UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: September 30, 2013
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
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 November 1, 2013 there were 36,408,018 Common Shares of Beneficial Interest outstanding.
FORM 10-Q SEPTEMBER 30, 2013
(Unaudited)
INDEX
Page | ||||||
Part I. |
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Item 1. |
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Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 |
3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
8 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
39 | ||||
Item 3. |
58 | |||||
Item 4. |
60 | |||||
Part II. |
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Item 6. |
61 | |||||
62 | ||||||
63 |
2
Item 1. Financial Statements (Unaudited)
FORM 10-Q SEPTEMBER 30, 2013
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share data)
September 30, 2013 |
December 31, 2012 |
|||||||
ASSETS |
||||||||
Investments in real estate, at cost |
||||||||
Land |
$ | 56,894 | $ | 43,252 | ||||
Buildings and improvements |
380,240 | 378,737 | ||||||
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437,134 | 421,989 | |||||||
Less: accumulated depreciation |
(55,195 | ) | (51,553 | ) | ||||
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Investments in real estate, net (variable interest entities $65,029 and $21,423, respectively) |
381,939 | 370,436 | ||||||
Cash and cash equivalents |
165,762 | 97,682 | ||||||
Restricted cash held in escrows (variable interest entities $6,637 and $1,101, respectively) |
19,084 | 13,250 | ||||||
Loans receivable, net |
108,163 | 211,250 | ||||||
Secured financing receivable |
30,395 | | ||||||
Accounts receivable, net of allowances of $478 and $374, respectively |
997 | 1,418 | ||||||
Accrued rental income |
19,205 | 17,241 | ||||||
Securities carried at fair value |
7,074 | 19,694 | ||||||
Loan securities carried at fair value |
226 | 11 | ||||||
Preferred equity investments |
12,703 | 12,250 | ||||||
Equity investments |
139,061 | 134,859 | ||||||
Lease intangibles, net (variable interest entities $20,059 and $3,485, respectively) |
48,774 | 37,744 | ||||||
Deferred financing costs, net |
4,546 | 4,864 | ||||||
Other assets |
28,135 | 2,464 | ||||||
Assets held for sale |
2,421 | | ||||||
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TOTAL ASSETS |
$ | 968,485 | $ | 923,163 | ||||
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LIABILITIES |
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Mortgage loans payable (variable interest entities $65,836 and $23,184, respectively) |
308,049 | 280,576 | ||||||
Senior notes payable |
86,250 | 86,250 | ||||||
Secured financings |
29,150 | 52,920 | ||||||
Notes payable (variable interest entities $864 and $876, respectively) |
1,664 | 1,676 | ||||||
Accounts payable, accrued liabilities and other liabilities |
21,522 | 21,056 | ||||||
Related party fees payable |
2,693 | 2,664 | ||||||
Dividends payable |
8,804 | 5,366 | ||||||
Deferred income |
995 | 1,136 | ||||||
Below market lease intangibles, net (variable interest entities $605 and $51, respectively) |
2,280 | 2,255 | ||||||
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TOTAL LIABILITIES |
461,407 | 453,899 | ||||||
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COMMITMENTS AND CONTINGENCIES |
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EQUITY |
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Winthrop Realty Trust Shareholders Equity: |
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Series D Cumulative Redeemable Preferred Shares, $25 per share liquidation preference, 5,060,000 shares authorized and 4,820,000 shares both issued and outstanding at September 30, 2013 and December 31, 2012 |
120,500 | 120,500 | ||||||
Common Shares of Beneficial Interest, $1 par, unlimited shares authorized; 36,397,949 and 33,018,711 both issued and outstanding at September 30, 2013 and December 31, 2012, respectively |
35,798 | 33,019 | ||||||
Additional paid-in capital |
646,620 | 618,426 | ||||||
Accumulated distributions in excess of net income |
(308,661 | ) | (317,385 | ) | ||||
Accumulated other comprehensive loss |
(70 | ) | (50 | ) | ||||
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|
|
|
|||||
Total Winthrop Realty Trust Shareholders Equity |
494,187 | 454,510 | ||||||
Non-controlling interests |
12,891 | 14,754 | ||||||
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|
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Total Equity |
507,078 | 469,264 | ||||||
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TOTAL LIABILITIES AND EQUITY |
$ | 968,485 | $ | 923,163 | ||||
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|
|
See Notes to Consolidated Financial Statements.
