial banks, private investment funds, hedge funds, specialty finance companies and other investors some of which may have a lower cost of funds and access to funding sources that are not available to us. In addition, 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.
Investing through ventures presents additional risks.
Our investments in ventures present additional risks such as our having objectives that differ from those of our partners or in the investments we make, becoming involved in disputes concerning operations, or possibly competing with those persons for investments unrelated to our venture. In addition, where we do not control the venture, we rely on the internal controls and financial reporting controls of our partners and, as such, their failure to comply with applicable standards may adversely affect us.
Investing in private companies involves specific risks.
We have held and may acquire additional ownership interests in private companies not subject to the reporting requirements of the SEC. Investments in private businesses involve a higher degree of business and financial risk, which can result in substantial losses and accordingly should be considered speculative. There is generally no publicly available information about these private companies, and we will rely significantly on the due diligence of our Advisor to obtain information in connection with our investment decisions.
Our due diligence may not reveal all of the liabilities associated with a proposed investment and may not reveal other weaknesses.
There can be no assurance that due diligence by our Advisor in connection with a new investment will uncover all relevant facts which could adversely affect the value of the investment and the success of the investment.
We face risks associated with property acquisitions.
We acquire properties and portfolios of properties, including large portfolios that would increase our size and potentially alter our capital structure. Although we enter into these acquisitions with the belief that they will enhance our future financial performance, the success of such transactions is subject to a number of factors, including the risk that:
   
we may not be able to obtain financing for acquisitions on favorable terms;
   
acquired properties may fail to perform as expected;
   
the actual costs of repositioning or redeveloping acquired properties may be higher than our estimates;
   
acquired properties may be located in new markets where we may have limited knowledge and understanding of the local economy, an absence of business relationships in the area or unfamiliarity with local governmental and permitting procedures; and
   
we may not be able to efficiently integrate acquired properties, particularly portfolios of properties, into our organization and manage new properties in a way that allows us to realize cost savings and synergies.
In the future we may acquire properties or portfolios of properties through tax deferred contribution transactions in exchange for partnership interests in our Operating Partnership. This acquisition structure has the effect, among other factors, of reducing the amount of tax depreciation we can deduct over the tax life of the acquired properties, and typically requires that we agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the acquired properties and/or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions on dispositions could limit our ability to sell an asset during a specified time, or on terms, that would be favorable absent such restrictions.

 

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Acquired properties may subject us to known and unknown liabilities.
Properties that we acquire may be subject to known and unknown liabilities for which we would have no recourse, or only limited recourse, to the former owners of such properties. As a result, if a liability were asserted against us based upon ownership of an acquired property, we might be required to pay significant sums to settle it, which could adversely affect our financial results and cash flow. Unknown liabilities relating to acquired properties could include:
   
liabilities for clean-up of pre-existing disclosed or undisclosed environmental contamination;
   
claims by tenants, vendors or other persons arising on account of actions or omissions of the former owners of the properties; and
   
liabilities incurred in the ordinary course of business.
Failure to renew expiring leases could adversely affect our financial condition.
We are subject to the risk that, upon expiration, leases may not be renewed, the space may not be relet or the terms of renewal or reletting, including the cost of any required renovations, may be less favorable than the prior or current lease terms. This risk is substantial with respect to our net leased properties as single tenants lease 100% of each property. Thirteen of our properties, containing an aggregate of approximately 2,560,000 square feet of space are net leased to six different tenants. Leases accounting for approximately 5% of the aggregate annualized base rents from our operating properties for 2010, representing approximately 5% of the net rentable square feet at the properties, are scheduled to expire in 2011. The lease at our Churchill, Pennsylvania property which accounted for approximately $3,100,000 in annual rental revenue in 2010, expired December 31, 2010. Other leases grant tenants early termination rights upon payment of a termination penalty. Lease expirations will require us to locate new tenants and negotiate replacement leases with them. The costs for tenant improvements, tenant concessions and leasing commissions with respect to new leases are traditionally greater than costs relating to renewal leases. If we are unable to promptly relet or renew leases for all or a substantial portion of the space subject to expiring leases, or if the rental rates upon such renewal or reletting are significantly lower than expected, our revenue and net income could be adversely affected.
We are subject to risks associated with the financial condition of our and our borrower’s tenants.
Our tenants or tenants at properties securing our loan assets may experience a downturn in their business resulting in their inability to make rental payments when due. In addition, a tenant may seek the protection of bankruptcy, insolvency or similar laws, which could result in the rejection and termination of such tenant’s lease and cause a reduction in our cash flow. If this were to occur at a net lease property, the entire property would become vacant.
We cannot evict a tenant solely because of its filing for bankruptcy. A bankruptcy court, however, may authorize a tenant to reject and terminate its lease. In such a case, our claim against the tenant for past due rent and unpaid future rent would be subject to a statutory cap that might be substantially less than the remaining rent owed under the lease. In any event, it is unlikely that a bankrupt tenant will pay the entire amount it owes us under a lease. The loss of rental payments from tenants could adversely affect our financial condition and results of operations.
Similarly, if a tenant at a property securing a loan asset fails to meet its rental obligations, the borrower may have insufficient funds to satisfy the debt service resulting in a default on our loan asset. Additionally, the loss of a tenant at a property securing a loan asset could negatively impact the value of the property and, therefore, our collateral.
The loss of a major tenant could adversely affect our financial condition.
We are and expect that we will continue to be subject to a degree of tenant concentration at certain of our operating properties and the properties securing our loan assets. As indicated above, we are subject to risks associated with the financial condition of our tenants and tenants at properties securing our loan assets. In the event that a tenant occupying a significant portion of one or more of our properties or whose rental income represents a significant portion of the rental revenue at such property or properties were to experience financial weakness, default on its lease, elect not to renew its lease or file bankruptcy it would negatively impact our financial condition and results of operations. Similarly, if a tenant occupying a significant portion of one or more of the properties securing our loan assets or whose rental income represents a significant portion of the rental revenue at such property or properties experiences financial weakness defaults on its lease, elects not to renew its lease or files for bankruptcy, it would negatively impact our financial condition and results of operations.

 

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We may experience increased operating costs, which might reduce our profitability.
Our properties are subject to increases in operating expenses such as for cleaning, electricity, heating, ventilation and air conditioning, administrative costs and other costs associated with security, landscaping and repairs and maintenance of our properties. In general, under our leases with tenants, we pass through all or a portion of these costs to them. There can be no assurance that tenants will actually bear the full burden of these higher costs, or that such increased costs will not lead them, or other prospective tenants, to seek office space elsewhere. If operating expenses increase, the availability of other comparable office space in the geographic markets of our properties might limit our ability to increase rents; if operating expenses increase without a corresponding increase in revenues, our profitability could diminish and limit our ability to make distributions to shareholders.
We leverage our portfolio, which may adversely affect our financial condition and results of operations.
We seek to leverage our portfolio through borrowings. Our return on investments and cash available for distribution to holders of our Series B-1 and Series C Preferred Shares and Common Shares may be reduced to the extent that changes in market conditions make new borrowings or refinancing of existing debt difficult or even impossible or cause the cost of our financings to increase relative to the income that can be derived from the assets. Our debt service payments reduce the cash available for distributions to holders of Series B-1 and Series C Preferred Shares and Common Shares. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or forced sale to satisfy our debt obligations. A decrease in the value of the assets may lead to a requirement that we repay certain existing or future credit facilities. We may not have the funds available, or the ability to obtain replacement financing, to satisfy such repayments.
Interest rate fluctuations may reduce our investment return.
Certain of our loan obligations and loan assets have floating interest rates. In such cases, an increase in interest rates would increase our loan obligations while a decrease in interest rates would decrease the interest received on our loan assets. Where possible we seek to mitigate these risks by acquiring interest rate cap agreements, rate collars and other similar protections. To the extent we have not mitigated these risks or our actions are ineffective, a fluctuation in interest rates could negatively impact our cash flow due to an increase in loan obligations or a decrease in interest received on our loan assets.
We engage in hedging transactions that may limit gains or result in losses.
We have and may continue to use hedging instruments in our risk management strategy to limit the effects of changes in interest rates on our operations. A hedge may not be effective in eliminating all of the risks inherent in any particular position. Further, we have and could in the future recognize losses on a hedge position which adversely effects our financial condition and results of operations. In addition, we run the risk of default by a counterparty to a hedging arrangement.
We may be unable to refinance our existing debt or preferred share financings or obtain favorable refinancing terms.
We are subject to the normal risks associated with debt and preferred share financings, including the risk that our cash flow will be insufficient to meet required payments of principal and interest on debt and distributions and redemption payments to holders of preferred shares and the risk that indebtedness on our properties, or unsecured indebtedness, will not be able to be renewed, repaid or refinanced when due, or that the terms of any renewal or refinancing will not be as favorable as the terms of such indebtedness. These risks are exacerbated by the current tightened lending requirements for real estate related assets and in some cases the inability to refinance real estate indebtedness. If we were unable to refinance indebtedness or preferred share financings on acceptable terms, or at all, we might be forced to dispose of one or more of our investments on disadvantageous terms, which might result in losses to us, which could have a material adverse affect on us and our ability to pay distributions to our holders of Preferred Shares and Common Shares. Furthermore, if a property is mortgaged or a loan pledged to secure payment of indebtedness and we are unable to meet the debt payments, the lender could foreclose upon the property or the loan, appoint a receiver or obtain an assignment of rents and leases or pursue other remedies, all with a consequent loss of revenues and asset value to us. Foreclosures could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements.

 

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The loans we invest in are subject to delinquency and loss.
Our loan assets are directly or indirectly secured by income producing property. The ability of a borrower to make payments on the loan underlying these securities is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower since the underlying loans are generally non-recourse in nature. These loans are subject to risks of delinquency and foreclosure as well as risk associated with the capital markets. If a borrower were to default on a loan, it is possible that we would not recover the full value of the loan.
We may be unable to foreclose on the collateral securing our loan assets on a timely basis.
In certain states foreclosing on a property can be a lengthy and costly process. In addition, a borrower can file for bankruptcy or raise defenses that could delay our ability to realize on our collateral on a timely basis. In such instances, the increased costs and time required to realize on our collateral would likely result in a reduced return on the investment.
The subordinate loan assets we invest are subject to risks relating to the structure and terms of the transactions, and there may not be sufficient funds or assets to satisfy our subordinate notes, which may result in losses to us.
We invest in loan assets that are subordinate in payment and collateral to more senior loans. If a borrower defaults or declares bankruptcy, after the more senior obligations are satisfied, there may not be sufficient funds or assets remaining to satisfy our subordinate notes. Because each transaction is privately negotiated, subordinate loan assets can vary in their structural characteristics and lender rights, including our rights to control the default or bankruptcy process. The subordinate loan assets that we invest in may not give us the right to demand foreclosure as a subordinate debtholder. Furthermore, the presence of intercreditor agreements, co-lender agreements and participation agreements may limit our ability to amend the loan documents, assign the loans, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire possession of underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process.
The widening of credit spreads could have a negative impact on the value of our loan asset and REIT debt securities.
The fair value of our loan assets is dependent upon the yield demanded on these assets by the market based on the underlying credit as well as general economic conditions. Although many of our directly held loan assets were purchased at significant discounts, a further deterioration of the real estate markets or a large supply of these loan assets available for sale combined with reduced demand will generally cause the market to require a higher yield on these loan assets, resulting in a higher, or “wider,” spread over the benchmark rate of such loan assets. Under these conditions, the value of the loan assets in our portfolio would decline.
Our investments in REIT debt securities are also subject to changes in credit spreads as their value is dependent upon the yield demanded on these securities by the market based on the underlying credit. Excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these real estate securities, resulting in the use of a higher, or “wider,” spread over the benchmark rate to value such securities. Under such conditions, the value of our REIT debt securities portfolio would tend to decline. Such changes in the market value of our portfolio may adversely affect our financial condition and results of operations.
The deterioration of the credit markets has had an adverse impact on the ability of borrowers to obtain replacement financing.
The deterioration of credit markets has made it extremely difficult for borrowers to obtain mortgage financing. The inability of borrowers to obtain replacement financing has led and will likely continue to lead to more loan defaults thereby resulting in expensive and time consuming foreclosure actions and/or negotiated extensions to existing loans beyond their current expirations on terms which may not be as favorable to us as the existing loans.
A prolonged economic slowdown, a lengthy or severe recession or continued instability in the credit markets could harm our operations and viability.
A prolonged economic slowdown, a lengthy or severe recession or the continued instability in the credit market has and will affect our operations and viability in a number of ways including:
   
Depressing prices for our investments, operating properties and loan assets;
   
Decreasing interest income received or increases in interest expenses paid;
   
Reducing the number of potential purchasers for our assets;
   
Increasing risk of default on loan assets;
   
Limiting the ability to obtain new or replacement financing; and
   
Limiting the ability to sell additional debt or equity securities.

 

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Many of our investments are illiquid, and we may not be able to adjust our portfolio in response to changes in economic and other conditions, which may result in losses to us.
Many of our investments are relatively illiquid and, therefore, our ability to sell or purchase assets in response to a change in economic or other conditions may be limited. The requirements of the Code that we hold assets for a set period of time or risk losing status as a REIT also may limit our ability to sell investments. These considerations could make it difficult for us to dispose of assets, even if a disposition were in the best interest of our shareholders. As a result, our ability to adjust our portfolio in response to changes in economic and other conditions may be relatively limited, which may result in losses and lost opportunities.
Our investments in REIT securities are subject to specific risks relating to the particular REIT issuer of the securities and to the general risks of investing in REITs.
Our investments in REIT securities involve special risks. These risks include many, if not all, of the foregoing risks which apply to an investment in us, including: (i) risks generally incident to interests in real estate assets; (ii) risks associated with the failure to maintain REIT qualification; (iii) risks that may be presented by the type and use of a particular property; and (iv) risks that the issuer of the security may reduce or eliminate expected dividend payments.
Some of our potential losses may not be covered by insurance.
We use our discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of the lost investment and also may result in certain losses being totally uninsured. Inflation, changes in building codes, zoning or other land use ordinances, environmental considerations, lender imposed restrictions or other factors might not make it feasible to use insurance proceeds to replace the building after such building has been damaged or destroyed. Under such circumstances, the insurance proceeds, if any, received by us might not be adequate to restore our economic position with respect to such property. With respect to our net leased properties, under the lease agreements for such properties, the tenant is required to adequately insure the property, but should a loss occur their failure or inability to have adequate coverage might adversely affect our economic position with respect to such property.
We have significant distribution obligations to holders of our Series B-1 and Series C Preferred Shares.
The provisions of our Series B-1 and Series C Preferred Shares currently require us to make quarterly distributions presently aggregating approximately $405,000 or $1,619,000 annually before any distributions may be made on our Common Shares.
Covenants in our debt instruments could adversely affect our financial condition and our ability to make future investments.
Debt instruments under which we are an obligor contain customary covenants such as those that limit our ability, without the prior consent of the lender, to further encumber, directly or indirectly, the applicable property. Our credit facility contains, and other loans that we may obtain in the future may contain, customary restrictions, requirements and other limitations on our ability to incur indebtedness. These restrictions can include, among other things, a limitation on our ability to incur debt based upon the level of our ratio of total debt to total assets, our ratio of secured debt to total assets, our ratio of EBITDA to interest expense and fixed charges, and a requirement for us to maintain a certain level of unencumbered assets to unsecured debt. Our ability to borrow under our credit facility with KeyBank National Association is subject to compliance with certain other covenants including the absence of factors both within and outside of our control. If we fail to comply with our covenants, it would cause a default under the applicable debt instrument, and we may then be required to repay such debt with funds from other sources which may not be available to us, or be available only on unattractive terms. Further, a default under a debt instrument could limit our ability to obtain additional equity or debt financing in the future, either of which would adversely affect our financial condition and results of operations.

 

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Covenants in our Preferred Shares limit our ability to issue additional preferred shares.
Our Series B-1 Preferred Shares restrict our ability to issue shares senior or pari passu in priority the Series B-1 Preferred Shares without the consent of two-thirds in interest of our Series B-1 Preferred Shares. Similarly, our Series C Preferred Shares restrict our ability to issue shares senior or, subject to limited issuance rights, pari passu in priority the Series C Preferred Shares without the consent of two-thirds in interest of our Series C Preferred Shares. Accordingly, our ability to raise capital through the issuance of additional preferred shares is significantly restricted until the Series B-1 and Series C Preferred Shares are redeemed.
Future issuances and sales of equity or debt interests may affect the market price of our Common Shares and the amount of dividends payable to our shareholders.
The actual issuance of additional common or preferred shares or the sale of debt securities by us may decrease the market price of our Common Shares. In paying dividends on our Common Shares we endeavor to have our dividends track recurring cash flow from operations. Accordingly, as we issue additional Common Shares, the per share dividend will likely decrease until such time as we deploy the proceeds from such issuance of Common Shares in investments which increase our recurring cash flow.
Our focus on total return investing may impact our ability to maintain our dividend rate.
Our focus on a total return value approach to investing may result in our inability to maintain the current dividend rate as we do not necessarily seek assets that provide recurring or potentially recurring cash flow but seek to invest in assets that we believe will provide us with a superior risk-adjusted total return which encompasses both current return and capital appreciation. Accordingly, the true value of an investment may not be realized until such investment is liquidated.
If we issue preferred equity or debt we may be exposed to additional restrictive covenants and limitations on our operating flexibility, which could adversely affect our ability to pay dividends.
If we decide to issue preferred equity or debt in the future, it is likely that they will be governed by an indenture or other instrument containing covenants that may restrict our operating flexibility which could have an adverse effect on the market price of our Common Shares or our ability to pay dividends.
We may fail to remain qualified as a REIT, which would reduce the cash available for distribution to our shareholders.
Qualification as a REIT for federal income tax purposes is governed by highly technical and complex provisions of the Code for which there are only limited judicial or administrative interpretations. Our qualification as a REIT also depends on various facts and circumstances that are not entirely within our control. In addition, legislation, new regulations, administrative interpretations or court decisions might change the tax laws with respect to the requirements for qualification as a REIT or the federal income tax consequences of qualification as a REIT. Although we currently intend to operate in a manner designed to allow us to continue to qualify as a REIT, future economic, market, legal, tax or other considerations might cause us to elect to revoke the REIT election. In that event, we and our shareholders would no longer be entitled to the federal income tax benefits applicable to a REIT.
If, with respect to any taxable year, we were to fail to maintain our qualification as a REIT or elect to revoke our REIT election, we would not be able to deduct distributions to our shareholders in computing our taxable income and would have to pay federal corporate income tax (including any applicable alternative minimum tax) on our taxable income. If we had to pay federal income tax, the amount of money available to distribute to our shareholders would be reduced for the year or years involved. In addition, we would be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost and thus our cash available for distribution to our shareholders would be reduced in each of those years, unless we were entitled to relief under relevant statutory or regulatory provisions.
In order to maintain our status as a REIT, we may be forced to borrow funds or sell assets during unfavorable market conditions.
As a REIT, we must distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, to our shareholders. To the extent that we satisfy the REIT distribution requirement but distribute less than 100% of our taxable income, we will be subject to federal and, where applicable, state corporate income tax on our undistributed taxable income. In addition, if we fail to distribute at least 90% of our annual REIT taxable income, subject to certain adjustments, we will be subject to a 4% nondeductible excise tax.

