10-K 1 d79432d10k.htm FORM 10-K Form 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, 2015

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 February 29, 2016, there were 36,425,084 Common Shares outstanding.

At June 30, 2015, the aggregate market value of the Common Shares held by non-affiliates was $497,655,502.

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, 2015, 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

     12   
1B.   

Unresolved Staff Comments

     18   
2.   

Properties

     19   
3.   

Legal Proceedings

     24   
4.   

Mine Safety Disclosures

     24   
   PART II   
5.   

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

     25   
6.   

Selected Financial Data

     27   
7.   

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

     29   
7A.   

Quantitative and Qualitative Disclosures about Market Risk

     39   
8.   

Financial Statements and Supplementary Data

     41   
9.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     88   
9A.   

Controls and Procedures

     88   
9B.   

Other Information

     88   
   PART III   
10.   

Directors, Executive Officers and Corporate Governance

     89   
11.   

Executive Compensation

     89   
12.   

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

     89   
13.   

Certain Relationships and Related Transactions and Director Independence

     89   
14.   

Principal Accountant Fees and Services

     89   
   PART IV   
15.   

Exhibits and Financial Statement Schedules

     90   
  

(a) Financial Statements and Financial Statement Schedules

     90   
  

(b) Exhibits

     90   
  

Signatures

     91   
  

Schedule III – Real Estate and Accumulated Depreciation

     92   
  

Schedule IV – Mortgage Loans on Real Estate

     94   
  

Exhibit Index

     95   

 

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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.

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, an entity that is majority owned by our current executive officers and senior management, including Michael L. Ashner and Carolyn Tiffany.

Our primary business is owning real property and real estate related assets. 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 (which we refer to as Common Shares) at a special meeting of shareholders on August 5, 2014. At the time of the adoption of the plan we held 20 consolidated operating properties, 18 equity investments, eight loans receivable, one secured financing receivable and one loan security. At December 31, 2015, we held 10 consolidated operating properties, 10 equity investments, four loans receivable, one secured financing receivable and one loan security.

Prior to the adoption of the plan of liquidation, we categorized our investments 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. 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.

At December 31, 2015 we had total assets of $745,629,000 and net assets in liquidation of $516,396,000. The net assets in liquidation at December 31, 2015 would result in liquidating distributions of approximately $14.18 per Common Share.

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.

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 including providing seller financing to purchasers of our assets if we deem it prudent to facilitate the sale of such asset. 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. 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.

 

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As we currently anticipate that all of our assets will not be sold by such date, we intend to satisfy this requirement by distributing our unsold assets to a liquidating trust at the end of such two-year period. The sole purpose of the liquidating trust will be to liquidate any remaining assets and, after satisfying any remaining liabilities, distribute the proceeds of the sale of assets to the holders of the interests in the liquidating trust. The liquidating trust will be managed by one or more trustees, which we presently expect will initially include at least one trustee that satisfies the independence requirements of the New York Stock Exchange (“NYSE”), designated by the Trust’s Board of Trustees at the time of formation of the liquidating trust. Although Internal Revenue Service (“IRS”) regulations do not provide any specific guidance as to the length of time a liquidating trust may last, the IRS’s ruling guidelines call for a term not to exceed three years, which period may be extended.

If we transfer our assets to a liquidating trust, our shareholders will receive beneficial interests in the liquidating trust in proportion to Common Shares held in the Trust. Holders of our Common Shares should note that unlike our Common Shares, which are freely transferable, beneficial interests in the liquidating trust will generally not be transferable except by will, intestate succession or operation of law. Therefore, the recipients of the interests in the liquidating trust will not have the ability to realize any value from these interests except from distributions made by the liquidating trust, the timing of which will be solely in the discretion of the liquidating trust’s trustees. If we transfer our assets to a liquidating trust, holders of our Common Shares will be treated for federal and, to the extent applicable, state 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 and, to the extent applicable, state income tax to the extent that such deemed distribution exceeds the remaining tax basis of such holder’s Common Shares. Any distributions received by holders of our Common Shares during the course of our liquidation will be considered to be reductions of such holder’s tax basis in the Common Shares.

Based on current guidance provided by the Securities and Exchange Commission we anticipate that the liquidating trust will be required to file only annual reports containing unaudited financial statements on Form 10-K and current reports on Form 8-K with the Securities and Exchange Commission.

The dissolution process and the amount and timing of distributions involves 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 holders of Common Shares (or, to the extent applicable, holders of beneficial interests in the liquidating trust) or the timing of such payments. Accordingly, no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the Consolidated Statements of Net Assets. To date, liquidating distributions have been paid totaling $4.50 per Common Share.

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 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.

 

 

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The decision to adopt the plan of liquidation followed a lengthy process in which our Board of Trustees explored numerous alternatives including continuing under the then current business plan, a revised business plan, acquiring through merger or otherwise the assets of another real estate company, seeking to dispose of our 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 previous 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 our assets for values equal to or exceeding the low range of our estimate of net asset value or that the dispositions would occur in the time frame expected.

 

    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.

 

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    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 Activity

701 Seventh – capital contributions – During 2015 we made additional capital contributions of $8,865,000 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, 2015 to $115,489,000. We have committed to invest up to $125,000,000 in the aggregate in this venture. To the extent the venture requires additional capital once we have fully funded our required $125,000,000, we have the option to fund our pro rata share of such additional capital needs.

The indebtedness encumbering the asset held by the venture was modified to (i) provide for an additional one year extension option potentially extending the final maturity on the loan, if fully extended, to January 31, 2020 and (ii) permit up to $200,000,000 in 5.9% EB-5 financing (of which $106,000,000 has been funded as of December 31, 2015), with a corresponding reduction in the existing mezzanine loan borrowing, thereby resulting in interest savings to the venture.

Sullivan Center, Chicago, Illinois – capital contributions / contract for sale – We have committed to fund 100% of retail tenant improvements and capital expenditure needs and 80% of office tenant improvements and capital expenditure needs at the Sullivan Center property in Chicago, Illinois that are not met by current operating cash flow at the property. During 2015 we funded $3,998,000 for improvements, and to date in 2016 we funded an additional $2,794,000 for improvements. All amounts funded are considered additions to the mezzanine loan and accrue interest at the rate of 15% per annum.

On January 8, 2016 we entered into a contract with our Sullivan Center venture partner to sell our interest in WRT One South State Lender LP which holds the mezzanine loan on the property and our interest in WRT-Elad One South State Equity LP for an aggregate purchase price of approximately $91,576,000 subject to upward adjustment for additional advances on the mezzanine loan by us prior to closing plus accrued and unpaid interest. The additional $2,794,000 advanced on the mezzanine loan on January 15, 2016 will be added to the purchase price at closing. The buyer’s $3,000,000 deposit under the purchase contract is non-refundable. If consummated, the sale is expected to close by the end of the second quarter of 2016.

44 Monroe—property sale—On April 14, 2015 the venture in which we hold an 83.7% interest sold its apartment building located in Phoenix, Arizona for gross proceeds of $50,650,000. The entire net proceeds, after closing costs and pro-rations, of approximately $49,143,000 were used to pay down the loan collateralized by the remaining properties in the venture. The liquidation value of this property was $50,650,000 at December 31, 2014.

 

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Vintage Housing Holdingssale of interest—We invested an additional $5,645,000 in this venture in the first quarter of 2015. The capital contribution was used to acquire the limited partnership interest in two of the underlying partnerships. During the first half of 2015 we received distributions totaling $4,959,000 from the venture. On June 1, 2015 we sold our interest in the venture and received net proceeds of approximately $82,471,000. The liquidation value of this investment was $82,928,000 at December 31, 2014.

Cerritos, California – property sale—On September 16, 2015 we sold our office property located in Cerritos, California for gross proceeds of $30,500,000 and received net proceeds of $6,174,000 after satisfaction of the third party mortgage debt, closing costs and pro rations. The liquidation value of the property was $29,916,000 at December 31, 2014.

Highgrove, Stamford, Connecticut – contract for sale – On June 26, 2015 the venture in which we hold an 83.7% interest entered into a contract (the “First Purchase Agreement”) to sell its apartment building located in Stamford, Connecticut for gross proceeds of $90,000,000. An additional $1,000,000 non-refundable deposit was received from the buyer in November 2015 bringing the total aggregate non-refundable deposits received from the buyer to $5,000,000. On January 21, 2016 the First Purchase Agreement was terminated due to the prospective purchaser’s inability to timely close. In accordance with the terms of the First Purchase Agreement, the venture retained the $5,000,000 deposit.

On February 18, 2016 the venture entered into a purchase agreement (the “Second Purchase Agreement”) to sell this asset for gross proceeds of $87,500,000. The purchaser has provided a $10,000,000 non-refundable deposit. The closing is expected to occur, if at all, in the second quarter of 2016. In connection with entering into the Second Purchase Agreement, the venture entered into a settlement agreement with the purchaser under the First Purchase Agreement providing for the return of $1,000,000 of the previously retained deposit and an agreement to return up to an additional $1,500,000 of the previously retained deposit upon the closing or termination of the Second Purchase Agreement. As a result, assuming the consummation of the transaction contemplated by the Second Purchase Agreement, the venture will receive gross sales proceeds, inclusive of forfeited deposits, totaling $90,000,000.

Mentor Retail – tenant bankruptcy – On October 5, 2015 American Apparel filed for voluntary bankruptcy protection. American Apparel leases 100% of the property owned by the Mentor Retail LLC venture in which the Trust has a 50% equity interest and holds the first mortgage debt. On December 30, 2015 American Apparel filed with the bankruptcy court assuming the lease at the Mentor Retail property. The bankruptcy filing had no impact on the liquidation values of our equity investment in Mentor Retail or our Mentor Building loan receivable.

Edens Center and Norridge Commons – On October 9, 2015, in connection with the repayment in full of the loan receivable collateralized by the Edens Center and Norridge Commons properties discussed below, we sold our general partner interests in the two properties for an aggregate price of $493,000 pursuant to the terms of an existing option agreement. The sale price plus aggregate distributions received in 2015 was consistent with our liquidation value at December 31, 2014.

Lake Brandt, Greensboro, North Carolina – contract for sale—On January 20, 2016 we entered into a contract with an independent third party to sell our residential property known as Lake Brandt Apartments for gross proceeds of $20,000,000. The Buyer’s $500,000 deposit under the contract is non-refundable. If consummated, the sale is expected to close in the second quarter of 2016. The liquidation value was $20,000,000 at December 31, 2015 and $18,610,000 at December 31, 2014.

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, 2015 (in thousands).

 

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Name

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

Loans Receivable

                      

Rockwell (5)

   Mezzanine    Industrial    Shirley, NY    12.00%   $  —         $ 1,486         05/01/16       $ 16,194   

Churchill

   Whole loan    Mixed use    Churchill, PA    LIBOR + 3.75%     —           333         08/01/16         —     

Poipu Shopping Village

   B Note    Retail    Kauai, HI    6.618%     2,769         2,756         01/06/17         27,896   

Mentor Building

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

 

 

          
              $ 5,280            
             

 

 

          

Loan Securities

                      

WBCMT 2007 WHL8 (6)

   CMBS    Hotel    Various    LIBOR + 1.75%   $  —         $ 1,130         12/31/15       $ 51,000   
             

 

 

          
              $  —              
             

 

 

          

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.    

 

  (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, 2015.

 

  (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) The loan security is in maturity default. No recovery is expected based on underlying collateral value.

Loan Asset Repayment/Disposition Activity

Edens Center and Norridge Commons – loan pay down – On February 5, 2015 the Norridge, Illinois property, which was one of the two properties that collateralized this loan receivable, was sold, and we received a principal payment of $15,275,000 plus all accrued and unpaid interest due in connection with the sale. The outstanding principal balance on the loan receivable was $225,000 following the repayment. Additional payments on the loan were received reducing the outstanding principal balance to $97,000 at September 30, 2015. Upon satisfaction of the loan, we were entitled to a participation interest equal to 30% of the value of both of the properties which collateralized the loan in excess of $115,000,000. On October 9, 2015 we received $3,100,000 in full satisfaction of the loan receivable and the participation interest.

Concord Debt Holdings – During May 2015 we received a distribution of $20,173,000 from our Concord Debt Holdings LLC venture. The distribution was in connection with the sale of the luxury hotel assets owned by the MSREF hotel venture in which Concord Debt Holdings LLC held an interest.

CDH CDO LLC—On June 25, 2015 the venture closed on the sale of four bond assets and one loan asset for gross proceeds of $54,122,000. The proceeds of the sale were utilized to fully satisfy the debt of the venture and the CDO structure was collapsed. All remaining assets of CDH CDO LLC are held free of debt. Additionally, in June 2015 a loan asset held by the venture was repaid at par which was consistent with our liquidation value at December 31, 2014. On July 1, 2015 we received a $6,200,000 distribution from this venture. The liquidation value of this investment was reduced by $15,274,000 at December 31, 2015 as a result of a decrease in the estimated underlying collateral value of one of the remaining loan assets based on the tenant’s notice of non-renewal.

Employees

As of December 31, 2015 we had no employees. Our affairs are administered by our Advisor pursuant to the terms of an advisory agreement for five years effective January 1, 2013 which we refer to, as the same may be amended from time to time, as the “Advisory Agreement.”

 

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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 ($427,686,000 on December 31, 2015 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, 2016). 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, 2015 the threshold amount required to be distributed before any incentive fee would be payable to FUR Advisors was $427,686,000, which was equivalent to $11.94 per Common Share. At December 31, 2015, based on our estimate of liquidating distributions, it is estimated that the Advisor would be entitled to an incentive fee of $15,305,000 in connection with our liquidation. This amount has been accrued and is reflected in our net assets in liquidation at December 31, 2015.

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 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, based on current estimates, will be achieved at such time as additional liquidating distributions of approximately $9.01 per Common Share in excess of the Growth Factor have been paid. For example, if the Trust had been liquidated at January 1, 2016, the termination fee would only have been payable if additional liquidating distributions of approximately $9.01 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 additional liquidating distributions paid per Common Share equaled approximately $10.05. At December 31, 2015 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, 2015.

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 20 for additional information on the grants.

Competition

We currently compete with other properties located in markets in which our assets are located 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.

 

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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 22.

Additional Information

The following materials are available free of charge through our website at www.winthropreit.com as soon as reasonably practicable after they are electronically filed with or furnished to the SEC under the Securities Exchange Act of 1934, as amended:

 

    our Annual Reports on Form 10-K and all amendments thereto;

 

    our quarterly reports on Form 10-Q and all amendments thereto;

 

    our current reports on Form 8-K and all amendments thereto;

 

    other SEC filings;

 

    organizational documents;

 

    Audit Committee Charter;

 

    Compensation Committee Charter;

 

    Conflicts Committee Charter;

 

    Nominating and Corporate Governance Committee Charter;

 

    Code of Business Conduct and Ethics; and

 

    Corporate Governance Guidelines.

We will provide a copy of the foregoing materials without charge to anyone who makes a written request to our Investor Relations Department, c/o FUR Advisors, LLC, 7 Bulfinch Place, Suite 500, P.O. Box 9507, Boston, Massachusetts 02114.

We also intend to promptly disclose on our website any amendments that we make to, or waivers for our Trustees or executive officers that we grant from, the Code of Business Conduct and Ethics.

New York Stock Exchange Certification

As required by applicable New York Stock Exchange listing rules, on July 1, 2015, following our 2015 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, 2015 was $516,396,000, or $14.18 per Common Share. This estimation is based on a number of estimates and assumptions including asset hold periods, expected revenues and expenses and other factors not within our control such as capitalization rates and market conditions. As a result, one or more of 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.