3
FORM 10-Q SEPTEMBER 30, 2013
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited, in thousands except per share data)
Three Months Ended September 30 , |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenue |
||||||||||||||||
Rents and reimbursements |
$ | 15,099 | $ | 12,224 | $ | 45,026 | $ | 35,022 | ||||||||
Interest, dividends and discount accretion |
3,917 | 3,722 | 13,545 | 15,018 | ||||||||||||
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19,016 | 15,946 | 58,571 | 50,040 | |||||||||||||
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Expenses |
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Property operating |
5,272 | 3,335 | 14,697 | 10,643 | ||||||||||||
Real estate taxes |
1,705 | 1,160 | 4,184 | 3,116 | ||||||||||||
Depreciation and amortization |
4,923 | 4,416 | 14,703 | 11,623 | ||||||||||||
Interest |
5,435 | 4,416 | 18,175 | 11,560 | ||||||||||||
General and administrative |
1,113 | 782 | 3,058 | 2,447 | ||||||||||||
Related party fees |
2,309 | 2,316 | 6,866 | 6,641 | ||||||||||||
Transaction costs |
106 | 30 | 158 | 335 | ||||||||||||
State and local taxes |
85 | 64 | 227 | 211 | ||||||||||||
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20,948 | 16,519 | 62,068 | 46,576 | |||||||||||||
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Other income (loss) |
||||||||||||||||
Equity in income of equity investments |
13,856 | 12,809 | 26,249 | 14,051 | ||||||||||||
Earnings from preferred equity investments |
189 | | 576 | | ||||||||||||
Realized gain (loss) on sale of securities carried at fair value |
(31 | ) | | (133 | ) | 41 | ||||||||||
Unrealized gain (loss) on securities carried at fair value |
| 3,113 | (142 | ) | 7,254 | |||||||||||
Unrealized gain on loan securities carried at fair value |
| 371 | 215 | 447 | ||||||||||||
Settlement expense |
(16 | ) | | (150 | ) | | ||||||||||
Interest income |
101 | 242 | 286 | 433 | ||||||||||||
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14,099 | 16,535 | 26,901 | 22,226 | |||||||||||||
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Income from continuing operations |
12,167 | 15,962 | 23,404 | 25,690 | ||||||||||||
Discontinued operations |
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(Loss) income from discontinued operations |
(1,434 | ) | 85 | 8,025 | 594 | |||||||||||
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Net income |
10,733 | 16,047 | 31,429 | 26,284 | ||||||||||||
Net loss (income) attributable to non-controlling interest |
995 | (939 | ) | 2,419 | 435 | |||||||||||
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Net income attributable to Winthrop Realty Trust |
11,728 | 15,108 | 33,848 | 26,719 | ||||||||||||
Preferred dividend on Series D Preferred Shares |
(2,787 | ) | (2,786 | ) | (8,360 | ) | (6,498 | ) | ||||||||
Amount allocated to Restricted Common Shares |
(106 | ) | | (235 | ) | | ||||||||||
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Net income attributable to Common Shares |
$ | 8,835 | $ | 12,322 | $ | 25,253 | $ | 20,221 | ||||||||
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Per Common Share data - Basic |
||||||||||||||||
Income from continuing operations |
$ | 0.31 | $ | 0.37 | $ | 0.52 | $ | 0.59 | ||||||||
Income (loss) from discontinued operations |
(0.04 | ) | | 0.24 | 0.02 | |||||||||||
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Net income attributable to Winthrop Realty Trust |
$ | 0.27 | $ | 0.37 | $ | 0.76 | $ | 0.61 | ||||||||
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Per Common Share data - Diluted |
||||||||||||||||
Income from continuing operations |
$ | 0.31 | $ | 0.37 | $ | 0.52 | $ | 0.59 | ||||||||
Income (loss) from discontinued operations |
(0.04 | ) | | 0.24 | 0.02 | |||||||||||
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Net income attributable to Winthrop Realty Trust |
$ | 0.27 | $ | 0.37 | $ | 0.76 | $ | 0.61 | ||||||||
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Basic Weighted-Average Common Shares |
33,076 | 33,075 | 33,047 | 33,064 | ||||||||||||
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Diluted Weighted-Average Common Shares |
33,148 | 33,076 | 33,089 | 33,064 | ||||||||||||
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Comprehensive income |
||||||||||||||||
Net income |
$ | 10,733 | $ | 16,047 | $ | 31,429 | $ | 26,284 | ||||||||
Change in unrealized loss on interest rate derivative |
(150 | ) | (16 | ) | (20 | ) | (73 | ) | ||||||||
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Consolidated comprehensive income |
10,583 | 16,031 | 31,409 | 26,211 | ||||||||||||
Net loss (income) attributable to non-controlling interest |
995 | (939 | ) | 2,419 | 435 | |||||||||||
Other comprehensive income attributable to non-controlling interest |
| | | | ||||||||||||
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Comprehensive loss (income) attributable to non-controlling interest |
995 | (939 | ) | 2,419 | 435 | |||||||||||
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Comprehensive income attributable to Winthrop Realty Trust |
$ | 11,578 | $ | 15,092 | $ | 33,828 | $ | 26,646 | ||||||||
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Dividend declared per Common Share |
$ | 0.1625 | $ | 0.1625 | $ | 0.4875 | $ | 0.4875 | ||||||||
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See Notes to Consolidated Financial Statements.