 

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From time to time, we may have taxable income greater than our cash available for distribution to our shareholders (for example, due to substantial non-deductible cash outlays, such as capital expenditures or principal payments on debt). If we did not have other sources of funds available in these situations, we could be required to borrow funds, sell investments at disadvantageous prices or find alternative sources of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid income and excise taxes in a particular year. Additionally, we could elect to pay a portion of our required dividend in Common Shares. Each of these alternatives could increase our operating costs and diminish our rate of growth.
Factors that may cause us to lose our New York Stock Exchange listing.
We might lose our listing on the New York Stock Exchange depending on a number of factors, including failure to qualify as a REIT, or our not meeting the New York Stock Exchange’s requirements, including those relating to the number of shareholders, the price of our Common Shares and the amount and composition of our assets.
Ownership limitations in our bylaws may adversely affect the market price of our Common Shares.
Our bylaws contain an ownership limitation that is designed to prohibit any transfer of Common Shares or Preferred Shares that would result in our being “closely-held” within the meaning of Section 856(h) of the Code. This ownership limitation, which may be waived by our Board of Trustees, generally prohibits any single shareholder, or any group of affiliated shareholders, from beneficially or constructively owning more than 9.8% of our outstanding Common Shares. Our Board of Trustees has waived this ownership limitation in the past where there is believed to be a benefit derived by the Company from granting such waiver and the party obtaining the waiver provides assurances that the issuance of the waiver will not result in the Company becoming, or likely becoming, “closely held.” Unless the Board of Trustees waives the restrictions or approves a bylaw amendment, Common Shares owned by a person or group of persons in excess of 9.8% of our outstanding Common Shares are not entitled to any voting rights, are not considered outstanding for quorum or voting purposes, and are not entitled to dividends, interest or any other distributions with respect to the Common Shares. The ownership limit may have the effect of inhibiting or impeding a change of control or a tender offer for our Common Shares.
We must manage our investments in a manner that allows us to rely on an exemption from registration under The Investment Company Act in order to avoid the consequences of regulation under that Act.
We intend to operate our business so that we are exempt from registration as an investment company under the Investment Company Act of 1940, as amended. Therefore, the assets that we may invest in, or acquire, are limited by the provisions of the Investment Company Act and the rules and regulations promulgated thereunder. If we are required to make investments in order to be exempt from registration, such investments may not represent an optimum use of our capital when compared to other available investments.
Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make unanticipated expenditures that adversely affect our financial condition and results of operations.
All of our properties are required to comply with the Americans with Disabilities Act, which we refer to as the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Although we believe that our properties are in compliance with the ADA, it is possible that we may have to incur additional expenditures which, if substantial, could adversely affect our financial condition and results of operations.
In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by local, state and federal governmental agencies and bodies and become applicable to our properties. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have an adverse affect on our financial condition and results of operations.

 

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We may incur costs to comply with environmental laws.
The obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation, may increase our operating costs. Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on or under the property. Environmental laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances and whether or not such substances originated from the property. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect our ability to borrow by using such property as collateral. We maintain insurance related to potential environmental issues on our properties which are not net leased which may not be adequate to cover all possible contingencies.
Ability of our Advisor and other third parties directly affects our financial condition.
Other than for severe economic conditions or natural forces which may be unanticipated or uncontrollable, the ultimate value of our assets and the results of our operations will depend on the ability of our Advisor and other third parties we retain to operate and manage our assets in a manner sufficient to maintain or increase revenues and control our operating and other expenses in order to generate sufficient cash flows to pay amounts due on our indebtedness and to pay dividends to our shareholders.
We are dependent on our Advisor and the loss of our Advisor’s key personnel could harm our operations and adversely affect the value of our shares.
We have no paid employees. Our officers are employees of our Advisor. We have no separate facilities and are completely reliant on our Advisor who has significant discretion as to the implementation of our investment and operating strategies. We are subject to the risk that our Advisor will terminate its Advisory Agreement and that no suitable replacement will be found. Furthermore, we are dependent on the efforts, diligence, skill, network of business contacts and close supervision of all aspects of our business by our Advisor and, in particular, Michael Ashner, Chairman of our Board of Trustees and our chief executive officer, Carolyn Tiffany, our president, as well as our other executive officers. While we believe that we could find replacements for these key personnel, the loss of their services could have a negative impact on our operations and the market price of our shares.
The incentive fee payable to our Advisor may be substantial.
Pursuant to the terms of the Advisory Agreement, our Advisor is entitled to receive an incentive fee equal to 20% of any amounts available for distribution in excess of a threshold amount. The incentive fee is only payable at such time, if at all, (i) when holders of our Common Shares receive aggregate distributions above a threshold amount or (ii) upon termination of the Advisory Agreement, if the value of our assets exceed the threshold amount based on then current market values and appraisals. That is, the incentive fee is not payable annually but only at such time, if at all, as shareholders have received the threshold amount or, if the Advisory Agreement is terminated, the assets of the Trust exceed the threshold amount. At December 31, 2010, the threshold amount was approximately $468,193,000, which was equivalent to $16.58 for each of our Common Shares on a fully diluted basis. At such time as shareholders’ equity exceeds the threshold amount, we will record a liability in our financial statements equal to approximately 20% of the difference between shareholders’ equity and the threshold amount in accordance with generally accepted accounting principles.
Termination of the Advisory Agreement may be costly or not in our best interest.
Termination of the Advisory Agreement either by us or our Advisor may be costly. Upon termination of the Advisory Agreement, our Advisor would be entitled to a termination fee equal to the incentive fee based on an appraised valuation of our assets assuming we were then liquidated. The amount payable on termination of the Advisory Agreement could be substantial which may have a negative effect on the price of our Common Shares. Further, affiliates of our Advisor hold approximately 12.3% of our outstanding Common Shares and serve as our executive officers. Accordingly, if we were inclined to terminate the Advisory Agreement, the ownership position of our Advisor in our Common Shares could result in other adverse effects to us and the price of our Common Shares.
ITEM 1B — UNRESOLVED STAFF COMMENTS
None.

 

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ITEM 2 — PROPERTIES
The following tables set forth certain information relating to operating properties in which we have an ownership interest. All information presented is as of December 31, 2010, except as noted. Dollars are stated in thousands.
Table of Operating Office, Retail and Industrial Properties
CONSOLIDATED PROPERTIES
                                                                         
                                        Major     ($000’s)         ($000’s)     Debt  
Description and   Year     Trust’s     Rentable     (**)     Major Tenants   Tenants’     Cost Less     Ownership   Debt     Maturity  
Location   Acquired     Ownership     Square Feet     % Leased     (Lease /Options Exp)   Sq. Feet.     Depreciation     of Land   Balance     & Int Rate  
 
                                                                       
Retail
                                                                       
 
                                                                       
Atlanta, GA
                                  The Kroger Co.                                    
    2004       100 %     61,000       100 %   (2016/2026)     61,000     $ 3,928     Ground Lease     (1 )     (1 )
 
                                                                       
Denton, TX
                                  Fitness Evolution                                    
    2004       100 %     46,000       63 %   (2012)     29,000       2,250     Fee     (1 )     (1 )
 
                                                                       
Greensboro, NC
                                  The Kroger Co.                                    
    2004       100 %     47,000       100 %   (2017/2037)     47,000       3,219     Ground Lease     (1 )     (1 )
 
                                                                       
Lousiville, KY
                                  The Kroger Co.                                    
    2004       100 %     47,000       100 %   (2015/2040)     47,000       2,681     Fee     (1 )     (1 )
 
                                                                       
Memphis, TN
                                  The Kroger Co.                                    
    2004       100 %     47,000       100 %   (2015/2040)     47,000       1,281     Fee     (1 )     (1 )
 
                                                                       
Seabrook TX
                                  The Kroger Co.                                    
    2004       100 %     53,000       100 %   (2015/2040)     53,000       1,798     Fee     (1 )     (1 )
 
                                                                       
St. Louis, MO (2)
    2004       100 %     46,000       0 %   Vacant     46,000       1,487     Fee     (1 )     (1 )
 
                                                               
 
                                                                       
Subtotal Retail
                    347,000                           16,644           19,002 (1)    
 
                                                               
(Continued on next page)

 

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CONSOLIDATED PROPERTIES (Continued)
                                                                         
                                        Major     ($000’s)         ($000’s)        
Description and   Year     Trust’s     Rentable     (**)     Major Tenants   Tenants’     Cost Less     Ownership   Debt     Debt Maturity  
Location   Acquired     Ownership     Square Feet     % Leased     (Lease /Options Exp)   Sq. Feet.     Depreciation     of Land   Balance     & Int Rate  
 
                                                                       
Office
                                                                       
 
                                                                       
Amherst, NY (3)
                                  Ingram Micro Systems                                 10/2013  
    2005       100 %     200,000       100 %   (2013/2023)     200,000     $ 17,083     Fee   $ 16,117       5.65 %
 
                                                                       
Andover, MA
                                  PAETEC Comm.                                 03/2011  
    2005       100 %     93,000       100 %   (2022/2037)     93,000       7,448     Fee     6,135       6.60 %
 
                                                                       
Chicago, IL
                                  The Gettys Group                                 03/2016  
(One East Erie / Marc Realty)
    2005       80 %     126,000       87 %   (2012/2016)     13,000       21,794     Fee     20,828       5.75 %
 
                                  River North Surgery                                    
 
                                  (2015/ n/a)     15,000                              
 
                                                                       
Chicago, IL
                                  Bally Total Fitness                                 04/2012  
(River City / Marc Realty )
    2007       60 %     253,000       72 %   (2013/2021)     55,000       14,854     Fee     9,100       6.00 %
 
                                  MCI d/b/a Verizon                                    
 
                                  (2019/2023)     37,000                              
 
                                                                       
Houston, TX
                                  Spectra Energy                                 04/2016  
    2004       8 %     614,000       100 %   (2018/2028)     614,000       60,042     Fee     60,351       6.34 %
 
                                                                       
Indianapolis, IN
                                  No Tenants                                 04/2015  
(Circle Tower)
    1974       100 %     111,000       84 %   Over 10%           4,732     Fee     4,245       5.82 %
 
                                                                       
Lisle, IL
                                  United Healthcare                                 06/2016  
    2006       100 %     169,000       52 %   (2014/ n/a)     41,000       18,709     Fee     16,972       6.26 %
 
                                                                       
Lisle, IL
                                  T Systems, Inc.                                 06/2016  
    2006       100 %     67,000       85 %   (2011)     35,000       8,166     Fee     6,932       6.26 %
 
                                  ABM Janitorial                                    
 
                                  (2012/2014)     11,000                              
 
                                  Zenith Insurance                                    
 
                                  (2011)     10,000                              
 
                                                                       
Lisle, IL
                                  Ryerson                                 03/2017  
(Marc Realty)
    2006       60 %     54,000       100 %   (2018/2028)     54,000       3,674     Fee     5,600       5.55 %
 
                                                                       
Orlando, FL
                                  Siemens Real Estate, Inc.                                 07/2017  
    2004       100 %     256,000       100 %   (2017/2042)     256,000       14,643     Ground Lease     38,657       6.40 %
 
                                                                       
Plantation, FL
                                  BellSouth                                    
    2004       100 %     133,000       100 %   (2020/2035)     133,000       11,567     Fee     (1 )     (1 )
 
                                                                       
South Burlington, VT
                                  Fairpoint Comm.                                 03/2011  
    2005       100 %     56,000       100 %   (2014/2029)     56,000       3,021     Ground Lease     2,629       6.60 %
 
                                                                       
Phoenix, AZ
(Deer Valley Professional Center)
    2010       96.5 %     82,000       61 %   United Healthcare (2017/2027)     42,000       8,126     Fee           n/a  
 
                                                                       
Englewood, CO
                                  RGN-Denver LLC                                    
(Crossroads I)
    2010       100.0 %     118,000       55 %   (2015/2025)     17,000       7,427     Fee           n/a  
 
                                                                       
Englewood, CO Catholic Health Initiatives
(Crossroads II)
    2010       100.0 %     118,000       58 %   (2011)     30,000       7,938     Fee           n/a  
 
                                                                 
Subtotal — Office
                    2,450,000                         209,224           187,566          
 
                                                                 
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CONSOLIDATED PROPERTIES (Continued)
                                                                         
                    Units /                 Major     ($000’s)         ($000’s)        
Description and   Year     Trust’s     Rentable     (**)     Major Tenants   Tenants’     Cost Less     Ownership   Debt     Debt Maturity  
Location   Acquired     Ownership     Square Feet     % Leased     (Lease /Options Exp)   Sq. Feet.     Depreciation     of Land   Balance     & Int Rate  
 
                                                                       
Other
                                                                       
 
                                                                       
Residential
                                                                       
 
                                                                       
Meriden, CT
                                                                    02/2012  
(Newbury Apts)
    2010       100 %   180 Units     92 %   n/a     n/a       25,115     Fee   $ 23,875       5.83 %
 
                                                                       
Warehouse
                                                                       
 
                                                                       
Jacksonville, FL
                                  Football Fanatics                                    
 
    2004       100 %     587,000       100 %   (2015/2024)     558,000       10,818     Fee     (1 )     (1 )
 
                                                                       
Mixed Use
                                                                       
 
                                                                       
Churchill, PA (4)
    2004       100 %     1,008,000       100 %   Viacom, Inc.
(2010)
    1,008,000       10,466     Ground Lease     (1 )     (1 )
 
                                                                 
Subtotal — Other
                    1,595,000                           46,399           23,875          
 
                                                                 
Total Consolidated Properties             4,392,000                         $ 272,267         $ 230,443          
 
                                                                 
     
(**)  
Occupancy rates include all signed leases, including space undergoing tenant improvements.
 
 
(1)  
Our retail properties and our properties located in Churchill, Pennsylvania, Plantation, Florida, and Jacksonville, Florida collateralized $19,002 of mortgage debt at an interest rate of LIBOR + 1.75% which matures in June 2011.
 
(2)  
On February 8, 2011 we entered into a contract to sell this property subject to the buyer’s due to diligence. We anticipate that the sale of this property will be consumated during the second quarter of 2011.
 
(3)  
The Amherst, New York office property represents two separate buildings. The ground underlying the properties is leased to us by the local development authority pursuant to a ground lease which requires no payment. Effective October 31, 2013, legal title to the ground will vest with us.
 
(4)  
The lease term with respect to our property located in Churchill, Pennsylvania expired on December 31, 2010. We currently are in litigation with the former tenant, Viacom, related to the condition of the property.

 

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EQUITY INVESTMENTS
                                                                         
                                                ($000’s)                  
                                        Major     Equity         ($000’s)        
Description and   Year     Trust’s     Rentable     (**)     Major Tenants   Tenants’     Investment     Ownership   Debt     Debt Maturity  
Location   Acquired     Ownership     Square Feet     % Leased     (Lease /Options Exp)   Sq. Feet.     Balance     of Land   Balance (1)     & Int Rate  
Marc Realty Portfolio — Equity Investments
                                                                       
 
                                                                       
8 South Michigan,
                                                                    08/2011  
Chicago, IL
    2005       50 %     174,000       94 %   No tenants over 10%         $ 7,087     Ground Lease   $ 3,886       6.87 %
 
                                                                       
11 East Adams,
                                  IL School of Health                                 08/2011  
Chicago, IL
    2005       49 %     161,000       78 %   (2015/2020)     28,700       3,223     Fee     9,999     Libor + 2 %
 
                                                                       
29 East Madison,
                                  Computer Systems Institute                                 05/2013  
Chicago, IL
    2005       50 %     235,000       90 %   (2020/2030)     25,000       7,720     Fee     11,130       5.20 %
 
                                                                       
30 North Michigan,
                                                                    08/2014  
Chicago, IL
    2005       50 %     221,000       91 %   No tenants over 10%           12,080     Fee     13,097       5.99 %
 
                                                                       
223 West Jackson, Chicago, IL
                                                                    06/2012  
(Brooks Building)
    2005       50 %     168,000       59 %   No tenants over 10%           7,452     Fee     7,794       6.92 %
 
                                                                       
4415 West Harrison, Hillside, IL
                                  North American Medical Mgmt                                 12/2015  
(High Point)
    2005       50 %     192,000       67 %   (2015/2020)     20,400       6,275     Fee     4,610       5.62 %
 
                                                                       
2000-60 Algonquin, Shaumburg, IL
                                                                    02/2013  
(Salt Creek)
    2005       50 %     101,000       70 %   No tenants over 10%           2,344     Fee     (2 )   Libor + 2.75 %
 
                                                                       
1701 E. Woodfield,
                                                                    09/2015  
Shaumburg, IL
    2005       50 %     175,000       87 %   No tenants over 10%           4,221     Fee     5,755     Libor + 3 % (3)
 
                                                                       
2720 River Rd,
                                                                    10/2012  
Des Plains, IL
    2005       50 %     108,000       92 %   No tenants over 10%           4,123     Fee     2,581       6.095 %
 
                                                                       
3701 Algonquin,
                                  ISACA                                 02/2013  
Rolling Meadows IL
    2005       50 %     193,000       82 %   (2018/2024)     29,600       2,931     Fee     10,373     Libor + 2.75 %
 
                                  Relational Funding                                    
 
                                  (2013/ n/a)     27,400                              
 
                                                                       
2205-55 Enterprise,
                                  Consumer Portfolio                                 02/2013  
Westchester, IL
    2005       50 %     130,000       94 %   (2014/2019)     18,900       3,018     Fee     (2 )   Libor + 2.75 %
 
                                                                       
900-910 Skokie, Northbrook, IL
                                  MIT Financial Group                                 02/2011 (4)
(Ridgebrook)
    2005       50 %     119,000       78 %   (2016/ n/a)     12,600       1,676     Fee     5,405     Libor + 2 %
 
                                                                 
 
                                                                       
Subtotal — Marc Realty Portfolio
                    1,977,000                           62,150           86,236          
 
                                                                 
(Continued on next page)

 

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EQUITY INVESTMENTS (Continued)
                                                                         
                                                ($000’s)                  
                                        Major     Equity         ($000’s)        
Description and   Year     Trust’s     Rentable     (**)     Major Tenants   Tenants’     Investment     Ownership   Debt     Debt Maturity  
Location   Acquired     Ownership     Square Feet     % Leased     (Lease /Options Exp)   Sq. Feet.     Balance     of Land   Balance (1)     & Int Rate  
Sealy Venture Properties — Equity Investments
                                                                       
 
                                                                       
Atlanta, GA (5)
                                  Original Mattress                                 01/2012  
(Northwest Atlanta)
    2006       60 %     472,000       75 %   (2020/2025)     57,000     $ 2,479     Fee   $ 28,750       5.7 %
 
                                                                       
Atlanta, GA (6)
                                  Alere Health                                 11/2016  
(Newmarket)
    2008       68 %     470,000       66 %   (2011/ n/a)     76,000       6,647     Fee     37,000       6.12 %
 
                                                                       
Nashville, TN (7)
                                                                    05/2012  
(Airpark)
    2007       50 %     1,155,000       86 %   No tenants over 10%           2,778     Fee     74,000       5.77 %
 
                                                                 
 
                                                                       
Subtotal — Sealy Venture Properties
                    2,097,000                         $ 11,904         $ 139,750          
 
                                                                 
 
                                                                       
Total Equity Investments
                    4,074,000                                                  
 
                                                                     
     
(**)  
Occupancy rates include all signed leases including space undergoing tenant improvements
 
(1)  
Debt balance shown represents 100% of the debt encumbering the properties.
 