 

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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 liquidation values. 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 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.

We may be unable to sell certain of our assets.

Certain of our assets are subject to agreements that require the consent of our venture partner or ground lessor for the sale of the underlying asset or our interest in certain ventures. If we are unable to obtain the required consent we may have difficulty in timely selling such asset or, in the case of a venture, 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 a 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 our properties could include:

 

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    liabilities for clean-up of pre-existing disclosed or undisclosed environmental contamination; and

 

    claims by tenants, vendors or other persons arising on account of actions or omissions of the former owners of the properties.

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 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, 2015, 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 2% of the aggregate annual base rent from our operating properties for 2015, representing approximately 2% of the net rentable square feet at the properties, are scheduled to expire in 2016. 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 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. 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.

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.

Interest rate fluctuations may reduce our investment return.

Certain of our loan obligations have floating interest rates. In such cases, an increase in interest rates would increase our loan obligations. 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.

 

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Our 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 nature of our B Notes is subject to risks relating to the structure and terms of the transactions, and there may not be sufficient funds or assets to satisfy the B Notes, which may result in losses to us.

We currently hold B Notes which are subordinate in payment to the more senior A Notes with respect to the loan. If a borrower defaults or declares bankruptcy, the amounts due on the A Notes are required to be satisfied in full prior to our receiving any amounts on account of our B Notes. Accordingly, there may not be sufficient funds remaining to satisfy our B Notes. Furthermore, the co-lender agreements limit our ability to amend the loan documents, assign the loan, accept prepayments, exercise remedies and control decisions made in bankruptcy proceedings relating to the borrower.

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, 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 operating properties, venture interests 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.

 

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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.

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 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.

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 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.

We do not expect we will have 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 holder’s 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 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.

 

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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 if we so choose and make protective acquisitions or advances with respect to our existing assets including providing seller financing to purchasers of our assets if we deem it prudent to facilitate the sale of such asset. 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.

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.

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.

 

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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, 2015, the threshold amount required to be distributed before any incentive fee would be payable to FUR Advisors was approximately $427,686,000 which was equivalent to $11.94 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 $322,706,000 which was equivalent to $9.01 for each of our Common Shares on a fully diluted basis. In accordance with liquidation accounting, we have recorded a liability in our financial statements equal to the estimated incentive fee and termination fee that would be payable to FUR Advisors based on the estimated cash available to be distributed over the liquidation period. In determining our estimated net assets in liquidation we have taken into account the termination fee and incentive fee.

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 have the ability to realize any value from these interests except from distributions made by the liquidating trust, the timing of 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 reports on Form 10-K and current reports on Form 8-K 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 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, 2015. Our portfolio of consolidated properties consists of seven commercial properties consisting of 1,366,000 square feet and three residential apartment complexes consisting of 773 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

                     

Chicago, IL (One East Erie)

    2005        100     126,000        81   River North
Surgery
(2023)
    15,000        22,046        175      Fee     19,104      03/2016
5.75%

Lisle, IL

    2006        100     169,000        82   United
Healthcare
(2015)
    21,000        11,544        68      Fee     5,459      10/2016
Libor+2.5%
          Primera
Engineers
(2017/2020)
    31,000             

Lisle, IL (Marc Realty)

    2006        60     54,000        100   Ryerson
(2018/2023)
    54,000        3,582        66      Fee     5,309      03/2017
5.55%

Orlando, FL

    2004        100     257,000        100   Siemens Real
Estate, Inc.
(2017/2042)
    257,000        13,094        51      Ground
Lease
    35,668      07/2017
6.40%

Plantation, FL

    2004        100     120,000        100   AT&T
Service, Inc.
(2020/2035)
    120,000        10,766        90      Fee     10,406      04/2018
6.48%
                     
     

 

 

         

 

 

       

 

 

   

Subtotal - Office

        726,000            $ 61,032          $ 75,946     
     

 

 

         

 

 

       

 

 

   

Other

                     

Warehouse

                     

Jacksonville, FL

    2004        100     588,000        100   Fanatics

(2018/2024)

    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     4,782      08/2024

3.50%

     

 

 

         

 

 

       

 

 

   

Subtotal - Other

        640,000            $ 17,160          $ 4,782     
     

 

 

         

 

 

       

 

 

   

Residential

                     

Houston, TX

    2013        84     396 units        92   n/a     n/a        104,150        263,000      Fee     44,319      10/2016
LIBOR

+
2.0% (3)

Stamford, CT (4)

    2013        84     93 units        89   n/a     n/a        77,850        846,000      Fee     33,448      10/2016
LIBOR

+
2.0% (3)

Greensboro, NC (4)

    2012        100     284 units        95   n/a     n/a        17,443        61,000      Fee     13,600      08/2016

6.22%

     

 

 

         

 

 

       

 

 

   

Subtotal - Residential

  

      773        units          $ 199,443          $ 91,367     
     

 

 

         

 

 

       

 

 

   

Total Consolidated Properties

  

    1,366,000            $ 277,635          $ 172,095     
     

 

 

         

 

 

       

 

 

   

 

(**) Occupancy rates include all signed leases, including space undergoing tenant improvements.
(1) Assets are no longer depreciated under liquidation accounting. Depreciated costs basis represents initial cost, plus improvements through December 31, 2015, less depreciation through July 31, 2014.
(2) The one month LIBOR rate at December 31, 2015 was 0.4295%.
(3) These properties are cross-collateralized. Proceeds from property sales go 100% to repay the mortgage loan.
(4) Property currently under contract for sale.

 

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UNCONSOLIDATED OPERATING PROPERTIES

The following table sets forth a schedule of unconsolidated operating properties at December 31, 2015. These properties consist of five commercial properties consisting of 1,132,000 square feet and one residential apartment complex consisting of 184 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)

WRT-Highline LLC—Equity Investment

  

                 

New York, NY (450 West 14th)

     2011         (3     104,000         87   Alice & Olivia
(2021/2031)
    27,000       Ground Lease    $ 50,653       05/2016
LIBOR+2.5%
       

 

 

              

 

 

    
             Fast Retailing

(2026/2036)

    23,000            
             Access Industries

(2021/2031)

    14,000            

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 (4)

  

               

One South State Street Chicago, IL (Sullivan Center)

     2012         38     946,000         96   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         (5    
 
Under
Development
  
  
     (6)     —         Fee    $ 494,273       1/2018

LIBOR + 8.0%

(7)

       

 

 

              

 

 

    

Atrium Mall LLC—Equity Investment

  

                 

Chicago, IL

     2013         50     75,000         88   No tenants over 10%     —         Ground

Lease

   $  —         N/A
       

 

 

              

 

 

    

Summit Pointe Apartment LLC—Equity Investment

  

               

Oklahoma City, OK

     2013         80     184 units         91   n/a     n/a       Fee    $ 8,943       02/2021

5.70%

       

 

 

              

 

 

    

 

(**) Occupancy rates include all signed leases including space undergoing tenant improvements
(1) Debt balance shown represents the property level debt encumbering the properties.
(2) The one month LIBOR rate at December 31, 2015 was 0.4295%.
(3) We hold a preferred equity interest. At December 31, 2015 our effective ownership was 83.6%.
(4) This investment is currently under contract for sale.
(5) We hold an 81% interest in this venture which provides us with a 61.14% effective ownership interest in the underlying property.
(6) There are no major tenants as the property is currently in development.
(7) There is a LIBOR floor of 1%.

 

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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, 2015 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, 2015 and does not reflect any straight-line rent adjustments or expense reimbursements. The average annualized revenue per square foot as of December 31, 2015 was $20.24 for consolidated multi-tenant operating properties and $7.65 for consolidated single tenant operating properties. Annualized revenue represents contractual base rent for the year ended December 31, 2015.

 

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

Year of Lease Expirations

   Expiring Leases      Expiring Leases      Expiring Leases (%)     Expiring Leases ($)      Leases ($)  

Consolidated Multi Tenant

             

Operating Properties:

             

2016

     6         21,000         9   $ 367,000       $ 17.48   

2017

     5         47,000         20     680,000         14.47   

2018

     10         54,000         23     1,112,000         20.59   

2019

     6         30,000         13     987,000         32.90   

2020

     3         5,000         2     93,000         18.60   

2021

     2         16,000         7     215,000         13.44   

2022

     4         21,000         9     496,000         23.62   

2023

     3         24,000         10     700,000         29.17   

2024

     2         14,000         6     32,000         2.29   

2025

     —           —           —          —           —     

2026 and thereafter

     2         3,000         1     75,000         25.00   
        

 

 

      
           100     
        

 

 

      

Consolidated Single Tenant

             

Operating Properties:

             

2016

     1         27,000         3     128,000         4.74   

2017

     1         257,000         24     3,745,000         14.57   

2018

     2         615,000         57     2,030,000         3.30   

2019

     —           —           —          —           —     

2020

     1         120,000         11     1,490,000         12.42   

2021

     —           —           —          —           —     

2022

     —           —           —          —           —     

2023

     —           —           —          —           —     

2024

     1         52,000         5     802,000         15.42   

2025

     —           —           —          —           —     

2026 and thereafter

     —           —           —          —           —     
        

 

 

      
           100     
        

 

 

      

Unconsolidated

             

Operating Properties:

             

2016

     5         24,000         2     879,000         36.51   

2017

     5         8,000         1     319,000         39.65   

2018

     5         10,000         1     360,000         34.36   

2019

     4         248,000         24     6,316,000         25.44   

2020

     8         171,000         16     4,179,000         24.39   

2021

     7         67,000         6     4,590,000         68.54   

2022

     8         193,000         18     5,313,000         27.58   

2023

     3         8,000         1     662,000         78.25   

2024

     5         8,000         1     217,000         25.62   

2025

     7         87,000         8     298,000         3.45   

2026 and thereafter

     4         236,000         22     7,838,000         33.26   
        

 

 

      
           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, 2015.

 

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)
 

Fanatics, Inc.

   Jacksonville, FL      31         561,000         43.0     7.3

Siemens Real Estate, Inc.

   Orlando, FL      24         257,000         19.7     24.7

AT&T Services, Inc.

   Plantation, FL      51         120,000         9.2     9.9

Ryerson, Inc.

   Lisle, IL      28         54,000         4.1     6.1

Westinghouse Electric Co., LLC

   Churchill, PA      105         52,000         4.0     5.3

 

(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 $130,370/month plus increases of 3% per annum each June as well as $100,000 increases per annum on November 1, 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 effect on the consolidated financial position, results of operations or cash flows of the Trust. As of December 31, 2015, 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, 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   

Year Ended December 31, 2015:

     

First Quarter

   $ 16.50       $ 15.60   

Second Quarter

     17.26         14.75   

Third Quarter

     15.21         14.02   

Fourth Quarter

     14.75         12.95   

Holders

As of December 31, 2015 there were 552 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. Prior to the adoption of the plan of liquidation, we were required to pay quarterly dividends of $0.578125 per Series D Preferred Share, which were paid for each of the first and second quarters of 2014. In addition, during the first and second quarters of 2014, we declared dividends of $0.1625 per Common Share.

Upon 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. On September 15, 2014 we satisfied the liquidation preference on our Series D Preferred Shares by payment of the $25.00 liquidating preference plus accrued and unpaid dividends to, but excluding, the date of payment. Accordingly, we are no longer restricted by the terms of the Series D Preferred Shares from paying dividends on our Common Shares.

In the second quarter of 2015 we declared a liquidating distribution of $1.25 per Common Share. In the fourth quarter of 2015 we declared a liquidating distribution of $1.00 per Common Share. In the fourth quarter of 2014 we declared a liquidating distribution of $2.25 per Common Share. Since the adoption of the plan of liquidation, we have made liquidating distributions totaling $4.50 per Common Share.

The actual amount and timing of, and record date for, future liquidating distributions 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 liquidating distributions on the Common Shares will be deemed a return of capital until the applicable holder has received liquidating distributions 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.

 

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Table of Contents

We do not believe that the financial covenants contained in our loan agreements will have any adverse impact on our ability to pay liquidating distributions on our Common Shares 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.

 

     Liquidation Basis  
Statement of Net Assets    December 31,      December 31,  
(in thousands, except per share data)    2015      2014  

Total assets

   $ 745,629       $ 1,136,261   

Mortgage loans payable

     172,095         296,954   

Senior notes payable

     —           71,265   

Liability for non-controlling interests

     17,796         46,564   

Liability for estimated costs in excess of estimated receipts

     29,297         31,253   

Dividends payable

     1,822         82,353   

Net assets in liquidation (1)

     516,396         594,704   

Net assets in liquidation value per Common Share (1)

     14.18         16.33   

 

(1) The net assets in liquidation as of December 31, 2015 and 2014 of $516,396 and $594,704, respectively, plus the cumulative liquidating distributions to our holders of Common Shares through December 31, 2015 and 2014 of $163,913 ($4.50 per common share) and $81,959 ($2.25 per common share), respectively, would result in cumulative liquidating distributions to holders of Common Shares of $18.68 and $18.58 per Common Share as of December 31, 2015 and 2014, respectively.

 

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Table of Contents
     Going Concern Basis  
     Seven Months                       
Operating Results    Ended      Years Ended December 31,  
(in thousands, except per share data)    July 31, 2014      2013      2012      2011  

Revenue

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

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations (1)

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

Income (loss) from discontinued operations (2)

     11,235         8,772         985         (508
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Winthrop Realty Trust

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

Preferred dividends

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

Amount allocated to Restricted Common Shares

     (192      (307      —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Common Shares

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

 

 

    

 

 

    

 

 

    

 

 

 

Per Common Share

           

Income (loss) from continuing operations, basic

     (0.15    $ 0.25       $ 0.43       $ 0.34   

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

     0.31         0.26         0.03         (0.02
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Common Shares, basic

   $ 0.16       $ 0.51       $ 0.46       $ 0.32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations, diluted

   $ (0.15    $ 0.25       $ 0.43       $ 0.34   

Income (loss) from discontinued operations, diluted

     0.31         0.26         0.03         (0.02
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Common Shares, diluted

   $ 0.16       $ 0.51       $ 0.46       $ 0.32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends declared per Common Share

   $ 0.325       $ 0.65       $ 0.65       $ 0.65   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Going Concern Basis  
Balance Sheet Data:    As of December 31,  
(in thousands)    2013      2012      2011  

Total Assets

   $ 1,132,324       $ 923,163       $ 733,933   
  

 

 

    

 

 

    

 

 

 

Total Debt

   $ 562,075       $ 421,422       $ 300,090   
  

 

 

    

 

 

    

 

 

 

Series D Cumulative Redeemable Preferred Shares

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

 

 

    

 

 

    

 

 

 

Total Shareholders’ Equity

   $ 480,874       $ 454,510       $ 387,802   
  

 

 

    

 

 

    

 

 

 

Dividends payable

   $ 6,099       $ 5,366       $ 5,369   
  

 

 

    

 

 

    

 

 

 

 

(1) Income from continuing operations, including per share data, are net of non-controlling interests.
(2) The results of the Lafayette, Louisiana; Knoxville, Tennessee and St. Louis, Missouri properties were classified as discontinued operations for 2011. The results of the Indianapolis, Indiana and Memphis, Tennessee properties were classified as discontinued operations for 2011 and 2012. The results of the Andover, Massachusetts; Denton, Texas and Seabrook, Texas properties were classified as discontinued operation for 2011 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 2011 through 2014.

