10-K 1 d837267d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

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

For the Fiscal Year Ended December 31, 2014

or

 

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

For the transition period from                      to                     

Commission File Number 1-6249

 

 

WINTHROP REALTY TRUST

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

 

 

 

Ohio   34-6513657

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

7 Bulfinch Place, Suite 500, Boston, Massachusetts   02114
(Address of principal executive offices)   (Zip Code)

(617) 570-4614

(Registrant’s telephone number, including area code)

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  ¨    No  x

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  ¨    No  x

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

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

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.  ¨

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  x

As of March 1, 2015, there were 36,425,084 Common Shares outstanding.

At June 30, 2014, the aggregate market value of the Common Shares held by non-affiliates was $504,255,912.

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, 2014, are incorporated by reference into Part III hereof.

 

 

 


Table of Contents

WINTHROP REALTY TRUST

CROSS REFERENCE SHEET PURSUANT TO ITEM G,

GENERAL INSTRUCTIONS TO FORM 10-K

 

Item of Form 10-K    Page  
   PART I   

1.

  

Business

     4   

1A.

  

Risk Factors

     14   

1B.

  

Unresolved Staff Comments

     23   

2.

  

Properties

     24   

3.

  

Legal Proceedings

     31   

4.

  

Mine Safety Disclosures

     31   
   PART II   

5.

   Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities      32   

6.

  

Selected Financial Data

     34   

7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36   

7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     53   

8.

  

Financial Statements and Supplementary Data

     55   

9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     115   

9A.

  

Controls and Procedures

     115   

9B.

  

Other Information

     115   
   PART III   

10.

  

Directors, Executive Officers and Corporate Governance

     116   

11.

  

Executive Compensation

     116   

12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      116   

13.

  

Certain Relationships and Related Transactions and Director Independence

     116   

14.

  

Principal Accountant Fees and Services

     116   
   PART IV   

15.

  

Exhibits and Financial Statement Schedules

     117   
  

(a) Financial Statements and Financial Statement Schedule

     117   
  

(b) Exhibits

     117   
  

Signatures

     118   
  

Schedule III – Real Estate and Accumulated Depreciation

     119   
  

Schedule IV – Mortgage Loans on Real Estate

     121   
  

Exhibit Index

     122   

 

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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 dividends and liquidating distributions by us;

 

    the ownership, management and operation of properties;

 

    potential dispositions of our properties, assets or other businesses;

 

    our policies regarding investments, 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;

 

    trends affecting us or our assets;

 

    the effect of dispositions on capitalization and financial flexibility; and

 

    the anticipated performance of our assets including, without limitation, statements regarding anticipated revenues, cash flows, funds, property net operating income, operating or profit margins and sensitivity to economic downturns or anticipated growth or improvements in any of the foregoing.

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.

 

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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.

On April 28, 2014 our Board of Trustees adopted a plan of liquidation which was subject to approval by the holders of a majority of our common shares of beneficial interest. The plan was approved at a special meeting of shareholders on August 5, 2014.

Prior to the plan of liquidation, we were engaged in the business of owning real property and real estate related assets which we categorized into three reportable segments: (i) the ownership of investment properties including wholly owned properties and investments in joint ventures which own investment properties, which we refer to as operating properties; (ii) the origination and acquisition of loans collateralized directly or indirectly by commercial and multi-family real property, which we refer to as loan assets; and (iii) the ownership of equity and debt interests in other real estate investment trusts (REITs), which we refer to as REIT securities. Subsequent to the adoption of the plan of liquidation, our business has been, and will continue to be, to sell our assets in an orderly fashion. Although we still hold operating properties and loan assets, we no longer make operating decisions or assess performance in separate segments as all assets are now considered as held for sale. Accordingly, we have only one reporting and operating segment subsequent to July 31, 2014.

At December 31, 2014 we had total assets of $1,136,261,000 and net assets in liquidation of $594,704,000. The net assets in liquidation at December 31, 2014 reflect an accrued liquidating dividend to our common shareholders of $81,959,000 or $2.25 per Common Share, which was paid on January 15, 2015.

Our executive offices are located at 7 Bulfinch Place, Suite 500, Boston, Massachusetts 02114 and Two Jericho Plaza, Jericho, New York 11753. Our telephone number is (617) 570-4614 and our website is located at http://www.winthropreit.com. The information contained on our website does not constitute part of this Annual Report on Form 10-K. On our website 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 and changed our name to Winthrop Realty Trust in 2005. Since January 1, 2004, we have been externally managed by FUR Advisors LLC, which we refer to as FUR Advisors or our Advisor. Prior to 2013, FUR Advisors was an entity owned by our current executive officers and senior management and members of senior management of AREA Property Partners, a New York based real estate investment advisor. During 2013, certain of the AREA senior management member’s interest in FUR Advisors was redeemed, and as a result, FUR Advisors is now majority owned by our current executive officers and senior management, including Michael L. Ashner and Carolyn Tiffany.

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.

 

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Plan of Liquidation

The plan of liquidation that was approved on August 5, 2014 provides for an orderly sale of our assets, payment of our liabilities and other obligations and the winding up of operations and dissolution of the Trust. We are not permitted to make any new investments other than protective acquisitions or advances with respect to our existing assets. We are permitted to satisfy any existing contractual obligations including any capital call requirements and acquisitions or dispositions pursuant to buy-sell provisions under existing joint venture documentation, pay for required tenant improvements and capital expenditures at our real estate properties, and repurchase our existing Common Shares and our 7.75% Senior Notes. We are also permitted to invest our cash reserves in short-term U.S. Treasuries or other short-term obligations.

The plan of liquidation enables us to sell any and all of our assets without further approval of the shareholders and provides that liquidating distributions be made to the shareholders as determined by the Board of Trustees. Pursuant to applicable REIT rules, in order to be able to deduct liquidating distributions as dividends, we must complete the disposition of our assets by August 5, 2016, two years after the date the plan of liquidation was adopted by shareholders. To the extent that all of our assets are not sold by such date, we intend to satisfy this requirement by distributing our unsold assets into a liquidating trust at the end of such two-year period, and the holders of interests in our Common Shares at such time will be beneficiaries of such liquidating trust.

The dissolution process and the amount and timing of distributions to shareholders involves risks and uncertainties. Accordingly, no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the Consolidated Statement of Net Assets.

We expect to continue to qualify as a REIT throughout the liquidation until such time as our remaining assets, if any, are transferred into a liquidating trust. The Board of Trustees shall use commercially reasonable efforts to continue to cause us to maintain our REIT status, provided however, the Board of Trustees may elect to terminate our status as a REIT if it determines that such termination would be in the best interest of the shareholders.

Management

We have engaged FUR Advisors to administer our affairs including seeking, servicing and managing our investments. For providing these and other services, FUR Advisors is entitled to a base management fee and, in certain instances, an incentive fee and termination fee. See “Employees” below for a description of the fees payable to FUR Advisors.

Pursuant to our bylaws, the consent of our Board of Trustees is required to acquire or dispose of an investment with a value in excess of $10,000,000. 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 of beneficial interest which we refer to as our Common Shares, either directly or upon the conversion of any of our 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

Prior to the adoption of the plan of liquidation, we were engaged in the business of owning and managing real property and real estate related assets. Our business objective was to maximize long term shareholder value through a total return value approach to real estate investing which emphasized superior risk adjusted returns. As

 

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a result of our emphasis on total return, we did not select or manage our investments for short-term dividend growth, but rather towards achieving overall superior total return. While this approach resulted in short-term uneven earnings, we believe this approach resulted in long term increased entity value.

We are a diversified REIT and as such we were able to invest in a broad range of investment opportunities. These opportunities included different investment types, sectors and geographic areas all at varying levels in the capital stack. In addition, because of our size we were able to make investments in transactions that were smaller and would generally be disregarded by larger real estate investors. Further, we also acquired assets through joint ventures and strategic alliances which allowed us to employ third party co-investment capital to maximize diversification of risk and reduce capital concentration and, in certain instances, leverage off our joint venture partner’s experience and expertise in specific geographic areas and/or specific asset types.

The decision to adopt the plan of liquidation followed a lengthy process in which our Board of Trustees explored numerous alternatives including continuing under our current or a revised business plan, acquiring through merger or otherwise the assets of another real estate company, seeking to dispose of its assets through a merger or a portfolio sale, and liquidation. Based on a number of factors, in April 2014 the Board of Trustees determined that a liquidation of our assets was in the best interest of our common shareholders. The factors considered at that time included:

 

    The relative stagnant price of the Common Shares over the past three years.

 

    The continued failure of the Common Share price to approximate the low end of our reported net asset value.

 

    The limited trading volume in the Common Shares and the certainty of liquidity that a liquidation offers at a value that is expected to be not less than the low end of our reported net asset value.

 

    The nature of our business strategy which was to invest in opportunistic real estate investments and the lack of such investments in the current market environment which would be accretive to our shareholders particularly in light of our cost of capital.

 

    The limitation, absent a plan of liquidation, on the number of assets that we could sell in any calendar year due to applicable federal tax law restrictions relevant to a REIT in order not to be subject to a 100% tax on gain from sales.

 

    Our inability to raise capital through the sale of Common Shares at a price that was not dilutive to existing shareholders.

 

    The inability to obtain an offer for the entire company that our Board of Trustees believed was commensurate with the projected proceeds that could be obtained from a liquidation of our assets.

 

    The overall return to shareholders during the past five years which was both below the Trust’s peer group (i.e., REITs with a diversity and other property focus and which had a current market value as of January 27, 2014 of less than $750 million) and the MSCI US REIT index.

 

    The costs of continuing to operate a public company.

 

    The federal income tax benefits that may be derived from the adoption of a plan of liquidation as all dividends on Common Shares are deemed a return of capital until the applicable holder has received dividends totaling its cost basis.

In addition, our Board of Trustees also considered potentially negative factors in their deliberations concerning the liquidation, including the following:

 

    There could be no assurance that we would be successful in disposing of its assets for values equal to or exceeding the low range of our estimate of net asset value or that the dispositions will occur in the time frame expected.

 

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    The anticipated expenses and potential for unforeseen expenses that will or may be incurred in connection with the sale of our assets and the continued operation of the Trust.

 

    The inability to take advantage of future changes in market conditions which could provide for presently unforeseen opportunistic investments that satisfy our investment strategy and minimum return parameters.

 

    Depending on their tax basis in their shares, shareholders may recognize taxable gain in connection with the completion of the liquidation.

 

    We may determine to distribute assets to a liquidating trust which may cause our shareholders to recognize taxable gain at the time of such distribution to the liquidating trust which we expect to occur, if at all, two years after the adoption of the plan of liquidation and may have adverse tax consequences on tax-exempt and foreign shareholders.

 

    Shareholders would no longer participate in any future earnings or growth of the Trust’s assets or benefit from any increases in their value once such asset is sold.

 

    As opposed to a business combination with a relatively short time frame during which a third party would acquire the Trust, the liquidation process would involve a longer distribution process and will require the Trust to incur potentially larger administrative and other costs.

 

    Certain conflicts of interest could exist for the Trust’s management in connection with the liquidation.

 

    The likelihood that the price of the Common Shares will decrease as we make distributions to shareholders.

 

    The potential loss of key personnel who provide services to the Trust and FUR Advisors.

Assets

Operating Properties

See Item 2. Properties for a description of our Operating Properties

Operating Property Acquisition Activity

Norridge equity acquisition – On March 5, 2014, in connection with the Edens Plaza and Norridge Commons loan origination discussed below, we acquired for $250,000 all of the issued and outstanding shares of Harlem Properties, Inc. (“Harlem”). Harlem is the entity that ultimately controls the entity that owns Norridge Commons, a retail shopping center located in Norridge, Illinois (the “Norridge Property”). We, through our ownership of Harlem, have an effective 0.375% interest in the property and control the business of the entity and all decisions affecting the entity and its management.

Edens – equity acquisition – On March 5, 2014 we acquired for $250,000 all of the issued and outstanding shares of Edens Properties, Inc. (“Edens”). Edens is a co-general partner of a limited partnership that is a general partner of Edens Center Associates, a retail shopping center located outside of Chicago, Illinois (the “Edens Property”).

701 Seventh – capital contributions – During 2014 we made additional capital contributions of $53,187,000 with respect to our interest in the venture that holds an indirect interest in the property located at 701 Seventh Avenue, New York, New York, bringing aggregate capital contributions through December 31, 2014 to $106,624,000. In January 2014, the property’s existing indebtedness was refinanced with a new $237,500,000 mortgage loan and $315,000,000 mezzanine loan to be advanced for construction costs of the approximately 110,000 square feet of retail space and an approximately 120 foot high, 20,000 square foot state of the art LED sign. Both the mortgage loan and the mezzanine loan bear interest at LIBOR plus 8% per annum, require payments of interest only and mature January 31, 2017, subject to two, one-year extensions. In addition, the venture entered into two additional loan agreements providing for supplemental loans of $262,500,000 which, subject to certain conditions, enables

 

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the venture to make draws to provide additional construction financing to develop a 452 room hotel which will be constructed above the retail component. If fully funded, the maximum aggregate debt among the various loans funded would be $815,000,000.

Simultaneously with entering into the loans, the venture executed an agreement with a wholly-owned affiliate of Marriott International, Inc. to manage and operate an “EDITION” hotel at the property. The hotel will include 452 rooms and utilize approximately 30,000 square feet of the 110,000 square foot retail space for food, beverage and entertainment space.

Operating Property Disposition Activity

Newbury Apartments – property sale – On February 26, 2014 we sold our interest in the Newbury Apartments property located in Meriden, Connecticut to an independent third party for gross sale proceeds of $27,500,000. After costs, pro-rations and the transfer of the debt, we received net proceeds of approximately $5,106,000 and recorded a gain of $4,422,000 on the sale of the property which is included in income from discontinued operations.

Marc Realty – sale of interest – On March 5, 2014 we sold to Marc Realty, our venture partner, our equity investments in High Point Plaza LLC, 1701 Woodfield LLC and Enterprise Center LLC and our interest in the River City, Chicago, Illinois property for gross sale proceeds of $6,000,000. We received $1,500,000 in cash and a note receivable for the remaining $4,500,000. The note bore interest at a rate of 6% per annum, increasing to 7% per annum on the first anniversary and to 8% on the second anniversary. The note required monthly payments of interest only and was scheduled to mature on March 1, 2017. The note was repaid in full during June 2014. We recorded a $3,000 gain on the sale of our interest in River City which is included in income from discontinued operations. We recorded a $69,000 gain on sale of the three equity investments which is included in equity in income of equity investments.

We also granted Marc Realty an option exercisable prior to March 1, 2016 to acquire our equity investment in Brooks Building LLC. Marc Realty exercised its option and acquired our interest in Brooks Building LLC on September 8, 2014 and we received net proceeds of $5,770,000 on the sale.

Crossroads I & IIproperty sale – On May 1, 2014 we sold our wholly-owned office properties referred to as Crossroads I and Crossroads II located in Englewood, Colorado to an independent third party for aggregate gross sale proceeds of $31,100,000. After costs and pro-rations we received net proceeds of approximately $29,633,000 and recorded a gain of $5,723,000 on the sale of the properties which is included in income from discontinued operations.

Amherst – property sale – On June 25, 2014 we sold our wholly-owned office property located in Amherst, New York to an independent third party for gross sale proceeds of $24,500,000. After costs, pro-rations and a reserve holdback we received net proceeds of approximately $21,226,000 on the sale of the property. Upon completion of the parking area for the office property we received $2,449,000 from the reserve holdback which resulted in aggregate net proceeds of approximately $23,675,000. We recorded a gain of $946,000 on the sale of the property which is included in income from discontinued operations.

Wateridge – sale of interest – On August 6, 2014 we sold our interest in the WRT-Fenway Wateridge venture to our venture partner for approximately $2,383,000.

5400 Westheimer – sale of interest – On October 1, 2014 we received $1,033,000 in full repayment of the note due from our venture that owns the property located at 5400 Westheimer Court, Houston, Texas. On October 15, 2014 we sold our interest in this venture to one of the venture partners for approximately $9,690,000.

 

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Waterford Place Apartments – property sale – On October 16, 2014 we sold our Waterford Place apartment building in Memphis, Tennessee to an independent third party for gross proceeds of $28,160,000 and received net proceeds of approximately $15,290,000 after satisfaction of the debt and payment of closing costs.

Kroger-Atlanta – property sale – On October 20, 2014 we sold our retail property located in Atlanta, Georgia for gross proceeds of $1,500,000 and received net proceeds of approximately $1,464,000.

Kroger-Greensboro – property sale – On October 20, 2014 we sold our retail property located in Greensboro, North Carolina for gross proceeds of $1,750,000 and received net proceeds of approximately $1,709,000.

San Pedro – property sale – On October 24, 2014 the venture in which we hold an 83.7% interest sold its apartment building located in San Pedro, California for gross proceeds of $23,800,000. The entire net proceeds of approximately $23,090,000 were used to pay down the $150,000,000 loan collateralized by the four properties in the venture.

Kroger-Louisville – property sale – On November 25, 2014, we sold our retail property located in Louisville, Kentucky for gross proceeds of $2,500,000 and received net proceeds of approximately $2,334,000.

1515 Market – property sale – On December 2, 2014, we sold our office property located at 1515 Market Street, Philadelphia, Pennsylvania for gross proceeds of $82,345,000 and received net proceeds of approximately $40,304,000 after satisfaction of the third party mortgage debt, closing costs and pro rations.

Burlington – property sale – On December 23, 2014, we sold our office property located in South Burlington, Vermont for gross proceeds of $2,850,000 and received net proceeds of approximately $2,475,000.

Sealy Northwest Atlanta – sale of interest – On December 23, 2014, we sold to Sealy, our venture partner, our interest in Sealy Northwest Atlanta for total proceeds of $5,641,000.

Loan Assets

The following table sets forth certain information relating to our loans receivable, loan securities and loans held in equity investments. All information presented is as of December 31, 2014 (in thousands).

 

Name

  Loan
Position
  Asset Type   Location   Stated Interest
Rate (1)
  Carrying
Amount (2)
    Par
Value
    Maturity
Date (3)
    Senior
Debt (4)
 

Loans Receivable

               

Churchill

  Whole loan   Mixed use   Churchill, PA   LIBOR + 3.75%   $ —        $ 333        06/01/15      $ —     

Rockwell (5)

  Mezzanine   Industrial   Shirley, NY   12.00%     —          1,486        05/01/16        16,342   

Poipu Shopping Village

  B Note   Retail   Kauai, HI   6.618%     2,804        2,791        01/06/17        28,272   

Mentor Building

  Whole loan   Retail   Chicago, IL   10.00%     2,511        2,497        09/10/17        —     

Edens Center – Norridge Commons* (6)(7)

  Mezzanine   Retail   IL   LIBOR + 12%     18,690        15,500        03/09/19        82,500   
         

 

 

       
$ 24,005   
         

 

 

       

Loan Securities

WBCMT 2007 WHL8

CMBS Hotel Various LIBOR + 1.75% $ 918    $ 1,130      12/31/15    $ 771,304   
         

 

 

       
$ 918   
         

 

 

       

Loans in Equity Investment

Our loan assets held in equity investments consist of our investments in Concord Debt Holdings LLC, CDH CDO LLC and RE CDO Management LLC.

 

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* Loan Asset was acquired in 2014. 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 our effective interest rate on certain loan investments.
(2) Carrying amount represents the estimated amount expected to be collected on disposition of the loan, plus contractual interest receivable at December 31, 2014.
(3) Maturity date after giving effect to all contractual extensions.
(4) Debt which is senior in payment and priority to our loan.
(5) Loan defaulted in December 2013. Carrying amount is net of a $348 loan loss reserve.
(6) Carrying amount includes estimated amount expected to be collected on the participation interest.
(7) A principal payment of $15,275 was received on February 5, 2015 resulting in an outstanding principal balance of $225.

Loan Asset Origination Activity

Playa Vista – On January 10, 2014 the mezzanine loan agreement was amended to increase the principal balance by up to $4,000,000 and to increase the interest rate by 1.5% to a rate of 16.25% per annum. Our share of the increased loan amount was up to $2,000,000. We fully funded our share of the new loan amount at $1,992,000. On July 7, 2014 we acquired for $14,000,000 the additional 50% interest in the Playa Vista loan. We also paid $108,000 for the prorated share of interest accrued through June 30, 2014. The purchase price represents a premium of approximately $762,000 over the face of the loan inclusive of interest through June 30, 2014.