(2)  
Both the 2000-60 Algonquin and 2205-55 Enterprise Road Marc Realty properties are cross collateralized by a mortgage of $11,606 which is included in total debt balance.
 
(3)  
An interest rate swap agreement with a notional amount of $5,755 effectively converts the interest rate to a fixed rate of 4.78%.
 
(4)  
In February 2011, the maturity date was extended to May 2011 and the venture is currently negotiating with the lender to further extend the maturity date.
 
(5)  
Equity investment in Sealy Northwest Atlanta consists of 12 flex/office properties.
 
(6)  
Equity investment in Sealy Newmarket consists of six flex/office campus style properties
 
(7)  
Equity investment in Sealy Airpark consists of 13 light distribution and service center properties.

 

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PREFERRED EQUITY INVESTMENT
                                                                 
                                        ($000’s)                    
                                        Preferred                    
                                        Equity             ($000’s)      
Description and   Year     Trust’s     Rentable     (**)     Major Tenants   Investment     Ownership     Debt   Debt Maturity  
Location   Acquired     Ownership     Square Feet     % Leased     (Lease /Options Exp)   Balance     of Land     Balance (1)   & Int Rate  
 
                                                                       
Office
                                                               
 
                                                               
180 North Michigan
                                                               
Chicago, IL
                                  None over                         03/2011 (2)
(Marc Realty)
    2008       70 %     229,000       89 %   10%   $ 3,923     Fee   18,080     Libor+1.5 %(3)
     
(1)  
Debt balance shown represents 100% of the debt encumbering the properties.
 
(2)  
In February 2011, the venture elected to exercise the extension option, extending maturity to March 27, 2013.
 
(3)  
An interest rate swap agreement with a notional amount of $17,614 effectively converts the interest rate to a fixed rate of 4.55%.
GROUND LEASES
On certain of our properties we own the improvements and lease the land underlying the improvements pursuant to ground leases.
The following table sets forth the terms of the ground leases:
             
    Current Term       Lease Term Rents
Property Location   Expiration   Renewal Terms   Per Annum
 
           
Atlanta, GA
  9/30/2011   Three 5 year   $30,000 plus 1/2 of 1% of sales greater than $27,805,800 (1)
 
           
Churchill, PA
  12/31/2015   Five 5 year   $300,000 through current term and then fair market value
 
           
Greensboro, NC
  12/31/2012   Three 5-year and fifteen 1-year   $71,178 increased by approximately $12,000 for each successive renewal period plus 1% of sales over $36,213,850 (1)
 
           
Lafayette, LA (2)
  4/30/2013   Seven 5-year   $185,064 increased by 5% for each successive renewal term
 
           
Orlando, FL
  12/31/2017   Five 5-year   $1 though the current term and then fair market value (1)
 
           
South Burlington, VT
  1/2/2015   Three 5-year and one 10-year   None (1)
     
(1)  
The lease requires the tenant to perform all covenants under the ground lease including the payment of ground rent.
 
(2)  
We have determined that the fair market value of the property is less than the required ground rent payments and have stopped making any payments on the ground lease. We have received notice that as a result of the failure to make such payments the ground lease is in default.

 

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Operating Properties — Multi-Tenant
The following tables set forth certain information concerning lease expirations (assuming no renewals and excluding month to month leases) as of December 31, 2010 for our consolidated multi-tenant properties:
One East Erie Property — Chicago, Illinois
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    4       12,000     $ 313,000       11 %
2012
    1       12,000       254,000       9 %
2013
    4       11,000       387,000       14 %
2014
    3       19,000       495,000       17 %
2015 and beyond
    10       49,000       1,417,000       49 %
River City Property — Chicago, Illinois
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    2       2,000     $ 32,000       1 %
2012
    2       13,000       314,000       10 %
2013
    3       60,000       667,000       21 %
2014
    1       6,000       121,000       4 %
2015 and beyond
    5       90,000       2,021,000       64 %
Circle Tower — Indianapolis, Indiana
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    17       18,000     $ $225,000       17 %
2012
    9       10,000       158,000       12 %
2013
    7       21,000       298,000       22 %
2014
    2       5,000       61,000       4 %
2015 and beyond
    11       37,000       618,000       45 %
Corporetum Properties — Lisle, Illinois
550/650 Corporetum
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    2       5,000     $ 56,000       5 %
2012
    2       8,000       77,000       7 %
2013
    3       18,000       178,000       17 %
2014
    4       51,000       755,000       70 %
2015 and beyond
    3       7,000       12,000       1 %

 

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701 Arboretum
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    2       45,000     $ 673,000       80 %
2012
    1       11,000       150,000       18 %
2013
    1       1,000       15,000       2 %
2014 and beyond
                       
Jacksonville Property — Jacksonville, Florida
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
              $        
2012
                       
2013
                       
2014
                       
2015 and beyond
    2       587,000       386,000       100 %
Deer Valley Medical Building — Deer Valley, Arizona
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
              $        
2012
                       
2013
                       
2014
    1       2,000       50,000       31 %
2015 and beyond
    2       48,000       112,000       69 %
Crossroads I at Meridian— Englewood, Colorado
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    4       20,000     $ 361,000       34 %
2012
    1       2,000       40,000       4 %
2013
    1       10,000       200,000       19 %
2014
    2       2,000       42,000       4 %
2015 and beyond
    3       31,000       423,000       39 %

 

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Crossroads II at Meridian— Englewood, Colorado
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    3       44,000     $ 83,000       68 %
2012
    2       6,000       14,000       11 %
2013
    2       5,000       8,000       7 %
2014
                       
2015 and beyond
    2       12,000       17,000       14 %
Equity Investments
The following tables set forth certain information concerning lease expirations (assuming no renewals) as of December 31, 2010 for our equity investment operating properties.
Sealy Equity Investment
Sealy Northwest Atlanta, LP
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    23       94,000     $ 1,041,000       37 %
2012
    14       54,000       544,000       19 %
2013
    13       68,000       529,000       19 %
2014
    4       16,000       109,000       4 %
2015 and beyond
    11       121,000       576,000       21 %
Sealy Newmarket, LP
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    14       118,000     $ 1,682,000       49 %
2012
    3       18,000       238,000       7 %
2013
    6       61,000       696,000       20 %
2014
                       
2015 and beyond
    11       104,000       820,000       24 %
Sealy Airpark Nashville, LP
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    22       220,000     $ 1,913,000       24 %
2012
    18       239,000       2,001,000       25 %
2013
    18       85,000       747,000       9 %
2014
    11       121,000       929,000       12 %
2015 and beyond
    17       297,000       2,447,000       30 %

 

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Marc Equity Investments
8 South Michigan
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    19       24,000     $ 534,000       15 %
2012
    15       16,000       355,000       10 %
2013
    14       27,000       598,000       16 %
2014
    8       20,000       378,000       10 %
2015 and beyond
    26       76,000       1,762,000       49 %
11 East Adams Street
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    5       18,000     $ 323,000       10 %
2012
    5       19,000       359,000       11 %
2013
    5       8,000       156,000       5 %
2014
    3       7,000       142,000       5 %
2015 and beyond
    12       74,000       2,163,000       69 %
29 East Madison
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    15       25,000     $ 571,000       13 %
2012
    32       50,000       1,428,000       32 %
2013
    8       23,000       722,000       16 %
2014
    5       23,000       193,000       4 %
2015 and beyond
    22       89,000       1,517,000       35 %
30 North Michigan Avenue
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    50       44,000     $ 1,149,000       21 %
2012
    46       37,000       948,000       17 %
2013
    24       14,000       345,000       6 %
2014
    16       19,000       538,000       10 %
2015 and beyond
    50       85,000       2,464,000       46 %
223 West Jackson Street
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    5       8,000     $ 164,000       7 %
2012
    3       3,000       59,000       3 %
2013
    4       13,000       156,000       7 %
2014
    6       16,000       414,000       18 %
2015 and beyond
    15       60,000       1,467,000       64 %

 

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4415 West Harrison Street
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    19       45,000     $ 765,000       36 %
2012
    8       14,000       267,000       13 %
2013
    6       20,000       246,000       12 %
2014
    3       11,000       173,000       8 %
2015 and beyond
    5       35,000       680,000       31 %
2000-2060 Algonquin Road
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    21       24,000     $ 326,000       52 %
2012
    4       7,000       76,000       12 %
2013
    6       17,000       126,000       20 %
2014
    2       4,000       29,000       5 %
2015 and beyond
    5       19,000       75,000       11 %
1701 East Woodfield Road
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    19       22,000     $ 454,000       16 %
2012
    20       42,000       704,000       25 %
2013
    19       32,000       715,000       26 %
2014
    8       12,000       154,000       6 %
2015 and beyond
    9       39,000       739,000       27 %
2720 River Road
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    20       26,000     $ 421,000       31 %
2012
    17       24,000       375,000       27 %
2013
    8       11,000       134,000       10 %
2014
    7       17,000       272,000       20 %
2015 and beyond
    7       12,000       170,000       12 %
3701 Algonquin Road
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    6       25,000     $ 435,000       16 %
2012
    4       7,000       110,000       4 %
2013
    7       41,000       756,000       27 %
2014
    3       24,000       446,000       16 %
2015 and beyond
    6       59,000       1,061,000       37 %

 

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2205-2255 Enterprise Drive
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    4       13,000     $ 215,000       11 %
2012
    6       16,000       261,000       13 %
2013
    4       12,000       192,000       10 %
2014
    5       36,000       612,000       31 %
2015 and beyond
    7       36,000       722,000       35 %
900 Ridgebrook
                                 
    Number of     Aggregate by     2010 Rental     % of Total  
    Tenants Whose     Ft. Covered by     Revenue for     Annualized  
    Leases Expire     Expiring Leases     Leases Expiring     Rental Revenue  
2011
    22       36,000     $ 621,000       42 %
2012
    8       9,000       163,000       11 %
2013
    10       16,000       305,000       20 %
2014
    4       9,000       88,000       6 %
2015 and beyond
    9       23,000       316,000       21 %
Mortgage Loans
Information pertaining to the terms of the first mortgages for each of the properties is included in the table at the beginning of ITEM 2 — Properties.
ITEM 3 — LEGAL PROCEEDINGS
The Trust is involved from time to time in litigation on various matters, including disputes with tenants and disputes arising out of agreements to purchase or sell properties. Given the nature of the Trust’s business activities, these lawsuits are considered routine to the conduct of its business. The Trust does not expect that the liabilities, if any, that may ultimately result from such legal actions will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Trust. As of December 31, 2010, the Trust was not involved in any material litigation.
ITEM 4 —RESERVED

 

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PART II
ITEM 5 — MARKET FOR TRUST’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our Common Shares are listed for trading on the New York Stock Exchange, under the symbol “FUR.”
The table below sets forth the high and low sales prices as reported by the New York Stock Exchange for our Common Shares for each of the periods indicated.
                 
    High     Low  
Year Ended December 31, 2009:
               
First quarter
  $ 12.30     $ 5.83  
Second quarter
    10.83       6.63  
Third quarter
    10.15       8.44  
Fourth quarter
    11.38       8.70  
 
               
Year Ended December 31, 2010:
               
First quarter
  $ 13.19     $ 10.59  
Second quarter
    14.30       10.10  
Third quarter
    14.59       11.01  
Fourth quarter
    13.84       11.80  
Holders
As of December 31, 2010 there were 576 record holders of our Common Shares.
Dividends
In order to retain REIT status, and thus avoid paying federal corporate tax, we are required by the Code to distribute at least 90% of our REIT taxable income. Dividends declared on Common Shares in each quarter for the last two years are as follows:
                 
Quarter Ended   2010     2009  
 
               
March 31
  $ 0.1625     $ 0.2500  
June 30
    0.1625       0.2500  
September 30
    0.1625       0.2500  
December 31
    0.1625       0.1625  
Pursuant to the terms of our Series B-1 and Series C Preferred Shares, we are required to pay quarterly dividends of $0.40625 per Preferred Share, all of which were paid during 2010 and 2009.
See Item 7 — Common Share Dividends.
Unregistered Share Issuances
During 2008, at the request of holders of our Series B-1 Preferred Shares we issued 548,389 of our Common Shares in redemption of 493,552 Series B-1 Preferred Shares. There were no requests for redemptions in 2009. In addition, during 2009 and 2008, we issued a total of 170,207 and 249,638 Common Shares pursuant to our Dividend Reinvestment and Stock Purchase Plan resulting in net proceeds of approximately $1,615,000 and $4,407,000, respectively.

 

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On October 12, 2009, we offered holders of the Series B-1 Preferred Shares the right, in a private transaction, to convert all or any portion of their Series B-1 Preferred Shares into an equivalent number of newly-issued Series C Preferred Shares. This right, which we refer to as the Conversion Offer, enabled the holders of the Series B-1 Preferred Shares to convert one Series B-1 Preferred Share into one Series C Preferred Share. Upon expiration of the Conversion Offer, holders of Series B-1 Preferred Shares had elected to convert an aggregate of 544,000 Series B-1 Preferred Shares into Series C Preferred Shares and, effective November 1, 2009, 544,000 Series C Preferred Shares were issued. As a result, effective November 1, 2009, we had 852,000 Series B-1 Preferred Shares and 544,000 Series C Preferred Shares outstanding.
In March 2010 an investor converted 400,000 Series C Preferred Shares into 714,400 Common Shares resulting in a decrease in the outstanding Series C Preferred Shares to 144,000. The conversion of the Series C Preferred Shares resulted in a transfer to common equity. There was no gain or loss recognized from the conversion.
The Series C Preferred Shares have substantially the same rights as the Series B-1 Preferred Shares including dividend rate, liquidation preference and mandatory redemption date, but are junior in right of payment to the Series B-1 Preferred Shares. However, the initial conversion price of the Series C Preferred Shares is $14.00, which is a reduction from the $22.50 conversion price on the Series B-1 Preferred Shares. Additionally, under the terms of the Series C Preferred Shares, we are permitted to issue additional preferred shares which are on par with the Series C Preferred Shares, subject to certain limitations, without the consent of the holders of the Series C Preferred Shares. We are not permitted to issue additional preferred shares which are on par with the Series B-1 Preferred Shares.

 

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Performance Graph
The following graph is a comparison of the five-year cumulative return of Common Shares, a peer group index and the Morgan Stanley REIT Index (“MSCI US REIT”) for the periods shown. The peer group consists of REITs with diverse investments which is in contrast to REITs which target a certain asset type, class or geographic location. The peer group REITs also have current market values as of January 12, 2011 under $750,000,000. The graph assumes that $100 was invested on December 31, 2005 in our Common Shares, a peer group index and the Morgan Stanley REIT Index and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of our shares will continue in line with the same or similar trends depicted in the graph. It should also be noted that if Common Shares were purchased at times after December 31, 2005, the results depicted would not have been the same.
(PERFORMANCE GRAPH)
                                                 
    Period Ended  
Index   12/31/05     12/31/06     12/31/07     12/31/08     12/31/09     12/31/10  
Winthrop Realty Trust
    100.00       126.31       104.89       46.78       51.90       64.30  
MSCI US REIT (RMS)
    100.00       135.92       113.06       70.13       90.20       115.89  
Peer Group Index
    100.00       122.90       88.59       64.72       68.95       80.45  

 

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ITEM 6 — SELECTED FINANCIAL DATA
The following table sets forth selected, historical, consolidated financial data for the Trust and should be read in conjunction with the Consolidated Financial Statements of the Trust and Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report on Form 10-K.
                                         
  Years Ended December 31,  
    2010     2009     2008     2007     2006  
Operating Results
(in thousands, except per share data)
                                       
 
                                       
Revenue
  $ 55,367     $ 47,357     $ 43,952     $ 49,608     $ 52,602  
 
                             
 
                                       
Income (loss) from continuing operations (1)
  $ 18,480     $ (85,212 )   $ (70,383 )   $ 3,167     $ 42,445  
Income (loss) from discontinued operations (2)
    (2,003 )     865       2,207       (686 )     491  
 
                             
Net income (loss)
    16,477       (84,347 )     (68,176 )     2,481       42,936  
Preferred dividends
    (288 )     (147 )                  
 
                             
Net income (loss) applicable to Common Shares
  $ 16,189     $ (84,494 )   $ (68,176 )   $ 2,481     $ 42,936  
 
                             
 
                                       
Per Common Share
                                       
Income (loss) from continuing operations, basic
  $ 0.81     $ (5.24 )   $ (4.74 )   $ 0.24     $ 3.62  
Income (loss) from discontinued operations, basic (2)
    (0.09 )     0.05       0.15       (0.05 )     0.05  
 
                             
Net income (loss) applicable to Common Shares, basic
  $ 0.72     $ (5.19 )   $ (4.59 )   $ 0.19     $ 3.67  
 
                             
 
                                       
Income (loss) from continuing operations per Common Share, diluted
  $ 0.81     $ (5.24 )   $ (4.74 )   $ 0.24     $ 3.54  
Income (loss) from discontinued operations, diluted
    (0.09 )     0.05       0.15       (0.05 )     0.03  
 
                             
Net income (loss) applicable to Common Shares, diluted
  $ 0.72     $ (5.19 )   $ (4.59 )   $ 0.19     $ 3.57  
 
                             
 
                                       
Dividends declared per Common Share
  $ 0.65     $ 0.9125     $ 1.35     $ 2.15     $ 1.50  
 
                             
 
                                       
Balance Sheet Data:
(in thousands)
                                       
 
                                       
Total Assets
  $ 610,128     $ 493,192     $ 578,094     $ 745,447     $ 851,620  
 
                             
Total Debt (3)
  $ 277,193     $ 238,067     $ 299,865     $ 335,191     $ 362,522  
 
                             
Non-Controlling redeemable preferred interest
  $ 3,221     $ 12,169     $     $     $  
 
                             
Total Shareholders’ Equity
  $ 295,771     $ 217,089     $ 248,250     $ 291,794     $ 323,586  
 
                             
     
(1)  
Income (loss) from continuing operation, including per share data, are net of non-controlling interests.
 