 

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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 including providing seller financing to purchasers of our assets if we deem it prudent to facilitate the sale of such asset. 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. 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 holders of Common Shares. We will continue to actively manage our remaining assets throughout the liquidation process.

In order to comply with applicable tax laws, any of our assets not sold by August 5, 2016 will be distributed into a liquidating trust. If we transfer our assets to a liquidating trust, holders of our Common Shares will receive beneficial interests in the liquidating trust equivalent to those held in the Trust. Holders of our Common Shares should note that unlike our Common Shares, which are freely transferable, beneficial interests in the liquidating trust will generally not be transferable except by will, intestate succession or operation of law. Therefore, the recipients of the interests in the liquidating trust will not have the ability to realize any value from these interests except from distributions made by the liquidating trust, the timing of 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 reports containing unaudited financial statements on Form 10-K and current reports on Form 8-K with the Securities and Exchange Commission.

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 holders of Common Shares or the timing of such payments. To date, liquidating distributions totaling $4.50 per Common Share have been paid.

 

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During 2015 we (i) sold two operating properties for aggregate gross proceeds of $81,150,000 and interests in three equity investments for aggregate proceeds of $82,964,000; (ii) received $18,500,000 in loan repayments inclusive of participation interests; (iii) received $26,373,000 in distributions from equity investments as a result of loan sales and loan repayments; and (iv) invested $18,638,000 in existing operating property and loan assets. Investments in existing assets was primarily funding of previous commitments such as the $8,865,000 of additional capital contributions to our 701 Seventh Avenue venture and the $3,998,000 of contributions to our WRT One South State Lender venture or to strengthen our position in ventures as demonstrated by our additional $5,645,000 investment in Vintage Housing Holdings prior to the sale of our interest.

At December 31, 2015 we held 10 consolidated operating properties, 10 equity investments, four loans receivable, one secured financing receivable and one loan security.

Investment Activity

701 Seventh – capital contributions – During 2015 we made additional capital contributions of $8,865,000 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, 2015 to $115,489,000. We have committed to invest up to $125,000,000 in the aggregate in this venture.

The indebtedness encumbering the asset held by the venture was modified to (i) provide for an additional one year extension option potentially extending the final maturity on the loan, if fully extended, to January 31, 2020 and (ii) permit up to $200,000,000 in 5.9% EB-5 financing (of which $106,000,000 has been funded as of December 31, 2015), with a corresponding reduction in the existing mezzanine loan borrowing, thereby resulting in interest savings to the venture.

Sullivan Center, Chicago, Illinois – capital contributions – We have committed to fund 100% of retail tenant improvements and capital expenditure needs and 80% of office tenant improvements and capital expenditure needs at the Sullivan Center property in Chicago, Illinois that are not met by current operating cash flow at the property. During 2015 we funded $3,998,000 for improvements, and to date in 2016 we funded an additional $2,794,000 for improvements. All amounts funded are considered additions to the mezzanine loan and accrue interest at the rate of 15% per annum.

Disposition/Repayment Activity

44 Monroe—property sale—On April 14, 2015 the venture in which we hold an 83.7% interest sold its apartment building located in Phoenix, Arizona for gross proceeds of $50,650,000. The entire net proceeds, after closing costs and pro-rations, of approximately $49,143,000 were used to pay down the loan collateralized by the remaining properties in the venture. The liquidation value of this property was $50,650,000 at December 31, 2014.

Vintage Housing Holdingssale of interest—We invested an additional $5,645,000 in this venture in the first quarter of 2015. The capital contribution was used to acquire the limited partnership interest in two of the underlying partnerships. During the first half of 2015 we received distributions totaling $4,959,000 from the venture. On June 1, 2015 we sold our interest in the venture and received net proceeds of approximately $82,471,000. The liquidation value of this investment was $82,928,000 at December 31, 2014.

Cerritos, California – property sale—On September 16, 2015 we sold our office property located in Cerritos, California for gross proceeds of $30,500,000 and received net proceeds of $6,174,000 after satisfaction of the third party mortgage debt, closing costs and pro rations. The liquidation value of the property was $29,916,000 at December 31, 2014.

Highgrove, Stamford, Connecticut – contract for sale – On June 26, 2015 the venture in which we hold an 83.7% interest entered into a contract (the “First Purchase Agreement”) to sell its apartment building located in Stamford, Connecticut for gross proceeds of $90,000,000. An additional $1,000,000 non-refundable deposit was received from the buyer in November 2015 bringing the total aggregate non-refundable deposits received from the buyer to $5,000,000. On January 21, 2016 the First Purchase Agreement was terminated due to the prospective purchaser’s inability to timely close. In accordance with the terms of the First Purchase Agreement, the venture retained the $5,000,000 deposit.

On February 18, 2016 the venture entered into a purchase agreement (the “Second Purchase Agreement”) to sell this asset for gross proceeds of $87,500,000. The purchaser has provided a $10,000,000 non-refundable deposit. The closing is expected to occur, if at all, in the second quarter of 2016. In connection with entering into the Second Purchase Agreement, the venture entered into a settlement agreement with the purchaser under the First Purchase Agreement providing for the return of $1,000,000 of the previously retained deposit and an agreement to return up to an additional $1,500,000 of the previously retained deposit upon the closing or termination of the Second Purchase Agreement. As a result, assuming the consummation of the transaction contemplated by the Second Purchase Agreement, the venture will receive gross sales proceeds, inclusive of forfeited deposits, totaling $90,000,000.

 

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Edens Center and Norridge Commons – loan payoff / sale of interest – On February 5, 2015 the Norridge, Illinois property was sold, and we received a principal payment of $15,275,000 in connection with the sale. The outstanding principal balance on the loan receivable was $225,000 following the repayment. Additional payments on the loan were received reducing the outstanding principal balance to $97,000 at September 30, 2015. Upon satisfaction of the loan, we were entitled to a participation interest equal to 30% of the value of both of the properties which collateralized the loan in excess of $115,000,000. On October 9, 2015 we received $3,100,000 in full satisfaction of the loan receivable and participation interest.

In connection with the repayment in full of the Edens Center and Norridge Commons loan receivable, we sold our general partner interest in the two properties for an aggregate price of $493,000.

Concord Debt Holdings – During May 2015 we received a distribution of $20,173,000 from our Concord Debt Holdings LLC venture. The distribution was in connection with the sale of the luxury hotel assets owned by the MSREF hotel venture in which Concord Debt Holdings LLC held an interest.

CDH CDO LLC—On June 25, 2015 the venture closed on the sale of four bond assets and one loan asset for gross proceeds of $54,122,000. The proceeds of the sale were utilized to fully satisfy the debt of the venture. Additionally, in June 2015 a loan asset held by the venture was repaid at par which was consistent with our liquidation value. On July 1, 2015 we received a $6,200,000 distribution from this venture.

Sullivan Center, Chicago, Illinois – contract for sale – On January 8, 2016 we entered into a contract with our Sullivan Center venture partner to sell our interest in WRT One South State Lender LP which holds the mezzanine loan on the property and our interest in WRT-Elad One South State Equity LP for an aggregate purchase price of approximately $91,576,000 subject to upward adjustment for additional advances on the mezzanine loan by us prior to closing plus accrued and unpaid interest. The buyer’s $3,000,000 deposit under the purchase contract is non-refundable. If consummated, the sale is expected to close by the end of the second quarter of 2016.

Lake Brandt, Greensboro, North Carolina – contract for sale—On January 20, 2016 we entered into a contract with an independent third party to sell our residential property known as Lake Brandt Apartments for gross proceeds of $20,000,000. The Buyer’s $500,000 deposit under the contract is non-refundable. If consummated, the sale is expected to close in the second quarter of 2016. The liquidation value was $20,000,000 at December 31, 2015 and $18,610,000 at December 31, 2014.

Consolidated Operating Properties

As of December 31, 2015 our consolidated properties were approximately 96% leased compared to approximately 96% leased at December 31, 2014 (as adjusted for properties sold during 2015). At December 31, 2015 we had one tenant, Siemens Real Estate, which represented approximately 24.7% of our annualized base rental revenue and 7.9% of total revenue.

Liquidity and Capital Resources

At December 31, 2015, we held $21,128,000 in unrestricted cash and cash equivalents. Our total assets and net assets in liquidation were $745,629,000 and $516,396,000, respectively at December 31, 2015. 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 assets; and

 

    cash distributions from joint ventures.

 

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Debt Maturities

At December 31, 2015, our statement of net assets contains mortgage loans payable of $172,095,000. We have $115,930,000 of mortgage debt maturing in 2016, $40,977,000 maturing in 2017 and $10,406,000 maturing in 2018 with the remainder maturing in 2019 or later. We redeemed our Senior Notes in full effective August 15, 2015. The aggregate redemption price paid was $72,635,000 (or $25.484375 per $25.00 face amount Senior Note) which represented the face amount of the Senior Notes not owned by us plus accrued and unpaid interest to, but not including, 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.

Net Loss Carry Forwards

At December 31, 2014, we had a net operating loss carry forward of approximately $9,077,000 which expires between 2023 and 2033. We do not anticipate having to utilize any of the net operating loss carry forward to offset 2015 taxable income as a result of the dividends paid deduction. Any unused net operating loss carry forwards will not be transferrable to the liquidating trust.

Cash Flows

Our liquidity based upon cash and cash equivalents decreased by approximately $106,455,000 from $127,583,000 at December 31, 2014 to $21,128,000 at December 31, 2015.

The holders of Common Shares 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 in 2015, and in accordance with the plan of liquidation, no further acquisitions are expected.

Our primary sources of non-operating cash flow for the year ended December 31, 2015 include:

 

    $83,886,000 in sale proceeds and return of capital distributions from our Vintage Housing Holdings equity investment;

 

    $21,570,000 in distributions from our Concord Debt Holdings equity investment from the payoff of underlying loan assets;

 

    $18,500,000 in principal repayments on our Edens Center and Norridge Commons loan receivable, including $3,000,000 in payment of our participation interest;

 

    $6,200,000 in distributions from our CDH CDO equity investment from the sale and payoff of underlying loan assets; and

 

    $6,174,000 in net proceeds from the sale of our Cerritos, California property after satisfaction of third party mortgage debt, closing costs and pro rations.

Our primary non-operating uses of cash flow for the year ended December 31, 2015 include:

 

    $163,915,000 for payment of liquidating distributions to our holders of Common Shares;

 

    $71,255,000 for redemption in full of our Senior Notes;

 

    $8,865,000 for additional contributions to our 701 Seventh Avenue equity investment;

 

    $5,645,000 for additional contributions to our Vintage Housing Holdings equity investment; and

 

    $3,998,000 for additional contributions to our WRT One South State Lender equity investment.

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;

 

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    $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.

Future Cash Commitments

Future Funding Requirements

We have future funding requirements relating to our 701 Seventh Avenue investment which total approximately $9,511,000 at December 31, 2015 with the option to fund our pro-rata share of additional capital calls in excess of our $125,000,000 commitment if we believe the additional investment would be accretive to the holders of our Common Shares.

We, through our investment in WRT One South State Lender LP, have future funding commitments related to tenant improvements and capital expenditure needs at the property located at One South State Street, Chicago, Illinois. We have committed to fund 100% of retail tenant improvement and capital expenditure needs and 80% of office tenant improvement and capital expenditure needs that are not met by current operating cash flow of the property. During the fourth quarter of 2015 we funded $3,998,000 for tenant improvements. During the first quarter of 2016 we funded an additional $2,794,000 for tenant improvements. We do not anticipate funding any additional amounts in connection with this commitment. Any amounts funded pursuant to this commitment will be considered additions to the mezzanine loan and will accrue interest at the rate of 15% per annum.

Common and Preferred Share Dividends

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. 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 our Series D Preferred Shares from paying dividends on our Common Shares. The actual amount and timing of, and record dates for, future liquidating distributions 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 liquidating distributions on the Common Shares will be deemed a return of capital until the applicable holder has received liquidating distributions totaling its cost basis.

A liquidating distribution of $2.25 per Common Share was paid on January 15, 2015 to holders of Common Shares of record on January 5, 2015. A liquidating distribution of $1.25 per Common Share was paid on June 16, 2015 to holders of Common Shares of record on June 9, 2015. A liquidating distribution of $1.00 per Common Share was paid on December 3, 2015 to holders of Common Shares of record on November 25, 2015.

 

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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, 2015 (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)

   $ 181,668       $ 123,220       $ 53,322       $ 616       $ 4,510   

Ground lease obligations (2)

     120,912         2,032         4,326         4,623         109,931   

Advisors’ fee (3)

     11,419         5,710         5,709         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 313,999       $ 130,962       $ 63,357       $ 5,239       $ 114,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Does not reflect financing activity subsequent to December 31, 2015.
(2) This obligation relates to the ground leases at our venture property located at 450 West 14th Street, New York, New York which expires May 31, 2053 and our Atrium Mall venture property located in Chicago, Illinois which expires September 30, 2034. 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, 2016, with no effect given to any liquidating distributions made, or equity that may be repurchased, after December 31, 2015. 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.

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.

Results of Operations

In light of the adoption of liquidation basis accounting as of August 1, 2014, the results of operations for the current year period are 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.

 

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Changes in Net Assets in Liquidation

Year Ended December 31, 2015

Net assets in liquidation decreased by $78,308,000 during the year ended December 31, 2015. The decrease in net assets in liquidation was the result of $81,956,000 of liquidating distributions to holders of our Common Shares partially offset by a $3,648,000 net increase in liquidation values. The primary reasons for the increase in liquidation values were as follows:

 

    A $29,062,000 increase in the liquidation value of our 701 Seventh Avenue equity investment due to an increase in expected retail rents at the property;

 

    a $5,000,000 increase in the liquidation value of our Stamford, Connecticut residential property based on the forfeited purchase deposit, plus a $1,478,000 increase in estimated receipts at the property due to a change in the anticipated holding period of the property, partially offset by a corresponding $1,105,000 increase in the liability for non-controlling interest in this property;

 

    a $3,975,000 increase in the liquidation value of our Chicago, Illinois (One East Erie) property based on marketing efforts. The anticipated holding period for the property has been extended until the mortgage loan can be pre-paid without penalty. The extended hold period results in a $1,956,000 increase in estimated receipts at the property;

 

    a $3,642,000 increase in estimated receipts from our Jacksonville, Florida property due to a longer anticipated holding period of the property;

 

    a $3,340,000 increase in the liquidation value of our WRT-Elad One South State Equity investment due to new lease signings at the property and the contract for sale;

 

    a $1,390,000 increase in the liquidation value of our Greensboro, North Carolina residential property based on the contract for sale;

 

    a $1,251,000 increase in estimated distributions from our Concord Debt Holdings equity investment primarily as a result of the sale of the MSREF hotel assets;

 

    a $584,000 increase in the liquidation value of our Cerritos, California office property based on the contract for sale, partially offset by a $302,000 decrease in estimated receipts due to flood damage that occurred prior to the sale of the property; and

 

    a $344,000 increase in estimated future distributions from our Atrium Mall equity investment due to a change in the estimated holding period of the investment.