Edens Center and Norridge Commons – loan origination – On March 5, 2014 we originated a $15,500,000 mezzanine loan to an affiliate of our venture partner in both the Sullivan Center and Mentor Retail LLC ventures (“Freed Management”) secured by a majority of the limited partnership interests in entities that hold a majority interest in the Edens Property and the Norridge Property. The loan bears interest at LIBOR plus 12% per annum (increasing by 100 basis points in each extended term), requires payments of current interest at a rate of 10% per annum (increasing by 50 basis points each year) and has a three-year term, subject to two, one-year extensions. Upon satisfaction of the loan, we will be entitled to a participation interest equal to the greater of (i) a 14.5% internal rate of return (“IRR”) (increasing to 15.5% IRR after the initial term) or (ii) 30% (increasing to 40% after the initial term and 50% after the first extended term) of the value of the properties in excess of $115,000,000. As additional collateral for the loan, Freed Management pledged to us its ownership interest in our Sullivan Center and Mentor Retail LLC ventures.

Loan Asset Repayment/Disposition Activity

Loan portfolio – sale of interest – In February 2014 we sold our interests in the loans secured directly or indirectly by Hotel Wales, Wellington Tower, 500-512 Seventh Avenue, Legacy Orchard and San Marbeya for an aggregate sales price of $42,900,000. The selling price is net of the secured financings on the Hotel Wales and San Marbeya loans which totaled $29,150,000. In connection with the sale, we retained an interest only participation in each of the Legacy Orchard and Hotel Wales loans entitling us to interest at 2.5% per annum on the principal amount of the Legacy Orchard loan and 0.5% per annum on the principal amount of the Hotel Wales loan. No gain or loss was recognized on the sale of the loans.

Queensridge – loan satisfaction – During the quarter ended March 31, 2014 several of the condominium units collateralizing the Queensridge loan receivable were sold resulting in principal payments to us of approximately $2,908,000. As a result of the payments, the outstanding principal balance on the Queensridge loan has been fully satisfied. In addition, we received an exit fee of $1,787,000 in connection with the early satisfaction of the loan which is classified as interest income.

Stamford – loan satisfaction – On August 6, 2014 our venture which held the mezzanine loan secured by seven office properties in Stamford, Connecticut received payment in full on the loan. We received net proceeds, inclusive of accrued interest, of $9,450,000 in connection with the payoff.

 

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Shops at Wailea – loan satisfaction – On August 7, 2014 we received $7,556,000, inclusive of accrued interest, in full repayment at par of our loan receivable collateralized by the Shops at Wailea.

Pinnacle II – loan sale – On October 22, 2014 we sold our B-Note receivable which had an outstanding balance of $5,017,000 for net proceeds of approximately $4,967,000.

Playa Vista – loan satisfaction – On December 9, 2014 we received repayment in full on our $27,394,000 loan receivable collateralized by the office complex in Playa Vista, California. In addition, we received $6,565,000 in exchange for our equity participation interest in the underlying collateral.

REIT Securities

During 2013 we liquidated all of our holdings of REIT securities. We had minimal activity in this segment during 2014 and hold no REIT securities at December 31, 2014.

Employees

As of December 31, 2014 we had no employees. Our affairs are administered by our Advisor pursuant to the terms of an advisory agreement for five years which we refer to, as the same may be amended from time to time, as the “Advisory Agreement.”

Under the Advisory Agreement, we pay to 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. The Advisory Agreement provides that any dividends paid on account of Common Shares that result in a reduction of the threshold amount (as described below) at the date of our liquidation or disposition are deemed a reduction in the aggregate issuance price of the Common Shares, thereby resulting in a reduction of the base management fee. In addition to receiving a base management fee, our Advisor is entitled to receive an incentive fee for administering the Trust and, in certain instances, a termination fee upon an early termination of the Advisory Agreement under certain circumstances or the liquidation of disposition of the Trust. Further, our Advisor, or its affiliate, is also entitled to receive property management fees and construction management fees at commercially reasonable rates.

The incentive fee is equal to 20% of any amounts available for distribution in excess of the threshold amount and is only payable at such time, if at all, (i) when holders of our Common Shares receive aggregate dividends above the 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 dividends in excess of the threshold amount ($569,963,000 on December 31, 2014 plus an annual return thereon equal to the greater of (x) 4% or (y) the 5 year U.S. Treasury Yield plus 2.5% (such return, the “Growth Factor”) less any dividends paid from and after January 1, 2015). The incentive fee will also be payable if the Advisory Agreement is terminated, other than for cause (as defined) by us or with cause by our Advisor, and if on the date of termination the net value of the Trust’s assets exceeds the threshold amount. At December 31, 2014 the threshold amount required to be distributed before any incentive fee would be payable to FUR Advisors was $569,963,000, which was equivalent to $15.91 per Common Share. At December 31, 2014, based on our estimate of liquidating distributions, it is estimated that the Advisor would be entitled to an incentive fee of $14,474,000 in connection with our liquidation. This amount has been accrued and is reflected in our net assets in liquidation at December 31, 2014.

With respect to the termination fee, it is only payable if there is (i) a termination of the Advisory Agreement for any reason other than for cause (as defined) by us or with cause by our Advisor, (ii) a disposition of all or substantially all of our assets, or (iii) an election by us to orderly liquidate our assets. The termination fee, if payable, is equal to the lesser of (i) the base management fee paid to our Advisor for the prior twelve month period or (ii) either (x) in the case of a termination of the Advisory Agreement, 20% of the positive difference, if any between (A) the appraised net asset value of our assets at the date of termination and (B) the threshold

 

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amount less $104,980,000, or (y) in the case of a disposition or liquidation, 20% of any dividends paid on account of our Common Shares at such time as the threshold amount is reduced to $104,980,000, which will be achieved at such time as aggregate distributions of approximately $12.98 per Common Share in excess of the Growth Factor have been paid. For example, if the Trust had been liquidated at January 1, 2014, the termination fee would only have been payable if total dividends of approximately $12.98 per Common Share had been paid, and then only until the total termination fee paid would have equaled $9,496,000 (the base management fee for the twelve months prior to the approved plan of liquidation), which amount would be achieved when total dividends paid per Common Share equaled approximately $14.31. At December 31, 2014 it is estimated that the Advisor will be entitled to a termination fee of $9,496,000 in connection with our liquidation. This amount has been accrued and is reflected in our net assets in liquidation at December 31, 2014.

In connection with the modifications entered into in February 2013 with respect to the Advisory Agreement, we issued 600,000 restricted Common Shares, which Common Shares were issued under our 2007 Long Term Incentive Plan. In connection with the adoption of the plan of liquidation, the Trust’s compensation committee has authorized amendments to the grant agreements to provide for an early expiration of the forfeiture period and the reissuance of forfeited shares. See Item 8 – Financial Statements and Supplementary Data, Note 24 for additional information on the grants.

Competition

Prior to our adoption of the plan of liquidation, we had 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. Subsequent to the adoption of the plan of liquidation, we have competition from other properties located in markets in which we have interests both from an operations perspective and with respect to the disposition of our assets. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business and our net assets in liquidation.

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

As discussed earlier, with the adoption of the plan of liquidation we have only one reporting and operating segment subsequent to July 31, 2014. Reportable segment data for the periods prior to August 1, 2014 may be found under Item 8 – Financial Statements and Supplementary Data Note 26.

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;

 

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    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 May 20, 2014, following our 2014 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.

 

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ITEM 1A – RISK FACTORS

We, our assets and the entities in which we invest are subject to a number of risks customary for REITs and owners of real estate and debt instruments secured, directly or indirectly, by real estate. In addition, as a result of the adoption of the plan of liquidation we are subject to additional risks that may affect the ultimate amount of liquidating distributions payable to holders of our Common Shares. Material factors that may adversely affect our business operations and, accordingly, the ultimate amount of liquidating distributions payable on our Common Shares are summarized below.

Risks incidental to real estate investments

Our assets consist of direct ownership and operation of operating properties and loan assets secured, directly or indirectly, by operating properties. As a result of the adoption of our plan of liquidation, we will not make any further investments other than in very limited instances as detailed in our plan of liquidation. Accordingly, an investment in us depends upon the financial performance and the value of our current portfolio of operating properties as well as the operating properties securing our loan assets, 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;

 

    fluctuations 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 our holders of Common Shares.

Risks that May Delay or Reduce Our Liquidating Distributions

Our estimate of net assets in liquidation at December 31, 2014 was $594,704,000, or $16.33 per Common Share. This estimation is based on a number of estimates and assumptions including asset hold periods, expected revenues and expenses, capitalization rates and other factors not within our control. As a result, one or more of

 

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these assumptions may change during our liquidation. For example, if we sell an asset prior to its estimated sale date or a loan asset is satisfied prior to its maturity date, the net assets in liquidation could be reduced due to our receipt of less operating cash flow from such assets than initially estimated, however, we would receive sales proceeds sooner than previously expected. As a result, the actual amount of liquidating distributions we pay to holders of Common Shares may be more or less than our current estimate. In addition, there can be no assurance as to the timing, and the amount, of each liquidating distribution to our holders of Common Shares.

If we are unable to find buyers for our assets at our expected sales prices, our liquidating distributions may be delayed or reduced.

In calculating our estimated net assets in liquidation, we assumed that we will be able to find buyers for all of our assets at our estimated amounts. We, however, may have overestimated the sales prices that we will be able to obtain for these assets or underestimated the costs associated with such sales. For example, in order to find buyers in a timely manner, we may be required to accept a purchase price below our current estimate. If we are not able to find buyers for these assets in a timely manner or if we have overestimated the sales prices we will receive, our liquidating distributions payable to holders of our Common Shares would be delayed or reduced. Furthermore, our estimated net assets in liquidation is based on current market conditions and asset operations, but real estate market values are constantly changing and fluctuate with changes in interest rates, supply and demand dynamics, occupancy percentages, lease rates, the availability of suitable buyers, the perceived quality and dependability of income flows from tenancies and a number of other factors, both local and national. The net liquidation proceeds from each asset may also be affected by the terms of prepayment or assumption costs associated with debt encumbering each asset. In addition, minority ownership matters, transactional fees and expenses, environmental contamination at our properties or unknown liabilities, if any, may adversely impact the net liquidation proceeds from those assets.

If any of the parties to our future sale agreements default thereunder, or if these sales do not otherwise close, our liquidating distributions may be delayed or reduced.

The consummation of the potential sales for which we will enter into sale agreements in the future will be subject to satisfaction of closing conditions. If any of the transactions contemplated by these future sale agreements do not close because of a buyer default, failure of a closing condition or for any other reason, we will need to locate a new buyer for the assets which we may be unable to do promptly or at prices or on terms that are as favorable as the original sale agreement. We will also incur additional costs involved in negotiating a new sale agreement for this asset. These additional costs are not included in our projections. In the event that we incur these additional costs, our liquidating distributions to our shareholders would be delayed or reduced.

If our transaction costs, liquidation costs or unpaid liabilities are greater than we expect, our liquidating distributions may be delayed or reduced.

Before making the liquidating distributions on our Common Shares, we will need to pay or arrange for the payment of all of our transaction costs in the liquidation, all other costs and all valid claims of our creditors. Our board may also decide to acquire one or more insurance policies covering unknown or contingent claims against us or them, for which we would pay a premium which has not yet been determined. Our board may also decide to establish a reserve fund to pay these contingent claims. The amounts of transaction costs in the liquidation are not yet final, so we have used estimates of these costs in calculating our estimated net assets in liquidation. To the extent that we have underestimated these costs in calculating our projections or we incur unforeseen additional costs, our actual liquidating distributions may be lower than our estimated net assets in liquidation. In addition, if the claims of our creditors are greater than we have anticipated or we decide to acquire one or more insurance policies covering unknown or contingent claims against us, our liquidating distributions may be delayed or reduced. Further, if a reserve fund is established, payment of liquidating distributions to our holders of Common Shares may be delayed or reduced.

 

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We may be unable to sell certain of our assets held in ventures.

We currently hold a number of our assets in ventures with third parties. Pursuant to the terms of certain of these agreements, the consent of our venture partner is required for the sale of the underlying asset or our interest in some of these ventures. If we are unable to obtain our venture partner’s consent we may have difficulty in timely selling such asset or may need to acquire our venture partner’s interest through the exercise of our dispute resolution provisions which, in all such cases, may cause us to incur additional expenses and result in a delay in the sale of such assets which could reduce our liquidating distributions.

Our properties may subject us to known and unknown liabilities.

Our existing properties may have 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.

If we are unable to maintain the occupancy rates of currently leased space and lease currently available space, if tenants default under their leases or other obligations to us during the liquidation process or if our cash flow during the liquidation is otherwise less than we expect, our liquidating distributions may be delayed or reduced.

In calculating our estimated net assets in liquidation, we made certain assumptions as to each asset’s occupancy and rental rates, that we would be able to rent certain currently available space and that we would not experience any significant tenant defaults during the liquidation process that were not subsequently cured. Negative trends in one or more of these factors may adversely affect the resale value of the properties, which would reduce our liquidating distributions. To the extent that we receive less rental income than we expect during the liquidation process, our liquidating distributions will be reduced. We may also decide in the event of a tenant default to restructure the lease, which could require us to substantially reduce the rent payable to us under the lease, or make other modifications that are unfavorable to us. This risk is substantial with respect to our net leased properties. As of December 31, 2014, our five single tenant properties, containing an aggregate of approximately 1,071,000 square feet of space are net leased to five different tenants. Gross leases accounting for approximately 5% of the aggregate annual base rent from our operating properties for 2014, representing approximately 39% of the net rentable square feet at the properties, are scheduled to expire in 2015. Other leases grant tenants early termination rights upon payment of a termination penalty.

We are subject to risks associated with the financial condition of our tenants 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 would reduce our liquidating distributions. Similarly, if a tenant

 

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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, as a result, our liquidating distributions. 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 net cash flow and the value of such asset and, as a result, our liquidating distributions.

We may experience increased operating costs, which might reduce our estimated net assets in liquidation and the sales prices received for our properties.

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 thereby reducing our estimated net assets in liquidation and limit the amount and likely delay the timing of our liquidating distributions.

We leverage our portfolio, which may adversely affect our financial condition and estimated net assets in liquidation.

We leverage our portfolio through borrowings. 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 default on our Senior Notes. If this were to occur, we may not have the funds available, or the ability to obtain replacement financing, to satisfy our Senior Notes.

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 have sought 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 used 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

 

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position. Further, we have and could in the future recognize losses on a hedge position which adversely effects our ultimate liquidating distributions payable on our Common Shares. In addition, we run the risk of default by a counterparty to a hedging arrangement.

The loan assets 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 or our loan assets may be subject to unfavorable treatment in a borrower bankruptcy.

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 or loss on the investment. Further, if a borrower were to file for bankruptcy protection, a plan could be approved over our objection that would extend our loan for a period of time at an interest rate that is less than our cost of funds, thereby having a negative impact on our cash flow and reducing our liquidating distributions.

The subordinate loan assets in which 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 debt holder. 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 assets.

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 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 potentially reducing our estimated net assets in liquidation.

Deterioration of the credit markets may have an adverse impact on the ability of borrowers to obtain replacement financing.

A deterioration in the credit markets will make it extremely difficult for borrowers to obtain mortgage financing. The inability of borrowers to obtain replacement financing has, in the past, led and will in the future,

 

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likely 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 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 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; and

 

    Limiting the ability to obtain new or replacement financing.

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.

Covenants and other provisions in our debt instruments could adversely affect our financial condition and the ultimate amount of liquidating distributions paid to holders of our Common Shares.

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. 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 earnings before interest, taxes, depreciation and amortization (which is commonly referred to as “EBITDA”) to interest expense and fixed charges, and a requirement for us to maintain a certain level of unencumbered assets to unsecured debt. In addition, the Indenture governing our Senior Notes provides that it is an event of default under the Indenture if (i) our consolidated leverage ratio (as defined in the Indenture) is equal to or greater than 60% on the last day of any calendar quarter or (ii) subject to certain exceptions, we or any of our consolidated subsidiaries do not pay when due, after the expiration of any applicable grace period, the principal of indebtedness in the aggregate principal amount of $7,500,000 or more, or the acceleration of our or our consolidated subsidiary’s indebtedness in the aggregate principal amount of $7,500,000 or more so that it becomes due and payable before the date on which it would otherwise have become due and payable. 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.

If we fail to remain qualified as a REIT, our holders of Common Shares would be adversely affected.

Although we expect to remain qualified as a REIT until such time, if at all, as we transfer any remaining assets and liabilities to a liquidating trust, given the changes in the nature of our assets and sources of our income that

 

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will result as we sell our assets, and the need to retain certain assets to meet our liabilities, there is no assurance that we will continue to qualify as a REIT through the completion of our liquidation. If we fail to remain qualified as a REIT, we would be taxed as a corporation for federal income tax purposes and could not deduct distributions to our shareholders in computing our taxable income. As a result, we would be liable for federal income taxes at corporate tax rates on our taxable income from operations and asset sales for the taxable year in which our qualification as a REIT terminates and any subsequent years, which could materially reduce the cash available for distribution to our shareholders.

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 dividend 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.

From time to time, we may have taxable income greater than our cash available to pay dividends 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 pay dividends sufficient to enable us to pay out enough of our taxable income to satisfy the REIT dividend 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.

The adoption of the plan of liquidation may cause our Common Shares to no longer be listed on the NYSE.

Although the adoption of the plan of liquidation has not caused our Common Shares to fail to meet the listing requirements of the NYSE, it is possible that as we reduce our overall assets through the distribution of sales proceeds whether to satisfy debt, expenses, Senior Notes or to make liquidating distributions to our shareholders, we may fail to satisfy the requirement to cause our Common Shares to remain listed on the NYSE. If this were to occur, the ability to transfer Common Shares would be substantially limited which may reduce the market price for our Common Shares.

Distributing interests to a liquidating trust may cause you to recognize gain.

If we have not sold all of our assets by August 5, 2016, our plan of liquidation requires that any remaining assets and liabilities be transferred to a liquidating trust. In that event, holders of Common Shares will be treated for federal income tax purposes as if they received a distribution of their pro rata share of the fair market value of any assets that are transferred to a liquidating trust, and will be subject to federal income tax to the extent that such “deemed” distribution exceeds the remaining tax basis of such holders Common Shares. As a result, holders of Common Shares may recognize taxable gain with respect to assets transferred to a liquidating trust prior to the subsequent sale of such assets and the distribution to them of the related net cash proceeds, if any. Such transfer also may have adverse tax consequences for tax-exempt and foreign shareholders.

Holders of Common Shares may not receive any profits resulting from the sale of one or more of our properties, or receive such profits in a timely manner, because we may provide financing to the purchaser of such property.

We may sell our assets either subject to or upon the assumption of any then outstanding mortgage debt or, alternatively, may provide financing to purchasers. We do not have any limitations or restrictions on taking such

 

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purchase money obligations. To the extent we receive promissory notes or other property in lieu of cash from sales, such proceeds, other than any interest payable on those proceeds, will not be included in net sale proceeds until and to the extent the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. We may receive initial down payments in the year of sale in an amount less than the selling price and subsequent payments may be spread over a number of years. In such event, holders of Common Shares may experience a delay in the distribution of the net proceeds of a sale until such time as the installment payments are received.

We will not make new investments.

In accordance with applicable tax law and our plan of liquidation, as a result of the implementation of the plan of liquidation, we are not permitted to make any new investments other than those required to satisfy existing contractual obligations and commitments, including any capital call requirements and acquisitions or dispositions pursuant to buy-sell provisions under existing venture documentation, pay for required tenant improvements and capital expenditures at our real estate properties, repurchase our existing Common Shares and Senior Notes if we so choose and make protective acquisitions or advances with respect to our existing assets. Accordingly, we will not be able to use our cash to participate in new investments which could generate a greater return to holders of our Common Shares.

We may incur a 100% tax on any prohibited transactions.

Assuming that we remain qualified as a REIT, we will incur a 100% tax on our net income and gain derived from our sale of any property that we are treated as holding primarily for sale to customers in the ordinary course of business. We believe, but cannot assure, that all of our properties are held for investment and that none of the asset sales that we have made and intend to make pursuant to the plan of liquidation should be subject to this tax.

Certain of our subsidiaries are required to comply with the Investment Advisers Act of 1940.

RE CDO Management LLC, an entity in which we hold a 50% economic interest, and WRP-Management LLC, an entity in which we hold a 100% economic interest, are registered as investment advisers under the Investment Advisers Act of 1940, as amended, which we refer to as the Advisers Act, because they provide collateral management services to private funds as defined under the Advisers Act. As registered investment advisors, these subsidiaries are required to operate in compliance with the Advisers Act which results in increased cost to us. Further, if we were to fail to comply with the Advisers Act, we could be subject to sanctions, up to and including no longer being permitted to provide services to private funds which could have an adverse effect on our results.

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 liquidating distributions.

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 liquidating distributions.

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 effect on our financial condition and liquidating distributions.