4
FORM 10-Q SEPTEMBER 30, 2013
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited, in thousands except per share data)
Series D Preferred Shares of Beneficial Interest |
Common Shares of Beneficial Interest |
Additional Paid-In |
Accumulated in Excess of |
Accumulated Other |
Non- Controlling |
|||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Net Income | Income (loss) | Interests | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2012 |
4,820 | $ | 120,500 | 33,019 | $ | 33,019 | $ | 618,426 | $ | (317,385 | ) | $ | (50 | ) | $ | 14,754 | $ | 469,264 | ||||||||||||||||||
Net income attributable to Winthrop Realty Trust |
| | | | | 33,848 | | | 33,848 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interests |
| | | | | | | (2,419 | ) | (2,419 | ) | |||||||||||||||||||||||||
Distributions to non-controlling interests |
| | | | | | | (52 | ) | (52 | ) | |||||||||||||||||||||||||
Contributions from non-controlling interests |
| | | | | | | 861 | 861 | |||||||||||||||||||||||||||
Purchase of non-controlling interests |
| | | | 103 | | | (253 | ) | (150 | ) | |||||||||||||||||||||||||
Dividends paid or accrued on Common Shares of Beneficial Interest ($0.4875 per share) |
| | | | | (16,553 | ) | | | (16,553 | ) | |||||||||||||||||||||||||
Dividends paid or accrued on Series D Preferred Shares ($1.7344 per share) |
| | | | | (8,360 | ) | | | (8,360 | ) | |||||||||||||||||||||||||
Dividends paid or accrued on restricted shares |
| | | | | (211 | ) | | | (211 | ) | |||||||||||||||||||||||||
Change in unrealized loss on interest rate derivatives |
| | | | | | (20 | ) | | (20 | ) | |||||||||||||||||||||||||
Stock issued pursuant to Dividend Reinvestment Plan |
| | 29 | 29 | 324 | | | | 353 | |||||||||||||||||||||||||||
Net proceeds from common shares offering |
| | 2,750 | 2,750 | 27,210 | | | | 29,960 | |||||||||||||||||||||||||||
Issuance of restricted shares |
| | 600 | | | | | | | |||||||||||||||||||||||||||
Amortization of restricted shares |
| | | | 557 | | | | 557 | |||||||||||||||||||||||||||
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Balance, September 30, 2013 |
4,820 | $ | 120,500 | 36,398 | $ | 35,798 | $ | 646,620 | $ | (308,661 | ) | $ | (70 | ) | $ | 12,891 | $ | 507,078 | ||||||||||||||||||
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Series D Preferred Shares of Beneficial Interest |
Common Shares of Beneficial Interest |
Additional Paid-In |
Accumulated Distributions in Excess of |
Accumulated Other Comprehensive |
Non- Controlling |
|||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Net Income | Income (Loss) | Interests | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2011 |
1,600 | $ | 40,000 | 33,041 | $ | 33,041 | $ | 626,099 | $ | (311,246 | ) | $ | (92 | ) | $ | 21,034 | $ | 408,836 | ||||||||||||||||||
Net income attributable to Winthrop Realty Trust |
| | | | | 26,719 | | | 26,719 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interests |
| | | | | | | (435 | ) | (435 | ) | |||||||||||||||||||||||||
Distributions to non-controlling interests |
| | | | | | | (6,115 | ) | (6,115 | ) | |||||||||||||||||||||||||
Contributions from non-controlling interests |
| | | | | | | 4,340 | 4,340 | |||||||||||||||||||||||||||
Purchase of non-controlling interests |
| | | | (5,695 | ) | | | (555 | ) | (6,250 | ) | ||||||||||||||||||||||||
Dividends paid or accrued on Common Shares of Beneficial Interest ($0.4875 per share) |
| | | | | (16,119 | ) | | | (16,119 | ) | |||||||||||||||||||||||||
Dividends paid or accrued on Series D Preferred Shares ($1.15625 per share) |
| | | | | (6,498 | ) | | | (6,498 | ) | |||||||||||||||||||||||||
Net proceeds from Series D Preferred Share offering |
3,220 | 80,500 | | | (2,928 | ) | | | | 77,572 | ||||||||||||||||||||||||||