Primarily offset by:

 

    a $15,494,000 decrease in the liquidation value of our Houston, Texas residential property due to unfavorable changes in the Houston real estate market plus a $155,000 net decrease in estimated receipts and closing costs due to a change in the anticipated holding period of the property, partially offset by a $2,551,000 corresponding decrease in the liability for non-controlling interest in this property;

 

    a $12,226,000 decrease in the liquidation value of our WRT One South State Lender equity investment due to the contract for sale and a shorter than anticipated holding period;

 

    a $15,274,000 decrease in the liquidation value of our CDH CDO equity investment as a result of a decrease in the estimated underlying collateral value of one of the loan assets held by the venture partially offset by a $3,601,000 increase in estimated future receipts based on the collection of an old receivable and an extension of one of the loan assets;

 

    a $3,544,000 net decrease in the liquidation value of our 450 West 14th Street equity investment as a result of a change in exit strategy of the investment resulting in the deconsolidation of the property and lower expected proceeds on disposition;

 

    a $1,422,000 decrease in estimated receipts at our Churchill, Pennsylvania property due to a shorter anticipated holding period of the property;

 

    a $1,260,000 increase in the estimated fees payable to our advisor over the duration of the liquidation;

 

    a $1,143,000 decrease in receipts from our Vintage Housing Holdings equity investment due to a shorter holding period and increased costs associated with the sale; and

 

    a $1,134,000 decrease in estimated receipts at our 550 Corporetum property located in Lisle, Illinois due to increased leasing costs and tenant improvements, partially offset by a $1,049,000 increase in the liquidation value as a result of new tenant leases;

 

    a $918,000 decrease in the liquidation value of our loan securities resulting from reduced net operating income and a lower appraisal of the underlying collateral.

 

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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;

 

    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, demolition of the existing structure is complete, the foundation is substantially complete 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.

Off-Balance Sheet Investments

We have seven off-balance sheet investments in operating properties totaling $311,358,000 and three off-balance sheet investments in loan assets totaling $16,380,000 at December 31, 2015. Our exposure to loss is limited to our investment balance. See Item 8 – Financial Statements and Supplementary Data, Note 9 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. 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.

 

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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 Statements of Net Assets.

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.

 

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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.

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 applicable to liquidation accounting.

 

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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.

The table below presents information about the Trust’s derivative financial instruments at December 31, 2015 (in thousands):

 

Type

   Maturity    Strike Rate     Notional
Amount of
Hedge
     Cost of Hedge  

Swap

   October 2016      0.69     77,767         —     

Cap

   November 2017      4.00     50,000         165   

Cap

   November 2018      5.00     50,000         220   

 

(1) See Item 8 – Financial Statements and Supplementary Data, Note 12 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 $172,222,000 and $297,376,000 at December 31, 2015 and December 31, 2014, respectively. The fair value of our Senior Notes outstanding, based on quoted market prices, was $73,859,000 at December 31, 2014.

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, 2015 taking into consideration the effect of our derivative financial instruments (in thousands):

 

     Change in LIBOR (2)  
     -0.43%      1%      2%      3%  

Change in consolidated interest expense

   $ (23    $ 54       $ 109       $ 164   

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

     —           196         652         1,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

(Increase) decrease in net income

   $ (23    $ 250       $ 761       $ 1,271   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents our pro-rata share of a change in interest expense in our 701 Seventh Avenue and 450 West 14th Street equity investments.
(2) The one month LIBOR rate at December 31, 2015 was 0.4295%.

 

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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, 2015 (in thousands):

 

     Change in LIBOR (1)  
     -0.43%     1%      2%      3%  

Change in consolidated interest income

   $ (1   $ 3       $ 7       $ 10   

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

     —          —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Increase (decrease) in net income

   $ (1   $ 3       $ 7       $ 10   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) The one month LIBOR rate at December 31, 2015 was 0.4295%.

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

     42   

Consolidated Statements of Net Assets (Liquidation Basis) as of December 31, 2015 and 2014

     43   

Consolidated Statements of Changes in Net Assets (Liquidation Basis) for the year ended December 31, 2015 and for the Five Months Ended December 31, 2014

     44   

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

     45   

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

     46   

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

     47   

Notes to Consolidated Financial Statements

     49   

 

 

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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 accompanying consolidated statements of net assets (liquidation basis) as of December 31, 2015 and 2014, the related consolidated statements of changes in net assets (liquidation basis) for the year ended December 31, 2015 and for the five months ended December 31, 2014 and the consolidated statements of operations and comprehensive income (going concern basis), of equity (going concern basis), and of cash flows (going concern basis) for the seven months ended July 31, 2014 and for the year ended December 31, 2013 present fairly, in all material respects, the net assets in liquidation of Winthrop Realty Trust and its subsidiaries at December 31, 2015 and 2014, the changes in their net assets in liquidation for the year ended December 31, 2015 and for the five months ended December 31, 2014, and the results of their operations and their cash flows for the seven months ended July 31, 2014 and for the year ended December 31, 2013 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 index appearing under Item 15(a)(2) 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 Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Trust’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 Trust’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.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 2, 2016

 

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WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF NET ASSETS

(Liquidation Basis)

(in thousands)

 

     December 31,      December 31,  
     2015      2014  

ASSETS

     

Investments in real estate

   $ 353,862       $ 557,325   

Equity investments

     327,738         389,921   

Cash and cash equivalents

     21,128         127,583   

Restricted cash held in escrows

     6,603         5,831   

Loans receivable

     5,280         24,005   

Secured financing receivable

     28,928         29,210   

Accounts receivable

     2,090         1,468   

Loan securities

     —           918   
  

 

 

    

 

 

 

TOTAL ASSETS

     745,629         1,136,261   

LIABILITIES

     

Mortgage loans payable

     172,095         296,954   

Senior notes payable

     —           71,265   

Liability for non-controlling interests

     17,796         46,564   

Liability for estimated costs in excess of estimated receipts during liquidation

     29,297         31,253   

Dividends payable

     1,822         82,353   

Accounts payable, accrued liabilities and other liabilities

     6,382         10,794   

Related party fees payable

     1,841         2,374   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     229,233         541,557   
  

 

 

    

 

 

 

COMMITMENTS AND CONTINGENCIES (Note 18)

     

Net assets in liquidation

   $ 516,396       $ 594,704   
  

 

 

    

 

 

 

See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(Liquidation Basis)

(in thousands)

 

     Year Ended     Five Months Ended  
     December 31, 2015     December 31, 2014  

Net assets in liquidation, beginning of period

   $ 594,704      $ 786,915   

Changes in net assets in liquidation

    

Change in liquidation value of investments in real estate

     (3,363     (2,102

Change in liquidation value of loans receivable

     (410     5,098   

Change in liquidation value of loan securities

     (918     —     

Change in liquidation value of equity investments

     10,343        16,018   

Remeasurement of assets and liabilities

     (3,449     (9,489

Remeasurement of non-controlling interests

     1,445        2,113   
  

 

 

   

 

 

 

Net increase in liquidation value

     3,648        11,638   

Liquidating distributions to Series D Preferred shareholders

     —          (121,890

Liquidating distributions to Common shareholders

     (81,956     (81,959
  

 

 

   

 

 

 

Changes in net assets in liquidation

     (78,308     (192,211
  

 

 

   

 

 

 

Net assets in liquidation, end of period

   $ 516,396      $ 594,704   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(Going Concern Basis)

(in thousands, except per share data)

 

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

Revenue

    

Rents and reimbursements

   $ 46,313      $ 51,865   

Interest and discount accretion

     9,643        18,455   
  

 

 

   

 

 

 
     55,956        70,320   
  

 

 

   

 

 

 

Expenses

    

Property operating

     17,127        17,769   

Real estate taxes

     5,379        4,926   

Depreciation and amortization

     15,957        17,275   

Interest

     13,394        22,365   

Impairment loss on investments in real estate

     9,200        —     

Provision for loss on loans receivable

     —          348   

General and administrative

     4,283        4,356   

Related party fees

     5,548        9,289   

Transaction costs

     586        1,885   

Federal, state and local taxes

     (60     424   
  

 

 

   

 

 

 
     71,414        78,637   
  

 

 

   

 

 

 

Other income (loss)

    

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

     12,622        22,641   

Earnings from preferred equity investments

     582        613   

Loss on extinguishment of debt, net

     (564     —     

Realized gain on sale of securities carried at fair value

     2        742   

Unrealized loss on securities carried at fair value

     —          (142

Unrealized gain on loan securities carried at fair value

     —          215   

Settlement expense

     —          (411

Interest and other income

     244        375   
  

 

 

   

 

 

 
     12,886        24,033   
  

 

 

   

 

 

 

Income (loss) from continuing operations

     (2,572     15,716   

Discontinued operations

    

Net income from discontinued operations

     11,235        8,772   
  

 

 

   

 

 

 

Net income

     8,663        24,488   

Net loss attributable to non-controlling interests

     3,818        4,290   
  

 

 

   

 

 

 

Net income attributable to Winthrop Realty Trust

     12,481        28,778   

Preferred dividend of Series D Preferred Shares

     (6,502     (11,146

Amount allocated to Restricted Common Shares

     (192     (307
  

 

 

   

 

 

 

Net income attributable to Common Shares

   $ 5,787      $ 17,325   
  

 

 

   

 

 

 

Per Common Share data—Basic

    

Income (loss) from continuing operations

   $ (0.15   $ 0.25   

Income from discontinued operations

     0.31        0.26   
  

 

 

   

 

 

 

Net income attributable to Common Shares

   $ 0.16      $ 0.51   
  

 

 

   

 

 

 

Per Common Share data—Diluted

    

Income (loss) from continuing operations

   $ (0.15   $ 0.25   

Income from discontinued operations

     0.31        0.26   
  

 

 

   

 

 

 

Net income attributable to Common Shares

   $ 0.16      $ 0.51   
  

 

 

   

 

 

 

Basic Weighted-Average Common Shares

     35,821        33,743   
  

 

 

   

 

 

 

Diluted Weighted-Average Common Shares

     35,821        33,774   
  

 

 

   

 

 

 

Comprehensive income

    

Net income

   $ 8,663      $ 24,488   

Change in unrealized loss on interest rate derivatives

     (193     (74
  

 

 

   

 

 

 

Consolidated comprehensive income

     8,470        24,414   

Net loss attributable to non-controlling interests

     3,818        4,290   
  

 

 

   

 

 

 

Comprehensive loss attributable to non-controlling interests

     3,818        4,290   
  

 

 

   

 

 

 

Comprehensive income attributable to Winthrop Realty Trust

   $ 12,288      $ 28,704   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF EQUITY

(Going Concern Basis)

(In thousands except per share data)

 

                                        Accumulated     Accumulated              
     Series D Preferred Shares      Common Shares      Additional      Distributions     Other     Non-        
     of Beneficial Interest      of Beneficial Interest      Paid-In      in Excess of     Comprehensive     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 loss attributable to non-controlling 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.

 

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WINTHROP REALTY TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Going Concern Basis)

(in thousands)

 

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

Cash flows from operating activities

    

Net Income

   $ 8,663      $ 24,488   

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   

Amortization of lease intangibles

     6,462        8,550   

Straight-line rental income

     1,121        669   

Loan discount accretion

     (2,086     (4,121

Discount accretion received in cash

     5,865        37   

Earnings of preferred equity investments

     (582     (613

Distributions of income from preferred equity investments

     565        607   

Income of equity investments

     (12,622     (22,641

Distributions of income from equity investments

     8,755        24,112   

Restricted cash held in escrows

     (27     1,242   

Gain on sale of securities carried at fair value

     (2     (742

Unrealized loss on securities carried at fair value

     —          142   

Gain on sale of real estate investments

     (11,073     (11,005

Unrealized gain on loan securities carried at fair value

     —          (215

Impairment loss on investments in real estate

     9,287        2,904   

Provision for loss on loans receivable

     —          348   

Tenant leasing costs

     (1,046     (4,229

Equity compensation expenses

     1,450        897   

Bad debt expense (recovery)

     (229     40   

Changes in assets and liabilities:

    

Interest receivable

     (64     (214

Accounts receivable and other assets

     665        (1,316

Accounts payable, accrued liabilities and other liabilities

     (8,234     (4,123
  

 

 

   

 

 

 

Net cash provided by operating activities

     18,199        30,268   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Issuance and acquisition of loans receivable

     (31,492     (21,437

Investments in real estate

     (5,575     (257,142

Investments in equity investments

     (48,154     (30,341

Return of capital distribution from equity investments

     705        14,618   

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     —     

Proceeds from sale of investments in real estate

     56,423        38,690   

Proceeds from sale of equity investments

     200        26   

Proceeds from sale of securities carried at fair value

     75        19,918   

Proceeds from sale of loans receivable

     37,052        19,319   

Restricted cash held in escrows

     2,127        863   

Issuance of secured financing receivable

     —          (30,000

Collection of loans receivable

     7,784        56,088   

Deposits on assets held for sale

     —          500   

Cash from consolidation of properties

     332        473   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     20,047        (182,278
  

 

 

   

 

 

 

 

    (Continued on next page)

See Notes to Consolidated Financial Statements.

 

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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
 

Cash flows from financing activities

    

Proceeds from mortgage loans payable

   $  —        $ 198,100   

Principal payments of mortgage loans payable

     (5,412     (22,287

Repurchase of senior notes payable

     (11,178     —     

Payment of secured financing

     —          (23,770

Restricted cash held in escrows

     (239     (228

Deferred financing costs

     (68     (796

Purchase of non-controlling interests

     —          (150

Contribution from non-controlling interests

     873        18,629   

Distribution to non-controlling interests

     (711     (51

Plan

     178        464   

Proceeds from issuance of Common Shares through offering, net

     —          30,021   

Dividend paid on Common Shares

     (17,461     (21,919

Dividend paid on Series D Preferred Shares

     (5,573     (11,146

Dividend paid on Restricted Shares

     (71     (27
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (39,662     166,840   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,416     14,830   

Cash and cash equivalents at beginning of year

     112,512        97,682   
  

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 111,096      $ 112,512   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information

    

Interest paid

   $ 15,280      $ 23,735   
  

 

 

   

 

 

 

Capitalized interest

   $ 2,457      $ 1,443   
  

 

 

   

 

 

 

Taxes paid

   $ 147      $ 247   
  

 

 

   

 

 

 

Supplemental Disclosure on Non-Cash Investing and Financing Activities

    

Dividends accrued on Common Shares and Restricted Shares

   $ 401      $ 6,099   
  

 

 

   

 

 

 

Dividends accrued on Series D Preferred Shares

   $ 929      $  —     
  

 

 

   

 

 

 

Capital expenditures accrued

   $ 1,736      $ 3,140   
  

 

 

   

 

 

 

Conveyance of secured financing in settlement of loans receivable

   $ (29,150   $  —     
  

 

 

   

 

 

 

Assumption of mortgage loan on investment in real estate

   $  —        $ 9,248   
  

 

 

   

 

 

 

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 to loans receivable

   $  —        $ (877
  

 

 

   

 

 

 

Contribution to Vintage Housing Holdings LLC

   $ 450      $  —     
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

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WINTHROP REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts related to number of buildings, square footage, 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’s primary business is owning real property and real estate related assets which it conducts 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 categorized its assets 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 discussed below, the Trust no longer makes operating decisions or assesses performance in separate segments. 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. 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. As management currently expects that all of the Trust’s assets will not be 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. Holders of the Trust’s Common Shares should note that unlike Common Shares, which are freely transferable, beneficial interests in the liquidating trust will generally not be transferable except by will, intestate succession or operation of law. Therefore, the recipients of the interests in the liquidating trust will not have the ability to realize any value from these interests except from distributions made by the liquidating trust, the timing of 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 management anticipates that the liquidating trust will be required to file only annual reports containing unaudited financial statements on Form 10-K and current reports on Form 8-K with the Securities and Exchange Commission.