 

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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. In 2011 we were conveyed title to the land underlying our Churchill, Pennsylvania property. Prior to the conveyance of the land, a Phase II environmental study was performed. The study found that there were certain contaminants at the property all of which were within permitted ranges. In addition, given the nature and use of the property currently and in the past, it is possible that additional contamination could occur which could require remediation. We believe that based on applicable law and existing agreements any such remediation costs would be the responsibility of a prior owner or tenant.

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 liquidating distributions 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 Common 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 plan of liquidation. We are subject to the risk that our Advisor will terminate its Advisory Agreement with us 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 termination fee and incentive fee payable to our Advisor may be substantial.

Pursuant to the terms of our Advisory Agreement with our Advisor, our Advisor is entitled to receive an incentive fee and, in certain instances, a termination 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 dividends above a threshold amount or (ii) upon termination of our Advisory Agreement if the value of our net 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 net assets of the Trust exceed the threshold amount. At December 31, 2014, the threshold amount required to be distributed before any incentive fee would be payable to FUR Advisors was approximately $569,963,000 which was equivalent to $15.91 for each of our Common Shares on a fully diluted basis. The threshold amount required to be distributed before any termination fee would be payable to FUR Advisors was approximately $464,982,000 which was equivalent to

 

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$12.98 for each of our Common Shares on a fully diluted basis. At such time as shareholders’ equity in accordance with generally accepted accounting principles exceeds the applicable threshold amount, we will record a liability in our financial statements equal to approximately 20% of the excess of shareholders’ equity in accordance with generally accepted accounting principles and the applicable threshold amount. In determining our estimated net assets in liquidation we have taken into account the termination fee and incentive fee.

Termination of the Advisory Agreement may be costly or not in our best interest.

Termination of the Advisory Agreement either by us without cause or by our Advisor for cause may be costly. Upon termination of the Advisory Agreement, our Advisor would be entitled to the incentive fee that would be paid as if we sold all of our assets for an amount based on appraised valuation of our assets assuming we were then liquidated. In addition, unless the Advisory Agreement is terminated by us for cause or by our Advisor without cause, our Advisor will also be entitled to the termination fee upon the termination of the Advisory Agreement or the liquidation or disposition of all or substantially all of our assets. The amount payable on termination of the Advisory Agreement, or liquidation or disposition, could be substantial which may have a negative effect on the price of our Common Shares. Further, affiliates of our Advisor hold approximately 9.8% 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.

If we transfer our assets to a liquidating trust, interests in the liquidating trust will not be freely transferable nor will the liquidating trust be required to comply with certain filing requirements of the Securities and Exchange Commission.

Interests in the liquidating trust will not be freely transferable except by will, intestate succession or operation of law. Therefore, the recipients of the interests in the liquidating trust will not realize any value from these interests unless and until the trustees of the liquidating trust distribute cash or other assets to them, which will be solely in the discretion of the liquidating trust’s trustees. As compared to the Trust which is required to comply with all of the filing requirements of the Securities and Exchange Commission for publicly traded entities, based on current guidance provide by the Securities and Exchange Commission we anticipate that the liquidating trust will be required to file only annual and current reports with the Securities and Exchange Commission.

Our property in Times Square is in its early stages of development.

The property located at 701 Seventh Ave in Times Square in which we are invested is in its very early stages of development and is uniquely located in Times Square. The construction is not expected to be completed until 2017. We utilized third party and market data, to the extent available, to project the future operations of the property once completed. The estimates of future operations were used by us to estimate the value of the investment at the projected date of the sale. The estimated value of this investment in our Net Assets in Liquidation is dependent upon significant assumptions, including but not limited to, future retail rents, hotel and signage revenues and operating expenses, all of which involve inherent uncertainty given they are related to estimating future events. The actual proceeds from the disposition of this asset may be significantly more or less than the amount included in net assets in liquidation.

ITEM 1B – UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2 – PROPERTIES

CONSOLIDATED OPERATING PROPERTIES

The following table sets forth a schedule of consolidated operating properties at December 31, 2014. Our portfolio of consolidated properties consists of nine commercial properties consisting of 1,655,000 square feet and four residential apartment complexes consisting of 956 units.

 

Description and
Location

  Year
Acquired
    Trust’s
Owner-
ship
    Rentable
Square
Feet
    (**)
%
Leased
    Major Tenants
(Lease / Options
Expiration)
  Major
Tenant
Sq. Ft.
    ($000’s)
Depreciated
Cost
Basis (1)
    Cost per
Square
Foot or
Unit
    Owner-
ship of
Land
  ($000’s) Debt
Balance
    Debt
Maturity
& Int
Rate (2)

Office

                     

Cerritos, CA

    2012        100     184,000        68   Sunwest

(2018)

    37,000      $ 21,754        118      Fee   $ 23,000      01/2017

5.07%

Chicago, IL

(One East Erie)

    2005        100     126,000        89   River North

Surgery (2023)

    15,000        21,126        168      Fee     19,491      03/2016

5.75%

Lisle, IL

    2006        100     169,000        78   United Healthcare

(2015)

    41,000        10,064        60      Fee     5,713      10/2015

Libor + 2.5%

Lisle, IL

(Marc Realty)

    2006        60     54,000        100   Ryerson

(2018/2023)

    54,000        3,582        66      Fee     5,392      03/2017

5.55%

New York, NY

(450 West 14th)

    2011        (3     105,000        82   Alice + Olivia

(2021/2031)

    27,000        55,708        194      Ground

Lease

    51,034      05/2016

Libor + 2.5%

          Fast Retailing

(2026/2036)

    23,000             
          Access Industries

(2021/2031)

    14,000             

Orlando, FL

    2004        100     257,000        100   Siemens Real

Estate, Inc.

(2017/2042)

    257,000        13,094        51      Ground

Lease

    36,347      07/2017

6.40%

Plantation, FL

    2004        100     120,000        100   AT&T Service,

Inc.

(2020/2035)

    120,000        10,766        90      Fee     10,550      04/2018

6.48%

     

 

 

         

 

 

       

 

 

   

Subtotal – Office

        1,015,000            $ 136,094          $ 151,527     
     

 

 

         

 

 

       

 

 

   

Other

                     

Warehouse

                     

Jacksonville, FL

    2004        100     588,000        100   Football

Fanatics

(2015/2024)

    561,000      $ 11,756        20      Fee   $ —        N/A

Mixed Use

                     

Churchill, PA

    2004        100     52,000        100   Westinghouse

(2024)

    52,000        5,404        104      Fee     4,918      08/2024

3.50%

     

 

 

         

 

 

       

 

 

   

Subtotal – Other

        640,000            $ 17,160          $ 4,918     
     

 

 

         

 

 

       

 

 

   

Residential

                     

Houston, TX

    2013        84     396 units        92   n/a     n/a        103,479        261      Fee     59,524      10/2016 LIBOR
+ 2.0%

Stamford, CT

    2013        84     92 units        96   n/a     n/a        77,814        846      Fee     44,923      10/2016 LIBOR
+ 2.0%

Phoenix, AZ

    2013        84     184 units        95   n/a     n/a        38,736        211      Fee     22,462      10/2016 LIBOR
+ 2.0%

Greensboro, NC

    2012        100     284 units        94   n/a     n/a        17,439        65      Fee     13,600      08/2016

6.22%

     

 

 

         

 

 

       

 

 

   

Subtotal – Residential

        956 units            $ 237,468          $ 140,509     
     

 

 

         

 

 

       

 

 

   

Total Consolidated Properties

        1,655,000            $ 390,722          $ 296,954     
     

 

 

         

 

 

       

 

 

   

 

(**) Occupancy rates include all signed leases, including space undergoing tenant improvements.

Notes to Consolidated Operating Properties

 

(1) Assets are no longer depreciated under liquidation accounting. Depreciated costs basis represents initial cost, plus improvements, less depreciation through July 31, 2014.

 

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CONSOLIDATED OPERATING PROPERTIES—(Continued)

 

(2) The one month LIBOR rate at December 31, 2014 was 0.17125%.
(3) We hold a preferred equity interest. At December 31, 2014 our effective ownership was 83%.

 

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UNCONSOLIDATED OPERATING PROPERTIES

The following table sets forth a schedule of unconsolidated operating properties at December 31, 2014. Our portfolio of unconsolidated properties was historically accounted for under the equity method of accounting. These properties consist of six commercial properties consisting of 1,537,000 square feet and 29 residential apartment complexes consisting of 5,070 units.

 

    Year
Acquired
    Trust’s
Ownership
    Rentable
Square Feet
    (**)
% Leased
    Major Tenants
(Lease / Options
Expiration)
  Major
Tenants
Sq. Ft.
    Ownership
of Land
    ($000’s) Debt
Balance (1)
    Debt Maturity
& Int Rate (2)

Mentor Retail LLC – Equity Investment

  

             

39 South State Street

Chicago, IL

    2012        50     7,000        100   American Apparel

(2022)

    7,000        Fee      $ 2,497      09/2017 10%
     

 

 

           

 

 

   

WRT-Elad One South State – Equity Investment

  

             

One South State Street

                 

Chicago, IL

(Sullivan Center)

    2012        38     944,000        88   Target

(2038 / 2063)

    147,000        Fee      $ 113,500      11/2018 3.95%
     

 

 

           

 

 

   
          Walgreens

(2022/2027)

    95,000         
          Illinois Dept. of

Employment

(2019/2024)

    243,000         
          Art Institute of

Chicago

(2020/2030)

    161,000         

701 Seventh WRT Investor LLC – Equity Investment

  

             

701 Seventh Avenue

New York, NY

    2012        81    
 
Under
Development
  
  
    (4)     —          Fee      $ 399,873      10/2015
LIBOR +

10.20% (3)

     

 

 

           

 

 

   

Atrium Mall LLC – Equity Investment

  

             

Chicago, IL

    2013        50     71,000        77   No tenants over 10%     —          Fee      $ —       
     

 

 

           

 

 

   

Summit Pointe Apartment LLC – Equity Investment

  

             

Oklahoma City, OK

    2013        80     184 units        94   n/a     n/a        Fee      $ 9,089      02/2021 5.70%
     

 

 

           

 

 

   

Irving – Harlem Venture – Equity Investment

  

              8/2015

Norridge, IL

    2014        <1     332,000        99   Kmart (2017)     116,000        Fee      $ 42,500      LIBOR + 5.75%
     

 

 

           

 

 

   

Edens Center Associates – Equity Investment

  

             

Wilmette, IL

    2014        <1     183,000        100   Bed Bath & Beyond     40,000        Fee      $ 40,000      5/9/2017
     

 

 

           

 

 

   
          (2020)         LIBOR + 5.15%
          Carsons Furniture     35,000         
          (2016)        
          Fresh Market
(2023)
    19,000         

 

(**) Occupancy rates include all signed leases including space undergoing tenant improvements

 

(continued on next page)

 

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Table of Contents

UNCONSOLIDATED OPERATING PROPERTIES (Continued)

    Year
Acquired
    Trust’s
Ownership
    Units     %
Leased
    Ownership
of Land
  ($000’s)
Debt
Balance (1)
   

Debt Maturity
& Int Rate (6)

  Subordinated
Debt ($000’s)
    Subodinated
Debt
Maturity
 

Vintage Housing Holdings LLC - Equity Investment

  

           

Agave Associates

Elk Grove, CA

    2011        (5     188        98   Fee   $ 14,600     

10/2036

SIFMA + 1.22%

  $ 2,500       

 

12/2036

3.50%

  

  

Vintage at Bend

Bend, OR

    2011        (5     106        97   Fee     5,395     

12/2036

SIFMA + 1.20%

   

The Bluffs Apartments

Reno, NV

    2011        (5     300        95   Fee     18,000     

10/2035

SIFMA + 1.46%

    8       

 

7/2033

3%

  

  

Bouquet Canyon Seniors

Santa Clarita, CA

    2011        (5     264        99   Fee     10,372     

7/2028

6.38%

   

Vintage at Bremerton

Bremerton, WA

    2011        (5     143        94   Fee     6,200     

5/2033

SIFMA + 1.37%

   

Vintage at Burien

Burien, WA

    2011        (5     101        97   Ground Lease     6,570     

1/2038

SIFMA + 1.40%

   

Vintage at Chehalis

Chehalis, WA

    2011        (5     150        98   Fee     8,190     

6/2040

SIFMA + 1.55% (7)

   

Elk Creek Apartments

Sequim, WA

    2011        (5     138        95   Fee     7,248     

11/2039

6.46%

   

Vintage at Everett

Everett, WA

    2011        (5     259        98   Fee     15,950     

1/2038

SIFMA + 1.37%

   

Falls Creek Apartments

Couer d’ Alene, ID

    2011        (5     170        97   Fee     8,200     

12/2040

6.25%

   

Forest Creek Apartments

Spokane, WA

    2011        (5     252        96   Fee     13,680     

6/2040

SIFMA + 1.54%

   

Hamilton Place Seniors

Bellingham, WA

    2011        (5     94        96   Fee     3,590     

7/2033

SIFMA + 1.43%

   

Heritage Place Apartments

St. Ann, MO

    2011        (5     113        92   Fee     1,683     

7/2015

8.37%

    473       

 

5/2039

1.0%

  

  

Holly Village Apartments

Everett, WA

    2011        (5     149        98   Fee     6,690     

7/2032

SIFMA + 1.42%

   

Larkin Place Apartments

Bellingham, WA

    2011        (5     101        93   Fee     4,825     

7/2033

SIFMA + 1.38%

   

Vintage at Mt. Vernon

              930      1/2037 SIFMA + 1.54% (8)    

Mt. Vernon, WA

    2011        (5     154        95   Fee     7,500      SIFMA + 1.54% (9)    

Vintage at Napa

Napa, CA

    2011        (5     115        98   Fee     5,745      6/2034
6.24%
   

Vintage at Richland

Richland, WA

    2011        (5     150        96   Fee     7,535     

1/2038

SIFMA + 1.66%

   

Rosecreek Senior Living

Arlington, WA

    2011        (5     100        98   Fee     3,205     

12/2037

SIFMA + 0.34%

   

Vintage at Sequim

Sequim, WA

    2011        (5     118        98   Fee     6,152     

3/2038

SIFMA + 2.28%

   

Silver Creek Apartments

Pasco, WA

    2011        (5     242        96   Fee     12,570     

12/2037

SIFMA + 1.60%

   

Vintage at Silverdale

Silverdale, WA

    2011        (5     240        96   Fee     14,880     

9/2039

SIFMA + 2.74% (10)

   

Vintage at Spokane

Spokane, WA

    2011        (5     287        96   Fee     16,295     

8/2040

SIFMA + 1.34%

   

Seven Hills/ St Rose

Henderson, NV

    2011        (5     244        99   Fee     14,770     

10/2035

SIFMA + 1.28%

    300       
 
10/2056
0%
  
  

Twin Ponds Apartments

Arlington, WA

    2011        (5     134        96   Fee    
 
5,515
1,056
  
  
 

1/2038

SIFMA + 1.38%
6.20%

   

 

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UNCONSOLIDATED OPERATING PROPERTIES (Continued)

    Year
Acquired
    Trust’s
Ownership
    Units     %
Leased
    Ownership
of Land
  ($000’s)
Debt
Balance (1)
   

Debt Maturity
& Int Rate (6)

  Subordinated
Debt ($000’s)
    Subordinated
Debt
Maturity

Vintage at Vancouver

Vancouver, WA

    2011        (5     154        96   Fee    

 

7,725

424

  

  

 

3/2036

SIFMA + 2.05%
8.12%

   

Vista Sonoma Seniors Apts Santa Rosa, CA

    2011        (5     189        98   Fee     9,489      1/2032
6.562%
   

Vintage at Tacoma

    2012        (5     231        95   Fee     17,800      7/2029
4.75%
   
     

 

 

       

 

 

     

 

 

   

Total – Vintage Properties

        4,886       units        $ 262,784        $ 3,281     
     

 

 

       

 

 

     

 

 

   

Notes to Unconsolidated Operating Properties Table

 

(1) Debt balance shown represents the property level debt encumbering the properties.
(2) The one month LIBOR rate at December 31, 2014 was 0.17125%.
(3) There is a LIBOR floor of 1%.
(4) There are no major tenants as the property is currently in development.
(5) The Vintage equity investment represents a 75% interest in Vintage Housing Holdings LLC, an entity which owns the general partnership interests in the properties listed above.
(6) SIFMA = Securities Industry and Financial Markets Association Municipal Swap Index. The one-month SIFMA rate at November 30, 2014 was 0.04%. Each of the Vintage floating rate debt instruments is subject to an interest rate cap ranging from 5.50% to 8.25%.
(7) An interest rate swap agreement with a notional amount of $7,733 effectively converts the interest rate to a fixed rate of 4.76%.
(8) An interest rate swap agreement with a notional amount of $7,500 effectively converts the interest rate to a fixed rate of 5.31%.
(9) An interest rate swap agreement with a notional amount of $783 effectively converts the interest rate to a fixed rate of 6.86%.
(10) An interest rate swap agreement with a notional amount of $13,995 effectively converts the interest rate to a fixed rate of 5.72%.

LEASE EXPIRATIONS

The following tables set forth a schedule of lease expirations at our consolidated and unconsolidated commercial properties respectively, with respect to leases in place at December 31, 2014 for each of the next ten years and thereafter (assuming that no tenants exercise renewals or cancellation options and that there are no tenant bankruptcies or other tenant defaults). Annual contractual rent under expiring leases represents base rent charges for the year ended December 31, 2014 and does not reflect any straight-line rent adjustments or expense reimbursements. The average annualized revenue per square foot as of December 31, 2014 was $30.49 for consolidated multi-tenant operating properties and $7.37 for consolidated single tenant operating properties. Annualized revenue represents contractual base rent for the year ended December 31, 2014.

 

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Year of Lease Expirations

  Number of
Expiring Leases
    Net Rentable
Square Feet
Subject to
Expiring Leases
    Percentage of Leased
Square Footage
Represented by
Expiring Leases (%)
    Annual Contractual
Rent Under
Expiring Leases ($)
    Annual Rent Per
Leased Square Foot
of Expiring
Leases ($)
 

Consolidated Multi Tenant

         

Operating Properties:

         

2015

    14        77,000        17   $ 1,078,000      $ 14.00   

2016

    8        26,000        5     549,000        21.12   

2017

    8        59,000        13     1,091,000        18.49   

2018

    13        86,000        19     1,992,000        23.16   

2019

    8        33,000        7     932,000        28.24   

2020

    4        8,000        2     110,000        13.75   

2021

    2        4,000        1     67,000        16.75   

2022

    9        99,000        22     4,961,000        50.11   

2023

    4        31,000        7     1,278,000        41.23   

2024

    2        4,000        1     89,000        22.25   

2025 and thereafter

    4        27,000        6     1,694,000        62.74   
     

 

 

     
  100
     

 

 

     

Consolidated Single Tenant

Operating Properties:

2015

  1      561,000      52   958,000      1.71   

2016

  1      27,000      3   126,000      4.67   

2017

  1      257,000      24   3,671,000      14.28   

2018

  1      54,000      5   918,000      17.00   

2019

  —        —        —        —        —     

2020

  1      120,000      11   1,447,000      12.06   

2021

  —        —        —        —        —     

2022

  —        —        —        —        —     

2023

  —        —        —        —        —     

2024

  1      52,000      5   778,000      14.96   

2025 and thereafter

  —        —        —        —        —     
     

 

 

     
  100
     

 

 

     

Unconsolidated

Operating Properties:

2015

  15      38,000      3   963,000      25.14   

2016

  8      60,000      4   1,592,000      26.53   

2017

  13      168,000      12   2,241,000      13.38   

2018

  10      54,000      4   1,457,000      27.12   

2019

  12      372,000      26   8,949,000      24.06   

2020

  6      204,000      15   4,598,000      22.51   

2021

  6      62,000      4   1,021,000      16.49   

2022

  10      198,000      14   4,743,000      23.90   

2023

  4      28,000      2   1,108,000      40.20   

2024

  6      12,000      1   196,000      16.06   

2025 and thereafter

  12      210,000      15   6,061,000      28.84   
     

 

 

     
  100
     

 

 

     

 

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TENANT DIVERSIFICATION

The following table sets forth information regarding the leases with respect to the five largest tenants in our consolidated properties portfolio, based on the amount of square footage leased by our tenants at December 31, 2014.

 

Tenant

   Property    Remaining
Lease Term in
Months
     Total Leased
Square Fee
     Percentage of
Aggregate
Portfolio
Leased Square
Feet (%) (1)
    Percentage of
Aggregate
Portfolio Annual
Rent (%) (2)
 

Football Fanatics, Inc.

   Jacksonville, FL      7         561,000         36.8     2.6

Siemens Real Estate, Inc.

   Orlando, FL      36         257,000         16.8     9.9

Bell South Communications

   Plantation, FL      63         120,000         7.9     3.9

Ryerson, Inc.