Change in unrealized gain on interest rate derivatives |
| | | | | | (73 | ) | | (73 | ) | |||||||||||||||||||||||||
Stock issued pursuant to dividend |
||||||||||||||||||||||||||||||||||||
reinvestment plan |
| | 36 | 36 | 361 | | | | 397 | |||||||||||||||||||||||||||
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Balance, September 30, 2012 |
4,820 | $ | 120,500 | 33,077 | $ | 33,077 | $ | 617,837 | $ | (307,144 | ) | $ | (165 | ) | $ | 18,269 | $ | 482,374 | ||||||||||||||||||
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See Notes to Consolidated Financial Statements.
5
FORM 10-Q SEPTEMBER 30, 2013
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended September 30, |
||||||||
2013 | 2012 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 31,429 | $ | 26,284 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization (including amortization of deferred financing costs) |
10,355 | 8,552 | ||||||
Amortization of lease intangibles |
5,901 | 5,028 | ||||||
Straight-line rental income |
(3,584 | ) | (2,662 | ) | ||||
Loan discount accretion |
(2,283 | ) | (5,984 | ) | ||||
Discount accretion received in cash |
37 | 14,065 | ||||||
Income from preferred equity investments |
(576 | ) | | |||||
Distributions of income from preferred equity investments |
123 | 97 | ||||||
Income of equity investments |
(26,249 | ) | (14,051 | ) | ||||
Distributions of income from equity investments |
19,354 | 17,097 | ||||||
Restricted cash held in escrows |
1,763 | (4,063 | ) | |||||
Loss (gain) on sale of securities carried at fair value |
133 | (41 | ) | |||||
Unrealized loss (gain) on securities carried at fair value |
142 | (7,254 | ) | |||||
Unrealized gain on loan securities carried at fair value |
(215 | ) | (447 | ) | ||||
Impairment loss on investment in real estate |
2,904 | 698 | ||||||
Tenant leasing costs |
(3,365 | ) | (3,211 | ) | ||||
Gain on sale of real estate investments |
(10,948 | ) | (945 | ) | ||||
Equity compensation expenses |
557 | | ||||||
Bad debt expense (recovery) |
104 | (116 | ) | |||||
Changes in assets and liabilities: |
||||||||
Interest receivable |
58 | (293 | ) | |||||
Accounts receivable and other assets |
450 | 533 | ||||||
Accounts payable, accrued liabilities and other liabilities |
(255 | ) | 4,425 | |||||
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Net cash provided by operating activities |
25,835 | 37,712 | ||||||
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|
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Cash flows from investing activities |
||||||||
Investments in real estate |
(6,289 | ) | (29,975 | ) | ||||
Investment in equity investments |
(11,982 | ) | (47,925 | ) | ||||
Investment in preferred equity investments |
| (4,000 | ) | |||||
Proceeds from sale of investments in real estate |
36,217 | 7,024 | ||||||
Proceeds from sale of equity investments |
26 | 2,297 | ||||||
Return of capital distribution from equity investments |
14,649 | 83,736 | ||||||
Purchase of securities carried at fair value |
| (5,654 | ) | |||||
Proceeds from sale of securities carried at fair value |
12,345 | 4,614 | ||||||
Restricted cash held in escrows |
(2,677 | ) | (4,478 | ) | ||||
Issuance and acquisition of loans receivable |
(21,437 | ) | (64,970 | ) | ||||
Collection of loans receivable |
47,597 | 37,126 | ||||||
Proceeds from sale of loans receivable |
19,318 | | ||||||
Cash from consolidation of properties |
473 | | ||||||
Issuance of secured financing receivable |
(30,000 | ) | | |||||
Deposits on real estate |
(25,606 | ) | | |||||
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Net cash provided by (used in) investing activities |
32,634 | (22,205 | ) | |||||
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(Continued on next page) |
See Notes to Consolidated Financial Statements.