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 Statements of Net Assets.

 

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WINTHROP REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 and December 31, 2013 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

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 Statements 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, 2015 are included in accounts payable, accrued liabilities and other liabilities on the Consolidated Statements 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 ventures where the Trust intends to sell its interest in the venture, rather than the property, are presented on a net basis and are included in equity investments on the Consolidated Statements 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.

 

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WINTHROP REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Out of Period Adjustments

During 2014, the Trust identified an error in its previously reported interim financial statements relating to the estimated costs in excess of estimated receipts during liquidation of the Trust’s investment in the luxury residential property located in Houston, Texas. The Trust recorded an out of period adjustment in the amount of $2,201,000 to correct the understatement of estimated costs in excess of estimated receipts in the Trust’s consolidated statement of net assets. The Trust concluded that this adjustment is not material to the current period or the prior period’s financial position. As such, this cumulative change was recorded in the consolidated statement of net assets during the quarter ended on December 31, 2014. This error had no impact on any other periods presented.

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 $1,300,000 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, disclosing 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 were 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 were 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 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.

 

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WINTHROP REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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.

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.

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 Statements 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.

 

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WINTHROP REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 Statements of Net Assets. As interest is earned, it is reclassified and included in loans receivable on the Consolidated Statements 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.

Accounts Receivable

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 and allowance for doubtful accounts monthly. Past due balances are reviewed individually for collectability. 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. 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.

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

 

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WINTHROP REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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 were 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 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 Statements 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.

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 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. 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, 2015. 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 and decreased revenue by $669,000 in the year ended December 31, 2013.

 

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Pursuant to the terms of the lease agreements with respect to net lease properties, the tenant at each property is required to pay all costs associated with the property including property taxes, ground rent, maintenance costs and insurance. These costs are not reflected in the consolidated financial statements.

Tenant leases that are not net leases generally provide for (i) billings of fixed minimum rental and (ii) billings of certain operating costs. The Trust 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 Statements 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 2012 – 2015 remain open to examination by major taxing jurisdictions to which the Trust is subject.

Series D Preferred Shares

On September 15, 2014 the Trust made the full liquidating distribution on its Series D Cumulative Redeemable Preferred Shares of Beneficial Interest (the “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.

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 20 – 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.

 

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

 

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

Basic

     

Income (loss) from continuing operations

   $ (2,572    $ 15,716   

Loss attributable to non-controlling interest

     3,764         4,251   

Preferred dividend of Series D Preferred Shares

     (6,502      (11,146

Amount allocated to Restricted Shares

     (192      (307
  

 

 

    

 

 

 

Income (loss) from continuing operations applicable to Common Shares

     (5,502      8,514   

Income from discontinued operations

     11,235         8,772   

Loss attributable to non-controlling interest from discontinued operations

     54         39   
  

 

 

    

 

 

 

Net income attributable to Common Shares for earnings per share purposes

   $ 5,787       $ 17,325   
  

 

 

    

 

 

 

Basic weighted-average Common Shares

     35,821         33,743   
  

 

 

    

 

 

 

Income (loss) from continuing operations

   $ (0.15    $ 0.25   

Income from discontinued operations

     0.31         0.26   
  

 

 

    

 

 

 

Net income per Common Share—basic

   $ 0.16       $ 0.51   
  

 

 

    

 

 

 

Diluted

     

Income (loss) from continuing operations

   $ (2,572    $ 15,716   

Loss attributable to non-controlling interest

     3,764         4,251   

Preferred dividend of Series D Preferred Shares

     (6,502      (11,146

Amount allocated to Restricted Shares

     (192      (307
  

 

 

    

 

 

 

Income (loss) from continuing operations applicable to Common Shares

     (5,502      8,514   

Income from discontinued operations

     11,235         8,772   

Loss attributable to non-controlling interest from discontinued operations

     54         39   
  

 

 

    

 

 

 

Net income attributable to Common Shares for earnings per share purposes

   $ 5,787       $ 17,325   
  

 

 

    

 

 

 

Basic weighted-average Common Shares

     35,821         33,743   

Stock options (1)

     —           —     

Restricted Shares (2)

     —           31   
  

 

 

    

 

 

 

Diluted weighted-average Common Shares

     35,821         33,774   
  

 

 

    

 

 

 

Income (loss) from continuing operations

   $ (0.15    $ 0.25   

Income from discontinued operations

     0.31         0.26   
  

 

 

    

 

 

 

Net income per Common Share—diluted

   $ 0.16       $ 0.51   
  

 

 

    

 

 

 

 

(1) The Trust’s stock options were exercised in 2013. The resulting shares were included in the basic weighted average Common Shares for the seven months ended July 31, 2014 and the year ended December 31, 2013.
(2) The Trust’s Restricted Shares were issued in 2013. The Trust’s Restricted Shares were anti-dilutive for the seven months ended July 31, 2014 and were not included in the weighted-average shares outstanding for the calculation of diluted earnings per Common Share. The Trust’s Restricted Shares were dilutive for the year ended December 31, 2013. The amendments to the Restricted Shares discussed in Note 20 had no impact on the calculation of earnings per share for the periods presented.

 

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4. Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation

The liquidation basis of accounting requires the Trust to estimate net cash flows from operations and to accrue all costs associated with implementing and completing the plan of liquidation. The Trust currently estimates that it will have costs in excess of estimated receipts during the liquidation. These amounts can vary significantly due to, among other things, the timing and estimates for executing and renewing leases, estimates of tenant improvement costs, the timing of property sales, direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of operations. These costs are estimated and are anticipated to be paid out over the liquidation period.

Upon transition to the liquidation basis of accounting on August 1, 2014, the Trust accrued the following revenues and expenses expected to be earned or incurred during liquidation (in thousands):

 

     Amount  

Rents and reimbursements

   $ 81,975   

Interest and dividends

     23,349   

Property operating expenses

     (31,583

Interest expense

     (30,216

General and administrative expenses

     (45,160

Capital expenditures

     (9,785

Sales costs

     (15,805
  

 

 

 

Liability for estimated costs in excess of estimated receipts during liquidation

   $ (27,225
  

 

 

 

The change in the liability for estimated costs in excess of estimated receipts during liquidation as of December 31, 2015 is as follows (in thousands):

 

                Remeasurement              
    December 31,     Cash Payments     of Assets and           December 31,  
    2014     (Receipts)     Liabilities     Deconsolidation (1)     2015  

Assets:

         

Estimated net inflows from investments in real estate, loans receivable and secured financing receivable

  $ 25,169      $ (12,551   $ (2,149   $ 54      $ 10,523   

Liabilities:

         

Sales costs

    (11,840     1,012        423        4,419        (5,986

Corporate expenditures

    (44,582     12,471        (1,723     —          (33,834
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (56,422     13,483        (1,300     4,419        (39,820
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liability for estimated costs in excess of estimated receipts during liquidation

  $ (31,253   $ 932      $ (3,449   $ 4,473      $ (29,297
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Due to a change in exit strategy, the venture that owns the property located at 450 W 14th Street, New York, New York is no longer consolidated. See Note 3 – Basis of Presentation for the Trust’s policy on accounting for joint ventures.

 

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The change in the liability for estimated costs in excess of estimated receipts during liquidation as of December 31, 2014 is as follows (in thousands):

 

                   Remeasurement         
            Cash Payments      of Assets and         
     August 1, 2014      (Receipts)      Liabilities      December 31, 2014  

Assets:

           

Estimated net inflows from investments in real estate, loans receivable and secured financing receivable

   $ 38,400       $ (5,183    $ (8,048    $ 25,169   

Liabilities:

           

Sales costs

     (15,805      3,965         —           (11,840

Corporate expenditures

     (49,820      6,679         (1,441      (44,582
  

 

 

    

 

 

    

 

 

    

 

 

 
     (65,625      10,644         (1,441      (56,422
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liability for estimated costs in excess of estimated receipts during liquidation

   $ (27,225    $ 5,461       $ (9,489    $ (31,253
  

 

 

    

 

 

    

 

 

    

 

 

 

 

5. Net Assets in Liquidation

The following is a reconciliation of Shareholder’s Equity under the going concern basis of accounting to net assets in liquidation under the liquidation basis of accounting as of August 1, 2014 (in thousands):

 

Shareholder’s Equity as of July 31, 2014

   $ 476,454   

Increase due to estimated net realizable value of investments in real estate

     220,338   

Increase due to estimated net realizable value of equity investments

     182,472   

Increase due to estimated net realizable value of loans receivable

     6,071   

Secured financing

     (1,699

Loan securities

     692   

Deconsolidation of properties

     10,178   

Decrease due to write-off of assets and liabilities

     (44,691

Increase in non-controlling interest

     (35,675

Liability for estimated costs in excess of estimated reciepts during liquidation

     (27,225
  

 

 

 

Adjustment to reflect the change to the liquidation basis of accounting

     310,461   
  

 

 

 
Estimated value of net assets in liquidation as of August 1, 2014    $ 786,915   
  

 

 

 

Net assets in liquidation decreased by $78,308,000 during the year ended December 31, 2015. The primary reason for the decline in net assets was due to liquidating distributions to holders of Common Shares of $81,956,000, a $3,363,000 net decrease in the value of investments in real estate, a $1,723,000 increase in estimated corporate expenditures resulting primarily from increases in estimated fees payable to FUR Advisors as a result of increases in liquidation values of certain investments and a $918,000 decrease in the value of the Trust’s loan securities. These decreases were partially offset by a $10,343,000 net increase in the liquidation value of equity investments and a $1,445,000 decrease in the liability for non-controlling interests.

Net assets in liquidation decreased by $192,211,000 during the period from August 1, 2014 through December 31, 2014. The primary reason for the decline in net assets was due to the liquidating distribution to holders of Series D Preferred Shares, net of previously accrued amounts, totaling $121,890,000 and the accrued liquidating distribution to holders of Common Shares, net of previously accrued amounts totaling $81,959,000.

 

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There were 36,425,084 Common Shares outstanding at December 31, 2015 and 2014. The net assets in liquidation at December 31, 2015 would result in liquidating distributions of approximately $14.18 per Common Share. The net assets in liquidation as of December 31, 2015 and 2014 of $516,396,000 and $594,704,000 respectively, plus the cumulative liquidating distributions to holders of Common Shares through December 31, 2015 and 2014 of $163,915,000 ($4.50 per common share) and $81,959,000 ($2.25 per common share), respectively, would result in cumulative liquidating distributions to holders of Common Shares of $18.68 and $18.58 per Common Share as of December 31, 2015 and 2014, respectively. This estimate of liquidating distributions includes projections of costs and expenses to be incurred during the period required to complete the plan of liquidation. There is inherent uncertainty with these projections, and they could change materially based on the timing of sales, the performance of underlying assets and any changes in the underlying assumptions of the projected cash flows.

 

6. Fair Value Measurements

Prior to the adoption of liquidation accounting, REIT securities, loan securities and derivative financial instruments were reported at fair value. The accounting standards establish a framework for measuring fair value as well as disclosures about fair value measurements. They emphasize that fair value is a market based measurement, not an entity-specific measurement. Therefore a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The Trust’s Level 3 loan securities carried at fair value primarily consisted of non-agency mortgage-related securities. The Trust valued the loan securities carried at fair value based primarily on prices received from a pricing service. The techniques used by the pricing service to develop the prices were generally either: (a) a comparison to transactions involving instruments with similar collateral and risk profiles; or (b) industry standard modeling, such as a discounted cash flow model. The significant inputs and assumptions used to determine the fair value of the Trust’s loan securities included prepayment rates, probability of default, loss severity and yield to maturity percentages.

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

Non-Recurring Measurements

Non-recurring measurements of fair value of assets or liabilities would typically include investments in real estate, assets held for sale and equity investments. During the seven months ended July 31, 2014 the Trust recognized impairment charges totaling $9,287,000 on its Jacksonville, Florida; Lisle, Illinois (550 Corporetum); Louisville, Kentucky and Greensboro, North Carolina properties. During the seven months ended July 31, 2014 the Trust also recognized $2,422,000 in other-than-temporary impairment charges on its equity investments. During the year ended December 31, 2013 the Trust recognized impairment charges totaling $2,904,000 on its Lisle, Illinois (701 Arboretum) and Denton, Texas properties. During the year ended December 31, 2013 the Trust recognized other-than-temporary impairment charges totaling $7,687,000 on its equity investments.

In light of the adoption of a plan of liquidation by the Board on April 28, 2014, the Trust tested the tangible and intangible assets for impairment, which considered a probability analysis of various scenarios including a shortened holding period for all of its operating properties. The Trust’s estimates of future cash flows expected to be generated in the impairment tests were based on a number of assumptions. Those assumptions were generally based on management’s experience in its real estate markets and the effects of current market conditions. The assumptions were subject to economic and market uncertainties including, among others, market capitalization rates, discount rates, demand for space, competition for tenants, changes in market rental rates, and costs to operate the property. As those factors were difficult to predict and were subject to future events that may alter management’s assumptions, the future cash flows estimated by management in its impairment analyses may not be achieved.

 

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Equity and Preferred Equity Investments

Under going concern accounting, equity and preferred equity investments were assessed for other-than-temporary impairment when the carrying value of the Trust’s investment exceeded its fair value. The fair value of equity investments was determined using a discounted cash flow model which incorporated a residual value utilizing an income capitalization approach considering prevailing market capitalization rates. The Trust reviewed each investment based on the highest and best use of the investment and market participation assumptions. The significant assumptions used in this analysis included rental revenues, operating expenses, inflation rates, market absorption rates, tenanting costs, the discount rate and capitalization rates used in the income capitalization valuation. The Trust determined that the significant inputs used to value its Marc Realty and Sealy equity investments fell within Level 3. The Trust recognized other-than-temporary impairment losses of $2,422,000 and $7,687,000 on these investments during the seven months ended July 31, 2014 and the year ended December 31, 2013. See Note 9—Equity Investments for further details on these impairments.

Investments in Real Estate and Assets Held For Sale

During the seven months ended July 31, 2014 and the year ended December 31, 2013, the Trust recognized impairment charges of $9,287,000 and $2,904,000, respectively, relative to investments in real estate and assets held for sale. Under going concern accounting, the Trust assessed the assets in its portfolio for recoverability based upon a determination of the existence of impairment indicators including significant decreases in market pricing and market rents, a change in the extent or manner in which real estate assets are being used or a decline in their physical condition, current period losses combined with a history of losses or a projection of continuing losses, and a current expectation that real estate assets will be sold or otherwise disposed of before the end of their previously estimated useful lives. When such impairment indicators existed, management estimated the undiscounted cash flows from the expected use and disposition of the asset. Significant inputs for this recoverability analysis included the anticipated holding period for the asset as well as assumptions over rental revenues, operating expenses, inflation rates, market absorption rates, tenanting and other capital improvement costs and the asset’s estimated residual value. For those assets not deemed to be fully recoverable, the Trust recorded an impairment charge equal to the difference between the carrying value and estimated fair value of the asset less costs to sell the asset. Management determined the fair value of those assets using an income valuation approach based on assumptions it believed a market participant would utilize. Significant assumptions included discount and capitalization rates used in the income valuation approach.

During the quarter ended June 30, 2013 the Trust entered into a purchase and sale agreement on its Denton, Texas property. A fair value measurement was prepared based on the purchase contract less costs to sell and a $154,000 impairment charge was recorded at June 30, 2013. The property was sold on July 2, 2013.