   Lisle, IL      40         54,000         3.5     2.5

Westinghouse Electric Co., LLC

   Churchill, PA      117         52,000         3.4     2.1

 

(1) Represents percentage of square footage leased excluding month to month leases.
(2) Represents base rent plus straight line rent adjustments.

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:

 

Property Location

   Current Term
Expiration
  

Renewal Terms

  

Lease Term Rents Per Annum

Orlando, FL

   12/31/17   

Five, 5-year renewal options

(Extended term 2037)

   Ground lease calls for $2/yr. of rent through the current term and then fair market value for each successive renewal period. (1)

450 West 14th Street
New York, NY

   05/31/53    None    Ground lease calls for $118,483/month plus increases of 3% per annum each June as well as $100,000 increases per annum on November 1, 2015 and 2017.

Atrium Mall
Chicago, IL

   09/19/19   

Five, 5-year renewal options

(Extended term 2044)

   Ground lease calls for rent of $36,648/month plus 50% of excess cash flow as defined in the
lease. (2)

 

(1) The lease requires the tenant to perform all covenants under the ground lease including the payment of ground rent. All extensions are at our option.
(2) All extensions are at our option. Landlord has right to terminate lease September 19, 2034.

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.

 

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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 affect on the consolidated financial position, results of operations or cash flows of the Trust. As of December 31, 2014, the Trust was not involved in any material litigation.

ITEM 4 – MINE SAFETY DISCLOSURES

Not Applicable.

 

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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, 2013:

     

First quarter

   $ 12.80       $ 11.04   

Second quarter

     13.29         11.40   

Third quarter

     13.66         11.07   

Fourth quarter

     12.02         10.77   

Year Ended December 31, 2014:

     

First Quarter

   $ 12.19       $ 10.81   

Second Quarter

     15.50         11.01   

Third Quarter

     15.58         14.53   

Fourth Quarter

     18.23         14.90   

Holders

As of December 31, 2014 there were 569 record holders of our Common Shares. This does not include beneficial owners for whom Cede & Co. or others act as nominee.

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. We declared dividends of $0.1625 per Common Share in each of the first and second quarters of 2014 and for each quarter in 2013. In the fourth quarter of 2014 we declared a liquidating distribution of $2.25 per Common Share.

Pursuant to the terms of our Series D Preferred Shares, we were required to pay quarterly dividends of $0.578125 per Series D Preferred Share. We made the quarterly dividend payment of $0.578125 per Series D Preferred Share for each of the first and second quarters of 2014 and for each quarter in 2013. On September 15, 2014 we made the full liquidating distribution on our Series D Preferred Shares of $25.4815 per share, which amount consisted of the $25.00 liquidating preference plus accrued and unpaid dividends to, but excluding, the date of payment.

As a result of the adoption of the plan of liquidation, as required by the terms of our Series D Preferred Shares, dividends on our Common Shares were suspended until the liquidation preference on our Series D Preferred Shares was satisfied. As noted above, the liquidation preference on our Series D Preferred Shares was satisfied on September 15, 2014. Accordingly, we are no longer restricted by the terms of the Series D Preferred Shares from paying dividends on our Common Shares. It is our Board of Trustees’ present expectation that liquidating distributions will be paid no less frequently than semi-annually beginning with the distribution paid January 15, 2015. However, the actual amount and timing of, and record date for, dividends on our Common Shares will be determined by our Board of Trustees and will depend upon the timing and proceeds of the sale of our assets and the amounts deemed necessary by our Board of Trustees to pay or provide for our liabilities and obligations and REIT requirements. Any such dividends on the Common Shares will be deemed a return of capital until the

 

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applicable holder has received dividends totaling its cost basis. The actual cash flow available to pay dividends will be affected by a number of factors, including, among others, the risks discussed under “Risk Factors” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of this Annual Report.

We do not believe that the financial covenants contained in our loan agreements will have any adverse impact on our ability to pay dividends to our common shareholders or to distribute amounts necessary to maintain our qualifications as a REIT.

See Item 7 – Common and Preferred Share Dividends for a further description of our dividend policy.

 

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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.

 

    Seven Months
Ended
July 31, 2014
    Years Ended December 31,  
Operating Results     2013     2012     2011     2010  
(in thousands, except per share data)                              

Revenue

  $ 46,313      $ 51,865      $ 33,930      $ 26,688      $ 26,270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations (1)

  1,246    $ 20,006    $ 23,646    $ 11,441    $ 19,211   

Income (loss) from discontinued operations (2)

  11,235      8,772      985      (508   (2,734
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Winthrop Realty Trust

  12,481      28,778      24,631      10,933      16,477   

Preferred dividends

  (6,502   (11,146   (9,285   (924   (288

Amount allocated to Restricted Common Shares

  (192   (307   —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Common Shares

$ 5,787    $ 17,325    $ 15,346    $ 10,009    $ 16,189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Common Share

Income (loss) from continuing operations, basic

  (0.15 $ 0.25    $ 0.43    $ 0.34    $ 0.84   

Income (loss) from discontinued operations, basic (2)

  0.31      0.26      0.03      (0.02   (0.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Common Shares, basic

$ 0.16    $ 0.51    $ 0.46    $ 0.32    $ 0.72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations, diluted

$ (0.15 $ 0.25    $ 0.43    $ 0.34    $ 0.84   

Income (loss) from discontinued operations, diluted

  0.31      0.26      0.03      (0.02   (0.12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Common Shares, diluted

$ 0.16    $ 0.51    $ 0.46    $ 0.32    $ 0.72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per Common Share

$ 0.325    $ 0.65    $ 0.65    $ 0.65    $ 0.65   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Balance Sheet Data:   As of December 31,  
(in thousands)   2014 (3)     2013     2012     2011     2010  

Total Assets

  $ 1,136,261      $ 1,132,324      $ 923,163      $ 733,933      $ 610,128   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Debt

$ 368,219    $ 562,075    $ 421,422    $ 300,090    $ 277,193   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Controlling redeemable preferred interest

$ —      $ —      $ —      $ —      $ 3,221   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Series D Cumulative Redeemable Preferred Shares

$ —      $ 120,500    $ 120,500    $ 40,000    $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Shareholders’ Equity

$ —      $ 480,874    $ 454,510    $ 387,802    $ 295,771   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability for non-controlling interest

$ 46,564    $ —      $ —      $ —      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability for estimated costs in excess of estimated receipts during liquidation

$ 31,253    $ —      $ —      $ —      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends payable

$ 82,353    $ 6,099    $ 5,366    $ 5,369    $ 4,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net assets in liquidation

$ 594,704    $ —      $ —      $ —      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Income from continuing operations, including per share data, are net of non-controlling interests.
(2)

The results of the Athens, Georgia and Sherman, Texas properties were classified as discontinued operations for 2010. The results of the Lafayette, Louisiana; Knoxville, Tennessee and St. Louis, Missouri properties

 

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  were classified as discontinued operations for 2010 and 2011. The results of the Indianapolis, Indiana and Memphis, Tennessee properties were classified as discontinued operations for 2010 through 2012. The results of the Andover, Massachusetts; Denton, Texas and Seabrook, Texas properties were classified as discontinued operation for 2010 through 2013. The results of the Deer Valley, Arizona; Meriden, Connecticut; Englewood, Colorado; Chicago, Illinois (River City); Lisle, Illinois (701 Arboretum); Louisville, Kentucky and Amherst, New York properties were classified as discontinued operations for 2010 through 2014.
(3) Amounts at December 31, 2014 are on the liquidation basis of accounting.

 

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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,” “estimates,” “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

On April 28, 2014 our Board of Trustees adopted a plan of liquidation. The plan, which provides for an orderly liquidation of our assets, was approved by holders of a majority of our common shares of beneficial interest (“Common Shares”) at a special meeting of shareholders on August 5, 2014. As a result of the approval of the plan of liquidation, we are not permitted to make any new investments other than to make protective acquisitions or advances with respect to our existing assets. We will, however, be able to satisfy any existing contractual obligations including any capital call requirements and acquisitions or dispositions pursuant to buy-sell provisions under existing joint venture documentation, pay for required tenant improvements and capital expenditures at our real estate properties and repurchase our existing Common Shares and 7.75% Senior Notes (“Senior Notes”). In addition, we will be able to invest our cash reserves in short-term U.S. Treasuries or other short-term obligations.

We are a diversified REIT, and prior to the adoption of the plan of liquidation, we operated in three strategic segments: (i) operating properties; (ii) loan assets; and (iii) REIT securities. As value investors we focused and aggressively pursued our investment activity in the segment we believed would generate the greater overall return to us given market conditions at the time. Under the plan of liquidation, our focus is on selling our assets in a manner that maximizes the return to our Common Shareholders. We will continue to actively manage our remaining assets throughout the liquidation process.

Under the plan of liquidation, we will seek to sell all of our assets with a view towards completing the liquidation by no later than August 5, 2016. In order to comply with applicable tax laws, any of our assets not sold by such date will be distributed into a liquidating trust. If we transfer our assets to a liquidating trust, our Common Shareholders will receive beneficial interest in the liquidating trust equivalent to those held in the Trust, which beneficial interests will generally not be transferrable.

 

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The timing and amount of the liquidating distributions to the shareholders will be determined by our Board of Trustees. The dissolution process and the amount and timing of distributions to shareholders involve risks and uncertainties. As such, it is impossible at this time to determine the ultimate amount of liquidation proceeds that will actually be distributed to Common Shareholders or the timing of such payments.

Although we expect that our Common Shares will continue to be traded on the New York Stock Exchange until our assets are either disposed of or transferred to a liquidating trust, under New York Stock Exchange rules it is possible that as we sell our assets we may not meet the listing standards of the New York Stock Exchange. If this occurs, our Common Shares could be delisted.

During 2014 we (i) sold 19 operating properties for aggregate gross proceeds of $255,489,000 and six loan assets for aggregate proceeds of $47,867,000; (ii) received $47,268,000 in loan repayments; and (iii) invested $16,000,000 in new operating property and loan assets and $69,179,000 in existing operating property and loan assets. The investment in new assets occurred prior to the adoption of the plan of liquidation by the Board of Trustees. Investments in existing assets was primarily funding of previous commitments such as the $53,187,000 of additional capital contributions to our 701 Seventh Avenue venture or to strengthen our position in ventures as demonstrated by our additional $15,992,000 investment in our Playa Vista loan asset.

In addition, on September 15, 2014 we paid the full liquidating distribution of $122,821,000 ($25.4815 per Series D Preferred Share) required on our Series D Preferred Shares. Accordingly, the holders of the Series D Preferred Shares are no longer entitled to receive any amounts from us on account of the Series D Preferred Shares.

At December 31, 2014 we held 13 consolidated operating properties, 12 equity investments, five loans receivable, one secured financing receivable and one loan security.

Acquisition Activity

Playa Vista – On January 10, 2014 the mezzanine loan agreement was amended to increase the principal balance by up to $4,000,000 and to increase the interest rate by 1.5% to a rate of 16.25% per annum. Our share of the increased loan amount was up to $2,000,000 of which $1,992,000 was funded. On July 7, 2014 we acquired for $14,000,000 the additional 50% interest in the Playa Vista loan. We also paid $108,000 for the prorated share of interest accrued through June 30, 2014. The purchase price represented a premium of approximately $762,000 over the face of the loan inclusive of interest through June 30, 2014. The loan was satisfied on December 9, 2014. See “Disposition Activity – Playa Vista” below.

Norridge equity acquisition – On March 5, 2014, in connection with the Edens Plaza and Norridge Commons loan origination discussed below, we acquired for $250,000 all of the issued and outstanding shares of Harlem Properties, Inc. (“Harlem”). Harlem is the entity that ultimately controls the entity that owns Norridge Commons, a retail shopping center located in Norridge, Illinois (the “Norridge Property”). We, through our ownership of Harlem, have an effective 0.375% interest in the property and control the business of the entity and all decisions affecting the entity, its policy and its management.

Edens – equity acquisition – On March 5, 2014, in connection with the Edens Plaza and Norridge Commons loan origination discussed below, we acquired for $250,000 all of the issued and outstanding shares of Edens Properties, Inc. (“Edens”). Edens is a co-general partner of a limited partnership that is a general partner of Edens Center Associates, a retail shopping center located outside of Chicago, Illinois (the “Edens Property”).

Edens Center and Norridge Commons – loan origination – On March 5, 2014 we originated a $15,500,000 mezzanine loan to an affiliate of our venture partner in both the Sullivan Center and Mentor Retail LLC ventures (“Freed Management”) secured by a majority of the limited partnership interests in entities that hold a majority interest in the Edens Property and the Norridge Property. The loan bears interest at LIBOR plus 12% per annum (increasing by 100 basis points in each extended term), requires payments of current interest at a rate of 10% per annum (increasing by 50 basis points each year) and has a three-year term, subject to two, one-year extensions.

 

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Upon satisfaction of the loan, we will be entitled to a participation interest equal to the greater of (i) a 14.5% internal rate of return (“IRR”) (increasing to 15.5% IRR after the initial term) and (ii) 30% (increasing to 40% after the initial term and 50% after the first extended term) of the value of the properties in excess of $115,000,000. As additional collateral for the loan, Freed Management pledged to us its ownership interest in our Sullivan Center and Mentor Retail LLC ventures.

Disposition Activity

Loan portfolio – sale of interest – In February 2014 we sold our interests in the loans secured directly or indirectly by Hotel Wales, Wellington Tower, 500-512 Seventh Avenue, Legacy Orchard and San Marbeya for an aggregate sales price of $42,900,000. The selling price is net of the secured financings on the Hotel Wales and San Marbeya loans which totaled $29,150,000. In connection with the sale, we retained an interest only participation in each of the Legacy Orchard and Hotel Wales loans entitling us to interest at 2.5% per annum on the principal amount of the Legacy Orchard loan and 0.5% per annum on the principal amount of the Hotel Wales loan. No gain or loss was recognized on the sale of the loans.

Newbury Apartments – property sale – On February 26, 2014 we sold our interest in the Newbury Apartments property located in Meriden, Connecticut to an independent third party for gross sale proceeds of $27,500,000. After costs, pro-rations and the transfer of the debt, we received net proceeds of approximately $5,106,000 and recorded a gain of $4,422,000 on the sale of the property which is included in income from discontinued operations.

Marc Realty – sale of interest – On March 5, 2014 we sold to Marc Realty, our venture partner, our equity investments in High Point Plaza LLC, 1701 Woodfield LLC and Enterprise Center LLC and our interest in the River City, Chicago, Illinois property for gross sale proceeds of $6,000,000. We received $1,500,000 in cash and a note receivable for the remaining $4,500,000. The note bore interest at a rate of 6% per annum, increasing to 7% per annum on the first anniversary and to 8% on the second anniversary. The note required monthly payments of interest only and was scheduled to mature on March 1, 2017. The note was repaid in full during June 2014. We recorded a $3,000 gain on the sale of our interest in River City which is included in income from discontinued operations. We recorded a $69,000 gain on sale of the three equity investments which is included in equity in income of equity investments.

We also granted Marc Realty an option exercisable prior to March 1, 2016 to acquire our equity investment in Brooks Building LLC. Marc Realty exercised its option and acquired our interest in Brooks Building LLC on September 8, 2014. The liquidation value of the investment was $5,770,000 at August 1, 2014, and we received net proceeds of $5,770,000 on the sale.

Queensridge – loan satisfaction – During the quarter ended March 31, 2014 several of the condominium units collateralizing the Queensridge loan receivable were sold resulting in principal payments to us of approximately $2,908,000. As a result of the payments, the outstanding principal balance on the Queensridge loan has been fully satisfied. In addition, we received an exit fee of $1,787,000 in connection with the early satisfaction of the loan which is classified as interest income.

Crossroads I & IIproperty sale – On May 1, 2014 we sold our wholly-owned office properties referred to as Crossroads I and Crossroads II located in Englewood, Colorado to an independent third party for aggregate gross sale proceeds of $31,100,000. After costs and pro-rations we received net proceeds of approximately $29,633,000 and recorded a gain of $5,723,000 on the sale of the properties which is included in income from discontinued operations.

Amherst – property sale – On June 25, 2014 we sold our wholly-owned office property located in Amherst, New York to an independent third party for gross sale proceeds of $24,500,000. After costs, pro-rations and a reserve holdback we received net proceeds of approximately $21,226,000 on the sale of the property. Upon completion

 

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of the parking area for the office property we received $2,449,000 from the reserve holdback which resulted in aggregate net proceeds of approximately $23,675,000. We recorded a gain of $946,000 on the sale of the property which is included in income from discontinued operations.

Wateridge – sale of interest – On August 6, 2014 we sold our interest in the WRT-Fenway Wateridge venture to our venture partner for approximately $2,383,000 which equaled our liquidation value at August 1, 2014.

Stamford – loan satisfaction – On August 6, 2014 our venture which held the mezzanine loan secured by seven office properties in Stamford, Connecticut received payment in full on the loan. We received net proceeds, inclusive of accrued interest, of $9,450,000 in connection with the payoff which equaled our liquidation value at August 1, 2014.

Shops at Wailea – loan satisfaction – On August 7, 2014 we received $7,556,000, inclusive of accrued interest, in full repayment at par of our loan receivable collateralized by the Shops at Wailea. The liquidation value of this investment was $7,516,000 at August 1, 2014.

5400 Westheimer – sale of interest – On October 1, 2014 we received $1,033,000 in full repayment of the note due from our venture that owns the property located at 5400 Westheimer Court, Houston, Texas. On October 15, 2014 we sold our interest in this venture to one of the venture partners for approximately $9,690,000. The liquidation value of this investment, including the note and our interest in the venture, was $10,777,000 at August 1, 2014.

Waterford Place Apartments – property sale – On October 16, 2014 we sold our Waterford Place apartment building in Memphis, Tennessee to an independent third party for gross proceeds of $28,160,000 which equaled our liquidation value at August 1, 2014. After satisfaction of the debt and payment of closing costs, we received net proceeds of approximately $15,290,000.

Kroger-Atlanta – property sale – On October 20, 2014 we sold our retail property located in Atlanta, Georgia for gross proceeds of $1,500,000 and received net proceeds of approximately $1,464,000. The liquidation value of this property was $2,000,000 at August 1, 2014.

Kroger-Greensboro – property sale – On October 20, 2014 we sold our retail property located in Greensboro, North Carolina for gross proceeds of $1,750,000 and received net proceeds of approximately $1,709,000. The liquidation value of this property was $2,500,000 at August 1, 2014.

Pinnacle II – loan sale – On October 22, 2014 we sold our B-Note receivable which had an outstanding balance of $5,017,000 for net proceeds of approximately $4,967,000. The liquidation value of this investment was $4,989,00 at August 1, 2014.

San Pedro – property sale – On October 24, 2014 the venture in which we hold an 83.7% interest sold its apartment building located in San Pedro, California for gross proceeds of $23,800,000 which equaled our liquidation value at August 1, 2014. The entire net proceeds of approximately $23,090,000 were used to pay down the $150,000,000 loan collateralized by the four properties in the venture.

Kroger-Louisville – property sale – On November 25, 2014, we sold our retail property located in Louisville, Kentucky for gross proceeds of $2,500,000 and received net proceeds of approximately $2,334,000. The liquidation value of this property was $2,500,000 at August 1, 2014.

1515 Market – property sale – On December 2, 2014, we sold our office property located at 1515 Market Street, Philadelphia, Pennsylvania for gross proceeds of $82,345,000 and received net proceeds of approximately $40,304,000 after satisfaction of the third party mortgage debt, closing costs and pro rations. The liquidation value of this property was $81,314,000 at August 1, 2014.

 

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Playa Vista – loan satisfaction – On December 9, 2014 we received repayment in full on our $27,394,000 loan receivable collateralized by the office complex in Playa Vista, California. In addition, we received $6,565,000 in exchange for our equity participation interest in the underlying collateral resulting in total proceeds of $33,959,000. The liquidation value of this investment, including the loan receivable and equity participation, was $29,369,000 at August 1, 2014.

Burlington – property sale – On December 23, 2014, we sold our office property located in South Burlington, Vermont for gross proceeds of $2,850,000 and received net proceeds of approximately $2,475,000. The liquidation value of this property was $3,225,000 at August 1, 2014.

Sealy Northwest Atlanta – sale of interest – On December 23, 2014, we sold to Sealy, our venture partner, our interest in Sealy Northwest Atlanta for total proceeds of $5,641,000. The liquidation value of this investment was $5,692,000 at August 1, 2014.

Consolidated Operating Properties

As of December 31, 2014 our consolidated properties were approximately 92% leased compared to approximately 94% leased at December 31, 2013 (as adjusted for properties sold during 2014). At December 31, 2014 we did not have any tenants who represented 10% or more of our annualized base rental revenue or our total revenue.