(2)  
The results of the Biloxi, Mississippi property were classified as discontinued operations for 2006 through 2008. The results of Ventek were classified as discontinued operations for 2006 through 2008. The results of the Athens, Georgia; Lafayette, Louisiana; Knoxville, Tennessee and Sherman, Texas properties were classified as discontinued operations for 2006 through 2010. The results of the Creekwood, Apartment property were classified as discontinued operations for 2007 through 2009.
 
(3)  
For comparability purposes, the Total Debt balances for 2007 and 2006 do not include repurchase agreements of $75,175 and $111,911, respectively. These debt securities were sold in January 2008.

 

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ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “would,” “may” or similar expressions in this Annual Report on Form 10-K. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, but are not limited to, those set forth under “Forward Looking Statements” and “ITEM 1A — Risk Factors,” as well as our other filings with the SEC. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on forward-looking statements, which are based on information, judgments and estimates at the time they are made, to anticipate future results or trends.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. This section should be read in conjunction with the financial statements, footnotes thereto and other items contained elsewhere in this report.
Overview
As a diversified REIT, we operate in three strategic segments: (i) operating properties; (ii) loan assets; and (iii) REIT securities. As such, we seek to focus our investing in the segment we believe will generate the greater overall return to us given market conditions at the time. During 2010, we shifted our investment focus from REIT securities which we believed were undervalued in 2009 to loan assets as our belief was, and continues to be, that investments in that level of the capital stack are more likely to generate a greater overall return. Accordingly, we invested in new loan assets and divested of a substantial portion of our REIT securities. We funded our investment activity in 2010 from cash reserves, proceeds from our REIT securities divestments and our public offering in September 2010 which netted cash proceeds of approximately $67,774,000.
At December 31, 2010, we held $45,257,000 in unrestricted cash and cash equivalents and $33,032,000 in REIT securities. In addition, in March 2011 we extended and modified our revolving line of credit. See “Liquidity and Capital Resources” below.
With respect to our operating results for 2010, net income attributable to Common Shares was $16,189,000 or $0.72 per Common Share as compared with a loss of $84,494,000 or loss of $5.19 per Common Share. The most significant factor in this increase was the increase in earnings from our loan assets segment due to our additional investments in 2010 and the negative impact in 2009 to this segment caused by the impairments taken on our Concord investment. See “Results of Operations” below.
As discussed in more detail below, for 2011 we expect that it is likely that our overall operating results at our existing operating properties will decline due primarily to the overall portfolio decline in occupancy experienced in 2010. In addition, we expect that operations from our loan assets segment will be enhanced as we continue to seek investments in this segment and our expectation that with the recent favorable ruling in the Concord Real Estate CDO-1, Ltd. litigation we will receive cash distributions from our investment in CDH CDO. With respect to our REIT securities segment, we expect to invest when we see opportunity and divest in our holdings where we believe that our return has been maximized.

 

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Loan Assets
As noted above, consistent with our investment strategy to focus our investing in the segment we believe will generate the greater overall return to us, during 2010 we concentrated our acquisition activity on our loan asset segment. The concentration in the loan asset segment was due to our belief that loan assets provided the best area for a current return in the form of interest payments as well as appreciation either through acquiring loan assets at a discount or acquiring loan assets with the expectation of a borrower default that will lead to foreclosure and an equity ownership interest. In acquiring loan assets, we target loan investments with underlying collateral value, future income return potential and in certain cases, non-performing loans with the possibility that our debt position will be converted into equity participation. As a result, we invested approximately $119,352,000 in new loan assets during 2010 consisting of whole loans, B-notes, mezzanine loans and loan securities. During 2010 we foreclosed on the collateral securing three of our loan assets we acquired in 2010 with a carrying value of $19,210,000 resulting in our becoming the owner of the underlying properties. For a description of our loan assets acquired during 2010 see ITEM 8. Financial Statements, Note 4.
Operating Properties
The 2010 operating properties segment was negatively impacted by: (i) a weak overall economy; (ii) Kroger electing not to renew its leases at six Kroger properties; and (iii) the Churchill property lawsuit. During 2010 we acquired four new operating properties: one through a direct acquisition and three as a result of our foreclosure on previously acquired loan assets as discussed above. Through these transactions we acquired four recently constructed real estate assets at a low cost in distressed transactions and added an aggregate 322,000 square feet of Class A office space and 180 multi-family apartment units to our operating property portfolio.
In respect to leasing activity in 2011, we are aggressively marketing the properties for lease through direct contact with both tenants and brokers. As a result we are experiencing increased leasing traffic from the prior year in most regions but do not expect that new leases in 2011 will fully account for the losses in 2010. With respect to our 2010 acquisitions we have underwritten a relatively long lease up period of approximately 18 to 24 months and anticipate that certain of our other properties will continue to have leasing issues in 2011. Consequently, as discussed in more detail below, our earnings from our operating properties are anticipated to decline in 2011.
While we plan to fund operating shortfalls on certain investments, we anticipate that a lack of cash flow at certain properties may cause lenders to place these loans in special servicing. Special servicing status on these mortgage loans will prompt work out discussions with banks affording us the opportunity to negotiate more reasonable loan terms in an effort to improve long term operating results. There can be no assurance, however, we will be successful in negotiating more favorable terms.
Consolidated Operating Properties — The average occupancy of our consolidated properties was approximately 94.1% during the year ended December 31, 2010. As of December 31, 2010 our consolidated properties were approximately 90.8% leased compared to approximately 84.6% leased at December 31, 2009. At January 31, 2011 our consolidated properties were 88.1% leased, excluding our Churchill, Pennsylvania property which contains 1,008,000 square feet and was 16% leased.
Unfavorable trends in revenue on our wholly owned properties are expected to continue during 2011 primarily as a result of (i) changes in our net leased retail portfolio created by the non-renewal of expired leases on six properties; (ii) challenges in leasing two of our Lisle, Illinois properties; and (iii) expiration of the lease at our Churchill property.
Of the six leases which expired and were not renewed in 2010 in the net leased retail portfolio, the Athens, Georgia property was sold, the Sherman, Texas property reverted back to the land owner and two others, Knoxville, Tennessee and Lafayette, Louisiana were transferred into discontinued operations during 2010. In February 2011 we entered into an agreement to sell the St. Louis, Missouri, and Knoxville, Tennessee properties, subject in each case to the respective buyer’s due diligence. We anticipate that the sale of these properties will be consummated, if at all, during the second quarter of 2011. The Denton, Texas property has been subdivided and is 63% leased as of December 31, 2010.
Occupancy has dropped to 52% on our Lisle, Illinois property also known as 550-560 Corporetum as of December 31, 2010 from 71% at December 31, 2009. Various smaller tenants have vacated and one significant tenant representing approximately 13% of the property square footage did not renew its lease at expiration in May 2010. At our other Lisle, Illinois property, referred to as 701 Arboretum, we have received notice from our major tenant that they will be vacating their space at the expiration of their current lease term on March 31, 2011. As a result, this property will be 32% occupied as of April 1, 2011. We continue to aggressively market these properties for lease, however, there can be no assurance that we will be able to find replacement tenants in the near term.
The tenant at our Churchill, Pennsylvania property elected not to exercise its renewal option at the December 31, 2010 expiration. The property is in need of substantial repairs and refurbishing, and we are currently seeking damages from the prior tenant for failure to return the property in the condition required by the lease. Additionally, we are actively marketing the property for lease.

 

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Sealy Equity Investments in Operating Properties — As of December 31, 2010 we continue to hold equity interests in three real estate ventures with Sealy & Co. which have an aggregate of approximately 2,097,000 rentable square feet consisting of 18 office flex buildings and 13 light distribution and service center properties. The investment properties are located in Northwest Atlanta, Georgia; Atlanta, Georgia; and Nashville, Tennessee and had occupancies of 75%, 66% and 86%, respectively, at December 31, 2010 as compared to occupancy of 73%, 78% and 86%, at December 31, 2009. Our Georgia properties continue to have historically low occupancy but are performing in line with the market, and we have not lost any tenants to competing properties. Finally, our Nashville, Tennessee property is outperforming the market. The properties are being aggressively marketed for lease. We received cash distributions from operations of $733,000 from the Nashville, Tennessee property for the year ended December 31, 2010. We received no cash distribution from the two Atlanta investments for the year ended December 31, 2010.
The Sealy properties have $139,750,000 of mortgage debt at December 31, 2010 with $102,750,000 maturing in 2012 and $37,000,000, maturing in 2016. Both Atlanta, Georgia properties are currently in special servicing. We together with our joint venture partner, are attempting to negotiate with the special servicer a restructuring of the debt. Both properties have ceased making their debt sevice payments until the loans are restructured. There can be no assurance that a restructuring of the loans will be accomplished.
Marc Realty Equity Investments in Operating Properties- As of December 31, 2010, we held equity interests in 12 properties with Marc Realty which consist of an aggregate of approximately 1,977,000 rentable square feet of office and retail space which was 82.2% occupied as compared to 84.1% occupied at December 31, 2009.
Five downtown Chicago properties contain approximately 959,000 rentable square feet of the aggregate Marc Realty portfolio and accounted for $37,562,000 of our December 31, 2010 carrying value. These five properties had occupancy of 83.4% at December 31, 2010, compared to 90.6% occupancy at December 31, 2009. The decline in occupancy in 2010 is primarily the result of the loss of one major tenant at one of the downtown properties.
The balance of the portfolio, located in the Chicago suburbs represents $24,588,000 of our December 31, 2010 carrying value, contains approximately 1,018,000 square feet and was 80.9% occupied at December 31, 2010 compared to 79.0% occupied at December 31, 2009.
At December 31, 2010, the Marc Realty properties are encumbered with $86,236,000 of mortgage debt, with $19,290,000 of mortgage debt maturing in 2011, $10,375,000 maturing in 2012 and the remainder in 2013 or later. We and our venture partner are negotiating with the lenders to further extend the debt balances maturing in 2011.
REIT Securities
During 2010 we reduced new investment activity in REIT securities. We sold REIT securities with a cost basis of $23,163,000 and received cash proceeds of $31,249,000. We expect to continue to hold our REIT preferred securities but will divest if needed to fund future acquitistions. As of December 31, 2010 our portfolio of REIT securities decreased to $33,032,000.
Liquidity and Capital Resources
At December 31, 2010, we held $45,257,000 in unrestricted cash and cash equivalents and $33,032,000 in REIT securities. In addition, as of December 31, 2010 we had $9,550,000 available to draw on our $35,000,000 revolving line of credit.
We believe that cash flow from operations will continue to provide adequate capital to fund our operating and administrative expenses, as well as debt service obligations in the short term. As a REIT, we must distribute annually at least 90% of our REIT taxable income. As a result of this dividend requirement, we, like other REITs, are unable to reinvest all of our operating cash flow and are dependent on raising capital through equity and debt issuances or forming ventures with investors to obtain funds with which to expand our business. Accordingly, we anticipate that capital with which to make future investment and financing activities will be provided from borrowings, the issuance of additional equity and debt securities and proceeds from sales of existing assets.

 

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Our primary sources of funds include:
   
the use of cash and cash equivalents;
   
rents and reimbursements received from our operating properties;
   
payments received under our loan assets;
   
interest and dividends received from investments in REIT securities;
   
cash distributions from joint ventures;
   
borrowings under our credit facility;
   
asset specific borrowings; and
   
the issuance of equity and debt securities.
In addition, in light of the recent Delaware Supreme Court’s affirmation of the Delaware Court of Chancery’s ruling that the notes held by a subsidiary of CDH CDO in CDO-1 are deemed cancelled effective January 2010, we expect to receive cash distributions from our CDH CDO investment through our interest in the entity that provides collateral management services to CDO-1 as well as through our equity ownership of CDH CDO.
Public Offering
On September 27, 2010 we closed a public offering of 5,750,000 Common Shares at a price of $12.25 per share before underwriter discount, and received net proceeds of approximately $67,000,000 which we utilized for the acquisition of new investments in the fourth quarter of 2010 and the first quarter of 2011.
Debt Maturities
We have a $35,000,000 revolving line of credit which matures on December 16, 2011. We drew down $25,450,00 in July in connection with new loan acquisitions and this amount remains outstanding on December 31, 2010.
At December 31, 2010, our balance sheet contains mortgage debt payable of $230,443,000. We have $27,766,000 of mortgage debt maturing in 2011, $32,975,000 maturing in 2012, $16,116,000 maturing in 2013 with the remainder maturing in 2015 or later.
On March 4, 2011 we financed our Plantation, Florida property with an $11,000,000 first mortgage loan bearing interest at 6.483% and maturing on April 1, 2018. The net proceed of approximately $10,676,000 and cash on hand of approximately $6,143,000 were used to pay down our mortgage loan payable with KeyBank by $16,819,000.
In March 2011, we amended our existing revolving line of credit with KeyBank, such that (i) the maximum borrowing was increased to $50,000,000 with an accordion feature of up to $150,000,000 (ii) the maturity date was extended to March 2014 with an option to extend the maturity date to March 2015. The amended credit facility bears interest at Libor plus 3%. On March 7, 2011, we utilized $8,799,000 to repay the maturing mortgage loans encumbering our Andover and Burlington properties and approximately $2,186,000 to payoff the balance on our mortgage loan payable with Keybank. In addition, we drew down $16,000,000 on the line of credit to fund new investments.
As a result of these transactions we have no mortgage loans for consolidated properties maturing in 2011.
We continually evaluate our debt maturities and, based on our current assessment, we believe there are viable financing and refinancing alternatives for debts as they mature that will not materially adversely impact our liquidity or our expected financial results.
Cash Flows
Our liquidity based upon cash and cash equivalents decreased by approximately $21,236,000 from $66,493,000 at December 31, 2009 to $45,257,000 at December 31, 2010.

 

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Our cash flow activities for the year ended December 31, 2010 are summarized as follows (in thousands):
         
Net cash flow provided by operating activities
  $ 19,612  
Net cash flow used in investing activities
    (112,650 )
Net cash flow provided by financing activities
    71,802  
 
     
Decrease in cash and cash equivalents
  $ (21,236 )
 
     
Operating Activities
For the year ended December 31, 2010, our operating activities generated net income of $17,365,000 and positive cash flow of $19,612,000. Our cash provided by operations reflects our net income adjusted by: (i) a reduction for non-cash items of $5,901,000 representing primarily loan discount accretion and unrealized gains on loan securities offset by adding back depreciation and amortization expenses; (ii) $5,610,000 of distributions from non-consolidated interests; and (iii) a net increase due to changes in other operating assets and liabilities of $2,538,000. See our discussion of Results of Operations below for additional details on our operations.
Investing Activities
Net cash used in investing activities of $112,650,000 for the year ended December 31, 2010 was comprised primarily of the following:
   
$115,854,000 for the acquisition of eleven new loans receivable;
   
$2,949,000 for additional loan advances under existing facilities;
   
$3,498,000 for the issuance of a new loan receivable;
   
$10,871,000 for investment in our PSW NYC joint venture;
   
$7,800,000 for investment in our Riverside loan joint venture;
   
$6,961,000 for investment in our Marc Realty equity investments;
   
$2,113,000 to fund a tenant improvement escrow for the Deer Valley Medical Center;
   
$6,110,000 for purchases of REIT securities carried at fair value;
   
$5,276,000 for investment in capital and tenant improvements at our operating properties;
   
$9,409,000 for the acquisition of the land underlying eight of our operating properties;
   
$7,112,000 for the purchase of loan securities; and
   
$8,700,000 for the acquisition of a new operating property (Crossroads I).
These uses of cash flow were offset primarily by:
   
$31,249,000 in proceeds from the sale of securities carried at fair value;
   
$9,876,000 in proceeds from the sale at par value of 50% interest in the 500-512 Seventh Avenue B Participation;
   
$3,000,000 in proceeds from the sale at par value of the Siete Square A Participation;
   
$6,540,000 received on full satisfaction of the Driver loan;
   
$8,200,000 received on full satisfaction of the 1701 E. Woodfield Road loan;
   
$9,625,000 return of capital distribution from our PSW NYC equity investment; and
   
$1,750,000 in proceeds from the sale of our Athens, Georgia property.
Financing Activities
Net cash provided by financing activities of $71,802,000 for the year ended December 31, 2010 was comprised primarily of the following:
   
$66,774,000 in proceeds from the issuance of 5,750,000 Common Shares pursuant to our public offering; and
   
$25,450,000 drawn down on our Revolving Line of Credit.
These sources of cash flow were offset primarily by:
   
$14,573,000 for dividend payments on our Common Shares; and
   
$10,199,000 for mortgage loan repayments which included $3,537,000 of the principal repayments related to the disposition of three operating properties.