In light of continued leasing challenges and specific sub-market dynamics, at September 30, 2013 the Trust re-evaluated its business plan and revised its holding period for its operating property in Lisle, Illinois referred to as 701 Arboretum. As a result, it was determined that due to the shorter holding period, the carrying value of the 701 Arboretum property was no longer fully recoverable. The Trust recorded a $2,750,000 impairment charge in 2013 as a result of the purchase contract. The property was sold on December 17, 2013.

The carrying value of the Trust’s wholly owned office property in Lisle, Illinois, referred to as 550 Corporetum, exceeded the estimated fair value resulting in a $8,500,000 impairment charge which was recorded at March 31, 2014. The carrying value of the Trust’s wholly owned retail property in Greensboro, North Carolina exceeded the estimated fair value resulting in a $500,000 impairment charge which was recorded at March 31, 2014. The fair value of these properties were calculated using the following key Level 3 inputs: discount rate of 8%, terminal capitalization rates of 8.5% to 10.0% and market rent and expense growth rates of 2.0%.

During April 2014 the Trust entered into a purchase and sale agreement on its Jacksonville, Florida property. A fair value measurement was prepared at March 31, 2014 based on the purchase contract and a $200,000 impairment charge was recorded. The sale of the property was not completed and the purchase contract was terminated.

During June 2014 the Trust entered into a purchase and sale agreement on its Louisville, Kentucky retail property. A fair value measurement was prepared at June 30, 2014 based on the purchase contract less costs to sell and an $87,000 impairment charge was recorded.

 

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7. Investment and Disposition Activities

2015 and 2016 Transactions

Vintage Housing Holdings – sale of interest – On January 2, 2015 the Trust contributed an additional $5,645,000 to the venture to acquire the limited partner interests in two of the underlying properties. During the six months ended June 30, 2015 the Trust received distributions, inclusive of return of capital distributions, totaling $4,959,000 from the venture. On June 1, 2015 the Trust sold its interest in Vintage Housing Holdings LLC to an independent third party and received net proceeds of approximately $82,471,000. The liquidation value of this investment was $82,928,000 at December 31, 2014.

Edens Center and Norridge Commons – loan satisfaction - On February 5, 2015 the Norridge, Illinois property, which was one of the two properties that collateralized this loan receivable, was sold and the Trust received a principal payment of $15,275,000 plus all accrued and unpaid interest due in connection with the sale. The outstanding principal balance on the loan receivable was $97,000 at September 30, 2015. Upon satisfaction of the loan, the Trust was entitled to a participation interest equal to 30% of the value of both of the properties which collateralized the loan in excess of $115,000,000. On October 9, 2015 the Trust received $3,100,000 in full satisfaction of the loan receivable and the participation interest.

In connection with the repayment in full of the loan receivable collateralized by the Edens Center and Norridge Commons properties, the Trust sold its general partner interests in the two properties for an aggregate price of $493,000 pursuant to the terms of an existing option agreement. The sale price plus aggregate distributions received in 2015 was consistent with the Trust’s liquidation value at December 31, 2014.

44 Monroe, Phoenix, Arizona – property sale – On April 14, 2015 the venture in which the Trust holds an 83.7% interest sold its apartment building located in Phoenix, Arizona for gross proceeds of $50,650,000. The entire net proceeds, after closing costs and pro-rations, of approximately $49,143,000 were used to pay down the loan collateralized by the remaining properties in the venture. The liquidation value of the property was $50,650,000 at December 31, 2014.

Concord Debt Holdings – loan satisfaction—During May 2015 the Trust received a distribution of $20,173,000 from its Concord Debt Holdings LLC venture. The distribution was in connection with the sale of the luxury hotel assets owned by the MSREF hotel venture in which Concord Debt Holdings LLC holds an interest.

CDH CDO LLC – loan sale/satisfaction - On June 25, 2015 the venture closed on the sale of four bond assets and one loan asset for gross proceeds of $54,122,000. The proceeds of the sale were utilized to fully satisfy the debt of the venture. Additionally, in June 2015 a loan asset held by the venture was repaid at par, which was consistent with the Trust’s liquidation value at December 31, 2014. On July 1, 2015 the Trust received a $6,200,000 distribution from this venture.

Cerritos, California – property sale—On September 16, 2015 the Trust sold its office property located in Cerritos, California for gross proceeds of $30,500,000 and received net proceeds of $6,174,000 after satisfaction of third party mortgage debt, closing costs and pro rations. The liquidation value of the property was $29,916,000 at December 31, 2014.

Highgrove, Stamford, Connecticut – contract for sale – On June 26, 2015 the venture in which the Trust holds an 83.7% interest entered into a contract (the “First Purchase Agreement”) to sell its apartment building located in Stamford, Connecticut for gross proceeds of $90,000,000. An additional $1,000,000 non-refundable deposit was received from the buyer in November 2015 bringing the total aggregate non-refundable deposits received from the buyer to $5,000,000. On January 21, 2016 the First Purchase Agreement was terminated due to the prospective purchaser’s inability to timely close. In accordance with the terms of the First Purchase Agreement, the venture retained the $5,000,000 deposit.

On February 18, 2016 the venture entered into a purchase agreement (the “Second Purchase Agreement”) to sell this asset for gross proceeds of $87,500,000. The purchaser has provided a $10,000,000 non-refundable deposit. The closing is expected to occur, if at all, in the second quarter of 2016. In connection with entering into the Second Purchase Agreement, the venture entered into a settlement agreement with the purchaser under the First Purchase Agreement providing for the return of $1,000,000 of the previously retained deposit and an agreement to return up to an additional $1,500,000 of the previously retained deposit upon the closing or termination of the Second Purchase Agreement. As a result, assuming the consummation of the transaction contemplated by the Second Purchase Agreement, the venture will receive gross sales proceeds, inclusive of forfeited deposits, totaling $90,000,000.

701 Seventh Avenue – capital contributions—The Trust has invested an additional $8,865,000 in this venture during 2015. As of December 31, 2015 the Trust has total invested capital in the venture of $115,489,000.

 

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Sullivan Center, Chicago, Illinois – capital contributions / contract for sale – The Trust has committed to fund 100% of retail tenant improvements and capital expenditure needs and 80% of office tenant improvements and capital expenditure needs at the Sullivan Center property in Chicago, Illinois that are not met by current operating cash flow at the property. During 2015 the Trust funded $3,998,000 for improvements, and to date in 2016 the Trust funded an additional $2,794,000 for improvements. All amounts funded are considered additions to the mezzanine loan and accrue interest at the rate of 15% per annum.

On January 8, 2016 the Trust entered into a contract with its Sullivan Center venture partner to sell its interest in WRT One South State Lender LP which holds the mezzanine loan on the property and its interest in WRT-Elad One South State Equity LP for an aggregate purchase price of approximately $91,576,000 subject to upward adjustment for additional advances on the mezzanine loan by the Trust prior to closing plus accrued and unpaid interest. The additional $2,794,000 advanced on the mezzanine loan on January 15, 2016 will be added to the purchase price at closing. The buyer’s $3,000,000 deposit under the purchase contract is non-refundable. If consummated, the sale is expected to close by the end of the second quarter of 2016.

Lake Brandt, Greensboro, North Carolina – contract for sale—On January 20, 2016 the Trust entered into a contract with an independent third party to sell its residential property known as Lake Brandt Apartments for gross proceeds of $20,000,000. The Buyer’s $500,000 deposit under the contract is non-refundable. If consummated, the sale is expected to close in the second quarter of 2016. The liquidation value was $20,000,000 at December 31, 2015 and $18,610,000 at December 31, 2014.

2014 Transactions

Playa Vista – loan activity – 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. The Trust’s share of the increased loan amount was up to $2,000,000 of which $1,992,000 was funded.

On July 7, 2014 the Trust acquired for $14,000,000 the additional 50% interest in the Playa Vista loan. The Trust 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.

On December 9, 2014 the Trust received repayment in full on its $27,394,000 loan receivable collateralized by the office complex in Playa Vista, California. In addition, the Trust received $6,565,000 in exchange for its 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 the equity participation, was $29,369,000 at August 1, 2014. Total proceeds exceeded the initial liquidation value as a result of the cash received in satisfaction of the Trust’s participation interest exceeding the Trust’s initial estimate at August 1, 2014.

Loan portfolio – sale of interest – In February 2014 the Trust sold its 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, the Trust retained an interest only participation in each of the Legacy Orchard and Hotel Wales loans entitling the Trust 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 the Trust sold its 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, the Trust 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 the Trust sold to Marc Realty, its venture partner, the Trust’s equity investments in High Point Plaza LLC, 1701 Woodfield LLC and Enterprise Center LLC and its interest in the River City, Chicago, Illinois property for gross sale proceeds of $6,000,000. The Trust received $1,500,000 in cash and a note receivable for the remaining $4,500,000. The note was repaid in full during June 2014. The Trust recorded a $3,000 gain on the sale of its interest in River City which is included in income from discontinued operations. The Trust recorded a $69,000 gain on sale of the three equity investments which is included in equity in income of equity investments.

 

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

Norridge—equity acquisition – On March 5, 2014, in connection with the Edens Center and Norridge Commons loan origination discussed below, the Trust 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”). The Trust, through its ownership of Harlem, has an effective 0.375% interest in the property and controls the business of the entity and all decisions affecting the entity, its policy and its management. As no other parties have significant participating rights, the Trust consolidated the Norridge Property as of March 5, 2014, the date it acquired the general partner interest.

The accompanying unaudited pro forma information for the seven months ended July 31, 2014 and the year ended December 31, 2013 is presented as if the acquisition of the Norridge Property on March 5, 2014 had occurred on January 1, 2013. This unaudited pro forma information is based upon the historical consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto. The unaudited pro forma information does not purport to represent what the actual results of operations of the Trust would have been had the above occurred. Nor do they purport to predict the results of operations of future periods.

 

Pro forma (unaudited)    For the Seven Months      For the Year Ended  
(In thousands, except for per share data)    Ended July 31, 2014      December 31, 2013  

Total revenue

   $ 57,101       $ 108,333   

Income (loss) from continuing operations

     (2,776      7,666   

Net income attributable to Winthrop Realty Trust

     12,480         24,414   

Per common share data—basic

     0.16         0.38   

Per common share data—diluted

     0.16         0.38   

Edens – equity acquisition – On March 5, 2014 the Trust 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”). As the other co-general partner of Edens Center Associates has significant participating rights, the Trust accounts for this investment under the equity method of accounting.

Edens Center and Norridge Commons – loan origination On March 5, 2014 the Trust originated a $15,500,000 mezzanine loan to an affiliate of the Trust’s 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, the Trust 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 the Trust its ownership interest in the Trust’s Sullivan Center and Mentor Retail LLC ventures.

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 the Trust 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, the Trust received an exit fee of $1,787,000 in connection with the early satisfaction of the loan which is classified as interest income.

 

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Crossroads I & IIproperty sale – On May 1, 2014 the Trust sold its 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 the Trust 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 the Trust sold its 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 the Trust received net proceeds of approximately $21,226,000 on the sale of the property. Upon completion of the parking area for the office property the Trust received $2,449,000 from the reserve in November 2014, which resulted in aggregate net proceeds of approximately $23,675,000. The Trust 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 the Trust sold its interest in the WRT-Fenway Wateridge venture to its venture partner for approximately $2,383,000 which equaled its liquidation value at August 1, 2014.

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

Shops at Wailea – loan satisfaction – On August 7, 2014 the Trust received $7,556,000, inclusive of accrued interest, in full repayment at par of its 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 the Trust received $1,033,000 in full repayment of the note due from its venture that owns the property located at 5400 Westheimer Court, Houston, Texas. On October 15, 2014 the Trust sold its 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 the Trust’s interest in the venture, was $10,777,000 at August 1, 2014.

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

Kroger-Atlanta – property sale—On October 20, 2014 the Trust sold its 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. The decline in value was the result of a change in the lease up assumptions for the property.

Kroger-Greensboro – property sale - On October 20, 2014 the Trust sold its 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. The decline in value was the result of a change in the lease up assumptions for the property.

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

San Pedro – property sale - On October 24, 2014 the venture in which the Trust holds an 83.7% interest sold its apartment building located in San Pedro, California for gross proceeds of $23,800,000 which equaled the 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 the Trust sold its 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.

 

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1515 Market – property sale - On December 2, 2014 the Trust sold its 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.

Burlington – property sale – On December 23, 2014 the Trust sold its 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. The decline in value was the result of a change in the lease up assumptions for the property.

Sealy Northwest Atlanta – sale of interest—On December 23, 2014 the Trust sold to Sealy, its venture partner, the Trust’s 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.

701 Seventh – capital contributions – During 2014 the Trust made additional capital contributions of $53,187,000 with respect to its 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.

Other Activity:

Notes Payable – On September 10, 2014 the Trust obtained a $25,000,000 unsecured working capital loan from KeyBank National Association. Borrowings under the loan bore interest at LIBOR plus 3%. The loan required monthly payments of interest only and had an initial maturity of March 10, 2015 with two, three-month extension options. Mandatory principal payments were required from net transaction proceeds from the sale or refinancing of any of the Trust’s assets. The loan was repaid in full in October 2014 from the proceeds of asset sales.

Series D Preferred Shares – On September 15, 2014 the Trust made the full liquidating distribution of $122,821,000 ($25.4815 per share) to the holders of its Series D Preferred Shares. Pursuant to the terms of the Series D Preferred Shares, the holders thereof have no further rights or claim to any of the remaining assets of the Trust.

 

8. Loans Receivable

The Trust’s loans receivable at December 31, 2015 and 2014 are as follows (in thousands):

 

              Carrying Amount (1)      Contractual
Maturity
Date

Description

   Loan Position    Stated
Interest Rate at
December 31, 2015
  December 31,
2015
     December 31,
2014
    

Rockwell

   Mezzanine    12.0%   $  —         $  —         5/01/16

Churchill

   Whole Loan    LIBOR + 3.75%     —           —         8/01/16

Poipu Shopping Village

   B-Note    6.62%     2,769         2,804       1/06/17

Mentor Building

   Whole Loan    10.0%     2,511         2,511       9/10/17

Edens Center and Norridge Commons (2)(3)

   Mezzanine    N/A     —           18,690       N/A
       

 

 

    

 

 

    
        $ 5,280       $ 24,005      
       

 

 

    

 

 

    

 

(1) The carrying amount represents the estimated amount expected to be collected on disposition of the loan plus contractual interest receivable.
(2) Carrying amount at December 31, 2014 includes the par amount plus the estimated amount to be collected on the participation interest of $3,000 and accrued interest of $1.
(3) The loan was repaid in full during 2015.

The carrying amount of loans receivable at December 31, 2015 and 2014 represents the estimated amount expected to be collected on disposition of the loans and includes accrued interest of $28,000 and $218,000, respectively.

 

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The weighted average coupon as calculated on the par value of the Trust’s loans receivable was 7.97% and 10.55% at December 31, 2015 and 2014, respectively, and the weighted average yield to maturity as calculated on the carrying value of the Trust’s loans receivable was 13.54% and 12.78% at December 31, 2015 and 2014, respectively.

At December 31, 2015 and 2014, none of the Trust’s loans receivable were directly financed.