Liquidity and Capital Resources

At December 31, 2014, we held $127,583,000 in unrestricted cash and cash equivalents. Our total assets and net assets in liquidation were $1,136,261,000 and $594,704,000, respectively at December 31, 2014. Our ability to meet our obligations is contingent upon the disposition of our assets in accordance with our plan of liquidation. We estimate that the proceeds from the sale of assets pursuant to the plan of liquidation will be adequate to pay our obligations, however, we cannot provide any assurance as to the prices or net proceeds we will receive from the disposition of our assets.

We believe that cash flow from operations along with sale proceeds will continue to provide adequate capital to fund our operating and administrative and other expenses incurred during liquidation 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.

Our primary sources of funds include:

 

    cash and cash equivalents;

 

    rents and reimbursements received from our operating properties;

 

    payments received under our loan assets;

 

    sale of existing assets; and

 

    cash distributions from joint ventures.

Debt Maturities

At December 31, 2014, our statement of net assets contains mortgage loans payable of $296,954,000. We have $5,713,000 of mortgage debt maturing in 2015, $211,034,000 maturing in 2016 and $64,739,000 maturing in 2017 with the remainder maturing in 2018 or later. Our Senior Notes, which have an outstanding balance of $71,265,000 at December 31, 2014, mature on August 15, 2022 but are callable by us beginning August 15, 2015. We continually evaluate our debt maturities and based on our current assessment, we believe that, to the extent we are unable to sell an asset prior to a loan’s maturity, 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.

 

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Net Loss Carry Forwards

At December 31, 2013, we had a net operating loss carry forward of approximately $9,077,000 which expire between in 2023 and 2033. We do not anticipate having to utilize any of the net operating loss carry forward to offset 2014 taxable income as a result of the dividends paid deduction. The utilization of a majority of our net operating loss carry forward will limit our ability to shelter taxable income in the future which may require us to distribute funds and reduce cash available for reinvestment on a going forward basis. We had capital loss carry forwards of $12,391,000 at December 31, 2013 which expire from 2014 through 2015. We anticipate utilizing all of the capital loss carry forward to offset 2014 capital gains.

Cash Flows

Our liquidity based upon cash and cash equivalents increased by approximately $15,071,000 from $112,512,000 at December 31, 2013 to $127,583,000 at December 31, 2014.

The common shareholders approved a plan of liquidation on August 5, 2014 and we adopted the liquidation basis of accounting effective August 1, 2014. We did not make any acquisitions in new investments between August 1, 2014 and December 31, 2014 and, as a result of the adoption of the plan of liquidation, no further acquisitions are expected.

Our primary sources of non-operating cash flow from August 1, 2014 through December 31, 2014 include the following:

 

    $40,304,000 of net proceeds from the sale of our 1515 Market Street property located in Philadelphia, Pennsylvania;

 

    $33,959,000 of net proceeds from the payoff at par of our Playa Vista loan receivable, inclusive of $6,565,000 we received in exchange for our equity participation in the loan;

 

    $15,290,000 of net proceeds from the sale of our Waterford Place Apartments property;

 

    $13,794,000 of net proceeds from the sale of our Brooks Building LLC, WRT-Fenway Wateridge LLC, and Sealy Northwest Atlanta equity investments;

 

    $9,690,000 of net proceeds from the sale of our interest in 5400 Westheimer LLC;

 

    $9,450,000 of distributions from our WRT-Stamford LLC equity investment;

 

    $7,516,000 of net proceeds from the payoff at par of our Shops at Wailea loan receivable;

 

    $5,507,000 of net proceeds from the sale of our three retail properties which were leased to Kroger and were located in Atlanta, Georgia; Louisville, Kentucky and Greensboro, North Carolina;

 

    $4,967,000 of net proceeds from the sale of our Pinnacle II loan receivable; and

 

    $2,475,000 of net proceeds from the sale of our South Burlington, Vermont property.

Our primary non-operating uses of cash flow from August 1, 2014 through December 31, 2014 include the following:

 

    $122,821,000 for payment of the full liquidating distribution (inclusive of accrued and unpaid dividends) on our Series D Preferred Shares;

 

    $7,861,000 for additional contributions to our 701 Seventh Avenue equity investment; and

 

    $3,955,000 for the repurchase of our Senior Notes in open market transactions.

 

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Future Cash Commitments

Future Funding Requirements

We have future funding requirements relating to our 701 Seventh Avenue investment which total approximately $18,376,000 at December 31, 2014.

Common and Preferred Share Dividends

For each of the three months ended March 31, 2014 and June 30, 2014, we paid a regular quarterly dividend of $0.1625 per Common Share and a regular quarterly dividend of $0.578125 per Series D Preferred Share.

As a result of the adoption of the plan of liquidation, as required by the terms of our Series D Preferred Shares, dividends on our Common Shares were suspended until the liquidation preference on our Series D Preferred Shares was satisfied. As noted above, the liquidation preference on our Series D Preferred Shares was satisfied on September 15, 2014. Accordingly, we are no longer restricted by the terms of Series D Preferred Shares from paying dividends on our Common Shares. It is our Board of Trustees’ present expectation that liquidating distributions will be paid no less frequently than semi-annually beginning in 2015. However, the actual amount and timing of, and record dates for, dividends on our Common Shares will be determined by our Board of Trustees and will depend upon the timing and proceeds of the sale of our assets and the amounts deemed necessary by our Board of Trustees to pay or provide for our liabilities and obligations and REIT requirements. Any such dividends on the Common Shares will be deemed a return of capital until the applicable holder has received dividends totaling its cost basis. On December 15, 2014 the Board of Trustees declared a liquidating distribution of $2.25 per Common Share which was paid on January 15, 2015 to common shareholders of record on January 5, 2015.

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, 2014 (in thousands):

 

     Payments Due By Period  
     Total      Less than
1 Year
     2-3 Years      4-5 Years      After
5 Years
 

Mortgage loans payable (principal and interest) (1)

   $ 321,343       $ 19,139       $ 286,476       $ 10,924       $ 4,804   

Senior notes payable (principal and interest)

     113,378         5,523         11,046         11,046         85,763   

Ground lease obligations (2)

     114,129         1,463         3,248         3,635         105,783   

Advisors’ fee (3)

     19,911         6,671         13,240         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 568,761    $ 32,796    $ 314,010    $ 25,605    $ 196,350   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not reflect financing activity subsequent to December 31, 2014.
(2) This obligation relates to the ground lease at our property located at 450 West 14th Street, New York, New York which expires May 31, 2053. In addition, our property located in Orlando, Florida is subject to a ground lease which calls for rent of $2.00 per year which is paid by the building tenant.
(3) Advisor’s fee based upon the terms of the Advisory Agreement with our external advisor, effective January 1, 2015, with no effect given to any equity that may be repurchased after December 31, 2014. No amounts have been included for subsequent renewal periods of the Advisory Agreement, termination fee payments or incentive fee payments.

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.

 

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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.

Comparability of Financial Data from Period to Period

Under going concern accounting, the comparability of financial data from period to period was affected by several items including (i) the timing of our acquisitions and leasing activities; (ii) the purchases and sales of assets and investments; (iii) when material other-than-temporary impairment charges on assets in our portfolio are taken; (iv) fluctuations in the fair value of our securities and loan securities carried at fair value; and (v) the reclassification of assets.

In light of the adoption of liquidation basis accounting as of August 1, 2014, the results of operations for the current year period is not comparable to the prior year period. In addition, prior to the adoption of the plan of liquidation, we were engaged in the business of owning real property and real estate related assets which we categorized into three reportable segments: (i) operating properties, (ii) loan assets and (iii) REIT securities. Subsequent to the adoption of the plan of liquidation, we no longer classify our assets in these separate segments to make operating decisions or assess performance. Accordingly, we have only one reporting and operating segment subsequent to July 31, 2014. Changes in the liquidation values of our assets are discussed below under Changes in Net Assets in Liquidation.

The comparability of financial results for the years presented under going concern accounting were impacted by other-than-temporary impairment charges on our equity investments recognized in 2013, property impairments recognized in 2012, the addition of five operating properties in 2013 and three operating properties in 2012, the acquisition of several loan assets in 2012, the divestiture of our REIT securities in 2013 and 2012, the sale of five consolidated operating properties in 2013 and the sale of several of our Marc Realty equity investments in 2012. A discussion of the comparable periods presented under going concern accounting is below under Results of Operations.

Changes in Net Assets in Liquidation

Period from August 1, 2014 through December 31, 2014

Net assets in liquidation decreased by $192,211,000 during the period August 1, 2014 through December 31, 2014. The primary reasons for decline were as follows:

 

    $121,890,000 in liquidating distributions on our Series D Preferred Shares;

 

    $81,959,000 in accrued liquidating distributions on our Common Shares;

 

    a $7,376,000 decrease in expected cash flows due primarily to changes in the expected hold periods of certain investments in real estate;

 

    a $2,676,000 decrease in the liquidation value of our Vintage Housing Holdings investment due to a shorter estimated holding period;

 

    a $1,625,000 decrease in the liquidation value of our investments in real estate as a result of changes in lease up assumptions on three properties which were sold in 2014; and

 

    a $477,000 decrease in the liquidation value of an investment in real estate as a result of a purchase and sale agreement entered into in February 2015.

Partially offset by:

 

    a $9,993,000 increase in the liquidation value of our investment in Concord Debt Holdings due to an increase in the proceeds expected to be received from the underlying investments;

 

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    a $8,701,000 increase in the liquidation value of our investment in CDH CDO LLC as a result of an increase in the proceeds expected to be received from the underlying investments;

 

    $4,098,000 of cash received in excess of the liquidation value of our Playa Vista loan receivable due to the borrower’s prepayment of the loan and satisfaction of the participation interest for an amount that exceeded our estimate at August 1, 2014; and

 

    a $1,000,000 increase in the estimated value of the equity participation in our Edens Plaza and Norridge Commons loan receivable as a result of the sale of the Norridge Commons property in February 2015 for a price that exceeded our initial estimates.

Our remaining assets continue to perform in a manner that is relatively consistent with prior reporting periods. We have experienced no significant changes in occupancy or rental rates and our loan assets continue to perform in accordance with their terms. With regard to our development property at 701 Seventh Ave in Times Square, our joint venture has received the permits necessary to commence construction. Demolition of the existing structure is underway and construction is estimated to be completed in 2017. Our joint venture has engaged a nationally recognized brokerage firm to market the retail space for lease.

Results of Operations

Our results of operations for 2013 and 2012 are discussed below by segment:

Non-segment specific results which include interest on cash reserves, general and administrative expenses and other non-segment specific income and expense items, are reported under corporate income (expense).

The following table summarizes our results from continuing operations by segment for each of the years ended December 31, (in thousands):

 

     2013      2012  

Operating properties

   $ 4,590       $ (886

Loan assets

     33,371         31,740   

REIT securities

     600         8,011   

Corporate expenses

     (22,845      (15,466
  

 

 

    

 

 

 

Consolidated income from continuing operations

$ 15,716    $ 23,399   
  

 

 

    

 

 

 

Comparison 2013 to 2012

Operating Properties

The following table summarizes our results from continuing operations for our operating properties segment for the years ended December 31, 2013 and 2012 (in thousands):

 

     2013      2012  

Rents and reimbursements

   $ 51,865       $ 33,930   

Operating expenses

     (17,769      (10,814

Real estate taxes

     (4,926      (2,598

Equity in income (loss) of Marc Realty investments

     (284      33   

Equity in income of 701 Seventh Avenue

     3,424         —     

Equity in income of WRT-Fenway Wateridge

     796         —     

Equity in loss of Atrium Mall

     (90      —     

Equity in loss of Sealy Northwest Atlanta

     (469      (388

Equity in income of Vintage Housing Holdings

     9,174         4,603   

Equity in income of WRT-Elad

     1,315         903   

Equity in income of Mentor

     84         46   

Equity in loss of Sealy Newmarket

     —           (2,811

Equity in income of F-II Co-invest

     —           232   
  

 

 

    

 

 

 

Operating properties operating income

  43,120      23,136   

 

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     2013      2012  

Depreciation and amortization expense

     (17,275      (11,277

Interest expense

     (13,157      (10,886

Impairment loss on investments in real estate

     —           (1,738

Impairment loss on Marc Realty equity investment

     (7,687      —     

Settlement expense

     (411      —     

Loss on extinguishment of debt

     —           (121
  

 

 

    

 

 

 

Operating properties net income (loss)

$ 4,590    $ (886
  

 

 

    

 

 

 

Operating income from our operating properties, which we define for our consolidated operating properties as all items of income and expense directly derived from or incurred by this segment before depreciation, amortization, interest expense and other non-recurring non-operating items, and including our share of income or loss from equity investments, increased by $19,984,000 compared to the prior year period.

The following table sets forth our operating results from same store properties (properties held throughout both the current and prior year reporting periods) and new store properties (in thousands):

Consolidated Operating Properties

 

     For the Year Ended December 31,  
             2013                      2012          

Rents and reimbursements

     

Same store properties

   $ 29,634       $ 30,721   

New store properties

     22,231         3,209   
  

 

 

    

 

 

 
  51,865      33,930   
  

 

 

    

 

 

 

Operating expenses

Same store properties

  8,021      9,458   

New store properties

  9,748      1,356   
  

 

 

    

 

 

 
  17,769      10,814   
  

 

 

    

 

 

 

Real estate taxes

Same store properties

  2,018      2,203   

New store properties

  2,908      395   
  

 

 

    

 

 

 
  4,926      2,598   
  

 

 

    

 

 

 

Consolidated operating properties operating income

Same store properties

  19,595      19,060   

New store properties

  9,575      1,458   
  

 

 

    

 

 

 
$ 29,170    $ 20,518   
  

 

 

    

 

 

 

The increase in operating income for our same store properties was primarily the result of a decrease in operating expenses of $1,437,000 and a decrease in real estate taxes of $185,000 which was partially offset by a decrease in revenues of $1,087,000. The same store results were supplemented by positive results from our new store properties.

 

    Rental revenues increased by $17,935,000 due to an increase in new store revenues of $19,022,000, while there was a decrease in same store revenues of $1,087,000. The decrease in same store revenue was the result of:

 

    An amendment to the lease terms for Spectra Energy at 5400 Westheimer located in Houston, Texas. The modified lease reduces the average annual contractual obligation but extends the term of the lease through April 30, 2026; and

 

    The sale of a portion of our Churchill, Pennsylvania property which occurred May 14, 2012.

 

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Which were partially offset by increases from:

 

    Increased average occupancy at our property known as 450 W 14th Street located in New York, New York from 82% to 83%.

New store revenues for the year ended December 31, 2013 were as follows:

 

    $9,484,000 from our 1515 Market St office property in Philadelphia, Pennsylvania which is consolidated as of February 1, 2013;

 

    $3,873,000 from our four luxury residential properties acquired on October 31, 2013;

 

    $3,430,000 from our Waterford Apartments property in Memphis, Tennessee which was acquired April 17, 2012;

 

    $2,756,000 from our office property in Cerritos, California which was acquired October 4, 2012;

 

    $2,353,000 from our Lake Brandt Apartments property in Greensboro, North Carolina which was acquired November 2, 2012; and

 

    $335,000 from our Summit Pointe Apartments property in Oklahoma City, Oklahoma which was acquired October 24, 2013.

Operating expenses increased by $6,955,000 due to an increase in expenses at our new store properties of $8,392,000. Same store operating expenses decreased by $1,437,000 due primarily to a decrease in expenses of $1,277,000 at our Churchill, Pennsylvania property as a result of the partial sale of the property and the new net lease with Westinghouse.

Real estate tax expense increased by $2,328,000. Real estate tax of $2,908,000 at our new store properties was offset by a decrease of $185,000 at our same store properties. The reduction at our same store properties was primarily a result of a decrease of $112,000 at our Churchill, Pennsylvania property as a result of a prior year tax abatement approved and received in 2013.

Depreciation and amortization expense increased by $5,998,000 in 2013 primarily as a result of our new store properties. Interest expenses related to our operating properties increased by $2,271,000 primarily as a result of financing at our new store properties in Memphis, Tennessee; Greensboro, North Carolina and Cerritos, California which were all acquired in 2012 and at our new store properties in Philadelphia, Pennsylvania; Oklahoma City, Oklahoma; Houston, Texas; Stamford, Connecticut; Phoenix, Arizona and San Pedro, California which were acquired in 2013.

During 2012 we recognized an impairment charge of $1,738,000 on our Atlanta, Georgia Kroger property as a result of a change to the holding period for this property.

Non-Consolidated Operating Properties: Equity Investments

Net operating income from equity investments was $13,950,000 for the year ended December 31, 2013 compared to net operating income of $2,618,000 for the year ended December 31, 2012. The increase was due primarily to:

 

    Operating income from our Vintage portfolio increased by $4,571,000 primarily due to a decrease in amortization of lease intangibles;

 

    Operating income from our 701 Seventh Avenue investment, which closed October 16, 2012, was $3,424,000;

 

    Operating loss from our Sealy Newmarket investment decreased by $2,811,000 as a result of having recognized losses in 2012, which brought our investment balance to zero at December 31, 2012 and the suspension of recognition of additional losses in 2013;

 

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    Operating income from our combined WRT-Elad investment which closed February 3, 2012 increased by $412,000; and

 

    Operating income from our WRT-Fenway Wateridge investment, which closed December 21, 2012, was $796,000.

During the fourth quarter of 2013, our equity investments in the Brooks Building, LLC (“223 West Jackson”), High Point Plaza, LLC (“High Point”), 1701 Woodfield, LLC (“1701 Woodfield”), and Enterprise Center, LLC (individually “Enterprise” and the aforementioned investments collectively the “Marc Investments”) suffered declines in occupancy, increasing competition for tenants, and increasing costs to operate the investments. Additionally, recent discussions related to marketing available space to potential tenants, along with lease renewals with existing tenants, indicated a capital infusion from us would be necessary to upgrade the investments to achieve rental rates in line with the suburban Chicago, Illinois office market. The factors above along with increasing capital demands and rising cost of capital caused us to reassess our business plan associated with the Marc Investments in the fourth quarter of 2013.

Subsequent to year end we entered into an agreement with Marc Realty, our joint venture partner in these equity investments, to sell our interests in High Point, 1701 Woodfield and Enterprise Center along with our controlling interest in the River City property, located in Chicago, Illinois, which is consolidated, for a gross sales price of $6,000,000. Additionally, we granted Marc Realty an option exercisable within two years to acquire our interest in 223 West Jackson for a purchase price ranging from $5,000,000 to $6,600,000. The purchase price for 223 West Jackson is dependent upon when the option is exercised and certain operating characteristics of the investment at the time of exercise.

Based on the factors noted above, we concluded that each of the Marc Investments were other-than-temporarily impaired in the aggregate by $7,687,000 at December 31, 2013 and a corresponding impairment charge has been included in equity in income (loss) of equity investments for the year then ended.

Loan Assets

The following table summarizes our results from our loan assets segment for the years ended December 31, 2013 and 2012 (in thousands):

 

     2013      2012  

Interest

   $ 14,334       $ 11,736   

Discount accretion

     4,121         8,333   

Earnings of Concord Debt Holdings

     3,072         422   

Earnings of CDH CDO

     1,033         1,715   

Equity in earnings of ROIC-Riverside

     —           706   

Realized gain on sale of loan securities carried at fair value

     —           614   

Unrealized gain on loan securities carried at fair value

     215         447   

Equity in loss of ROIC Lakeside Eagle

     (25      (42

Equity in earnings of RE CDO Management

     3,709         67   

Equity in earnings (loss) of SoCal Office Loan Portfolio

     (2      9,706   

Equity in earnings (loss) of Concord Debt Holdings (1)

     64         (456

Equity in earnings (loss) of CDH CDO (1)

     4,926         (997

Equity in earnings of WRT-Stamford

     930         769   

Equity in earnings of 10 Metrotech

     3,284         335   
  

 

 

    

 

 

 

Loan assets operating income

  35,661      33,355   

Interest expense

  (1,898   (1,494

Provision for loss on loans receivable

  (348   —     

General and administrative expense

  (44   (121
  

 

 

    

 

 

 

Loan assets net income

$ 33,371    $ 31,740   
  

 

 

    

 

 

 

 

(1) Represents the interest acquired from Lexington Realty Trust on May 1, 2012.

 

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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 segment before general and administrative and interest expense and other non-recurring non-operating items, increased by $2,306,000 as compared to the prior year period. The increase was due primarily to:

 

    a $8,411,000 increase in net earnings from our Concord equity investments resulting from the payoffs of two of the underlying loan assets during the third quarter of 2013;

 

    a $3,642,000 increase in net earnings from our RE CDO Management equity investment which resulted from the sale of subordinated interests in collateralized debt obligation entities held by this venture;

 

    a $2,949,000 increase in net earnings from our 10 Metrotech equity investment as a result of the underlying loan asset being paid off at par in July 2013; and

 

    a $2,598,000 increase in interest income as a result of our 2012 and 2013 origination and acquisition activity, primarily our Queensridge Tower loan which generated $2,200,000 of interest income during the year ended December 31, 2013.