 

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Future Cash Commitments
Future Funding Requirements
In addition to our initial purchase price of certain loans and operating properties, we have future funding requirements which total approximately $8,079,000 at December 31, 2010.
Common Share Dividends
In paying dividends we seek to have our quarterly dividends track cash flow from operations. As a result of our emphasis on total return, while we seek to achieve a stable, predictable dividend for our shareholders, we do not select or manage our investments for short-term dividend growth, but rather towards achieving overall superior total return. While we intend to continue paying dividends each quarter, the amount of our dividend will depend on the actual cash flow, financial condition, capital requirements, utilization of available capital losses and net operating loss carry forwards, distribution requirements for REITs under the Internal Revenue Code, and such other factors as our Board of Trustees deem relevant. Subject to the foregoing, we expect to continue distributing our current cash flow from operations after reserving normal and customary amounts thereby allowing us to maintain adequate capital reserves. In addition, when deemed prudent or necessitated by applicable distribution requirements for REITs under the Internal Revenue Code, we may make one or more special distributions during any particular year. However, during a favorable investing environment, we expect that we will utilize our carry forward capital losses to shelter gains from the disposition of our assets so we may use the proceeds for investment. We expect to continue applying these standards with respect to our dividends on a quarterly basis which may cause the dividends to increase or decrease depending on these various factors.
During 2010 we have paid a regular quarterly dividend of $0.1625 per Common Share. We paid regular quarterly dividends of $0.40625 per Series B-1 Preferred Share and Series C Preferred Share for all four quarters of 2010.
Contractual Obligations
The following table summarizes our payment obligations under contractual obligations, including all fixed and variable rate debt obligations, except as otherwise noted, as of December 31, 2010 (in thousands):
                                         
            Less than                     After  
    Total     1 Year     2-3 Years     4-5 Years     5 Years  
Mortgage loans payable
(principal and interest) (1)
  $ 284,083     $ 46,273     $ 80,104     $ 33,978     $ 123,728  
Revolving line of credit
(principal and interest)
    26,108       26,108                    
Ground lease obligations
    1,932       485       847       600        
Advisors’ fee (2)
    6,838       6,838                    
Series B-1 Preferred Shares (3)
    21,300             21,300              
Series C Preferred Shares (3)
    3,600             3,600              
 
                             
 
  $ 343,861     $ 79,704     $ 105,851     $ 34,578     $ 123,728  
 
                             
     
(1)  
Does not reflect financing activity subsequent to December 31, 2010.
 
(2)  
Advisor’s fee based upon the terms of the Advisory Agreement, effective January 1, 2011, with no effect given to any equity that may be issued after December 31, 2010. No amounts have been included for subsequent renewal periods of the Advisory Agreement.
 
(3)  
Series B-1 and Series C Preferred Shares assumes mandatory redemption date in February 2012 with no further conversions.

 

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We carry comprehensive liability and all risk property insurance covering fire, flood, extended coverage, “acts of terrorism,” as defined in the Terrorism Risk Insurance Act of 2002 and rental loss insurance with respect to our operating properties where coverage is not provided by our net lease tenants. Under the terms of our net leases, the tenant is obligated to maintain adequate insurance coverage.
Our debt instruments, consisting of mortgage loans secured by our operating 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.
Comparability of Financial Data from Period to Period
The comparability of financial data from period to period is affected by several items including (i) the timing of our property acquisitions and leasing activities; (ii) the purchases and sales of assets and investments; (iii) when material other-than-temporary impairment losses on assets in our portfolio are taken; and (iv) the reclassification of assets. In this regard, the comparability of financial results for the years presented were impacted by the addition of four operating properties (one direct acquisition and three loan foreclosures) in 2010. The acquisition of several loan assets in 2010, the divestiture of several REIT securities in 2010, the write-down of our investment in Lex-Win Concord to zero during the second quarter of 2009 and the reclassification of certain Marc Realty assets from an aggregated preferred equity investment to 12 individual common equity investments as of July 1, 2009.
Results of Operations
Our results of operations are discussed below by segment:
   
Operating Properties — our wholly and partially owned operating properties and from July 1, 2009 our 12 Marc Realty equity investments;
 
   
Loan Assets — our loans receivable, loan securities carried at fair value, and equity investments in loan assets;
 
   
REIT Securities — our ownership of equity and debt securities in other real estate investment trusts; and
 
   
Corporate — non-segment specific results which includes interest on cash reserves, general and administrative expenses and other non-segment specific income and expense items.
The following table summarizes our assets by segment at year end (in thousands):
                 
    2010     2009  
 
               
Operating properties
  $ 373,142     $ 313,682  
Loan assets
    134,269       31,774  
REIT securities
    33,032       52,597  
Corporate
               
Cash and cash equivalents
    45,257       66,493  
Restricted cash
    8,593       9,505  
Accounts receivable and prepaids
    12,402       14,559  
Deferred financing costs
    1,158       1,495  
Discontinued Operations
    2,275       3,087  
 
           
Total Assets
  $ 610,128     $ 493,192  
 
           
The increase in operating property assets was due primarily to the acquisition of four operating properties and eight land parcels underlying our existing properties during 2010. In addition, we made $6,121,000 of building improvements to our existing properties during the year. These increases were partially offset by the disposition of three properties and the classification to discontinued operations of one additional property.

 

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The increase in loan assets was due primarily to the acquisition of 12 new loan assets for an aggregate investment of $119,352,000. In addition, we recognized $8,782,000 of loan discount accretion income during 2010.
The decrease in REIT securities assets was primarily the result of our divestiture of these assets. We received proceeds of $31,249,000 from the sale of securities in 2010 while only investing $6,110,000 in acquiring new securities during the year.
The following table summarizes our results from continuing operations by segment for each of the years ended December 31 (in thousands):
                         
    2010     2009     2008  
 
                       
Operating properties (1)
  $ 2,588     $ (8,345 )   $ 2,666  
Loan assets (1)
    19,218       (99,830 )     (67,770 )
REIT securities
    8,273       27,002       1,346  
Corporate expenses
    (10,711 )     (3,022 )     (6,142 )
 
                 
 
                       
Consolidated income (loss) from continuing operations
  $ 19,368     $ (84,195 )   $ (69,900 )
 
                 
     
(1)  
As of July 1, 2009, in conjunction with the restructuring of our preferred equity investment in Marc Realty, our investments in the Marc Realty portfolio which were previously included in the loan assets business segment are now classified as equity investments and are included in the operating properties segment.
Comparison 2010 to 2009
Operating Properties
The following table summarizes our results from continuing operations for our operating properties segment for the years ended December 31, 2010 and 2009 (in thousands):
                 
    2010     2009  
 
               
Rents and reimbursements
  $ 38,239     $ 40,021  
Operating expenses
    (8,674 )     (7,042 )
Real estate taxes
    (2,542 )     (2,542 )
Impairment loss on investments in real estate
          (10,000 )
Equity in income of Marc Realty investments
    1,776       281  
Impairment loss on Marc Realty equity investment
          (2,500 )
Equity in loss of Sealy Northwest Atlanta
    (710 )     (457 )
Equity in loss of Sealy Airpark Nashville
    (1,107 )     (1,056 )
Equity in loss of Sealy Newmarket
    (1,193 )     (691 )
 
           
Operating income
    25,789       16,014  
 
               
Depreciation and amortization expense
    (10,008 )     (10,585 )
Interest expense
    (13,193 )     (13,774 )
 
           
Net income (loss)
  $ 2,588     $ (8,345 )
 
           
Operating income from our operating properties, which we define as all items of income and expense directly derived from or incurred by this segment before depreciation, amortization and interest expense, increased by $9,775,000 compared to the prior year period. The increase was due primarily to:
   
an increase of $1,495,000 in income from our 12 Marc Realty equity investments. We received cash distributions of $4,147,000 from the Marc Realty equity investments during the year ended December 31, 2010;
   
rents and reimbursements of $831,000 from our four 2010 property acquisitions;

 

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an increase of $252,000 in rents and reimbursements at our Jacksonville, Florida property as a result of the property being 100% occupied for the full year in 2010;
   
a $10,000,000 impairment loss recorded in 2009 on our Churchill, Pennsylvania property; and
   
a $2,500,000 other-than-temporary impairment loss recorded in 2009 on our Marc Realty equity investment in the property located at 1701 East Woodfield Rd, Schaumburg, Illinois;
 
     
Partially offset by:
   
a $1,632,000 increase in operating expenses due primarily to increased cost of $491,000 at our River City property, a $205,000 increase in costs at our Andover, Massachusetts property as a result of the lease in 2010 being a gross lease as compared to a net lease in 2009, a $956,000 increase in legal and professional fees related to tenant disputes primarily in connection with the Churchill tenant litigation and $550,000 of operating expenses at our four 2010 property acquisitions;
   
a decrease of $846,000 in rents and reimbursements from our two Lisle, Illinois properties due to an approximate 20% decrease in average occupancy at one of the properties and an approximate 10% decrease at the other property in 2010;
   
an $806,000 increase in losses from our Sealy equity investments due primarily to a $502,000 increase in loss related to our Newmarket office complex in Atlanta, Georgia which experienced a 12% loss in occupancy during 2010;
   
a decrease of $745,000 in rents and reimbursements at our Andover, Massachusetts property due to the expiration of the lease in place at December 31, 2009. This space was leased effective March 18, 2010;
   
a decrease of $571,000 in rents and reimbursements at our One East Erie property as a result of an approximate 4% decrease in average occupancy
   
a decrease of $417,000 in rents and reimbursements at our River City property due to the turnover of tenants; and
   
a decrease of $340,000 in rents and reimbursements pursuant to a restructuring as of April 1, 2009 which provided for a reduction in rent in exchange for a ten-year extension of the lease for our Plantation, Florida property.
Depreciation and amortization expense decreased by $577,000 primarily as a result of certain assets being fully amortized during 2010. Interest expenses related to our operating properties decreased by $581,000 primarily as a result of normal amortization of the mortgage loans payable, which was partially offset by $438,000 of interest expense on our newly acquired Connecticut multi-family property.
Loan Assets
The following table summarizes our results from our loan assets segment for the years ended December 31, 2010 and 2009 (in thousands):
                 
    2010     2009  
 
               
Interest and discount accretion income
  $ 14,473     $ 3,442  
Equity in earnings of preferred equity investment in Marc Realty
    338       78  
Impairment loss on preferred equity investments
          (2,186 )
Impairment loss on Lex-Win Concord
          (31,670 )
Equity in loss of Lex-Win Concord
          (66,904 )
Equity in earnings of ROIC-Riverside
    473        
Equity in loss of PSW NYC
    (1,246 )      
Realized gain on loan securities carried at fair value
    469        
Unrealized gain on loan securities carried at fair value
    5,011        
Impairment loss on available for sale loan
          (203 )
Provision for loss on loans receivable
          (2,152 )
 
           
Operating income (loss)
    19,518       (99,595 )
 
               
General and administrative expense
    (300 )     (235 )
 
           
Net income (loss)
  $ 19,218     $ (99,830 )
 
           

 

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Operating income from loan assets, which we define as all items of income and expense directly derived from or incurred by this business segment before general and administrative expense, increased by $119,113,000 from a loss of $99,595,000 in 2009 to income of $19,518,000 in 2010 primarily due to the $31,670,000 impairment loss on Lex-Win Concord and $66,904,000 equity in loss of Lex-Win Concord recognized in 2009. Excluding the impairment loss and equity loss in Lex-Win Concord, operating income from loan assets increased by $20,539,000 for the year ended December 31, 2010 as compared to the year ended December 31, 2009 to income of $19,518,000 from a loss of $1,021,000. The increase was due primarily to:
   
a $5,011,000 unrealized gain on loan securities carried at fair value recognized in 2010 and a $469,000 realized gain on loan securities which were paid off at par at maturity in December 2010;
   
a $2,152,000 provision for loss on loans receivable related to properties in our Marc Realty portfolio recognized in 2009;
   
a $11,031,000 increase in interest income due primarily to $11,713,000 recognized on loan assets acquired since June 2009 which was partially offset by a reduction of $661,000 of interest on our tenant improvement and capital expenditure loans related to the Marc Realty investments which are now reported in the operating properties segment as of July 1, 2009; and
   
a reduction of impairments from the prior year resulting in a $2,446,000 increase in earnings from our preferred equity investment in Marc Realty.
Partially offset by:
   
a $1,246,000 loss recognized on our 2010 investment in our PSW NYC venture.
REIT Securities
The following table summarizes our results from our REIT securities segment for the years ended December 31, 2010 and 2009 (in thousands):
                 
    2010     2009  
 
               
Dividends
  $ 2,655     $ 3,894  
Gain on sale of securities carried at fair value
    558       5,416  
Unrealized gain on securities carried at fair value
    5,060       17,862  
Equity in loss of Lex-Win Acquisition, LLC
          (95 )
 
           
Operating income
    8,273       27,077  
 
               
Interest expense
          (75 )
 
           
Net income
  $ 8,273     $ 27,002  
 
           
Operating income from REIT securities, which we define as all items of income and expense directly derived from or incurred by this business segment before interest expense, decreased by $18,804,000 over the prior year period. The decrease was due primarily to:
   
a $12,802,000 decrease in unrealized gain on securities carried at fair value;
   
a $1,239,000 decrease in interest and dividend income primarily as the result of the sale of various securities; and
   
a $4,858,000 decrease in realized gain on the sale of securities carried at fair value.

 

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Corporate
The following table summarizes our results from our corporate business segment for the years ended December 31, 2010 and 2009 (in thousands):
                 
    2010     2009  
 
               
Interest income
  $ 139     $ 172  
General and administrative
    (8,534 )     (7,068 )
Interest expense
    (2,182 )     (2,815 )
Gain on extinguishment of debt
          6,846  
State and local taxes
    (134 )     (157 )
 
           
Operating loss
  $ (10,711 )   $ (3,022 )
 
           
The increase in operating loss from corporate operations for the comparable periods was due primarily to:
   
a $5,681,000 gain on extinguishment of debt recognized in 2009 resulting from our 2009 purchase of 1,017,105 Series B-1 Preferred Shares at a discount to their liquidation value;
   
a $1,165,000 gain on extinguishment of debt recognized in 2009 resulting from the conversion of 544,000 Series B-1 Preferred Shared to Series C Preferred Shares; and
   
A $1,466,000 increase in general and administrative expense due primarily to an increase in the base management fee paid to our advisor of $2,118,000 partially offset by a reduction in professional fees of $642,000.
 
 
Partially offset by:
   
a $633,000 decrease in corporate interest expense due primarily to lower aggregate payments in 2010 of $897,000 on our Series B-1 Preferred Shares as a result of fewer Series B-1 Preferred Shares outstanding during 2010 offset by an increase in interest expense of $264,000 related to our KeyBank line of credit.
Comparison 2009 to 2008
Operating Properties
The following table summarizes our results from continuing operations for our operating properties segment for the years ended December 31, 2009 and 2008. Certain balances have been reclassified as a result of discontinued operations (in thousands):
                 
    2009     2008  
 
               
Rents and reimbursements
  $ 40,021     $ 41,504  
Operating expenses
    (7,042 )     (6,767 )
Real estate taxes
    (2,542 )     (2,428 )
Impairment loss on investments in real estate
    (10,000 )     (2,100 )
Equity in income of Marc Realty investments
    281        
Impairment loss on Marc Realty equity investment
    (2,500 )      
Equity in loss of Sealy Northwest Atlanta
    (457 )     (409 )
Equity in loss of Sealy Airpark Nashville
    (1,056 )     (1,023 )
Equity in loss of Sealy Newmarket
    (691 )     (250 )
 
           
Operating income
    16,014       28,527  
 
               
Depreciation expense
    (10,585 )     (11,572 )
Interest expense
    (13,774 )     (14,289 )
 
           
Net income (loss)
  $ (8,345 )   $ 2,666  
 
           

 

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For purposes of management’s discussion of our results of operations, operating income for each business segment is defined as all items of income and expense before depreciation, amortization and interest expense. Operating income from our operating properties decreased by $12,513,000 over the prior year period. The decrease was due primarily to:
   
a $10,000,000 impairment loss recorded in 2009 as compared to an impairment loss of $2,100,000 recognized in 2008;
   
a $2,500,000 other-than-temporary impairment loss on our Marc Realty equity investment in the property located at 1701 East Woodfield Rd, Schaumburg, Illinois;
   
a decrease of $1,021,000 in rents and reimbursements from our net lease portfolio due to the reduced rent pursuant to the restructuring and 10-year extension of the lease for our Plantation, Florida property as of January 1, 2009;
   
a decrease of $686,000 in rents and reimbursements at our Jacksonville, Florida property due to the loss of two tenants who occupied approximately 80% of the property;
   
a decrease of $529,000 in rents and reimbursements from our Lisle, Illinois properties due to an approximate 12% decrease in average occupancy at one of the properties in 2009;
   
a $275,000 increase in operating expenses due primarily to increased cost of $145,000 at our One East Erie property, a $380,000 bad debt reserve at our Burlington property as a result of a tenant bankruptcy and a $122,000 increase in legal and professional fees related to tenant disputes which were offset by a $290,000 decrease in costs at our River City property; and
   
a $522,000 increase in losses from our Sealy equity investments due primarily to a $441,000 increase in loss related to our Newmarket office complex in Atlanta, Georgia which we held for 12 months in 2009. Losses from the Sealy portfolio are primarily the result of non-cash depreciation and amortization expenses. We received cash distributions of $1,195,000 from the Sealy equity investments for the year ended December 31, 2009.
Partially offset by:
   
income of $281,000 in 2009 representing our share of operations from our 12 Marc Realty equity investments since July 1, 2009. We received cash distributions of $1,089,000 from the Marc Realty equity investments during the year ended December 31, 2009;
   
an increase of $194,000 in rents and reimbursements at our One East Erie property as a result of a $412,000 increase in rental revenue due to an approximate 1% increase in average occupancy which was partially offset by a $218,000 decline in revenue from the parking facility in 2009; and
   
an increase of $577,000 in rents and reimbursements at our River City property due to an approximate 6% increase in average occupancy in 2009.
Depreciation and amortization expense decreased by $987,000 primarily as a result of values assigned to leases in place at the time of acquisition being fully amortized during 2009. Interest expenses related to our operating properties decreased by $515,000 primarily as a result of normal amortization of the mortgage loans payable.
Loan Assets
The following table summarizes our results from our loan assets segment for the years ended December 31, 2009 and 2008 (in thousands):
                 