Loan Receivable Activity

Activity related to loans receivable is as follows (in thousands):

 

     Year Ended      Year Ended  
     December 31, 2015      December 31, 2014  

Balance at beginning of year

   $ 24,005       $ 101,100   

Purchase and advances

     —           35,992   

Interest received, net

     (190      (283

Repayments / sale proceeds / forgiveness

     (18,535      (120,194

Loan discount accretion

     —           2,086   

Discount accretion received in cash

     —           (5,865

Liquidation adjustment

     —           6,071   

Change in liquidation value

     —           5,098   
  

 

 

    

 

 

 
Balance at end of year    $ 5,280       $ 24,005   
  

 

 

    

 

 

 

The following table summarizes the Trust’s interest and discount accretion income for the seven months ended July 31, 2014 and the year ended December 31, 2013 (in thousands):

 

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

Interest on loan assets

   $ 5,770       $ 14,334   

Exit fee/prepayment penalty

     1,787         —     

Accretion of loan discount

     2,086         4,121   
  

 

 

    

 

 

 

Total interest and discount accretion

   $ 9,643       $ 18,455   
  

 

 

    

 

 

 

The secured financing receivable, the Queensridge loan receivable and the Shops at Wailea loan receivable, each individually representing more than 10% of interest income, contributed approximately 58% of interest income of the Trust for the seven months ended July 31, 2014.

The San Marbeya loan and the Queensridge loan, each representing more than 10% of interest income, contributed approximately 34% of interest income of the Trust for the year ended December 31, 2013.

Credit Quality of Loans Receivable and Loan Losses

Prior to the adoption of the plan of liquidation, the Trust evaluated impairment on its loan portfolio on an individual basis and developed a loan grading system for all of its outstanding loans that are collateralized directly or indirectly by real estate. Grading categories included debt yield, debt service coverage ratio, length of loan, property type, loan type, and other more subjective variables that included property or collateral location, market conditions, industry conditions, and sponsor’s financial stability. Management reviewed each category and assigned an overall numeric grade for each loan to determine the loan’s risk of loss and to provide a determination as to whether an individual loan was impaired and whether a specific loan loss allowance was necessary. A loan’s grade of credit quality was determined quarterly.

 

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All loans with a positive score did not require a loan loss allowance. Any loan graded with a neutral score or “zero” was subject to further review of the collectability of the interest and principal based on current conditions and qualitative factors to determine if impairment was warranted. Any loan with a negative score was deemed impaired and management then would measure the specific impairment of each loan separately using the fair value of the collateral less costs to sell.

Management estimated the loan loss allowance by calculating the estimated fair value less costs to sell of the underlying collateral securing the loan based on the fair value of the underlying collateral, and comparing the fair value to the loan’s net carrying value. If the fair value was less than the net carrying value of the loan, an allowance was created with a corresponding charge to the provision for loan losses. The allowance for each loan was maintained at a level the Trust believed would be adequate to absorb losses.

Under liquidation accounting, the Trust carries its loans receivable at the estimated amount of principal payments the Trust expects to receive over the holding period of the loan. Subsequent to the adoption of the plan of liquidation, the Trust utilizes the same grading system to assess the collectability of its loan portfolio. Any change in the credit quality of the loan receivable that changes the Trust’s estimate of the amount it expects to collect will be recorded as a change to the liquidation value of its loans receivable.

The table below summarizes the Trust’s loans receivable by internal credit rating at December 31, 2015 and 2014 (in thousands, except for number of loans):

 

     December 31, 2015      December 31, 2014  
            Liquidation             Liquidation  
     Number of      Value of Loans      Number      Value of Loans  

Internal Credit Quality

   Loans      Receivable      of Loans      Receivable  

Greater than zero

     2       $ 5,280         3       $ 24,005   

Equal to zero

     1         —           1         —     

Less than zero

     1         —           1         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     4       $ 5,280         5       $ 24,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-Performing Loans

Prior to adopting the liquidation basis of accounting, the Trust considered a loan to be non-performing and placed loans on non-accrual status at such time as management determined it was probable that it would be unable to collect all amounts due according to the contractual terms of the loan. While on non-accrual status, based on the Trust’s judgment as to collectability of principal, loans were either accounted for on a cash basis, where interest income was recognized only upon actual receipt of cash, or on a cost-recovery basis, where all cash receipts reduced a loan’s carrying value. If and when a loan was brought back into compliance with its contractual terms, the Trust resumed accrual of interest.

As of July 31, 2014 and December 31, 2013, there was one non-performing loan with past due payments. A $348,000 provision for loan loss was recorded as of December 31, 2013. The Trust did not record any provision for loan loss for the seven months ended July 31, 2014.

 

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Secured Financing Receivable

In August 2013 the Trust closed on an agreement to acquire its venture partner’s (“Elad”) 50% interest in the mezzanine lender with respect to the One South State Street, Chicago, Illinois property (“Lender LP”) for $30,000,000. In connection with the transaction, the Trust entered into an option agreement with Elad granting Elad the right, but not obligation, to repurchase the interest in the venture. The option agreement provides Elad, as the transferor, the option to unilaterally cause the return of the asset at the earlier of two years from and after August 21, 2013 or an event of default on Lender LP’s mezzanine debt. As such, Elad is able to retain control of its interest in Lender LP for financial reporting purposes as the exercise of the option is unconditional other than for the passage of time. As a result, for financial reporting purposes, the transfer of the financial asset was accounted for as a secured financing rather than an acquisition. The $30,000,000 acquisition price was recorded as a secured financing receivable. Under the going concern basis of accounting, the Trust recognized interest income on the secured financing receivable on an accrual basis in accordance with GAAP, at an annual interest rate of 15%. The Trust recorded $2,215,000 of interest income during the seven months ended July 31, 2014 and $1,386,000 during the year ended December 31, 2013.

 

9. Equity Investments

Under liquidation accounting, equity investments are carried at net realizable value. The Trust’s nominal ownership percentages in its equity investments consist of the following at December 31, 2015 and December 31, 2014:

 

Venture Partner

  

Equity Investment

   Nominal % Ownership at
December 31, 2015
    Nominal % Ownership at
December 31, 2014
 

Elad Canada Ltd

   WRT One South State Lender LP      50.0     50.0

Elad Canada Ltd

   WRT-Elad One South State Equity LP      50.0     50.0

Atrium Holding

   RE CDO Management LLC      50.0     50.0

Freed

   Mentor Retail LLC      49.9     49.9

Inland

   Concord Debt Holdings LLC      66.6     66.6

Inland

   CDH CDO LLC      49.6     49.6

Marc Realty

   Atrium Mall LLC      50.0     50.0

New Valley/Witkoff (1)

   701 Seventh WRT Investor LLC      81.0     81.0

RS Summit Pointe (2)

   RS Summit Pointe Apartments LLC      80.0     80.0

Serure/C&B High Line (3)

   446 High Line LLC      83.6     N/A   

Freed (4)

   Edens Plaza Associates LLC      N/A        <1

Freed (2)(4)

   Irving-Harlem Venture Limited      N/A        <1

Gancar Trust (4)

  

Vintage Housing Holdings LLC

     N/A        75.0

 

(1) The Trust’s investment in this venture provides the Trust with a 61.14% effective ownership interest in the underlying property.
(2) Investment was previously consolidated under going concern accounting. See Note 3 “Post Plan of Liquidation” for further discussion.
(3) Investment was reclassified as an equity investment as of December 31, 2015 due to a change in exit strategy. The investment was consolidated in previous filings. The nominal ownership percentage is based on the waterfall provision of the partnership. See Note 3 “Post Plan of Liquidation” for further discussion.
(4) The Trust’s investment was sold or fully redeemed during the year ended December 31, 2015.

See Note 7 – Investment and Disposition Activities for information relating to 2015 activity with respect to equity investments.

At December 31, 2014 there is a basis differential for each investment between the Trust’s carrying value of its investments and the basis reflected at the joint venture’s level. The basis differential primarily relates to the difference between the net realizable value of the investment and the inside basis of the Trust’s equity in the joint venture. The basis differential is accounted for in the Trust’s calculation of the net realizable value.

 

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Equity Investment Impairments

During the fourth quarter of 2013, the Trust’s 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 the Trust 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 the Trust to reassess its business plan associated with the Marc Investments in the fourth quarter of 2013.

Subsequent to December 31, 2013 the Trust entered into an agreement with Marc Realty, its joint venture partner in these equity investments, to sell its interests in High Point, 1701 Woodfield, Enterprise Center along with its controlling interest in the River City property, located in Chicago, Illinois, which is consolidated, for a gross sales price of $6,000,000. The Trust considered the underlying investment characteristics and negotiations with Marc Realty in allocating the purchase price to the specific assets included in the transaction. Additionally, the Trust granted Marc Realty an option exercisable within two years to acquire its interest in 223 West Jackson.

Based on the factors noted above, the Trust concluded that each of the Marc Investments were other-than-temporarily impaired in the aggregate by $7,687,000 at December 31, 2013, when comparing each of their carrying values of $14,438,000 in the aggregate to each of their fair values of $6,751,000 in the aggregate and a corresponding impairment charge has been included in equity in income (loss) of equity investments in the Consolidated Statements of Operations and Comprehensive Income for the year then ended. The Trust separately tested the River City property for impairment and determined that the carrying value of River City was recoverable at December 31, 2013 when comparing the portion of the gross sales price attributable to the River City property to its carrying value.

During June 2014 the Trust was notified by Marc Realty of its intention to exercise its option to acquire the Trust’s interest in 223 West Jackson prior to year end. The purchase price of the Trust’s interest was dependent upon when the option was exercised and certain operating characteristics of the investment at the time of exercise. The Trust considered a probability analysis of various scenarios based on the notification of exercise and the Trust concluded that the carrying value of this investment exceeded its fair value. As a result, the Trust recorded an other-than-temporary impairment charge of $762,000 at June 30, 2014.

During the second quarter of 2014, the Trust, together with Sealy its venture partner in Northwest Atlanta Partners LP, agreed to market for sale the property held by the venture. In preparation for marketing the property, the venture obtained multiple third party valuations to provide a range of residual values. The fair value of the Trust’s equity investment in Northwest Atlanta Partners LP was calculated using the following weighted average key Level 3 inputs: discount rate of 10.8%, terminal capitalization rate of 8.5%, market rent growth rate of 2.7% and expense growth rates of 2.8%. The Trust concluded that the carrying value of this investment exceeded its current fair value and the Trust recorded an other-than-temporary impairment charge of $1,660,000 at June 30, 2014.

Separate Financial Statements for Unconsolidated Subsidiaries

The Trust has determined that for the periods presented in the Trust’s financial statements, certain of its unconsolidated subsidiaries have met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X for which the Trust is required, pursuant to Rule 3-09 of Regulation S-X, to attach separate financial statements as exhibits to its Annual Report on Form 10-K as follows:

 

     Year(s) Determined         

Entity

   Significant      Exhibit  

CDH CDO LLC

     2013         99.1   

Vintage Housing Holdings LLC

     2013         99.2   

701 Seventh WRT Investor LLC and subsidiaries

     2015, 2013           

 

 

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WINTHROP REALTY TRUST

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Trust was granted a waiver of the requirements to provide comparable unaudited Regulation S-X 3-09 financial statements for the year ended December 31, 2014 for its equity method joint venture investees CDH CDO LLC, Vintage Housing Holdings LLC and 701 Seventh WRT Investor LLC by the U.S. Securities and Exchange Commission. Audited financial statements for the year ended December 31, 2013 for CDH CDO LLC and Vintage Housing Holdings LLC are attached to this Form 10-K. Audited financial statements for the years ended December 31, 2015 and 2013 for 701 Seventh WRT Investor LLC will be filed as an amendment to this Form 10-K.

Combined Financial Statements for Unconsolidated Subsidiaries

Pursuant to Rule 4-08(g), the following summarized financial data for unconsolidated subsidiaries includes information for the following entities: Vintage Housing Holdings, LLC, WRT-Elad One South State Equity LP, WRT-Stamford LLC, 10 Metrotech Loan LLC, Mentor Retail LLC, 701 Seventh WRT Investor LLC, WRT-Fenway Wateridge LLC, Brooks Building LLC, High Point Plaza LLC, 1701 Woodfield LLC, Enterprise Center LLC, Atrium Mall LLC, Edens Plaza Associates LLC, Northwest Atlanta Partners LP, Concord Debt Holdings LLC, CDH CDO LLC and WRT-ROIC Lakeside Eagle LLC.

 

     Year Ended December 31,  
     2015      2014      2013  

Income Statements

        

Rental Revenue

   $ 70,705       $ 94,432       $ 85,660   

Interest, dividends and discount accretion

   $ 6,874       $ 14,017       $ 40,229   

Expenses

   $ 78,165       $ 98,107       $ 93,344   

Other loss

   $ 747       $ 5,297       $ 23,188   

Income (loss) from continuing operations

   $ (1,333    $ 5,045       $ 9,357   

 

     December 31, 2015      December 31, 2014  

Balance Sheets

     

Investment in real estate

   $ 876,400       $ 1,251,615   

Total assets

   $ 954,374       $ 1,453,983   

Total debt

   $ 693,013       $ 913,406   

Total liabilities

   $ 40,943       $ 179,224   

Non controlling interests

   $ 52,052       $ 88,363   

The Trust had elected a one-month lag reporting period for Vintage Housing Holdings LLC, WRT-Elad One South State Equity LP and WRT-Fenway Wateridge LLC. The Trust had elected a three-month lag reporting period for 701 Seventh WRT Investor LLC.

The Trust was granted a waiver of the requirements to provide Regulation S-X 3-09 financial statements for its equity method joint venture investee WRT One South State Lender LP (“Lender LP”) by the U.S. Securities and Exchange Commission. Lender LP met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X for 2013 solely due to impairment charges recorded on other equity investments as discussed in this Note 9 and non-recurring income recorded by Lender LP in 2013.

Lender LP holds a single loan receivable with a face amount of $55,714,000 at December 31, 2015. The loan bears interest at a rate of 15% per annum, requires payments of interest only and matures December 2017. The loan was acquired at a discount to face and the discount is being accreted into income over the life of the loan.

 

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The balance sheets of Lender LP, on a going concern basis, are as follows (in thousands):

 

     December 31,  
     2015      2014  

Assets

     

Loan receivable

   $ 50,109       $ 44,014   

Other assets, net

     6,110         5,446   
  

 

 

    

 

 

 

Total assets

   $ 56,219       $ 49,460   
  

 

 

    

 

 

 

Liabilities and Equity

     

Accounts payable and accrued expenses

   $ 2       $ 2   

Other liabilities

     —           —     
  

 

 

    

 

 

 

Total liabilities

     2         2   
  

 

 

    

 

 

 

Equity

     56,217         49,458   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 56,219       $ 49,460   
  

 

 

    

 

 

 

The statements of operations for Lender LP , on a going concern basis, are as follows (in thousands):

 

     Year Ended December 31,  
     2015      2014      2013  

Revenue

        

Interest income

   $ 10,400       $ 10,123       $ 8,506   

Management fee income

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     10,400         10,123         8,506   

Expenses

        

General and administrative

     —           —           86   

Other expenses

     —           —           —     
  

 

 

    

 

 

    

 

 

 
     —           —           86   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 10,400       $ 10,123       $ 8,420   
  

 

 

    

 

 

    

 

 

 

 

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Statement of cash flows for Lender LP are as follows (in thousands):

 

     2015      2014      2013  

Net cash provided by operating activities

   $ 7,639       $ 7,865       $ 879   

Net cash used in investing activities

   $ (3,998    $  —         $  —     

Net cash used in financing activities

   $ (3,641    $ (7,865    $ (5,952

Cash and cash equivalents, end of year

   $  —         $  —         $  —     

Non cash investing and financing activity

        

Distribution to partners

   $  —         $  —         $ (4,166

Contribution from partners

   $  —         $ 20       $  —     

The Trust was granted a waiver of the requirements to provide Regulation S-X 3-09 financial statements for its equity method joint venture investee RE CDO Management LLC (“RE CDO”) by the U.S. Securities and Exchange Commission. RE CDO met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X for 2013 solely due to impairment charges recorded on other equity investments as discussed in this Note 9 and non-recurring income recorded by RE CDO in 2013.