Partially offset by:

 

    a $9,708,000 decrease in earnings from our SoCal Office Portfolio Loan investment as a result of the payoff of the underlying loan asset at par in September 2012; and

 

    a $4,212,000 decrease in discount accretion due primarily to the payoff at par in May 2012 of our 160 Spear and Magazine loans which had been acquired at a discount.

Interest expense represents interest on (i) the $15,150,000 senior participation held by Concord Real Estate CDO 2006-1, Ltd. (“CDO-1”), an unaffiliated third party, on our San Marbeya loan receivable, (ii) the $14,000,000 senior participation held by CDO-1 on our Hotel Wales loan and (iii) on the recourse secured financing on our Queensridge Towers loan receivable. Both of the senior participations are treated as secured financings for financial statement purposes.

REIT Securities

The following table summarizes our results from our REIT securities segment for the years ended December 31, 2013 and 2012 (in thousands):

 

     2013      2012  

Dividends

   $ —         $ 1,054   

Gain on sale of securities carried at fair value

     742         41   

Unrealized gain on securities carried at fair value

     (142      6,916   
  

 

 

    

 

 

 

REIT securities operating income

$ 600    $ 8,011   
  

 

 

    

 

 

 

Operating income from REIT securities, which we define as all items of income and expense directly derived from or incurred by this segment before interest expense, decreased by $7,411,000 as compared to the prior year period. The decrease was primarily due to the liquidation of all of our holdings of REIT securities in 2013.

 

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Corporate

The following table summarizes our results from our non-segment specific income and expense items for the years ended December 31, 2013 and 2012 (in thousands):

 

     2013      2012  

Interest and other income

   $ 375       $ 699   

General and administrative

     (4,312      (3,408

Related party fees

     (9,289      (8,953

Transaction costs

     (1,885      (421

Interest expense

     (7,310      (3,153

Federal, state and local taxes

     (424      (230
  

 

 

    

 

 

 

Operating loss

$ (22,845 $ (15,466
  

 

 

    

 

 

 

The decrease in corporate operations for the comparable periods was due primarily to the following:

 

    an increase in corporate interest expense of $4,178,000 resulting from the issuance of our Senior Notes in August 2012;

 

    a $1,464,000 increase in transaction costs primarily associated with our acquisition of the four luxury residential properties; and

 

    a $904,000 increase in general and administrative expense due to $899,000 in compensation expense associated with the issuance of Restricted Shares in 2013.

Discontinued Operations

During 2012 our office property in Indianapolis, Indiana and our retail property in Memphis, Tennessee were sold and are included in discontinued operations for all periods presented. During 2013 our office properties located in Deer Valley, Arizona; Lisle, Illinois (701 Arboretum) and Andover, Massachusetts and our retail properties in Seabrook, Texas and Denton, Texas were sold and are included in discontinued operations for all periods presented. During 2014 our residential property in Meriden, Connecticut and our office properties in Englewood, Colorado; Chicago, Illinois (River City); and Amherst, New York were sold and are included in discontinued operations for all periods presented. Our retail property in Louisville, Kentucky, which was under contract to be sold, was classified as held for sale at July 31, 2014 and is included in discontinued operations for all periods presented.

In September 2012, the Indianapolis, Indiana and Memphis, Tennessee properties were classified as discontinued operations and sold. The Indianapolis, Indiana property was sold for net proceeds of $1,071,000 after satisfaction of the debt. We recorded a $945,000 gain on the sale of the property. The Memphis, Tennessee property was sold on September 28, 2012, and we recorded a $698,000 impairment charge, offset by $592,000 of settlement income which is included in discontinued operations for the year ended December 31, 2012.

In March 2013 the Andover, Massachusetts property was classified as discontinued operations and sold. The property was sold for net proceeds of $11,538,000 and we recorded a $2,775,000 gain on the sale of the property.

In June 2013 the Deer Valley, Arizona and Denton, Texas properties were classified as discontinued operations. The Deer Valley, Arizona property was sold in June 2013 for net proceeds of $19,585,000 and we recorded a $6,745,000 gain on the sale of the property.

We recorded an $824,000 impairment charge on the Denton, Texas property in 2012 as a result of a change to the anticipated holding period of this property. We recorded an additional $154,000 impairment charge for this property in June 2013 as a result of the purchase contract. The property was sold in July 2013 and we received net proceeds of $1,703,000.

 

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In August 2013, the Seabrook, Texas property was classified as discontinued operations. The property was sold in August 2013 for net proceeds of $3,202,000 and recorded a $1,428,000 gain on the sale of the property.

In September 2013, our 701 Arboretum property located in Lisle, Illinois was classified as discontinued operations. We had previously recorded a $3,000,000 impairment charge on this property in 2011 as a result of continued declines in occupancy. We recorded an additional $2,750,000 impairment charge in 2013 as a result of the purchase contract. The property was sold in December 2013 for net proceeds of $2,351,000 and we recorded a $58,000 gain on the sale.

The Meriden, Connecticut property was classified as discontinued operations as of December 31, 2013. A purchase and sale contract was signed for a gross sales price of $27,500,000 and we received a non-refundable deposit of $500,000. The sale of the property was consummated on February 26, 2014. After transfer of the debt, we received net proceeds of $5,106,000 and recorded a gain of $4,422,000 on the sale of the property.

In March 2014 the Chicago, Illinois property was classified as discontinued operations. We sold to Marc Realty, our venture partner, our interest in the River City, Chicago, Illinois property for gross sale proceeds of $5,800,000. We received $1,300,000 in cash and a note receivable for the remaining $4,500,000. The note bore interest at a rate of 6% per annum, increasing to 7% per annum on the first anniversary and to 8% on the second anniversary. The note required monthly payments of interest only and was scheduled to mature on March 1, 2017. The note was repaid in full during June 2014. We recorded a $3,000 gain on the sale of our interest in River City.

In May 2014 the properties referred to as Crossroads I and Crossroads II located in Englewood, Colorado were classified as discontinued operations and sold for aggregate gross sale proceeds of $31,100,000. After costs and pro-rations we received net proceeds of approximately $29,633,000 and recorded a gain of $5,723,000 on the sale of the properties.

In June 2014 the property located in Amherst, New York was classified as discontinued operations and sold for gross sale proceeds of $24,500,000. After costs, pro-rations and a reserve holdback we received net proceeds of approximately $21,226,000 on the sale of the property. Upon completion of the parking area for the office property we received $2,449,000 from the reserve in November 2014, which resulted in aggregate net proceeds of approximately $23,675,000. We recorded a gain of $946,000 on the sale of the property.

Off-Balance Sheet Investments

We have nine off-balance sheet investments in operating properties totaling $332,369,000 and three off-balance sheet investments in loan assets totaling $57,552,000 at December 31, 2014. Our exposure to loss is limited to our investment balance. See Item 8 – Financial Statements Statements and Supplementary Data, Note 11 for additional information on these investments.

Critical Accounting Policies and Estimates

Below is a discussion of the accounting policies that management believes are critical to our operations. We consider these policies critical because they involve difficult management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. Prior to the adoption of the plan of liquidation, our most sensitive estimates involve the allocation of the purchase price of acquired properties and evaluating our real estate-related investments for impairment.

 

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Subsequent to the adoption of the plan of liquidation, we are required to estimate all costs and income we expect to incur and earn through the end of liquidation including the estimated amount of cash we expect to collect on the disposal of our assets and the estimated costs to dispose of our assets.

Investments in Real Estate

Prior to the adoption of the plan of liquidation, upon the acquisition of real estate, we assessed 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 we allocated purchase price based on these assessments. We assessed fair value based on estimated cash flow projections and utilized appropriate discount and capitalization rates and available market information. Estimates of future cash flows were based on a number of factors including the historical operating results, known trends and market/economic conditions that may affect the property.

As of August 1, 2014, the investments in real estate were adjusted to their estimated net realizable value, or liquidation value, to reflect the change to the liquidation basis of accounting. The liquidation value represents the estimated amount of cash that we will collect on disposal of our assets as we carry out our plan of liquidation. The liquidation value of our investments in real estate were presented on an undiscounted basis and investments in real estate are no longer depreciated. Estimated costs to dispose of these investments are presented separately from the related assets. Subsequent to August 1, 2014, all changes in the estimated liquidation value of the investments in real estate are reflected as a change to our net assets in liquidation.

Under liquidation accounting, the presentation for joint ventures historically consolidated under going concern accounting is determined based on our planned exit strategy. Those ventures in which we intend to sell the underlying property are presented on a gross basis with a payable to the non-controlling interest holder. Those ventures in which we intend to sell our interest in the venture, rather than the property, are accounted for as an equity investment and are presented on a net basis without a non-controlling interest component.

Impairment

Operating properties – Under going concern accounting, we evaluated the need for an impairment loss on real estate assets when indicators of impairment were present and the projected undiscounted cash flows from an asset were not sufficient to recover an asset group’s carrying amount. The impairment loss is measured by comparing the fair value of the asset group to its carrying amount. The projection of cash flows used in the impairment evaluation involves significant judgment by management.

Loan assets – Under going concern accounting, loan assets were periodically evaluated for possible impairment in order to determine whether it was necessary to establish a loan loss allowance. A loan asset was considered to be impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the existing contractual terms of the loan. Impairment was then measured based on the present value of expected future cash flows or, if the loan was collateral dependent, the fair value of the collateral. When a loan was considered to be impaired, we established an allowance for loan losses and recorded a corresponding charge to earnings. Significant judgments were required in determining impairment. We did not record interest income on impaired loans. Any cash receipts on impaired loans were recorded as a recovery reducing the allowance for loan losses.

Under liquidation accounting, we carry our loans receivable at their estimated net realizable value, or liquidation value, which represents the estimated amount of principal payments we expect to receive over the holding period of the loan. The liquidation value of our loans receivable are presented on an undiscounted basis. Interest payments that we expect to receive on our loans receivable are accrued and are classified as part of liability for estimated costs in excess of estimated receipts during liquidation on the Consolidated Statement of Net Assets.

 

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We continue to evaluate the collectability of the interest and principal of each of our loans receivable using the same methodology used under going concern accounting. Any changes in collectability will be reflected as a change to the Trust’s net assets in liquidation.

Preferred equity investments – Under going concern accounting, we had certain investments which were classified as preferred equity investments. Determining whether a preferred equity investment was other-than-temporarily impaired requires significant judgment. This evaluation included consideration of the length of time and extent to which the fair value of an investment had 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. Under liquidation accounting, preferred equity investments are classified as equity investments and are carried at their estimated net realizable value.

Equity investments – Under going concern accounting, equity investments were reviewed for impairment periodically. For equity investments in which the carrying value exceeded the fair value, we evaluated if these were other-than-temporarily impaired. Under liquidation accounting, equity investments are recorded at their net realizable value.

Variable Interest Entities

Consolidated Variable Interest Entities

Under going concern accounting, consolidated variable interest entities were those where we were the primary beneficiary of a variable interest entity. The primary beneficiary is the party that has a controlling financial interest in the VIE, which is defined by the entity having both of the following characteristics: 1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance, and 2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.

See Item 8 – Financial Statements and Supplementary Data, Note 3.

Recently Issued Accounting Standards

None.

 

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ITEM 7A – QUANTITATIVE AND 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. We seek to limit our risk to interest rate fluctuations through match financing on our loan assets as well as through hedging transactions.

The table below presents information about the Trust’s derivative financial instruments at December 31, 2014 (in thousands):

 

Type

   Maturity    Strike Rate     Notional
Amount
of Hedge
     Cost of Hedge      Estimated Fair
Value of Hedge (1)
 

Swap

   Oct-16      0.69     126,910         —           (80

Cap

   Nov-17      4.00     50,000         165         41   

Cap

   Nov-18      5.00     50,000         220         58   

 

(1) See Item 8 – Financial Statements and Supplementary Data, Note 16 for information on the accounting treatment of our derivative financial investments.

The fair value of our mortgage loans payable and secured financings, 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 $297,376,000 and $474,112,000 at December 31, 2014 and December 31, 2013, respectively. The fair value of our Senior Notes outstanding as of the applicable date, based on quoted market prices, was $73,859,000 and $86,940,000 at December 31, 2014 and 2013, respectively.

The following table shows what the annual effect a change in the LIBOR rate would have on interest expense based upon our variable rate debt at December 31, 2014 taking into consideration the effect of our derivative financial instruments (in thousands):

 

    Change in LIBOR (2)  
    -0.17%     1%     2%     3%  

Change in consolidated interest expense

  $ (10   $ 145      $ 712      $ 1,279   

Pro-rata share of change in interest expense of debt on non-consolidated entities (1)

    —          3        7        11   
 

 

 

   

 

 

   

 

 

   

 

 

 

(Increase) decrease in net income

$ (10 $ 148    $ 719    $ 1,290   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents our pro-rata share of a change in interest expense in our 701 Seventh Avenue, Norridge Commons and Edens Plaza equity investments.
(2) The one month LIBOR rate at December 31, 2014 was 0.17125%.

 

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The Trust’s equity investment in Vintage, which is reported on a 30 day lag, holds floating rate debt of approximately $169,266,000 and bears interest at a rate indexed to the Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA). The following table shows the annual effect a change in the SIFMA rate would have on the Trust based on property level interest expense based upon the unhedged balances in variable rate debt at November 30, 2014 (in thousands):

 

     Change in SIFMA(1)  
     -0.04%      1%      2%      3%  

Change in consolidated interest expense

   $ —         $ —         $ —         $ —     

Pro-rata share of change in interest expense on Vintage debt

     (42      1,049         2,099         3,148   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Increase) decrease in net income

$ (42 $ 1,049    $ 2,099    $ 3,148   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The one-month SIFMA rate at November 30, 2014 was 0.04%.

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.

The following table shows what the annual effect a change in the LIBOR rate would have on interest income based upon our variable rate loan assets at December 31, 2014 (in thousands):

 

     Change in LIBOR (1)  
     -0.17%     1%      2%      3%  

Change in consolidated interest income

   $ (3   $ 119       $ 288       $ 458   

Pro-rata share of change in interest income of loan assets in non-consolidated entities

     —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Increase (decrease) in net income

$ (3 $ 119    $ 288    $ 458   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) The one month LIBOR rate at December 31, 2014 was 0.17125%.

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. We believe that there is a low likelihood that these counterparties will fail to meet their obligations. There can be no assurance that we will adequately protect against the foregoing risks.

 

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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

     Page  

Report of Independent Registered Public Accounting Firm

     56   

Consolidated Statement of Net Assets (Liquidation Basis) as of December 31, 2014

     58   

Consolidated Balance Sheet (Going Concern Basis) as of December 31, 2013

     59   

Consolidated Statement of Changes in Net Assets (Liquidation Basis) for the Period from August  1, 2014 through December 31, 2014

     60   

Consolidated Statements of Operations and Comprehensive Income (Going Concern Basis) for the Seven Months Ended July 31, 2014 and for the Years Ended December 31, 2013 and 2012

     61   

Consolidated Statements of Equity (Going Concern Basis) for the Seven Months Ended July  31, 2014 and for the Years Ended December 31, 2013 and 2012

     63   

Consolidated Statements of Cash Flows (Going Concern Basis) for the Seven Months Ended July  31, 2014 and for the Years Ended December 31, 2013 and 2012

     64   

Notes to Consolidated Financial Statements

     66   

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Winthrop Realty Trust

In our opinion, the consolidated balance sheet (going concern basis) as of December 31, 2013 and the related consolidated statements of operations and comprehensive income (going concern basis), of equity (going concern basis) and of cash flows (going concern basis) for each of the two years in the period ended December 31, 2013 and for the period from January 1, 2014 to July 31, 2014 and the consolidated statement of net assets (liquidation basis) as of December 31, 2014 and the related consolidated statement of changes in net assets (liquidation basis) for the period from August 1, 2014 to December 31, 2014 present fairly, in all material respects, the financial position of Winthrop Realty Trust and its subsidiaries at December 31, 2013, the results of their operations and their cash flows for each of the two years in the period ended December 31, 2013 and for the period from January 1, 2014 to July 31, 2014, their net assets in liquidation as of December 31, 2014, and the changes in their net assets in liquidation for the period from August 1, 2014 to December 31, 2014, in conformity with accounting principles generally accepted in the United States of America applied on the bases described in the second paragraph of this report. In addition, in our opinion, the financial statement schedules listed in the accompanying index present 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, 2014, based on criteria established in Internal Control – Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the 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.

As discussed in Notes 2 and 3 to the consolidated financial statements, the shareholders of Winthrop Realty Trust approved a plan of liquidation on August 5, 2014 and the trust commenced liquidation shortly thereafter. As a result, the trust has changed its basis of accounting for periods subsequent to July 31, 2014 from the going concern basis to a liquidation basis.

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.

 

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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, MA

March 16, 2015

 

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WINTHROP REALTY TRUST

CONSOLIDATED STATEMENT OF NET ASSETS

(Liquidation Basis)

(in thousands)

 

     December 31,
2014
 

ASSETS

  

Investments in real estate

   $ 557,325   

Equity investments

     389,921   

Cash and cash equivalents

     127,583   

Restricted cash held in escrows

     5,831   

Loans receivable

     24,005   

Secured financing receivable

     29,210   

Accounts receivable

     1,468   

Loan securities

     918   
  

 

 

 

TOTAL ASSETS

  1,136,261   

LIABILITIES

Mortgage loans payable

  296,954   

Senior notes payable

  71,265   

Liability for non-controlling interests

  46,564   

Liability for estimated costs in excess of estimated receipts during liquidation

  31,253   

Dividends payable

  82,353   

Accounts payable, accrued liabilities and other liabilities

  10,794   

Related party fees payable

  2,374   
  

 

 

 

TOTAL LIABILITIES

  541,557   
  

 

 

 

COMMITMENTS AND CONTINGENCIES

Net assets in liquidation

$ 594,704   
  

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST

CONSOLIDATED BALANCE SHEET

(Going Concern Basis)

(in thousands, except share and per share data)

 

     December 31,
2013
 

ASSETS

  

Investments in real estate, at cost

  

Land

   $ 82,215   

Buildings and improvements

     588,653   
  

 

 

 
     670,868   

Less: accumulated depreciation

     (56,448
  

 

 

 

Investments in real estate, net (variable interest entities $65,275)

     614,420   

Cash and cash equivalents (variable interest entities $1,163)

     112,512   

Restricted cash held in escrows (variable interest entities $7,340)

     13,372   

Loans receivable, net

     101,100   

Secured financing receivable

     30,728   

Accounts receivable, net of allowance of $414

     2,229   

Accrued rental income

     19,760   

Loan securities carried at fair value

     226   

Preferred equity investments

     6,485   

Equity investments

     149,085   

Lease intangibles, net (variable interest entities $20,043)

     49,866   

Deferred financing costs, net

     6,189   

Other assets

     3,314   

Assets held for sale

     23,038   
  

 

 

 

TOTAL ASSETS

   $ 1,132,324   
  

 

 

 

LIABILITIES

  

Mortgage loans payable (variable interest entities $90,404)

   $ 444,933   

Senior notes payable

     86,250   

Secured financings

     29,150   

Notes payable (variable interest entities $942)

     1,742   

Accounts payable, accrued liabilities and other liabilities

     26,266   

Related party fees payable

     2,831   

Dividends payable

     6,099   

Deferred income

     1,353   

Below market lease intangibles, net (variable interest entities $527)

     2,399   

Liabilities of assets held for sale

     21,638   
  

 

 

 

TOTAL LIABILITIES

     622,661   
  

 

 

 

COMMITMENTS AND CONTINGENCIES

  

EQUITY

  

Winthrop Realty Trust Shareholders’ Equity:

  

Series D Cumulative Redeemable Preferred Shares, $25 per share liquidation preference, 5,060,000 shares authorized and 4,820,000 shares issued and outstanding

     120,500   

Common Shares of Beneficial Interest, $1 par, unlimited shares authorized; 36,401,438 shares issued and outstanding

     35,809   

Additional paid-in capital

     647,121   

Accumulated distributions in excess of net income

     (322,432

Accumulated other comprehensive loss

     (124
  

 

 

 

Total Winthrop Realty Trust Shareholders’ Equity

     480,874   

Non-controlling interests

     28,789   
  

 

 

 

Total Equity

     509,663   
  

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 1,132,324   
  

 

 

 

See Notes to Consolidated Financial Statements.