    2009     2008  
 
               
Interest income
  $ 3,442     $ 1,532  
Equity in earnings of preferred equity investment of Marc Realty
    78       5,868  
Impairment loss on preferred equity investments
    (2,186 )     (7,513 )
Impairment loss on Lex-Win Concord
    (31,670 )     (36,543 )
Equity in loss of Lex-Win Concord
    (66,904 )     (30,207 )
Gain on sale of mortgage backed securities
          454  
Gain on sale of other assets
          24  
Impairment loss on available for sale loan
    (203 )      
Provision for loss on loan receivable
    (2,152 )     (1,179 )
 
           
Operating loss
    (99,595 )     (67,564 )
 
               
General and administrative expense
    (235 )      
Interest expense
          (206 )
 
           
Net loss
  $ (99,830 )   $ (67,770 )
 
           

 

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Operating loss from loan assets increased by $32,031,000 from a loss of $67,564,000 in 2008 to a loss of $99,595,000 in 2009. The increase was due primarily to:
   
a $36,697,000 increase in equity in loss from Lex-Win Concord due primarily to our allocable share of the increased operating loss from Concord for the year ended December 31, 2009 compared to the year ended December 31, 2008. In addition, we recorded a $31,670,000 other-than-temporary impairment loss in 2009 to reduce our equity investment in Lex-Win Concord to zero. In 2008, we recorded a $36,543,000 other-than-temporary impairment loss.
   
a $5,790,000 decrease in earnings from our preferred equity investment primarily as a result of the restructuring of the Marc Realty portfolio. Items that affected the decrease included a $2,664,000 loss from the transfer of our interest in three of the properties in the Marc Realty portfolio in May 2009, a $2,624,000 decrease in interest earnings and a $511,000 decrease in gains on sale of real estate; and
   
a $973,000 increase in provision for loss on loans receivable related to properties in our Marc Realty portfolio;
 
 
Partially offset by:
   
a $1,910,000 increase in interest income due primarily to $2,675,000 recognized on loan assets acquired in 2009 which was partially offset by a reduction of $522,000 of interest on our tenant improvement and capital expenditure loans related to the Marc Realty investments which are now reported in the operating properties segment as of July 1, 2009; and
   
a $5,327,000 decrease in impairment loss on preferred equity investments. We recognized $2,186,000 of other-than-temporary impairments on four of our Marc Realty preferred equity investments during the year ended December 31, 2009 compared with a $7,513,000 other-than-temporary impairment recognized on four Marc Realty preferred equity investments during the same period in 2008.
REIT Securities
The following table summarizes our results from our REIT securities segment for the years ended December 31, 2009 and 2008 (in thousands):
                 
    2009     2008  
 
               
Dividends
  $ 3,894     $ 916  
Gain on sale of securities carried at fair value
    5,416        
Gain on sale of available for sale securities
          1,580  
Impairment loss on available for sale securities
          (207 )
Unrealized gain on securities carried at fair value
    17,862       24  
Equity in loss of Lex-Win Acquisition, LLC
    (95 )     (878 )
 
           
Operating income
    27,077       1,435  
 
               
Interest expense
    (75 )     (89 )
 
           
Net income
  $ 27,002     $ 1,346  
 
           
Operating income from REIT securities increased by $25,642,000 over the prior year period. The increase was due primarily to:
   
a $2,978,000 increase due primarily to interest and dividends as the result of the increased investment in REIT securities during the year ended December 31, 2009;
   
a $17,862,000 unrealized gain on securities carried at fair value recognized in 2009; and
   
a $3,836,000 increase in gain on sale of securities.

 

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Corporate
The following table summarizes our results from our corporate business segment for the years ended December 31, 2009 and 2008 (in thousands):
                 
    2009     2008  
 
               
Interest income
  $ 172     $ 1,670  
General and administrative
    (7,068 )     (6,887 )
Interest expense
    (2,815 )     (7,379 )
Gain on extinguishment of debt
    6,846       6,284  
State and local taxes
    (157 )     (329 )
Other
          499  
 
           
Operating loss
  $ (3,022 )   $ (6,142 )
 
           
The decrease in the operating loss from corporate operations for the comparable periods was due primarily to:
   
a $4,564,000 decrease in corporate interest expense due primarily to lower aggregate payments in 2009 of $3,470,000 on our Series B-1 Preferred Shares as a result of fewer Series B-1 Preferred Shares outstanding during 2009 and a reduction of interest expense of $1,102,000 related to our KeyBank line of credit;
Partially offset by:
   
a $1,498,000 decrease in corporate interest income earned on our cash and cash equivalents due primarily to lower yields on U.S. Treasury securities and other depository accounts during 2009 versus 2008; and
   
state income taxes decreased by $172,000 to $157,000 for the year ended December 31, 2009 from $329,000 for the year ended December 31, 2008 due primarily to our anticipated lower taxable income for state purposes, after deductions for dividends paid and after the utilization of net operating loss carryforwards, where applicable.
Discontinued Operations
In October 2009 a tenant of our retail net leased properties, The Kroger Company (“Kroger”), notified us of its intention not to exercise its lease renewal options on six buildings containing approximately 281,000 square feet of retail space. Concurrently, Kroger also notified us that it would be exercising its option to purchase one of these six properties, the Athens, Georgia property, resulting in our classifying that property in discontinued operations effective with the fourth quarter of 2009. Upon receipt of the notice, management actively marketed the remaining locations for lease or sale.
The Lafayette, Louisiana and Sherman, Texas locations have been classified as discontinued operations as of September 30, 2010. During the quarter ended September 30, 2010, management determined that the potential market rents were not sufficient to cover prospective ground lease payments plus the costs to convert these properties to multi-tenant facilities. Therefore, we decided to permit the ownership of the Sherman, Texas property to revert back to the land owner as of November 1, 2010. We elected not to make ground rent payments on the Lafayette, Louisiana property and anticipate that the ground owner will exercise its remedies and take title to the property. We recorded a $704,000 impairment charge related to these investments which is included in discontinued operations for the year ended December 31, 2010.
The Knoxville, Tennessee location has also been classified as discontinued operations as of September 30, 2010. During the quarter ended September 30, 2010, management determined that after having exercised its purchase option under its ground lease and acquiring the land in October 2010 the best course of action was to pursue a sale of the real estate. As a result, we recorded a $626,000 impairment charge which is included in discontinued operations for the year ended December 31, 2010. On February 24, 2011 we entered into an agreement to sell this property subject to the buyer’s due diligence. We anticipate that the sale will be consummated during the second quarter of 2011.
With respect to Kroger’s purchase of the Athens, Georgia property, in accordance with a three party agreement between us, Kroger and the land owner, an appraisal process was conducted to determine the fair market value of the property. As a result of the finalization of the appraisal process we recorded an impairment charge of $1,390,000 during the year ended December 31, 2010.

 

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In August 2009 the First District Court of Wyandotte County, Kansas, appointed a receiver to operate and manage our apartment complex in Kansas City, Kansas commonly referred to as Creekwood Apartments. In October 2009 a notice of foreclosure was issued on behalf of the first mortgage holder. The property was foreclosed in December 2009.
Tenant Concentrations
Three tenants, who each represent more than 10% of rental revenues, contributed approximately 44%, 41% and 39% of our base rental revenues for the years ended December 31, 2010, 2009 and 2008, respectively, and represent approximately 43%, 24% and 24%, respectively, of the total rentable square footage of the operating property portfolio.
Off-Balance Sheet Investments
We have three off-balance sheet investments — our Marc Realty, Lex-Win Concord and Sealy investment platforms. For our three off-balance sheet arrangements, our exposure to loss is limited to our investment balance.
Critical Accounting Policies and Estimates
Impairment
Operating properties — We evaluate the need for an impairment loss on real estate assets when indicators of impairment are present and the projected undiscounted cash flows from an asset are not sufficient to recover an 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.
Preferred equity investments — We have certain mezzanine loans which are classified as preferred equity investments. Determining whether a preferred equity investment is other-than-temporarily impaired requires significant judgment. This evaluation includes consideration of the length of time and extent to which the fair value of an investment has been less than its cost basis, our intent and ability to hold the investment until a forecasted recovery in value and the collateral underlying the investment.
Loan assets — Loan assets are periodically evaluated for possible impairment in order to determine whether it is necessary to establish a loan loss allowance. 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. A loan asset is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms of the loan. Impairment is then measured based on the present value of expected future cash flows or, if the loan is collateral dependent, the fair value of the collateral. When a loan is considered to be impaired, we will establish an allowance for loan losses and record a corresponding charge to earnings. Significant judgments are required in determining impairment. We do not record interest income on impaired loans. Any cash receipts on impaired loans are recorded as a recovery reducing the allowance for loan losses.
Equity investments — Equity investments are reviewed for impairment periodically. Equity investments for which the carrying value exceeds the fair value, the Trust evaluates if these are other-than-temporarily impaired.
Contingent liabilities — Estimates are used when accounting for the allowance for contingent liabilities and other commitments. Estimating probable losses requires analysis of multiple forecasts that often depend on judgments about potential actions by third parties such as regulators. All of the estimates and evaluations are susceptible to change and actual results could differ from the estimates and evaluations.
Variable Interest Entities
We have evaluated our investments to determine whether they are variable interests in a variable interest entity (“VIE”). A VIE is required 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 its expected returns. Determination of whether we must consolidate variable interest entities requires significant judgments and assumptions to be made.

 

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Net Leased Property — At December 31, 2010 we identified our wholly owned Andover, Massachusetts operating property as a VIE given that the net leased tenant has an option to purchase the building for a fixed price and the option is exercisable at the tenant’s discretion at any point during the lease term. We have the determined that we have the power to direct activities that most significantly impact the economics of the property and therefore are the primary beneficiary and consolidate this property.
Deer Valley Venture — We have concluded that WRT-DV LLC (“WRT-DV”), the entity that owns the Deer Valley property that we hold a 96.5% ownership interest is a VIE. This assessment is primarily based on the fact that the equity investment at risk is not sufficient to finance its activities without additional subordinated financial support. We have determined that we have the power to direct activities that most significantly impact the economics of the property and therefore are the primary beneficiary and consolidate this property.
Loans Receivable and Loan securities — At December 31, 2010 we identified certain loan assets as variable interests in VIEs because the equity investment at risk is not considered sufficient for the entity to finance its activities without additional subordinated financial support. However, we do not currently have the power to direct the activities of the ventures collateralizing any of its loans receivable. For this reason, we believe that we do not have the power to direct activities that most significantly impact the economics of the VIE and therefore are not the primary beneficiary of these ventures. We account for these investments under the guidance for loans receivable and real estate debt investments.
Concord and CDH CDO — At December 31, 2010 we have identified our Concord and CDH CDO equity investments (the “Concord Investments”) as variable interests in VIEs. The carrying value of our Concord Investments is zero and we do not have the current obligation to provide financial or other support to the Concord Investments and the obligations of the Concord Investments are non-recourse to us. In addition we do not have the power to direct activities that most significantly impact the economics of the VIE and therefore we have determined that we are not the primary beneficiary and we account for these investments under the equity method of accounting.
Marc Realty Investments — We have concluded that our 12 Marc Realty equity investments and our preferred equity investment are variable interests in VIEs. This assessment is primarily based on the fact that the underlying entities do not have sufficient equity at risk to permit them to finance their activities without additional subordinated financial support. While we maintain certain protective rights under the terms of the agreements governing the Marc Realty investments, the power to direct the activities that most significantly impact the economics of the Marc Realty investments is vested in Marc Realty as the managing member. As such, management has concluded that we are not the primary beneficiary of these Marc Realty investments.
Recently Issued Accounting Standards
See “ITEM 8. Financial Statements and Supplementary Data — Note 2.”

 

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ITEM 7A — QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We have exposure to fluctuations in market interest rates. Market interest rates are highly sensitive to many factors beyond our control. Various financial vehicles exist which would allow management to mitigate the potential negative effects of interest rate fluctuations on our cash flow and earnings.
Our liabilities include both fixed and variable rate debt. As discussed in ITEM 7 — Management’s Discussion and Analysis of Financial Conditions and Results of Operations, we seek to limit our risk to interest rate fluctuations through match financing on our loan assets as well as through hedging transactions. In this regard, we entered into the following agreement:
 
Effective June 30, 2010, we entered into an interest rate swap agreement, with a notional amount of $20,000,000 and will expire June 30, 2011 which effectively converts the interest rate on that portion of principal from a floating rate of 1.75% to a fixed rate of 2.675%.
The fair value of our debt, based on discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term of such debt, was less than its carrying value by $22,042,000 and $25,704,000 at December 31, 2010 and 2009 respectively.
The following table shows what the annual effect a change in the LIBOR rate would have on interest expense based upon the unhedged balances in variable rate debt at December 31, 2010 (in thousands):
                                 
    Change in LIBOR(2)  
    -0.26%     1%     2%     3%  
 
                               
Change in consolidated interest expense
  $ (66 )   $ 255     $ 509     $ 764  
Pro-rata share of change in interest expense of debt on non-consolidated entities (1)
    (20 )     77       237       423  
 
                       
(Increase) decrease in net income
  $ (86 )   $ 332     $ 746     $ 1,187  
 
                       
     
(1)  
Represents our pro-rata share of a change in interest expense in our Marc Realty equity investment. The amount does not reflect our equity investment in Concord which has been written down to zero.
 
(2)  
The one month LIBOR rate at December 31, 2010 was 0.26%.
We may utilize various financial instruments to mitigate the potential negative impact of interest rate fluctuations on our cash flows and earnings, including hedging strategies, depending on our analysis of the interest rate environment and the costs and risks of such strategies. In addition, as of December 31, 2010 our variable rate loans receivable with a face value aggregating $53,922,000 partially mitigate our exposure to change in interest rates.
Market Value Risk
Our hedge transactions using derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. The one counterparty of these arrangements is KeyBank at the present time. We do not anticipate that this counterparty will fail to meet its obligations. There can be no assurance that we will adequately protect against the foregoing risks.

 

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Table of Contents

Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of Winthrop Realty Trust:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Winthrop Realty Trust and its subsidiaries at December 31, 2010 and December 31, 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under ITEM 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits in 2010, 2009 and 2008. 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2011

 

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WINTHROP REALTY TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
                 
    December 31,  
    2010     2009  
ASSETS
               
Investments in real estate, at cost
               
Land
  $ 37,142     $ 20,659  
Buildings and improvements
    271,357       228,419  
 
           
 
    308,499       249,078  
Less: accumulated depreciation
    (36,232 )     (31,269 )
 
           
Investments in real estate, net
    272,267       217,809  
 
               
Cash and cash equivalents
    45,257       66,493  
Restricted cash held in escrows
    8,593       9,505  
Loans receivable, net
    110,395       26,101  
Accounts receivable, net of allowances of $262 and $565, respectively
    12,402       14,559  
Securities carried at fair value
    33,032       52,394  
Loan securities carried at fair value
    11,981       1,661  
Available for sale securities, net
          203  
Preferred equity investment
    4,010       4,012  
Equity investments
    81,937       73,207  
Lease intangibles, net
    26,821       22,666  
Deferred financing costs, net
    1,158       1,495  
Assets held for sale
    2,275       3,087  
 
           
TOTAL ASSETS
  $ 610,128     $ 493,192  
 
           
 
               
LIABILITIES
               
Mortgage loans payable
  $ 230,443     $ 216,767  
Series B-1 Cumulative Convertible Redeemable Preferred Shares, $25 per share liquidation preference; 852,000 shares authorized and outstanding at December 31, 2010 and December 31, 2009
    21,300       21,300  
Revolving line of credit
    25,450        
Accounts payable and accrued liabilities
    12,557       7,401  
Dividends payable
    4,431       3,458  
Deferred income
    150       48  
Below market lease intangibles, net
    2,696       2,849  
Liabilites of held for sale assets
    33        
 
           
TOTAL LIABILITIES
    297,060       251,823  
 
           
 
               
COMMITMENTS AND CONTINGENCIES
               
 
               
NON-CONTROLLING REDEEMABLE PREFERRED INTEREST
               
Series C Cumulative Convertible Redeemable Preferred Shares, $25 per share liquidation preference, 144,000 and 544,000 shares authorized and outstanding at December 31, 2010 and December 31, 2009, respectively
    3,221       12,169  
 
           
Total non-controlling redeemable preferred interest
    3,221       12,169  
 
           
 
               
EQUITY
               
Winthrop Realty Trust Shareholders’ Equity:
               
Common Shares, $1 par, unlimited shares authorized; 27,030,186 and 20,375,483 issued and outstanding at December 31, 2010 and December 31, 2009, respectively
    27,030       20,375  
Additional paid-in capital
    569,586       498,118  
Accumulated distributions in excess of net income
    (300,782 )     (301,317 )
Accumulated other comprehensive loss
    (63 )     (87 )
 
           
Total Winthrop Realty Trust Shareholders’ Equity
    295,771       217,089  
Non-controlling interests
    14,076       12,111  
 
           
Total Equity
    309,847       229,200  
 
           
TOTAL LIABILITIES AND EQUITY
  $ 610,128     $ 493,192  
 
           
See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
                         
    Years Ended December 31,  
    2010     2009     2008  
Revenue
                       
Rents and reimbursements
  $ 38,239     $ 40,021     $ 41,504  
Interest, dividends and discount accretion
    17,128       7,336       2,448  
 
                 
 
    55,367       47,357       43,952  
 
                 
Expenses
                       
Property operating
    8,674       7,042       6,767  
Real estate taxes
    2,542       2,542       2,428  
Depreciation and amortization
    10,008       10,585       11,572  
Interest
    15,375       16,664       21,963  
Impairment loss on investment in real estate
          10,000       2,100  
Impairment loss on available for sale securities
                207  
Provision for loss on loans receivable
          2,152       1,179  
General and administrative
    8,834       7,303       6,887  
State and local taxes
    134       157       329  
 
                 
 
    45,567       56,445       53,432  
 
                 
Other income (loss)
                       
Earnings (loss) from preferred equity investments
    338       (2,108 )     (1,645 )
Equity in loss of equity investments
    (2,007 )     (103,092 )     (69,310 )
Gain on sale of available for sale securities
                1,580  
Gain on sale of mortgage-backed securities
                454  
Gain on sale of other assets
                24  
Realized gain on sale of securities carried at fair value
    558       5,416        
Unrealized gain on securities carried at fair value
    5,060       17,862       24  
Impairment loss on real estate loan available for sale
          (203 )      
Gain on extinguishment of debt
          6,846       6,284  
Realized gain on loan securities carried at fair value
    469              
Unrealized gain on loan securities carried at fair value
    5,011              
Interest income
    139       172       1,670  
Other income
                499  
 