6
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands, continued)
Nine Months Ended September 30, |
||||||||
2013 | 2012 | |||||||
Cash flows from financing activities |
||||||||
Proceeds from mortgage loans payable |
48,100 | 15,897 | ||||||
Principal payments of mortgage loans payable |
(20,295 | ) | (8,740 | ) | ||||
Payment of secured financing |
(23,770 | ) | | |||||
Proceeds from issuance of Series D Preferred Shares |
| 77,572 | ||||||
Proceeds from issuance of Senior Notes Payable |
| 86,250 | ||||||
Repayment of revolving line of credit |
| (40,000 | ) | |||||
Restricted cash held in escrows |
(2,921 | ) | (2,818 | ) | ||||
Deferred financing costs |
(789 | ) | (3,766 | ) | ||||
Contribution from non-controlling interest |
861 | 4,340 | ||||||
Distribution to non-controlling interest |
(52 | ) | (6,115 | ) | ||||
Purchase of non-controlling interests |
(150 | ) | (400 | ) | ||||
Issuance of Common Shares under Dividend Reinvestment Plan |
353 | 397 | ||||||
Issuance of Common Shares through offering |
29,960 | | ||||||
Dividend paid on Common Shares |
(16,102 | ) | (16,113 | ) | ||||
Dividend paid on Series D Preferred Shares |
(5,574 | ) | (3,712 | ) | ||||
Dividend paid on Restricted Shares |
(10 | ) | | |||||
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Net cash provided by financing activities |
9,611 | 102,792 | ||||||
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|||||
Net increase in cash and cash equivalents |
68,080 | 118,299 | ||||||
Cash and cash equivalents at beginning of period |
97,682 | 40,952 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of period |
165,762 | 159,251 | ||||||
|
|
|
|
|||||
Supplemental Disclosure of Cash Flow Information |
||||||||
Interest paid |
$ | 17,780 | $ | 11,248 | ||||
|
|
|
|
|||||
Capitalized interest |
$ | 600 | $ | | ||||
|
|
|
|
|||||
Taxes paid |
$ | 201 | $ | 317 | ||||
|
|
|
|
|||||
Supplemental Disclosure on Non-Cash Investing and Financing Activities |
||||||||
Dividends accrued on Common Shares |
$ | 6,018 | $ | 5,375 | ||||
|
|
|
|
|||||
Dividends accrued on Series D Preferred Shares |
$ | 2,786 | $ | 2,786 | ||||
|
|
|
|
|||||
Capital expenditures accrued |
$ | 2,547 | $ | 2,777 | ||||
|
|
|
|
|||||
Transfer from loans receivable |
$ | | $ | (2,938 | ) | |||
|
|
|
|
|||||
Transfer from preferred equity |
$ | | $ | (3,923 | ) | |||
|
|
|
|
|||||
Transfer to equity investment |
$ | | $ | 6,861 | ||||
|
|
|
|
|||||
Transfer to loan receivable |
$ | | $ | 6,550 | ||||
|
|
|
|
|||||
Transfer from equity investment |
$ | | $ | (12,400 | ) | |||
|
|
|
|
|||||
Transfer to additional paid-in capital |
$ | | $ | 5,487 | ||||
|
|
|
|
|||||
Transfer to non-controlling interests |
$ | | $ | 363 | ||||
|
|
|
|
|||||
Contribution to WRT-Elad One South State Equity L.P. |
$ | 897 | $ | | ||||
|
|
|
|
See Note 18 for a discussion of fair value assets acquired and liabilities assumed.
See Notes to Consolidated Financial Statements.
7
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Organization |
Winthrop Realty Trust (Winthrop), a real estate investment trust (REIT) under Sections 856-860 of the Internal Revenue Code is an unincorporated association in the form of a business trust organized in Ohio under a Declaration of Trust dated August 1, 1961, as amended and restated on May 21, 2009, which has as its stated principal business activity the ownership and management of, and lending to, real estate and related investments.