 

59


Table of Contents

WINTHROP REALTY TRUST

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS

(Liquidation Basis)

(in thousands)

 

     Period From
August 1, 2014
Through
December 31, 2014
 

Net assets in liquidation, beginning of period

   $ 786,915   

Changes in net assets in liquidation

  

Change in liquidation value of investments in real estate

     (2,102

Change in liquidation value of loans receivable

     5,098   

Change in liquidation value of equity investments

     16,018   

Remeasurement of assets and liabilities

     (9,489

Remeasurement of non-controlling interests

     2,113   
  

 

 

 

Net increase in liquidation value

  11,638   

Liquidating distributions to Series D Preferred shareholders

  (121,890

Liquidating distributions to Common shareholders

  (81,959
  

 

 

 

Changes in net assets in liquidation

  (192,211
  

 

 

 

Net assets in liquidation, end of period

$ 594,704   
  

 

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

60


Table of Contents

WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Going Concern Basis)

(in thousands, except per share data)

 

     Seven Months
Ended July 31,

2014
    Year Ended
December 31,
2013
    Year Ended
December 31,
2012
 

Revenue

      

Rents and reimbursements

   $ 46,313      $ 51,865      $ 33,930   

Interest, dividends and discount accretion

     9,643        18,455        21,123   
  

 

 

   

 

 

   

 

 

 
     55,956        70,320        55,053   
  

 

 

   

 

 

   

 

 

 

Expenses

      

Property operating

     17,127        17,769        10,814   

Real estate taxes

     5,379        4,926        2,598   

Depreciation and amortization

     15,957        17,275        11,277   

Interest

     13,394        22,365        15,533   

Impairment loss on investments in real estate

     9,200        —          1,738   

Provision for loss on loans receivable

     —          348        —     

General and administrative

     4,283        4,356        3,529   

Related party fees

     5,548        9,289        8,953   

Transaction costs

     586        1,885        421   

Federal, state and local taxes

     (60     424        230   
  

 

 

   

 

 

   

 

 

 
     71,414        78,637        55,093   
  

 

 

   

 

 

   

 

 

 

Other income (loss)

      

Equity in income of equity investments (inclusive of impairments of $2,422, $7,687 and $0)

     12,622        22,641        14,843   

Earnings from preferred equity investments

     582        613        —     

Loss on extinguishment of debt, net

     (564     —          (121

Realized gain on sale of securities carried at fair value

     2        742        41   

Unrealized gain (loss) on seurities carried at fair falue

     —          (142     6,916   

Realized gain on loan securities carried at fair value

     —          —          614   

Unrealized gain on loan securities carried at fair value

     —          215        447   

Settlement expense

     —          (411     —     

Interest and other income

     244        375        699   
  

 

 

   

 

 

   

 

 

 
     12,886        24,033        23,439   
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (2,572     15,716        23,399   

Discontinued operations

      

Net income from discontinued operations

     11,235        8,772        985   
  

 

 

   

 

 

   

 

 

 

Net income

     8,663        24,488        24,384   

Net loss attributable to non-controlling interests

     3,818        4,290        247   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Winthrop Realty Trust

     12,481        28,778        24,631   

Preferred dividend of Series D Preferred Shares

     (6,502     (11,146     (9,285

Amount allocated to Restricted Common Shares

     (192     (307     —     
  

 

 

   

 

 

   

 

 

 

Net income attributable to Common Shares

   $ 5,787      $ 17,325      $ 15,346   
  

 

 

   

 

 

   

 

 

 

Per Common Share data – Basic

      

Income (loss) from continuing operations

   $ (0.15   $ 0.25      $ 0.45   

Income from discontinued operations

     0.31        0.26        0.01   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Common Shares

   $ 0.16      $ 0.51      $ 0.46   
  

 

 

   

 

 

   

 

 

 

Per Common Share data – Diluted

      

Income (loss) from continuing operations

   $ (0.15   $ 0.25      $ 0.45   

Income from discontinued operations

     0.31        0.26        0.01   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Common Shares

   $ 0.16      $ 0.51      $ 0.46   
  

 

 

   

 

 

   

 

 

 

Basic Weighted-Average Common Shares

     35,821        33,743        33,062   
  

 

 

   

 

 

   

 

 

 

Diluted Weighted-Average Common Shares

     35,821        33,774        33,062   
  

 

 

   

 

 

   

 

 

 

Comprehensive income

      

Net income

   $ 8,663      $ 24,488      $ 24,384   

Change in unrealized gain (loss) on interest rate derivatives

     (193     (74     42   
  

 

 

   

 

 

   

 

 

 

Consolidated comprehensive income

     8,470        24,414        24,426   

Net loss attributable to non-controlling interests

     3,818        4,290        247   
  

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to non-controlling interests

     3,818        4,290        247   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Winthrop Realty Trust

   $ 12,288      $ 28,704      $ 24,673   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

61


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WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF EQUITY

(Going Concern Basis)

(in thousands, except per share data)

 

    Series D
Preferred Shares
of Beneficial
Interest
   

Common Shares
of Beneficial

Interest

    Additional
Paid-In
    Accumulated
Distributions
in Excess of
    Accumulated
Other
Comprehensive
    Non-
Controlling
       
    Shares     Amount     Shares     Amount     Capital     Net Income     Income (Loss)     Interests     Total  

Balance, December 31, 2011

    1,600      $ 40,000        33,041      $ 33,041      $ 626,099      $ (311,246   $ (92   $ 21,034      $ 408,836   

Net income attributable to Winthrop Realty Trust

    —          —          —          —          —          24,631        —          —          24,631   

Net loss attributable to non-controlling interests

    —          —          —          —          —          —          —          (247     (247

Distributions to non-controlling interests

    —          —          —          —          —          —          —          (7,242     (7,242

Contributions from non-controlling interests

    —          —          —          —          —          —          —          4,576        4,576   

Purchase of non-controlling interests

    —          —          —          —          (4,533     —          —          (3,367     (7,900

Dividends declared on Common Shares of beneficial interest ($0.65 per share)

    —          —          —          —          —          (21,485     —          —          (21,485

Dividends declared on Series D Preferred

                    0   

Shares ($1.92628 per share)

    —          —          —          —          —          (9,285     —          —          (9,285

Series D Preferred Share offering

    3,220        80,500        —          —          (2,937     —          —          —          77,563   

Change in unrealized gain on interest rate derivatives

    —          —          —          —          —          —          42        —          42   

Stock issued pursuant to Dividend Reinvestment Plan

    —          —          48        48        469        —          —          —          517   

Stock buyback

    —          —          (70     (70     (672     —          —          —          (742
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

  4,820    $ 120,500      33,019    $ 33,019    $ 618,426    $ (317,385 $ (50 $ 14,754    $ 469,264   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See Notes to Consolidated Financial Statements.

 

62


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WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF EQUITY

(Going Concern Basis)

(In thousands except per share data)

 

    Series D
Preferred Shares
of Beneficial
Interest
    Common Shares
of Beneficial
Interest
    Additional
Paid-In
    Accumulated
Distributions
in Excess of
    Accumulated
Other
Comprehensive
    Non-
Controlling
       
    Shares     Amount     Shares     Amount     Capital     Net Income     Income (Loss)     Interests     Total  

Balance, December 31, 2012

    4,820      $ 120,500        33,019      $ 33,019      $ 618,426      $ (317,385   $ (50   $ 14,754      $ 469,264   

Net income attributable to Winthrop Realty Trust

    —          —          —          —          —          28,778        —          —          28,778   

Net loss attributable to non-controlling interests

    —          —          —          —          —          —          —          (4,290     (4,290

Distributions to non-controlling interests

    —          —          —          —          —          —          —          (51     (51

Contributions from non-controlling interests

    —          —          —          —          —          —          —          18,629        18,629   

Purchase of non-controlling interests

    —          —          —          —          103        —          —          (253     (150

Dividends declared on Common Shares of Beneficial Interest ($0.65 per share)

    —          —          —          —          —          (22,372     —          —          (22,372

Dividends declared on Series D Preferred Shares ($2.3125 per share)

    —          —          —          —          —          (11,146     —          —          (11,146

Dividends declared on Restricted Shares

    —          —          —          —          —          (307     —          —          (307

Change in unrealized loss on interest rate derivatives

    —          —          —          —          —          —          (74     —          (74

Stock issued pursuant to Dividend Reinvestment Plan

    —          —          40        40        424        —          —          —          464   

Net proceeds from Common Shares offering

    —          —          2,750        2,750        27,271        —          —          —          30,021   

Issuance of Restricted Shares

    —          —          592        —          —          —          —          —          —     

Amortization of Restricted Shares

    —          —          —          —          897        —          —          —          897   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

    4,820      $ 120,500        36,401      $ 35,809      $ 647,121      $ (322,432   $ (124   $ 28,789      $ 509,663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Winthrop Realty Trust

    —        $ —        $ —        $ —        $ —        $ 12,481      $ —        $ —        $ 12,481   

Net income attributable to non-confirming interests

    —          —          —          —          —          —          —          (3,818     (3,818

Distributions to non-controlling interests

    —          —          —          —          —          —          —          (711     (711

Contributions from non-controlling interests

    —          —          —          —          —          —          —          873        873   

Increase in non-controlling interest due to consolidation of property

    —          —          —          —          —          —          —          16,391        16,391   

Decrease in non-controlling interest due to property sale

    —          —          —          —          —          —          —          (3,764     (3,764

Dividends declared on Common Shares of Beneficial Interest ($0.325 per share)

    —          —          —          —          —          (11,642     —          —          (11,642

Dividends declared on Series D Preferred Shares ($1.348963 per share)

    —          —          —          —          —          (6,502     —          —          (6,502

Dividends declared on Restricted Shares

    —          —          —          —          —          (192     —          —          (192

Change in unrealized loss on interest rate derivatives

    —          —          —          —          —          —          (193     —          (193

Stock issued pursuant to Dividend
Reinvestment Plan

    —          —          16        16        162        —          —          —          178   

Amortization of Restricted Shares

    —          —          —          —          1,450        —          —          —          1,450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, July 31, 2014

    4,820      $ 120,500        36,417      $ 35,825      $ 648,733      $ (328,287   $ (317   $ 37,760      $ 514,214   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

63


Table of Contents

WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Going Concern Basis)

(in thousands)

 

     Seven Months
Ended July 31,
2014
    Year Ended
December 31,
2013
    Year Ended
December 31,
2012
 

Cash flows from operating activities

      

Net Income

   $ 8,663      $ 24,488      $ 24,384   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization (including amortization of deferred financing costs and fair value of debt)

     11,331        15,451        11,824   

Amortization of lease intangibles

     6,462        8,550        6,746   

Straight-line rental income

     1,121        669        (2,177

Loan discount accretion

     (2,086     (4,121     (8,333

Discount accretion received in cash

     5,865        37        15,720   

Earnings of preferred equity investments

     (582     (613     —     

Distributions of income from preferred equity investments

     565        607        97   

Income of equity investments

     (12,622     (22,641     (14,678

Distributions of income from equity investments

     8,755        24,112        21,593   

Restricted cash held in escrows

     (27     1,242        (3,477

Gain on sale of securities carried at fair value

     (2     (742     (41

Unrealized loss (gain) on securities carried at fair value

     —          142        (6,916

Gain on sale of real estate investments

     (11,073     (11,005     (945

Gain on sale of loan securities carried at fair value

     —          —          (614

Unrealized gain on loan securities carried at fair value

     —          (215     (447

Impairment loss on investments in real estate

     9,287        2,904        3,260   

Loss on extinguishment of debt

     —          —          121   

Provision for loss on loans receivable

     —          348        —     

Tenant leasing costs

     (1,046     (4,229     (4,250

Equity compensation expenses

     1,450        897        —     

Bad debt expense (recovery)

     (229     40        (265

Changes in assets and liabilities:

      

Interest receivable

     (64     (214     (516

Accounts receivable and other assets

     665        (1,316     726   

Accounts payable, accrued liabilities and other liabilities

     (8,234     (4,123     4,623   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     18,199        30,268        46,435   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Issuance and acquisition of loans receivable

     (31,492     (21,437     (163,800

Investments in real estate

     (5,575     (257,142     (37,678

Investments in equity investments

     (48,154     (30,341     (78,679

Investments in preferred equity investments

     —          —          (10,750

Return of capital distribution from equity investments

     705        14,618        84,026   

Return of capital distribution from preferred equity investments

     643        5,771        —     

Return of capital distribution from securities carried at fair value

     —          376        —     

Purchase of securities carried at fair value

     (73     —          (5,655

Proceeds from sale of investments in real estate

     56,423        38,690        7,024   

Proceeds from sale of equity investments

     200        26        4,297   

Proceeds from sale of securities carried at fair value

     75        19,918        21,774   

Proceeds from pay off of loan securities

     —          —          6,359   

Proceeds from sale of loans receivable

     37,052        19,319        —     

Restricted cash held in escrows

     2,127        863        (5,600

Issuance of secured financing receivable

     —          (30,000     —     

Collection of loans receivable

     7,784        56,088        68,824   

Deposits on assets held for sale

     —          500        —     

Cash from consolidation of properties

     332        473        —     

Cash from foreclosure on properties

     —          —          411   
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     20,047        (182,278     (109,447
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Proceeds from mortgage loans payable

   $ —        $ 198,100      $ 36,897   

Proceeds from notes payable

     —          —          880   

Payment of notes payable

     —          —          (80

Payment of revolving line of credit

     —          —          (40,000

Principal payments of mortgage loans payable

     (5,412     (22,287     (25,584

Repurchase of senior notes payable

     (11,178     —          —     

 

(Continued on next page)

See Notes to Consolidated Financial Statements.

 

64


Table of Contents

WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Going Concern Basis)

(in thousands, continued)

 

     Seven Months
Ended July 31,
2014
    Year Ended
December 31,
2013
    Year Ended
December 31,
2012
 

Proceeds from issuance of senior notes payable

     —          —          86,250   

Proceeds from secured financing

     —          —          25,000   

Payment of secured financing

     —          (23,770     (1,230

Restricted cash held in escrows

     (239     (228     (42

Deferred financing costs

     (68     (796     (4,198

Purchase of non-controlling interests

     —          (150     (2,050

Contribution from non-controlling interests

     873        18,629        4,576   

Distribution to non-controlling interests

     (711     (51     (7,242

Proceeds from issuance of Common Shares under Dividend Reinvestment Plan

     178        464        517   

Proceeds from issuance of Common Shares through offering, net

     —          30,021        —     

Buyback of Common Shares

     —          —          (742

Issuance of Series D Preferred Shares

     —          —          77,563   

Dividend paid on Common Shares

     (17,461     (21,919     (21,488

Dividend paid on Series C Preferred Shares

     —          —          —     

Dividend paid on Series D Preferred Shares

     (5,573     (11,146     (9,285

Dividend paid on Restricted Shares

     (71     (27     —     
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     (39,662     166,840        119,742   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,416     14,830        56,730   

Cash and cash equivalents at beginning of year

     112,512        97,682        40,952   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 111,096      $ 112,512      $ 97,682   
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

      

Interest paid

   $ 15,280      $ 23,735      $ 16,467   
  

 

 

   

 

 

   

 

 

 

Capitalized interest

   $ 2,457      $ 1,443      $ —     
  

 

 

   

 

 

   

 

 

 

Taxes paid

   $ 147      $ 247      $ 332   
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosure on Non-Cash Investing and Financing Activities

      

Dividends accrued on Common Shares and Restricted Shares

   $ 401      $ 6,099      $ 5,366   
  

 

 

   

 

 

   

 

 

 

Dividends accrued on Series D Preferred Shares

   $ 929      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Capital expenditures accrued

   $ 1,736      $ 3,140      $ 4,011   
  

 

 

   

 

 

   

 

 

 

Conveyance of secured financing in settlement of loans receivable

   $ (29,150   $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Assumption of mortgage loan on investment in real estate

   $ —        $ 9,248      $ 13,600   
  

 

 

   

 

 

   

 

 

 

Forgiveness of loan receivable

   $ 190      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Contribution to WRT-Elad One South State Equity L.P.

   $ —        $ 2,083      $ —     
  

 

 

   

 

 

   

 

 

 

Distribution from WRT – One South State Lender LP

   $ —        $ (2,083   $ —     
  

 

 

   

 

 

   

 

 

 

Fair value of assets acquired

   $ 69,140      $ 62,208      $ —     
  

 

 

   

 

 

   

 

 

 

Fair value of liabilities assumed

   $ 52,687      $ 62,198      $ —     
  

 

 

   

 

 

   

 

 

 

Transfer from preferred equity investments

   $ —        $ —        $ 3,923   
  

 

 

   

 

 

   

 

 

 

Transfer from loans receivable

   $ —        $ —        $ 2,938   
  

 

 

   

 

 

   

 

 

 

Transfer to equity investments

   $ —        $ —        $ (6,861
  

 

 

   

 

 

   

 

 

 

Transfer from equity investments

   $ —        $ —        $ 17,600   
  

 

 

   

 

 

   

 

 

 

Transfer to loans receivable

   $ —        $ (877   $ (11,750
  

 

 

   

 

 

   

 

 

 

Transfer to additional paid-in capital

   $ —        $ —        $ (5,487
  

 

 

   

 

 

   

 

 

 

Transfer to non-controlling interests

   $ —        $ —        $ (363
  

 

 

   

 

 

   

 

 

 

Contribution to Vintage Housing Holdings LLC

   $ 450      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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Amounts related to number of buildings, square footage, occupancy and tenant data are unaudited.

 

1. Business

Winthrop Realty Trust (“Winthrop”), a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue 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.

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

On April 28, 2014 the Trust’s Board of Trustees (the “Board”) adopted a plan of liquidation which was subject to approval by the holders of a majority of the Trust’s common shares of beneficial interest (“Common Shares”). The plan was approved at a special meeting of shareholders on August 5, 2014 and the Trust adopted the liquidation basis of accounting as of August 1, 2014.

Prior to the plan of liquidation, the Trust was engaged in the business of owning real property and real estate related assets which it categorized into three segments: (i) ownership of investment properties including wholly owned properties and investments in joint ventures which own investment properties (“operating properties”); (ii) origination and acquisition of loans collateralized directly or indirectly by commercial and multi-family real property, (collectively “loan assets”); and (iii) equity and debt interests in other real estate investment trusts (“REIT securities”). Subsequent to the adoption of the plan of liquidation, the Trust no longer makes operating decisions or assesses performance in separate segments as all assets are now considered as held for sale. Accordingly, the Trust has only one reporting and operating segment subsequent to July 31, 2014.

 

2. Plan of Liquidation

The plan of liquidation provides for an orderly sale of the Trust’s assets, payment of the Trust’s liabilities and other obligations and the winding up of operations and dissolution of the Trust. The Trust is not permitted to make any new investments other than protective acquisitions or advances with respect to the Trust’s existing assets. The Trust is permitted to satisfy any existing contractual obligations including any capital call requirements and acquisitions or dispositions pursuant to buy-sell provisions under existing joint venture documentation, pay for required tenant improvements and capital expenditures at its real estate properties, and repurchase its existing Common Shares and its 7.75% Senior Notes (the “Senior Notes”). The Trust is also permitted to invest its cash reserves in short-term U.S. Treasuries or other short-term obligations.

The plan of liquidation enables the Trust to sell any and all of its assets without further approval of the shareholders and provides that liquidating distributions be made to the shareholders as determined by the Board. Pursuant to applicable REIT rules, in order to be able to deduct liquidating distributions as dividends, the Trust must complete the disposition of its assets by August 5, 2016, two years after the date the plan of liquidation was adopted by shareholders. To the extent that all of the Trust’s assets are not sold by such date, the Trust intends to satisfy this requirement by distributing its unsold assets into a liquidating trust at the end of such two-year period, and the holders of interests in the Trust at such time will be beneficiaries of such liquidating trust.

 

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The dissolution process and the amount and timing of distributions to shareholders involves risks and uncertainties. Accordingly, it is not possible to predict the timing or aggregate amount which will ultimately be distributed to shareholders and no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the Consolidated Statement of Net Assets.

The Trust expects to continue to qualify as a REIT throughout the liquidation until such time as any remaining assets, if any, are transferred into a liquidating trust. The Board shall use commercially reasonable efforts to continue to cause the Trust to maintain its REIT status, provided however, the Board may elect to terminate the Trust’s status as a REIT if it determines that such termination would be in the best interest of the shareholders.

 

3. Summary of Significant Accounting Policies

Basis of Presentation

Pre Plan of Liquidation

The accompanying consolidated financial statements represent the consolidated results of Winthrop, its wholly-owned taxable REIT subsidiary, WRT-TRS Management Corp., the Operating Partnership and 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. All significant intercompany balances and transactions have been eliminated in consolidation. Prior to the adoption of the plan of liquidation, the Trust accounted 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 was included in consolidated net income.