                 
 
    9,568       (75,107 )     (60,420 )
 
                 
 
                       
Income (loss) from continuing operations
    19,368       (84,195 )     (69,900 )
 
                       
Discontinued operations
                       
Income (loss) from discontinued operations
    (2,003 )     865       2,207  
 
                 
 
                       
Consolidated net income (loss)
    17,365       (83,330 )     (67,693 )
Income attributable to non-controlling interest
    (888 )     (1,017 )     (483 )
 
                 
Net income (loss) attributable to Winthrop Realty Trust
    16,477       (84,347 )     (68,176 )
Income attributable to non-controlling redeemable preferred interest
    (288 )     (147 )      
 
                 
Net income (loss) attributable to Common Shares
  $ 16,189     $ (84,494 )   $ (68,176 )
 
                 
 
                       
Comprehensive income (loss)
                       
Consolidated net income (loss)
  $ 17,365     $ (83,330 )   $ (67,693 )
Change in unrealized gain on mortgage-backed securities
                190  
Change in unrealized gain on available for sale securities
    2       19       1,662  
Change in unrealized gain (loss) on interest rate derivative
    22       543       (743 )
Change in unrealized gain (loss) from equity investments
          26,174       (6,137 )
Less reclassification adjustment included in net income
                (2,058 )
 
                 
Comprehensive income (loss)
  $ 17,389     $ (56,594 )   $ (74,779 )
 
                 
 
                       
Per Common Share data — Basic
                       
Income (loss) from continuing operations
  $ 0.81     $ (5.24 )   $ (4.74 )
Income (loss) from discontinued operations
    (0.09 )     0.05       0.15  
 
                 
Net income (loss) attributable to Winthrop Realty Trust
  $ 0.72     $ (5.19 )   $ (4.59 )
 
                 
 
                       
Per Common Share data — Diluted
                       
Income (loss) from continuing operations
  $ 0.81     $ (5.24 )   $ (4.74 )
Income (loss) from discontinued operations
    (0.09 )     0.05       0.15  
 
                 
Net income (loss) attributable to Winthrop Realty Trust
  $ 0.72     $ (5.19 )   $ (4.59 )
 
                 
 
                       
Basic Weighted-Average Common Shares
    22,566       16,277       14,866  
 
                 
Diluted Weighted-Average Common Shares
    22,568       16,277       14,866  
 
                 
See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands except per share data)
                                                         
                            Accumulated     Accumulated              
    Common Shares     Additional     Distributions     Other     Non-        
    of Beneficial Interest     Paid-In     in Excess of     Comprehensive     Controlling        
    Shares     Amount     Capital     Net Income     Income     Interests     Total  
 
                                                       
Balance, December 31, 2007
    13,258     $ 66,292     $ 358,145     $ (124,553 )   $ (8,090 )   $ 9,978     $ 301,772  
 
                                                       
Net loss attributable to Winthrop Realty Trust
                      (68,176 )                 (68,176 )
Net income attributable to non-controlling interests
                                  483       483  
Distributions to non-controlling interests
                                  (103 )     (103 )
Contributions from non-controlling interests
                                  600       600  
Dividends paid or accrued on Common Shares of beneficial interest ($1.35 per share)
                      (20,555 )                 (20,555 )
Change in unrealized loss on available for sale securities, net of reclassification adjustments for amounts included in net income
                            58             58  
Change in unrealized loss on mortgage backed securities held for sale
                            (264 )           (264 )
Change in unrealized gain on interest rate derivatives
                            (743 )           (743 )
Change in unrealized loss from equity investments
                            (6,137 )           (6,137 )
Effect of the Reverse Split
          (63,298 )     63,298                          
Partial shares retired due to Reverse Split
    (1 )     (5 )     (5 )                       (10 )
Purchase and retirement of Common Shares
    (70 )     (70 )     (860 )                       (930 )
Conversion of Series B-1 Preferred Shares to Common Shares
    548       2,742       9,190                         11,932  
Issuance of Common Shares through rights offering
    1,769       8,845       28,029                         36,874  
Stock issued pursuant to dividend reinvestment plan
    250       1,248       3,159                         4,407  
 
                                         
Balance, December 31, 2008
    15,754       15,754       460,956       (213,284 )     (15,176 )     10,958       259,208  
 
                                                       
Cumulative effect, change in accounting principle
                      11,647       (11,647 )            
Net loss attributable to Winthrop Realty Trust
                      (84,347 )                 (84,347 )
Net income attributable to non-controlling interests
                                  1,017       1,017  
Distributions to non-controlling interests
                                  (843 )     (843 )
Contributions from non-controlling interests
                                  979       979  
Dividends paid or accrued on Common Shares of beneficial interest ($0.9125 per share)
                      (15,186 )                 (15,186 )
Dividends paid or accrued on Series C Preferred Shares ($0.406 per share)
                      (147 )                 (147 )
Change in unrealized loss on available for sale securities, net of reclassification adjustments for amounts included in net income
                            19             19  
Change in unrealized gain on interest rate derivatives
                            543             543  
Change in unrealized loss from equity investments
                            26,174             26,174  
Issuance of Common Shares through rights offering
    4,451       4,451       35,717                         40,168  
Stock issued pursuant to dividend reinvestment plan
    170       170       1,445                         1,615  
 
                                         
Balance, December 31, 2009
    20,375       20,375       498,118       (301,317 )     (87 )     12,111       229,200  
 
                                         
(Continued on next page)
See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

(In thousands except per share data, continued)
                                                         
                            Accumulated     Accumulated              
    Common Shares     Additional     Distributions     Other     Non-        
    of Beneficial Interest     Paid-In     in Excess of     Comprehensive     Controlling        
    Shares     Amount     Capital     Net Income     Income     Interests     Total  
 
                                                       
Balance, December 31, 2009
    20,375     $ 20,375     $ 498,118     $ (301,317 )   $ (87 )   $ 12,111     $ 229,200  
 
                                                       
Net income attributable to Winthrop Realty Trust
                      16,477                   16,477  
Net income attributable to non-controlling interests
                                  888       888  
Distributions to non-controlling interests
                                  (354 )     (354 )
Contributions from non-controlling interests
                                  1,431       1,431  
Dividends paid or accrued on Common Shares of beneficial interest ($0.65 per share)
                      (15,654 )                 (15,654 )
Dividends paid or accrued on Series C Preferred Shares ($0.406 per share)
                      (288 )                 (288 )
Change in unrealized loss on available for sale securities, net of reclassification adjustments for amounts included in net income
                            2             2  
Change in unrealized gain on interest rate derivatives
                            22             22  
Conversion of Series C Preferred Shares to Common Shares
    714       714       8,234                         8,948  
Net proceeds from Common Shares offering
    5,750       5,750       61,024                         66,774  
Stock issued pursuant to dividend reinvestment plan
    191       191       2,210                         2,401  
 
                                         
 
                                                       
Balance, December 31, 2010
    27,030     $ 27,030     $ 569,586     $ (300,782 )   $ (63 )   $ 14,076     $ 309,847  
 
                                         
See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                         
    Years Ended December 31,  
    2010     2009     2008  
Cash flows from operating activities
                       
Net income (loss)
  $ 17,365     $ (83,330 )   $ (67,693 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Depreciation and amortization (including amortization of deferred financing costs)
    6,988       7,504       8,072  
Amortization of lease intangibles
    3,033       4,771       5,507  
Straight-lining of rental income
    212       (1,280 )     (1,701 )
Loan discount accretion
    (8,782 )     (1,021 )      
(Earnings) loss of preferred equity investments
    (338 )     2,758       2,805  
Distributions of income from preferred equity investments
    340       2,373       4,804  
Loss of equity investments
    2,007       103,092       69,310  
Distributions of income from equity investments
    5,270       2,784       6,878  
Restricted cash held in escrows
    1,167       (1,824 )     (318 )
Gain on sale of securities carried at fair value
    (558 )     (5,416 )      
Unrealized gain on securities carried at fair value
    (5,060 )     (17,862 )     (24 )
Gain on sale of available for sale securities
                (1,580 )
Gain on sale of mortgage backed securities held for sale
                (454 )
Gain on sale of investments in real estate
                (1,807 )
Gain on loan securities carried at fair value
    (469 )            
Unrealized gain on loan securities carried at fair value
    (5,011 )            
Impairment loss on real estate loan available for sale
          203        
Impairment loss on investments in real estate
    2,720       10,000       2,307  
Gain on extinguishment of debt
          (7,138 )     (6,284 )
Provision for loss on loan receivable
          2,152       1,179  
Tenant leasing costs
    (2,996 )     (2,191 )     795  
Bad debt (recovery) expense
    (643 )     340       62  
Net change in interest receivable
    (361 )     (74 )     (70 )
Net change in accounts receivable
    2,363              
Net change in accounts payable and accrued liabilities
    2,365       (873 )     4,084  
 
                 
Net cash provided by operating activities
    19,612       14,968       25,872  
 
                 
Cash flows from investing activities
                       
Issuance and acquisition of loans receivable
    (122,301 )     (31,514 )     (24,124 )
Investments in real estate
    (23,484 )     (2,522 )     (3,901 )
Investment in equity investments
    (25,632 )     (3,358 )     (14,093 )
Investment in preferred equity investment
          (487 )     (4,973 )
Return of equity on equity investments
    9,625       118       19,041  
Investment in real estate loan available for sale
          (35,000 )      
Return of capital distribution from securities carried at fair value
    181              
Purchase of available for sale securities
                (5,055 )
Purchase of securities carried at fair value
    (13,222 )     (33,115 )     (36,896 )
Proceeds from sale of investment in real estate
    1,750              
Proceeds from preferred equity investments
          145       21,273  
Proceeds from sale of mortgage backed securities available for sale
                78,318  
Proceeds from sale of real estate loan available for sale
          34,797        
Proceeds from sale of securities carried at fair value
    31,249       39,015       422  
Proceeds from sale of available for sale securities
    205             58,088  
Proceeds of loan securities at maturity
    2,272              
Proceeds from sale of loans receivable
    12,876              
Restricted cash held in escrows
    (1,508 )     2,668       (252 )
Collection of loans receivable
    15,064       11,467       12,635  
Cash from foreclosure on properties
    275              
 
                 
Net cash provided by (used in) investing activities
    (112,650 )     (17,786 )     100,483  
 
                 
(Continued on next page)
See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, continued)
                         
    Years Ended December 31,  
    2010     2009     2008  
Cash flows from financing activities
                       
Proceeds from mortgage loans payable
  $     $ 49     $ 875  
Proceeds from loan payable
          19,818        
Payment of loan payable
          (19,818 )      
Proceeds from revolving line of credit
    25,450       35,000       70,000  
Payment of revolving line of credit
          (35,000 )     (70,000 )
Principal payments of mortgage loans payable
    (10,199 )     (6,229 )     (8,063 )
Restricted cash held in escrows
    1,520       4,004       (5,127 )
Payments of note payable
          (9,800 )      
Deferred financing costs
    (252 )     (61 )     (392 )
Contribution from non-controlling interest
    1,431       979       600  
Distribution to non-controlling interest
    (354 )     (843 )     (103 )
Issuance of Common Shares under Dividend Reinvestment Plan
    2,401       1,615       4,407  
Issuance of Common Shares through offering
    66,774       40,168       36,874  
Dividend paid on Common Shares
    (14,573 )     (17,809 )     (30,863 )
Dividend paid on Series C Preferred Shares
    (396 )            
Redemption of Series B-1 Preferred Shares
          (2,000 )     (18,583 )
Repayment of borrowings under repurchase agreement
                (75,175 )
Deposit on Series B-1 Preferred Shares
                (17,081 )
Proceeds from note payable
                9,800  
Purchase of retirement of Common Shares
                (930 )
Redemption of Common Shares through reverse split
                (10 )
 
                 
Net cash provided by (used in) financing activities
    71,802       10,073       (103,771 )
 
                 
 
                       
Net increase (decrease) in cash and cash equivalents
    (21,236 )     7,255       22,584  
Cash and cash equivalents at beginning of period
    66,493       59,238       36,654  
 
                 
Cash and cash equivalents at end of period
  $ 45,257     $ 66,493     $ 59,238  
 
                 
 
                       
Supplemental Disclosure of Cash Flow Information
                       
Interest paid
  $ 14,240     $ 16,324     $ 25,167  
 
                 
Taxes paid
  $ 133     $ 220     $ 189  
 
                 
 
                       
Supplemental Disclosure on Non-Cash Investing and Financing Activities
                       
Dividends accrued on Common Shares
  $ 4,392     $ 3,311     $ 5,934  
 
                 
Dividends accrued on Series C Preferred Shares
  $ 39     $ 147        
 
                 
Capital expenditures accrued
  $ 1,046     $ 201     $ 358  
 
                 
Distribution from equity investment
  $     $ 161     $  
 
                 
Conversion of Series B-1 Preferred Shares into Common Shares
  $     $     $ 12,339  
 
                 
Redemption of Series B-1 Preferred Shares
  $     $ (17,081 )   $  
 
                 
Deposit on redemption of Series B-1 Preferred Shares
  $     $ 17,081     $  
 
                 
Transfer of preferred equity investments to equity method investments
  $     $ (41,823 )   $  
 
                 
Transfer of loans to equity method investments
  $     $ (15,805 )   $  
 
                 
Transfer to equity method investments from loans and preferred equity investments
  $     $ 57,628     $  
 
                 
Transfer from loan assets to investments in real estate and lease intangibles
  $ 19,210     $     $  
 
                 
Transfer to investments in lease intangibles
  $ 3,204     $     $  
 
                 
Transfer to investments in real estate
  $ 41,425     $     $  
 
                 
Transfer to below market lease intangibles
  $ 125     $     $  
 
                 
Assumption of mortgage loan on investment in real estate
  $ 23,875     $     $  
 
                 
See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   
Amounts related to number of buildings, square footage and tenant data are unaudited.
1.  
Business
   
Winthrop Realty Trust (“WRT”), a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code (the “Code”), is an unincorporated association in the form of a business trust organized in Ohio under a Declaration of Trust dated August 1, 1961, as amended and restated on May 21, 2009, which has as its stated principal business activity the ownership and management of, and lending to, real estate and related investments.
 
   
Since January 1, 2005, WRT has conducted its business through WRT Realty L.P., a Delaware limited partnership (the “Operating Partnership”). WRT is the sole general partner of, and owns directly and indirectly, 100% of the limited partnership interest in the Operating Partnership. All references to the “Trust” refer to WRT and its consolidated subsidiaries, including the Operating Partnership.
 
   
The Trust is engaged in the business of owning real property and real estate related assets which it categorizes into three specific areas: (i) ownership of investment properties (“operating properties”); (ii) origination and acquisition of loans and debt securities collateralized directly or indirectly by commercial real property (“loan assets”), including collateral mortgage-backed securities and collateral debt obligation securities; and (iii) equity and debt interests in other real estate investment trusts (“REIT securities”).
2.  
Summary of Significant Accounting Policies
   
Consolidation and Basis of Presentation
 
   
The consolidated financial statements represent the consolidated results of WRT, its wholly-owned taxable REIT subsidiary, WRT-TRS Management Corp. (“TRS”), and the Operating Partnership. TRS’ sole asset is a 0.2% ownership interest in the Operating Partnership. All majority-owned subsidiaries and affiliates over which the Trust has financial and operating control and variable interest entities (“VIE”s) in which the Trust has determined it is the primary beneficiary are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. The Trust accounts for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Trust’s share of the earnings of these joint ventures and companies is included in consolidated net income.
 
   
Reverse Stock Split
 
   
In November 2008 WRT effected a 1-for-5 reverse stock split (the “Reverse Split”) of its Common Shares of Beneficial Interest (“Common Shares”) pursuant to which five Common Shares issued and outstanding as of the close of the market on November 28, 2008 were automatically combined into one Common Share, subject to the elimination of fractional shares. All references to Common Shares outstanding, per Common Share amounts and stock option data have been restated to reflect the effect of the Reverse Split for all periods presented.
 
   
Reclassifications
 
   
Certain prior year balances have been reclassified in order to conform to the current year presentation. Discontinued operations for the periods presented include the Trust’s properties in Biloxi, Mississippi; Athens, Georgia; Kansas City, Kansas; Lafayette, Louisiana; Sherman, Texas; and Knoxville, Tennessee.
 
   
Out of Period Adjustments
 
   
During the quarter ended June 30, 2010, the Trust identified an error in its year ended December 31, 2009 allocation of fair value attributable to the building component of its Athens, Georgia property which was assessed for impairment in connection with its reclassification as held for sale and its presentation in discontinued operations. As a result, net loss was understated by approximately $700,000 for the year ended December 31, 2009. The Trust determined that this amount was not material to the years ended December 31, 2010 or 2009, or to the three and six months ended June 30, 2010. As such, a charge of approximately $700,000 has been recorded in the consolidated statement of operations within discontinued operations as an out of period adjustment in the second quarter of 2010. There was no impact on cash flow from operations.
 