RE CDO holds a 5.52% interest in (i) a first priority mortgage loan collateralized by land located in Las Vegas, Nevada (the “LV Land”), which loan bears interest at LIBOR plus 40% with a current pay rate of 7.5% and the balance accruing and compounding and which had an outstanding balance of $76,733,000 at December 31, 2015, and (ii) a second priority mortgage loan collateralized by the LV Land which bears interest at 10% per annum, all of which accrues, and which had an outstanding balance of $47,515,000 at December 31, 2015. The interest in the loan was acquired for $1,093,000 and RE CDO accounts for this investment on the cost recovery method.

RE CDO also holds the collateral management agreement for a collateralized debt obligation entity that holds loans and loan securities.

The balance sheets of RE CDO, on a going concern basis, are as follows (in thousands):

 

     December 31,  
     2015      2014  

Assets

     

Loan receivable

   $ 965       $ 1,002   

Other assets, net

     825         869   
  

 

 

    

 

 

 

Total assets

   $ 1,790       $ 1,871   
  

 

 

    

 

 

 

Liabilities and equity

     

Accounts payable and accrued expenses

   $ 8       $ 12   
  

 

 

    

 

 

 

Total liabilities

     8         12   
  

 

 

    

 

 

 

Equity

     1,782         1,859   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 1,790       $ 1,871   
  

 

 

    

 

 

 

 

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The statements of operations for RE CDO, on a going concern basis, are as follows (in thousands):

 

     Year Ended December 31,  
     2015      2014      2013  

Revenue

        

Management fee income

   $ 113       $ 149       $ 226   
  

 

 

    

 

 

    

 

 

 
     113         149         226   
  

 

 

    

 

 

    

 

 

 

Expenses

        

General and administrative

     58         79         290   

Other expenses

     48         51         1,459   
  

 

 

    

 

 

    

 

 

 
     106         130         1,749   
  

 

 

    

 

 

    

 

 

 

Other income and expense

        

Gain on sale of assets

     —           —           8,940   
  

 

 

    

 

 

    

 

 

 

Net income

   $ 7       $ 19       $ 7,417   
  

 

 

    

 

 

    

 

 

 

Statement of cash flows for RE CDO are as follows (in thousands):

 

     Year Ended December 31,  
     2015      2014      2013  

Net cash provided by (used in) operating activities

   $ 97       $ 104       $ (7

Net cash provided by investing activities

   $  —         $  —         $ 8,940   

Net cash used in financing activities

   $ (84    $ (141    $ (8,993

Cash and cash equivalents, end of year

   $ 39       $ 26       $ 63   

 

10. Debt

Mortgage Loans Payable

Mortgage loans payable are carried at their contractual amounts due under liquidation accounting. The Trust had outstanding mortgage loans payable of $172,095,000 and $296,954,000 at December 31, 2015 and 2014, respectively. The mortgage loan payments of principal and interest are generally due monthly, quarterly or semi-annually and are collateralized by applicable real estate of the Trust.

 

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The Trust’s mortgage loans payable at December 31, 2015 and 2014 are summarized as follows (in thousands):

 

Location of Collateral

   Maturity      Spread Over
LIBOR (1)
          Interest Rate at
December 31, 2015
    December 31,
2015
     December 31,
2014
 

Chicago, IL

     Mar 2016         —            5.75     19,104         19,491   

Greensboro, NC

     Aug 2016         —            6.22     13,600         13,600   

Lisle, IL

     Oct 2016         Libor + 2.5       2.93     5,459         5,713   

Stamford, CT (4)(5)

     Oct 2016         Libor + 2.0     (3     2.69     33,448         44,923   

Houston, TX (4)(5)

     Oct 2016         Libor + 2.0     (3     2.69     44,319         59,524   

Lisle, IL

     Mar 2017         —            5.55     5,309         5,392   

Orlando, FL

     Jul 2017         —            6.40     35,668         36,347   

Plantation, FL

     Apr 2018         —            6.48     10,406         10,550   

Churchill, PA

     Aug 2024         —            3.50     4,782         4,918   

New York, NY

     N/A         Libor + 2.5     (2     N/A        —           51,034   

Phoenix, AZ (4)(5)

     N/A         —            N/A        —           22,462   

Cerritos, CA (6)

     N/A         —            N/A        —           23,000   
           

 

 

    

 

 

 
            $ 172,095       $ 296,954   
           

 

 

    

 

 

 

 

(1) The one-month LIBOR rate at December 31, 2015 was 0.4295%. The one-month LIBOR rate at December 31, 2014 was 0.17125%.
(2) The loan has a LIBOR floor of 1%. Property was deconsolidated at December 31, 2015.
(3) The loan has an interest rate swap which effectively fixes LIBOR at 0.69%.
(4) These properties are cross-collateralized. Proceeds from property sales go 100% to repay the mortgage loan.
(5) A portion of the loan was satisfied during 2015 in connection with the sale of a property.
(6) The loan was satisfied during 2015 in connection with the sale of the property.

The following table summarizes future principal repayments of mortgage loans payable as of December 31, 2015 (in thousands):

 

Year

   Amount  

2016

   $ 117,026   

2017

     40,482   

2018

     10,242   

2019

     157   

2020

     162   

Thereafter

     4,026   
  

 

 

 
   $ 172,095   
  

 

 

 

Notes Payable

In conjunction with the 2012 loan modification on the property located in Cerritos, California the Trust assumed a $14,500,000 B Note that bore interest at 6.6996% per annum and required monthly interest payments of approximately $12,000 with the balance of the interest accruing. The loan modification agreement provided for a participation feature whereby the B Note could be fully satisfied with proceeds from the sale of the property, after the Trust received a 9.0% priority return on its capital, during a specified time period as defined in the loan modification document. As a result of the loan modification, the B Note did not have a contractually specified settlement amount. As such, the B Note was recorded at the estimated settlement amount based on an estimated sale of the property. As discussed in Note 7 – Investment and Disposition Activities, the property was sold on September 16, 2015. No payment was due to the holder of the B Note in connection with the sale. The liquidation value of the B Note was $0 at December 31, 2014.

 

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11. Senior Notes Payable

In August 2012 the Trust issued a total $86,250,000 of its 7.75% Senior Notes (the “Senior Notes”) at an issue price of 100% of par value. The Senior Notes matured on August 15, 2022 and bore interest at the rate of 7.75% per year, payable quarterly in arrears.

Pursuant to its securities repurchase plan, as of August 15, 2015 the Trust had acquired $14,995,000 of its outstanding Senior Notes in open market transactions for an aggregate price of $15,707,000. The Trust redeemed the Senior Notes in full effective August 15, 2015. The aggregate redemption price paid was $72,635,000 (or $25.484375 per $25.00 face amount Senior Note) which represents the face amount of the Senior Notes not owned by the Trust plus accrued and unpaid interest to, but not including, August 15, 2015.

 

12. Derivative Financial Instruments

The Trust has exposure to fluctuations in market interest rates. The Trust seeks to limit its risk to interest rate fluctuations through match financing on its assets as well as through hedging transactions. Under going concern accounting, the Trust’s derivative financial instruments were classified as other assets and other liabilities on the balance sheet. As these instruments will not be converted to 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, 2015. The Trust has accrued the estimated monthly settlement amounts for its swap agreements. This amount is included in the liability for estimated costs in excess of estimated receipts during liquidation.

Under going concern accounting, the effective portion of changes in fair value of derivatives designated and that qualify as cash flow hedges was recorded in accumulated other comprehensive income and was subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change, if any, in fair value of the derivatives was recognized directly in earnings.

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designed as cash flow hedges for the seven months ended July 31, 2014 and the twelve months ended December 31, 2013, respectively (in thousands):

 

     2014      2013  

Amount of gain (loss) recognized in accumulated other comprehensive income on interest rate derivatives (effective portion)

   $ (200    $ (72
  

 

 

    

 

 

 

Amount of gain (loss) reclassified from accumulated other comprehensive income into income as interest expense (effective portion)

   $ 7       $ (1
  

 

 

    

 

 

 

Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)

   $ —         $  —     
  

 

 

    

 

 

 

 

13. Non-controlling Interests

Under going concern accounting, consolidated joint ventures are recorded on a gross basis with an allocation of equity to non-controlling interest holders. The following transactions affecting non-controlling interests occurred prior to August 1, 2014.

Houston, Texas Operating Property – During 2013 a wholly-owned subsidiary of the Trust acquired two quarter-unit limited partner interests from non-controlling interest partners, representing 2% of Westheimer Holding LP (“Westheimer”) for an

 

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aggregate purchase price of $150,000. As of July 31, 2014, the Trust owned 32% of Westheimer. The Trust accounted for these purchases as equity transactions recording the difference in the $253,000 carrying value of the acquired non-controlling interest and the purchase price as a $103,000 increase in paid-in capital. The Trust sold its interest in this property on October 15, 2014.

Chicago, Illinois Operating Property – On March 5, 2014 the Trust sold its interest in its consolidated Chicago, Illinois property known as River City which resulted in a decrease in non-controlling interest of $3,764,000.

Norridge, Illinois Operating Property – On March 5, 2014 the Trust acquired the general partner interest in the Norridge Property. The consolidation of the property resulted in an increase in non-controlling interest of $16,391,000. The Trust sold its interest in this property on October 9, 2015.

The changes in the Trust’s ownership interest in the subsidiaries impacted consolidated equity during the period as follows:

 

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

Net income attributable to Winthrop Realty Trust

   $ 12,481       $ 28,778   

Increase (decrease) in Winthrop Realty Trust paid in capital adjustments from transaction with non-controlling interests

     —           103   
  

 

 

    

 

 

 

Changes from net income attributable to Winthrop Realty Trust and transfers (to) from non-controlling interest

   $ 12,481       $ 28,881   
  

 

 

    

 

 

 

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

 

14. Common Shares

The Trust’s Common Shares have a par value of $1 per share with an unlimited number of shares authorized. There were 36,425,084 Common Shares issued and outstanding at December 31, 2015 and 2014.

 

15. Common Share Options

In May 2007 the Trust’s shareholders approved the Winthrop Realty Trust 2007 Long Term Incentive Plan (the “2007 Plan”) pursuant to which the Trust can issue options to acquire Common Shares and restricted share awards to its Trustees, directors and consultants. In May 2013 the Trust’s shareholders approved an amendment to the 2007 Plan increasing the number of shares issuable under the plan to 1,000,000. During 2013 the Trust issued 600,000 Restricted Shares pursuant to the plan amendment. See Note 20 – Restricted Share Grants for details on the issuance of the Restricted Shares. There are 400,000 Common Shares reserved for issuance under the 2007 Plan as of December 31, 2015. No stock options have been issued.

 

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16. Discontinued Operations

During 2013 the Trust’s office properties located in Deer Valley, Arizona; Lisle, Illinois (701 Arboretum) and Andover, Massachusetts and its retail properties in Seabrook, Texas and Denton, Texas were sold and are included in discontinued operations for all periods presented. During 2014 the Trust’s residential property in Meriden, Connecticut and its 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. The Trust’s 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.

Assets and liabilities of assets held for sale at July 31, 2014 consisted of land and building of $2,536,000 and accounts receivable of $58,000.

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 the Trust 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 the Trust recorded a $6,745,000 gain on the sale of the property.

The Trust 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. The Trust 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 the Trust received net proceeds of $1,703,000.

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 the Trust recorded a $1,428,000 gain on the sale of the property.

In September 2013 the Trust’s 701 Arboretum property located in Lisle, Illinois was classified as discontinued operations. The Trust had previously recorded a $3,000,000 impairment charge on this property in 2011 as a result of continued declines in occupancy. The Trust 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 the Trust 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 the Trust received a non-refundable deposit of $500,000. The sale of the property was consummated on February 26, 2014. After transfer of the debt, the Trust 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. The Trust sold to Marc Realty, its venture partner, its interest in the River City, Chicago, Illinois property for gross sale proceeds of $5,800,000. The Trust 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. The Trust recorded a $3,000 gain on the sale of its 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 the Trust 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 the Trust received net proceeds of approximately $21,226,000 on the sale of the property. Upon completion of the parking area for the office property the Trust received $2,449,000 from the reserve in November 2014, which resulted in aggregate net proceeds of approximately $23,675,000. The Trust recorded a gain of $946,000 on the sale of the property.

 

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Results for discontinued operations for the seven months ended July 31, 2014 and the year ended December 31, 2013 are as follows (in thousands):

 

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

Revenues

   $ 3,220       $ 13,790   

Operating expenses

     (1,614      (6,572

Depreciation and amortization

     (932      (4,632

Interest expense

     (446      (1,915

Impairment loss

     (87      (2,904

Gain on sale of real estate

     11,094         11,005   
  

 

 

    

 

 

 
Income from discontinued operations    $ 11,235       $ 8,772   
  

 

 

    

 

 

 

 

17. Federal and State Income Taxes

The Trust has made no provision for regular current or deferred federal income taxes and no deferred state income taxes have been provided for on the basis that the Trust operates in a manner intended to enable it to continue to qualify as a real estate investment trust under Sections 856-860 of the Code. In order to qualify as a REIT, the Trust is generally required each year to distribute to its shareholders at least 90% of its taxable income (excluding any net capital gain). The Trust intends to comply with the foregoing minimum dividend requirements. As of December 31, 2014, the Trust has net operating loss carryforwards of approximately $9,077,000 which will expire between 2023 and 2033. The Trust does not expect to utilize any of the net operating loss carryforwards to offset 2015 taxable income. The Trust treats certain items of income and expense differently in determining net income reported for financial and tax purposes.

Certain states and localities disallow state income taxes as a deduction and exclude interest income from United States obligations when calculating taxable income. Federal and state tax calculations can differ due to differing recognition of net operating losses. Accordingly, the Trust has recorded state and local taxes of $126,000 for the seven months ended July 31, 2014 and $247,000 for the year ended December 31, 2013.

The 2014 and 2013 cash dividends per Series D Preferred Share for an individual shareholder’s income tax purposes were as follows:

 

     Ordinary
Dividends
     Capital
Gains
     Nontaxable
Distribution
     Cash
Liquidating
Distribution
     Total Dividends
Paid
 

2014

   $ —         $ 1.16       $  —         $ 25.48       $ 26.64   

2013

     2.31         —           —           —           2.31   

 

 

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The 2015, 2014 and 2013 cash dividends per Common Share for an individual shareholder’s income tax purposes were as follows:

 

     Ordinary
Dividends
     Capital Gains      Nontaxable
Distribution
     Cash
Liquidating
Distribution
     Total Dividends
Paid
 

2015

   $  —         $  —         $  —         $ 4.50       $ 4.50   

2014

     —           0.49         —           —           0.49   

2013

     0.65         —           —           —           0.65   

The following table reconciles GAAP net income attributable to the Trust to taxable income (in thousands):

 

     For the Years Ended December 31,  
     2015      2014      2013  

Net income (loss) attributable to Winthrop Realty Trust

   $ 10,310       $ 12,481       $ 28,778