The consolidated financial statements for the periods ended July 31, 2014, December 31, 2013, and December 31, 2012 were prepared on the going concern basis of accounting, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

Post Plan of Liquidation

Liquidation Basis of Accounting

As a result of the approval of the plan of liquidation by the shareholders, the Trust has adopted the liquidation basis of accounting as of August 1, 2014 and for the periods subsequent to August 1, 2014 in accordance with accounting principles generally accepted in the United States (“GAAP”). Accordingly, on August 1, 2014 assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that the Trust will collect on disposal of assets as it carries out its plan of liquidation. The liquidation value of the Trust’s operating properties and loan assets are presented on an undiscounted basis. Estimated costs to dispose of assets have been presented separately from the related assets. Liabilities are carried at their contractual amounts due or estimated settlement amounts.

The Trust accrues costs and income that it expects to incur and earn through the end of liquidation to the extent it has a reasonable basis for estimation. These amounts are classified as a liability for estimated costs in excess of estimated receipts during liquidation on the Consolidated Statement of Net Assets. Actual costs and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material. See Note 4 for further discussion. Actual costs incurred but unpaid as of December 31, 2014 are included in accounts payable, accrued liabilities and other liabilities on the Consolidated Statement of Net Assets.

In liquidation, the presentation for joint ventures historically consolidated under going concern accounting will be determined based on the Trust’s planned exit strategy. Those ventures where the Trust intends to sell the property are presented on a gross basis with a payable to the non-controlling interest holder. Those

 

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ventures where the Trust intends to sell its interest in the venture, rather than the property, are presented on a net basis and included in equity investments on the Consolidated Statement of Net Assets. Amounts due to non-controlling interests in connection with the disposition of consolidated joint ventures have been accrued and are recorded as liability for non-controlling interests.

Net assets in liquidation represents the estimated liquidation value available to holders of Common Shares upon liquidation. Due to the uncertainty in the timing of the anticipated sale dates and the estimated cash flows, actual operating results and sale proceeds may differ materially from the amounts estimated.

Reclassifications

Discontinued operations for the periods presented include the Trust’s properties in Deer Valley, Arizona; Englewood, Colorado; Meriden, Connecticut; Chicago, Illinois (River City); Lisle, Illinois (701 Arboretum); Indianapolis, Indiana; Andover, Massachusetts; Amherst, New York; Memphis, Tennessee (Retail); Denton, Texas; and Seabrook, Texas. Also included in discontinued operations for all periods presented are the operations of the Trust’s retail property located in Louisville, Kentucky which was under contract to be sold and was classified as held for sale at July 31, 2014. This property was sold on November 25, 2014.

Out of Period Adjustments

During 2013, the Trust identified an error in its previously reported interim financial statements relating to the purchase price allocation of the Trust’s investment in the 1515 Market Street property. The Trust recorded an out of period adjustment in the amount of $1.3 million to correct the overstatement of other liabilities and overstatement of building in the Trust’s consolidated balance sheet. The Trust also recorded an out of period adjustment to reduce depreciation expense in the amount of $21,000 during the Trust’s fourth quarter of 2013 to correct the depreciation expense in the consolidated statement of operations. The Trust concluded that these adjustments are not material to the current period or the prior period’s financial position or results from operations. As such, this cumulative change was recorded in the consolidated balance sheet and consolidated statement of operations during the quarter ended on December 31, 2013. This error had no impact on any other periods presented.

Use of Estimates

The preparation of financial statements in conformity with 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. Under going concern accounting, 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 carried at fair value. In addition, estimates are used in accounting for the allowance for doubtful accounts. Under liquidation accounting, the Trust is required to estimate all costs and income that it expects to incur and earn through the end of liquidation including the estimated amount of cash it will collect on disposal of its assets and estimated costs incurred to dispose of assets. All of the estimates and evaluations are susceptible to change and actual results could differ materially from the estimates and evaluations.

Investments in Real Estate

Prior to the adoption of the plan of liquidation, real estate assets were stated at historical cost. Expenditures for repairs and maintenance were expensed as incurred. Significant renovations that extended the useful life of the properties were capitalized. Depreciation for financial reporting purposes was computed using the straight-line method. Buildings were 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

 

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the buildings were 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 was completed. Tenant improvements were 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 assessed 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 allocated purchase price based on these assessments. The Trust assessed fair value based on estimated cash flow projections and utilized appropriate discount and capitalization rates and available market information. Estimates of future cash flows were based on a number of factors including the historical operating results, known trends, and market/economic conditions that may have affected the property. If the acquisition was determined to be a business combination, then the related acquisition costs were expensed. If the acquisition was determined to be an asset acquisition, then the related acquisition costs were capitalized.

The fair value of the tangible assets of an acquired property was determined by valuing the property as if it were vacant, and the “as-if-vacant” value was then allocated to land, building and improvements and fixtures and equipment based on management’s determination of the fair values of these assets. Factors considered by management in performing these analyses included 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 included 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 estimated costs to execute similar leases including leasing commissions.

Real estate investments and purchased intangible assets subject to amortization were reviewed for impairment whenever events or changes in circumstances indicated that the carrying amount of an asset group may not be recoverable. Recoverability of real estate investments to be held and used was measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated from the use and eventual disposition of the asset group. If the carrying amount of an asset group exceeded its estimated undiscounted future cash flows, an impairment charge was recognized equal to the amount by which the carrying amount of the asset group exceeded the fair value of the asset group.

Assets to be disposed of that qualified as being held for sale were 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 to be assumed by the buyer were classified separately as held for sale in the Consolidated Balance Sheet and were no longer depreciated.

As of August 1, 2014 the investments in real estate were adjusted to their estimated net realizable value, or liquidation value, to reflect the change to the liquidation basis of accounting. The liquidation value represents the estimated amount of cash that the Trust will collect on disposal of its assets as it carries out its plan of liquidation. The liquidation value of the Trust’s investments in real estate are presented on an undiscounted basis and investments in real estate are no longer depreciated. Estimated costs to dispose of these investments are presented separately from the related assets. Subsequent to August 1, 2014, all changes in the estimated liquidation value of the investments in real estate are reflected as a change to the Trust’s net assets in liquidation.

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.

 

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Restricted Cash

Restricted cash in escrow accounts include cash reserves for tenant improvements, leasing commissions, real estate taxes and other expenses pursuant to the loan agreements. In addition, certain security deposit accounts are classified as restricted cash. The classification of restricted cash within the Consolidated Statement of Cash Flows under going concern accounting is determined by the nature of the escrow account. Activity in escrow accounts related to real estate taxes, insurance, rent reserves and security deposits was classified as operating activity. Activity in escrow accounts related to capital improvements and tenant improvements was classified as investing activity. Any debt service reserves are classified as financing activity.

Loans Receivable

Prior to the adoption of the plan of liquidation, the Trust’s policy was to record loans receivable at cost, net of unamortized discounts unless such loan receivable was deemed to be impaired. Discounts on loans receivable were amortized over the life of the loan receivable using the effective interest method based upon an evaluation of prospective future cash flows. The amortization was reflected as an adjustment to interest income. Other costs incurred in connection with acquiring loans, such as marketing and administrative costs, were charged to expense as incurred. Loan fees and direct costs associated with loans originated by the Trust were deferred and amortized over the life of the loan as interest income.

The Trust evaluated the collectability of the interest and principal of each of its loans to determine potential impairment. A loan receivable was considered to be impaired when, based on current information and events, it was probable that the Trust was unable to collect all amounts due according to the existing contractual terms of the loan receivable. Impairment was then measured based on the present value of expected future cash flows or the fair value of the collateral. When a loan receivable was considered to be impaired, the Trust recorded a loan loss allowance and a corresponding charge to earnings equal to the amount by which the Trust’s net investment in the loan exceeded its fair value. Significant judgments were required in determining impairment. The Trust did not record interest income on impaired loans receivable. Any cash receipts on impaired loans receivable were recorded as a recovery reducing the allowance for loan losses. The Trust charged uncollectible loans against its allowance for loan loss after it had exhausted all economically warranted legal rights and remedies to collect the receivables or upon successful foreclosure and taking of loan collateral.

Certain real estate operating properties were acquired through foreclosure or through deed-in-lieu of foreclosure in full or partial satisfaction of non-performing loans that the Trust intended to hold, operate or develop for a period of at least twelve months. Upon acquisition of a property, tangible and intangible assets and liabilities acquired were recorded at their estimated fair values and depreciation was computed in the same manner as described in “Investments in Real Estate” above.

Under liquidation accounting, the Trust carries its loans receivable at their estimated net realizable value, or liquidation value, which represents the estimated amount of principal payments the Trust expects to receive over the holding period of the loan. The liquidation value of the Trust’s loans receivable are presented on an undiscounted basis. Interest payments that the Trust expects to receive on its loans receivable over the estimated holding period of the loan are accrued and are classified as part of liability for estimated costs in excess of estimated receipts during liquidation on the Consolidated Statement of Net Assets. As interest is earned, it is reclassified and included in loans receivable on the Consolidated Statement of Net Assets.

The Trust continues to evaluate the collectability of the interest and principal of each of its loans receivable using the same methodology used under going concern accounting. Any changes in collectability will be reflected as a change to the Trust’s net assets in liquidation.

 

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Accounts Receivable

Prior to the adoption of the plan of liquidation, accounts receivable were recorded at the contractual amount and did not bear interest. The allowance for doubtful accounts was the Trust’s best estimate of the amount of probable credit losses in existing accounts receivable. The Trust reviewed the allowance for doubtful accounts monthly. Past due balances were reviewed individually for collectability. Account balances were charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts balances were $185,000 and $414,000 at July 31, 2014 and December 31, 2013, respectively. In accordance with liquidation accounting, as of August 1, 2014, accounts receivable were adjusted to their net realizable value. The Trust continues to review its accounts receivable monthly and applies the same guidelines for determining an allowance for doubtful accounts. Any changes in the allowance are reflected in the net realizable value of the accounts receivable.

Under going concern accounting, accrued rental income included the difference between straight line rent and contractual amounts due. The Trust reviewed its straight line rent receivables monthly in conjunction with its review of allowance of doubtful accounts. Accrued rental income is not contemplated under liquidation accounting. The Trust accrues rental revenue based on contractual amounts expected to be collected during liquidation.

Securities and Loan Securities at Fair Value

Prior to the adoption of the plan of liquidation, the Trust had the option to elect fair value for these financial assets. The Trust elected the fair value option for real estate securities to mitigate a divergence between accounting and economic exposure for these assets. These securities were recorded on the Consolidated Balance Sheet as securities carried at fair value and loan securities carried at fair value. The changes in the fair value of these instruments were recorded in unrealized gain (loss) on securities and loan securities carried at fair value in the Consolidated Statements of Operations. Under liquidation accounting, loan securities are recorded at their estimated net realizable value.

Preferred Equity Investment

The Trust has certain investments in ventures which entitle it to priority returns ahead of the other equity holders in the ventures. At the inception of each such investment, management determined whether such investment should be accounted for as a loan, preferred equity, equity or as real estate. The Trust classified these investments as preferred equity investments and they were 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 were 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.

Prior to the adoption of the plan of liquidation, at each reporting period the Trust assessed whether there were any indicators of declines in the fair value of preferred equity investments. An investment’s value was impaired only if the Trust’s estimate of the fair value of the investment was less than the carrying value of the investment and such difference was deemed to be other-than-temporary. To the extent impairment had occurred, the loss was measured as the excess of the carrying amount of the investment over the estimated fair value of the investment. Under liquidation accounting, preferred equity investments are classified as equity investments and are carried at their estimated net realizable value.

 

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Equity Investments

The Trust accounts for its investments in entities 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 not 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. Prior to the adoption of the plan of liquidation, under the equity method, the investment, originally recorded at cost, was adjusted to recognize the Trust’s share of net earnings or losses as they occurred and for additional contributions made or distributions received. To recognize the character of distributions from equity investments, the Trust looked at 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 assessed whether there are any indicators or declines in the fair value of the equity investments. An investment’s value was impaired only if the Trust’s estimate of the fair value of the investment was less than the carrying value of the investment and such difference was deemed to be other-than-temporary. To the extent impairment had occurred, the loss was measured as the excess of the carrying amount of the investment over the estimated fair value of the investment.

Subsequent to the adoption of liquidation accounting, equity investments are recorded at their net realizable value. The Trust evaluates the net realizable value of its equity investments at each reporting period. Any changes in net realizable value will be reflected as a change to the Trust’s net assets in liquidation.

Lease Intangibles

Under going concern accounting, the Trust estimated the fair value of the identified intangible assets and liabilities of an acquired property. In estimating the fair value, above-market and below-market lease values were recorded based on the difference between the current in-place lease rent and a management estimate of current market rents. Below-market lease intangibles were recorded as a liability and amortized into rental revenue over the non-cancelable periods of the respective leases plus the term of any below-market fixed rate renewal options, if any. Above-market leases were recorded as part of intangible assets and amortized as a direct charge against rental revenue over the non-cancelable portion of the respective leases. In-place lease values were based upon the Trust’s evaluation of the specific characteristics of each tenant lease. Factors considered included estimates of carrying costs during a hypothetical lease up period considering current market conditions and costs to execute similar leases. The in-place lease value was recorded as an intangible asset and amortized as a charge to amortization expense over the life of the respective lease.

Under liquidation accounting, any residual value attributable to lease intangibles is included in the net realizable value of the corresponding investment in real estate. As such, lease intangibles are no longer separately stated on the Consolidated Statement of Net Assets.

Deferred Financing Costs

Prior to the adoption of the plan of liquidation, direct financing costs were deferred and amortized over the terms of the related agreements as a component of interest expense. As deferred financing costs will not be converted to cash or other consideration, these have been valued at $0 as of August 1, 2014 in accordance with liquidation accounting.

 

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Financial Instruments

Financial instruments held by the Trust include cash and cash equivalents, restricted cash, loan securities, loans receivable, interest rate hedge agreements, accounts receivable, accounts payable and long term debt. Under going concern accounting, cash and cash equivalents, restricted cash, loan securities and interest rate hedge agreements were recorded at fair value. The fair value of accounts receivable and accounts payable approximated their current carrying amounts. Under liquidation accounting, all financial instruments are recorded at their net realizable value.

Derivative Financial Instruments

Prior to the adoption of the plan of liquidation, the Trust’s interest rate swap and interest rate cap agreements were classified on the balance sheet as other assets and other liabilities and were carried at fair value. An interest rate swap was carried 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. For the Trust’s interest rate contracts that were designated as “cash flow hedges,” the change in the fair value of such derivative was recorded in other comprehensive income or loss for hedges that qualify as effective and the change in the fair value was transferred from other comprehensive income or loss to earnings as the hedged item affected earnings. The ineffective amount of the interest rate swap agreement, if any, was recognized in earnings.

Upon entering into hedging transactions, the Trust documents the relationship between the interest rate financial instrument 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 is no longer appropriate. The Trust utilizes its interest rate swap and interest rate cap agreements to manage interest rate risk and does not intend to enter into derivative transactions for speculative or trading purposes.

As these instruments will not be converted into cash or other consideration, derivative financial instruments have been valued at $0 as of August 1, 2014 in accordance with liquidation accounting. These financial instruments are still in place and effective as of December 31, 2014. The Trust has accrued the estimated monthly amounts for its swap agreements. The amount is included in the liability for estimated costs in excess of estimated receipts during liquidation.

Revenue Recognition

Prior to the adoption of the plan of liquidation, the Trust accounted for its leases with tenants as operating leases with rental revenue recognized on a straight-line basis over the minimum non-cancellable term of the lease. The straight-line rent adjustment decreased revenue by $1,121,000 during the seven months ended July 31, 2014, decreased revenue by $669,000 in the year ended December 31, 2013 and increased revenue by $2,177,000 during the year ended December 31, 2012. The accrued straight-line rent receivable amount at December 31, 2013 was $19,760,000.

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.

 

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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 accrued the recovery of operating costs based on actual costs incurred.

The Trust recognized lease termination payments as a component of rental revenue in the period received, provided that the Trust has no further obligations under the lease; otherwise, the lease termination payment was amortized on a straight-line basis over the remaining obligation period.

Under liquidation accounting, the Trust has accrued all income that it expects to earn through the end of liquidation to the extent it has a reasonable basis for estimation. These amounts are classified in liability for estimated costs in excess of estimated receipts during liquidation on the Consolidated Statement of Net Assets.

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 dividend requirements.

In order for the Trust to continue to qualify as a REIT, the value of the Trust’s taxable REIT Subsidiary (“TRS”) stock cannot exceed 25% 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.

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 taxing 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 Statements of Operations and Comprehensive Income. The only provision for federal income taxes relates to the TRS. The Trust’s tax returns are subject to audit by taxing authorities. The tax years 2011 – 2014 remain open to examination by major taxing jurisdictions to which the Trust is subject.

Series D Preferred Shares

On March 23, 2012 the Trust closed on a public offering of 3,220,000 Series D Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series D Preferred Shares”) at a price of $25.0385 per share, par value of $1 per share. The Trust received net proceeds, after underwriters discounts and expenses, of $77,563,000. The Series D Preferred Shares rank senior to the Common Shares with respect to dividend rights and liquidation or dissolution rights. The Series D Preferred Shares have no stated maturity date and are not subject to mandatory redemption or any sinking fund. Holders of the Series D Preferred Shares will generally have no voting rights except for limited voting rights if the Trust fails to pay dividends for six or more quarterly periods. As of July 31, 2014 and December 31, 2013 there were 4,820,000 Series D Preferred Shares outstanding which are classified as a component of permanent equity.

On September 15, 2014 the Trust made the full liquidating distribution on its Series D Preferred Shares of $25.4815 per Series D Preferred Share, which amount consisted of the $25.00 liquidation preference plus accrued and unpaid dividends to, but excluding, the date of payment.

 

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Stock-Based Compensation

Pursuant to the Trust’s 2007 Long Term Stock Incentive Plan the Trust may, from time to time, issue stock-based compensation awards to certain eligible persons including those performing services for FUR Advisors LLC (“FUR Advisors”), the Trust’s external advisor. During 2013, the Trust issued 600,000 restricted common shares of beneficial interest (“Restricted Shares”). See Note 24 – Restricted Share Grants for further discussion. Under going concern accounting, the Trust accounted for this stock-based compensation in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Until the awards were no longer subject to forfeiture, the Trust measured stock-based compensation expense at each reporting date for any changes in fair value and recognized the expense prorated for the portion of the requisite service period completed.

Under liquidation accounting, compensation expense is no longer recorded as the vesting of the Restricted Shares does not result in cash outflow for the Trust.

Earnings Per Share

Prior to the adoption of the plan of liquidation, the Trust determined basic earnings per share on the weighted average number of Common Shares outstanding during the period and reflected the impact of participating securities. The Trust computed 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):

 

     Seven Months
Ended July 31,
2014
    Year Ended
December 31, 2013
    Year Ended
December 31, 2012
 

Basic

      

Income (loss) from continuing operations

   $ (2,572   $ 15,716      $ 23,399   

Loss attributable to non-controlling interest

     3,764        4,251        762   

Preferred dividend of Series D Preferred Shares

     (6,502     (11,146     (9,285

Amount allocated to Restricted Shares

     (192     (307     —     
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations applicable to Common Shares

  (5,502   8,514      14,876   

Income from discontinued operations

  11,235      8,772      985   

(Income) loss attributable to non-controlling interest from discontinued operations

  54      39      (515
  

 

 

   

 

 

   

 

 

 

Net income attributable to Common Shares for earnings per share purposes

$ 5,787    $ 17,325    $ 15,346   
  

 

 

   

 

 

   

 

 

 

Basic weighted-average Common Shares

  35,821      33,743      33,062   
  

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

$ (0.15 $ 0.25    $ 0.45   

Income from discontinued operations

  0.31      0.26      0.01   
  

 

 

   

 

 

   

 

 

 

Net income per Common Share – basic

$ 0.16    $ 0.51    $ 0.46   
  

 

 

   

 

 

   

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Seven Months
Ended July 31,
2014
    Year Ended
December 31, 2013
    Year Ended
December 31, 2012
 

Diluted

      

Income (loss) from continuing operations

   $ (2,572   $ 15,716      $ 23,399   

Loss attributable to non-controlling interest

     3,764        4,251        762   

Preferred dividend of Series D Preferred Shares

     (6,502     (11,146     (9,285

Amount allocated to Restricted Shares

     (192     (307     —     
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations applicable to Common Shares

  (5,502   8,514      14,876   

Income from discontinued operations

  11,235      8,772      985   

(Income) loss attributable to non-controlling interest from discontinued operations

  54      39      (515
  

 

 

   

 

 

   

 

 

 

Net income attributable to Common Shares for earnings per share purposes

$ 5,787    $ 17,325    $ 15,346   
  

 

 

   

 

 

   

 

 

 

Basic weighted-average Common Shares

  35,821      33,743      33,062   

Stock options (1)

  —        —        —     

Restricted Shares (2)

  —        31      —     
  

 

 

   

 

 

   

 

 

 

Diluted weighted-average Common Shares

  35,821      33,774      33,062