   
During the quarter ended December 31, 2010, the Trust identified an error related to the capitalization of certain legal costs in its year ended December 31, 2009 financial statements. As a result, net loss was understated by approximately $228,000 for the year ended December 31, 2009. The Trust determined that this amount was not material to the year or any quarter for the years ended December 31, 2010 or 2009. As such, a charge of $228,000 has been recorded in the consolidated statement of operations as an out of period adjustment for the year ended December 31, 2010. There was no impact on cash flow from operations.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions in determining the values of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amounts of revenue and expenses during the reporting period. The estimates that are particularly susceptible to management’s judgment include but are not limited to the impairment of real estate, loans and investments in ventures and real estate securities at fair value. In addition, estimates are used in 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.
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 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 shorter of the estimated useful life of the improvement or the term of the lease of the tenant.
Upon the acquisition of real estate, the Trust assesses the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above and below market leases and acquired in-place leases and tenant relationships) and acquired liabilities and the Trust allocates purchase price based on these assessments. The Trust assesses fair value based on estimated cash flow projections and utilizes 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.
Real estate investments and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated from the use and eventual disposition of the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized equal to the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell. The assets and liabilities are classified separately as held for sale in the consolidated balance sheet and are no longer depreciated.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments purchased with maturities of three months or less. The Trust maintains cash and cash equivalents in financial institutions in excess of insured limits, but believes this risk is mitigated by only investing in or through major financial institutions.
Restricted Cash
Restricted cash in escrow accounts and deposits securing a loan payable include cash reserves for tenant improvements, leasing commissions, real estate taxes and other expenses pursuant to the loan agreements.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Receivable
The Trust’s policy is to record loans receivable at cost, net of unamortized discount unless such loan receivable is deemed to be impaired. Discounts on loans receivable are amortized over the life of the loan receivable using the effective interest method based upon an evaluation of prospective future cash flows. The amortization is reflected as an adjustment to interest income. Other costs incurred in connection with acquiring loans, such as marketing and administrative costs, are charged to expense as incurred.
The Trust evaluates the collectability of the interest and principal of each of its loans to determine impairment. A loan receivable 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 of the loan receivable. Impairment is then measured based on the present value of expected future cash flows or the fair value of the collateral. When a loan receivable is considered to be impaired, the Trust will record a loan loss allowance and a corresponding charge to earnings. Significant judgments are required in determining impairment. The Trust does not record interest income on impaired loans receivable. Any cash receipts on impaired loans receivable are recorded as a recovery reducing the allowance for loan losses. The Trust charges uncollectible loans against its allowance for loan losses after it has exhausted all economicaly warranted legal rights and remedies to collect the receivables or upon successful foreclosure and taking of loan collateral.
Certain real estate operating properties are acquired through foreclosure or through deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans that the Trust intends to hold, operate or develop for a period of at least twelve months. These assets are initially recorded at their estimated fair value. If there is any excess of the loan carrying value over the fair value of the property acquired, a charge is recorded to loan losses when title to the property is obtained. Additionally, upon acquisition of a property, tangible and intangible assets and liabilities acquired are recorded at their estimated fair values and depreciation is computed in the same manners as described in “Investments in Real Estate” above.
Accounts Receivable
Accounts receivable are recorded at the contractual 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 existing accounts receivable. The Trust reviews the allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectability. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote.
Securities and Loan Securities at Fair Value
The Trust elected to adopt a one-time option to apply fair value treatment on its existing financial assets and liabilities on January 1, 2008. For all new financial instruments, the Trust has the option to elect fair value for these financial assets or liabilities. The Trust elected the fair value option for certain real estate securities to mitigate a divergence between accounting and economic exposure for these assets. These securities are recorded on the consolidated balance sheets as securities carried at fair value. The changes in the fair value of these instruments are recorded in unrealized gain (loss) on investments and other in the Consolidated Statements of Operations and Comprehensive Income.
Preferred Equity Investment
The Trust invests in certain 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, as a venture or as real estate. The Trust classifies these mezzanine loans 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. Earnings for each investment are recognized in accordance with each respective investment agreement and where applicable, based upon an allocation of the investment’s net assets at adjusted book value as if the investment was hypothetically liquidated at the end of each reporting period.
At each reporting period the Trust assesses whether there are any indicators or declines in the fair value of preferred equity investments. An investment’s value is impaired only if the Trust’s estimate of the fair value of the investment is less than the carrying value of the investment and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 or managing member in situations where the Trust is the general partner or managing member, and (ii) substantive participating rights of equity holders in significant business decisions including dispositions and acquisitions of assets, financing, operations and capital budgets, and other contractual rights. 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. To recognize the character of distributions from equity investments, the Trust looks as the nature of the cash distribution to determine the proper character of cash flow distributions as either returns on investment, which would be included in operating activities, or returns of investment, which would be included in investing activities.
At each reporting period the Trust assesses whether there are any indicators or declines in the fair value of the equity investments. An investment’s value is impaired only if the Trust’s estimate of the fair value of the investment is less than the carrying value of the investment and such difference is deemed to be other-than-temporary. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.
Lease Intangibles
The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and improvements and fixtures and equipment based on management’s determination of the relative fair values of these assets. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods, current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions.
In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market, below-market and 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 a liability 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 on a straight-lined basis over the terms of the related agreements as a component of interest expense on a basis which approximates the effective interest method.
Financial Instruments
Financial instruments held by the Trust include cash and cash equivalents, restricted cash, real estate securities available for sale, loans receivable, interest rate swap agreements, accounts receivable, revolving line of credit, accounts payable and long term debt. Cash and cash equivalents, restricted cash, real estate securities available for sale and interest rate swap agreements are recorded at fair value. The fair value of accounts receivable and accounts payable approximate their current carrying amounts.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Financial Instruments
The Trust’s interest rate swap agreement is carried on the balance sheet at its fair value, as an asset if the counterparty would be required to pay the Trust, or as a liability if the Trust would be required to pay the counterparty to settle the swap. Since the Trust’s derivative is designated as “cash flow hedge,” the change in the fair value of 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 item affects earnings. The ineffective amount of the interest rate swap agreement, if any, is recognized in earnings. The effective portion of the change in fair value is recorded through other comprehensive income.
Upon entering into hedging transactions, the Trust documents the relationship between the interest rate swap agreements and the hedged item. The Trust also documents its risk management policies, including objectives and strategies, as they relate to its hedging activities. Both at inception of a hedge and on an on-going basis, the Trust assesses whether or not the hedge is highly “effective” in achieving offsetting changes in cash flow attributable to the hedged item. 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 a hedge or not is no longer appropriate. To date, the Trust has not discontinued hedge accounting for its interest rate swap agreements. The Trust utilizes its interest rate swap agreement to manage interest rate risk and does not intend to enter into derivative transactions for speculative or trading purposes.
Revenue Recognition
The Trust accounts for its leases with tenants as operating leases with rental revenue recognized on a straight-line basis. The straight-line rent adjustment decreased revenue by $212,000 in 2010, and increased revenue by $1,280,000 in 2009 and $1,701,000 in 2008. The accrued straight-line rent receivable amounts at December 31, 2010 and 2009 were $8,729,000 and $8,941,000, net of allowances, respectively.
Rental income may also include payments received in connection with lease termination agreements. In addition, leases typically provide for reimbursement to the Trust of common area maintenance costs, real estate taxes and other operating expenses. Operating expense reimbursements are recognized as earned.
Pursuant to the terms of the lease agreements with respect to net lease properties, the tenant at each property is required to pay all costs associated with the property including property taxes, ground rent, maintenance costs and insurance. These costs are not reflected in the consolidated financial statements.
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.
The Trust recognizes lease termination payments as a component of rental revenue in the period received, provided there are no further Trust obligations under the lease; otherwise, the lease termination payment is amortized on a straight-line basis over the remaining obligation period.
Income Taxes
The Trust operates in a manner intended to enable it to continue to qualify as a REIT. 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.
In order for the Trust to continue to qualify as a REIT, the value of the TRS stock cannot exceed 20% of the value of the Trust’s total assets. The net income of TRS 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 TRS do not file consolidated tax returns.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Trust reviews its tax positions under accounting guidance which require that a tax position may only be recognized in the financial statements if it is more likely than not that the tax position will prevail if challenged by tax authorities. The Trust believes it is more likely than not that its tax positions will be sustained in any tax examination. The Trust has no income tax expense, deferred tax assets or deferred tax liabilities associated with any such uncertain tax positions for the operations of any entity included in the Consolidated Statement of Operations and Comprehensive Income.
Earnings Per Share
The Trust determines basic earnings per share on the weighted average number of Common Shares outstanding during the period and reflects the impact of participating securities. The holders of the Trust’s Series B-1 Cumulative Convertible Redeemable Preferred Shares (“Series B-1 Preferred Shares”) and the Series C Cumulative Convertible Redeemable Preferred Shares (“Series C Preferred Shares”) are entitled to receive cumulative preferential dividends on a quarterly basis equal to the greater of (i) $0.40625 per share quarterly (6.5% of the liquidation preference on an annualized basis) or (ii) cash dividends payable on the number of Common Shares into which the Series B-1 Preferred Shares and Series C Preferred Shares (assuming for this purpose that the conversion price of the Series C Preferred Shares equals the conversion price of the Series B-1 Preferred Shares) are convertible. The Trust computes diluted earnings per share based on the weighted average number of Common Shares outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.
The Trust has calculated earnings per share in accordance with relevant accounting guidance for participating securities and the two class method. The reconciliation of earnings attributable to Common Shares outstanding for the basic and diluted earnings per share calculation is as follows (in thousands, except per share data):

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         
    2010     2009     2008  
Basic
                       
Income (loss) from continuing operations
  $ 19,368     $ (84,195 )   $ (69,900 )
Income attributable to non-controlling interest
    (888 )     (1,017 )     (483 )
Preferred dividend of Series C Preferred Shares
    (288 )     (147 )      
 
                 
Income (loss) from continuing operations applicable to Common Shares
    18,192       (85,359 )     (70,383 )
Income (loss) from discontinued operations
    (2,003 )     865       2,207  
 
                 
Net income (loss) applicable to Common Shares for earnings per share purposes
  $ 16,189     $ (84,494 )   $ (68,176 )
 
                 
 
                       
Basic weighted-average Common Shares
    22,566       16,277       14,866  
 
                 
 
                       
Income (loss) from continuing operations
  $ 0.81     $ (5.24 )   $ (4.74 )
Income (loss) from discontinued operations
    (0.09 )     0.05       0.15  
 
                 
Net income (loss) per Common Share
  $ 0.72     $ (5.19 )   $ (4.59 )
 
                 
Diluted
                       
Income (loss) from continuing operations
  $ 19,368     $ (84,195 )   $ (69,900 )
Income attributable to non-controlling interest
    (888 )     (1,017 )     (483 )
Preferred dividend of Series C Preferred Shares
    (288 )     (147 )      
 
                 
Income (loss) from continuing operations applicable to Common Shares
    18,192       (85,359 )     (70,383 )
Income (loss) from discontinued operations
    (2,003 )     865       2,207  
 
                 
Net income (loss) applicable to Common Shares for earnings per share purposes
  $ 16,189     $ (84,494 )   $ (68,176 )
 
                 
 
                       
Basic weighted-average Common Shares
    22,566       16,277       14,866  
Series B-1 Preferred Shares (1)
                 
Series C Preferred Shares (2)
                 
Stock options (3)
    2              
 
                 
Diluted weighted-average Common Shares
    22,568       16,277       14,866  
 
                 
 
                       
Income (loss) from continuing operations
  $ 0.81     $ (5.24 )   $ (4.74 )
Income (loss) from discontinued operations
    (0.09 )     0.05       0.15  
 
                 
Net income (loss) per Common Share
  $ 0.72     $ (5.19 )   $ (4.59 )
 
                 
     
(1)  
The Series B-1 Preferred Shares are anti-dilutive for the years ended December 31, 2010, 2009 and 2008 and are not included in the weighted-average shares outstanding for the calculation of diluted earnings per Common Share.
 
(2)  
The Series C Preferred Shares were issued November 1, 2009, are anti-dilutive for the years ended December 31, 2010 and 2009 and are not included in the weighted-average shares outstanding for the calculation of diluted earnings per Common Share.
 
(3)  
The Trust’s stock options were dilutive for the year ended December 31, 2010. The stock options were anti-dilutive for the years ended December 31, 2009 and 2008 and are not included in the weighted-average shares outstanding for the calculation of diluted earnings per Common Share.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Standards
In July 2010 an amendment was issued to the accounting and disclosure requirements which outlines specific disclosures that will be required for the allowance for credit losses and all finance receivables. Finance receivables include loans, lease receivables and other arrangements with a contractual right to receive money on demand or on fixed or determinable dates. The new guidance will require companies to provide detailed disclosures by portfolio segment and class to enable users of the financial statement to understand the nature of credit risk, how the risk is analyzed in determining the related allowance for credit losses and changes to the allowance during the reporting period. Certain disclosures as of the end of the reporting period required under these provisions will be effective for the Trust’s December 31, 2010 annual reporting period. Additional disclosure rules about activity that occurs during a reporting period will be effective for the Trust’s March 31, 2011 interim reporting period. The Trust has adopted this standard which did not have a material impact on its consolidated financial statements.
In January 2010 an amendment was issued to the accounting and disclosure requirements for fair value measurements. This amendment requires more robust disclosure of valuation techniques and inputs into fair value measurements and requires amounts and reasons for significant transfers between levels in the fair value hierarchy to be reported along with disclosure of a company’s policy for recognizing such transfers. This amendment is effective for the Trust beginning on January 1, 2010, except for Level 3 sensitivity disclosures, which are effective for the Trust beginning in fiscal 2011. The Trust has adopted this standard which did not have a material impact on its consolidated financial statements.
3.  
Fair Value Measurements
The accounting standards establish a framework for measuring fair value as well as disclosures about fair value measurements. They emphasize that fair value is a market based measurement, not an entity-specific measurement. Therefore a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Trust has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability other than quoted prices, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Trust’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Level 1 financial investments include highly liquid government bonds, mortgage products and exchange-traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which would generally be classified within Level 2 of the valuation hierarchy, include certain derivative financial instruments. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. Securities classified within Level 3 include, for example, residual interests in securitizations and other less liquid securities, investments in joint ventures and real estate investments.
The following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recurring Measurements
Cash, Cash Equivalents and Restricted Cash Held in Escrows
The Trust’s cash, cash equivalents and restricted cash held in escrows are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The types of instruments that are valued based on quoted market prices in active markets include most U.S. government treasury bills with original maturities of less than 90 days and money market securities acquired through overnight sweeps.
Available for Sale Securities
Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.
Securities Carried at Fair Value
Securities carried at fair value are classified within Level 1 of the fair value hierarchy.
Loan Securities Carried at Fair Value
The Trust uses a third party pricing model to establish values for the loan securities in its portfolio. The Trust also performs further analysis of the performance of the loans and collateral underlying the securities, the estimated value of the collateral supporting such loans and a consideration of local, industry and broader economic trends and factors. Significant judgment is utilized in the ultimate determination of fair value. This valuation methodology has been characterized as Level 3 in the fair value hierarchy.
Derivative Financial Instruments
The Trust uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using both quantitative and qualitative valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative as well as potential credit risks with the swap counterparty. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
The Trust incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Trust has considered the impact of netting as well as any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.
Although the Trust has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by itself and its counterparties. However, the Trust has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Trust has determined that the derivative valuations in their entirety should be classified in Level 2 of the fair value hierarchy.

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2010, according to the level in the fair value hierarchy within which those measurements fall (in thousands):
                                 
    Quoted Prices in                    
    Active Markets     Significant Other     Significant        
    for Identical Assets     Observable     Unobservable        
    and Liabilities     Inputs     Inputs        
Recurring Basis   (Level 1)     (Level 2)     (Level 3)     Total  
Assets
                               
Cash and cash equivalents
  $ 45,257     $     $     $ 45,257  
Restricted cash held in escrow
    8,593                   8,593  
Securities carried at fair value
    33,032                   33,032  
Loan securities carried at fair value
                11,981       11,981  
 
                       
 
  $ 86,882     $     $ 11,981     $ 98,863  
 
                       
Liabilities
                               
Derivative liabilities
  $     $ 63     $     $ 63  
 
                       
The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2009, according to the level in the fair value hierarchy within which those measurements fall (in thousands):
                                 
    Quoted Prices in                    
    Active Markets     Significant Other     Significant        
    for Identical Assets     Observable     Unobservable        
    and Liabilities     Inputs     Inputs        
Recurring Basis   (Level 1)     (Level 2)     (Level 3)     Total  
Assets
                               
Cash and cash equivalents
  $ 66,493     $     $     $ 66,493  
Restricted cash held in escrow
    9,505                   9,505  
Available for sale securities
    203                   203  
Securities carried at fair value
    51,702             692       52,394  
Loan securities carried at fair value
                1,661       1,661  
 
                       
 
  $ 127,903     $     $ 2,353     $ 130,256  
 
                       
Liabilities
                               
Derivative liabilities
  $     $ 85     $     $ 85  
 
                       

 

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WINTHROP REALTY TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below includes a roll forward of the balance sheet amounts from January 1, 2009 to December 31, 2010, including the change in fair value, for financial instruments classified by the Trust within Level 3 of the valuation hierarchy. When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement.
                 
            Loan Securities  
    Securities Carried     Carried at Fair  
Year Ended Ended December 31, 2010   at Fair Value     Value  
(in thousands)            
Fair value, January 1, 2009
  $     $  
Purchases
    692       1,661  
Transfers in/and or out of Level 3
           
 
           
Fair value, January 1, 2010
    692       1,661  
Purchases
          7,112  
Sale Repayment
    (692 )     (2,272 )
Realized Gain
            469  
Unrealized gain, net
          5,011  
Transfers in/and or out of Level 3
           
 
           
Fair value, December 31, 2010
  $     $ 11,981  
 
           
Non-Recurring Measurements
Impaired Loans
Most of the Trust’s loans are collateral dependent loans and are evaluated for impairment by comparing the fair value of the underlying collateral to the carrying value of each loan. Due to the unique nature of each individual property collateralizing the Trust’s loans, the Trust uses a combination of the income approach through internally developed valuation models and an evaluation of recent transactions to estimate the fair value of the collateral. This approach requires the Trust to make significant judgments with respect to discount rates and the timing and amounts of estimated future cash flows that are considered Level 3 inputs in accordance with the guidance. These cash flows include costs of completion, operating costs and lot and unit sale prices.
Equity and Preferred Equity Investments
Equity and preferred equity investments are assessed for other-than-temporary impairment. The determination of fair value of preferred equity and equity investments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each asset as well as the income capitalization approach considering prevailing market capitalization rates. The Trust reviews each investment based on the highest and best use of the investment and market participation assumptions. The significant assumptions used in this analysis include the discount rate used in the income capitalization valuation. The Trust has determined that the significant inputs used to value its equity investment in Lex-Win Concord LLC fall within Level 3. The Trust recognized impairment losses of $31,670,000 and $36,543,000 on this asset during the years ended December 31, 2009 and 2008, respectively.
The Trust has determined that the significant inputs used to value certain of its equity method and preferred equity investments fall within Level 3. The Trust recorded impairment losses of $2,186,000 and $7,513,000 on these preferred equity investments during the years ended December 31, 2009 and 2008, respectively. Due to the restructuring of the Trust’s investment in the Marc Realty properties, these preferred equity investments were reclassified as equity investments as of July 1, 2009. The Trust recognized an impairment loss of $2,500,000 on one of its Marc Realty equity investments during the period ended December 31, 2009. All of the Trust’s remaining equity investments are carried at cost which is equal to or lower than their current fair value at December 31, 2010.

 

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