Winthrop conducts its business through WRT Realty L.P., a Delaware limited partnership (the Operating Partnership). Winthrop is the sole general partner of, and owns directly and indirectly, 100% of the limited partnership interest in the Operating Partnership. All references to the Trust refer to Winthrop and its consolidated subsidiaries, including the Operating Partnership.
The Trust is engaged in the business of owning real property and real estate related assets which it categorizes into three segments: (i) ownership of investment properties including wholly owned properties and investments in joint ventures which own 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).
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the SEC). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, although management believes that the disclosures presented herein are adequate to make the accompanying unaudited consolidated interim financial statements not misleading. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated annual financial statements and the notes thereto included in Winthrops Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC. In the opinion of management, all adjustments considered necessary for fair statements have been included, and all such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results for the full year.
The accompanying unaudited consolidated interim 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 (VIEs) in which the Trust has determined it is the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. The Trust accounts for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Trusts share of the earnings of these joint ventures and companies is included in consolidated net income.
Stock-Based Compensation
Pursuant to the Trusts 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 Trusts external advisor. During the first nine months of 2013, the Trust issued 600,000 restricted common shares of beneficial interest. See Note 16 for further discussion. The Trust accounts for this stock-based compensation in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. Until the awards are no longer subject to forfeiture, the Trust measures stock-based compensation expense at each reporting date for any changes in fair value and recognizes the expense prorated for the portion of the requisite service period completed.
8
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reclassifications
Certain prior year balances of accounts receivable have been reclassified to accrued rental income in order to conform to the current year presentation. Discontinued operations for all periods presented in the Consolidated Statements of Operations include the operations of the Trusts retail properties in Seabrook, Texas and Denton, Texas which were disposed of in August 2013 and July 2013, respectively, and the Trusts office properties in Deer Valley, Arizona and Andover, Massachusetts which were disposed of in June 2013 and March 2013, respectively, and the Trusts retail property in Memphis, Tennessee and its office property in Indianapolis, Indiana, both of which were disposed of in September 2012. Also included in discontinued operations for all periods presented are the operations of the Trusts office property in Lisle, Illinois which is currently under contract to be sold and is classified as held for sale at September 30, 2013. It is expected that the sale will be consummated during the fourth quarter of 2013.
Out of Period Adjustment
During the three months ended September 30, 2013, the Trust recorded an out of period adjustment in the amount of $224,000 to correct the capitalization of interest on an equity method investment in the Trusts balance sheet and interest expense in the statement of operations. As a result, the Trusts net income and income from continuing operations was understated by $224,000 for the period ended June 30, 2013 and overstated by the same amount for the three months ended September 30, 2013. Additionally, for the period ended June 30, 2013, the Trusts cash provided by operating activities was understated by $224,000 and cash provided by investing activities was overstated by $224,000. The Trust concluded that this adjustment is not material to the current period or the prior periods consolidated financial statements. As such, this cumulative charge was recorded in the statement of operations for the three months ended September 30, 2013, rather than restating prior periods.
Earnings Per Share
The Trust determines basic earnings per share on the weighted average number of common shares of beneficial interest (Common Shares) outstanding during the period and reflects the impact of participating securities. The Trust computes diluted earnings per share based on the weighted average number of Common Shares outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.
9
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Trust has calculated earnings per share in accordance with relevant accounting guidance for participating securities and the two class method. The reconciliation of earnings attributable to Common Shares outstanding for the basic and diluted earnings per share calculation is as follows (in thousands, except per share data):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Basic |
||||||||||||||||
Income from continuing operations |
$ | 12,167 | $ | 15,962 | $ | 23,404 | $ | 25,690 | ||||||||
(Income) loss attributable to non-controlling interest |
995 | (939 | ) | 2,419 | 435 | |||||||||||
Preferred dividend on Series D Preferred Shares |
(2,787 | ) | (2,786 | ) | (8,360 | ) | (6,498 | ) | ||||||||
Dividend on Restricted Shares |
(97 | ) | | (211 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations applicable to Common Shares |
10,278 | 12,237 | 17,252 | 19,627 | ||||||||||||
Income (loss) from discontinued operations |
(1,434 | ) | 85 | 8,025 | 594 | |||||||||||
Allocation of undistributed earnings to Restricted Shares |
(9 | ) | | (24 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income applicable to Common Shares |
$ | 8,835 | $ | 12,322 | $ | 25,253 | $ | 20,221 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic weighted-average Common Shares |
33,076 | 33,075 | 33,047 | 33,064 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
$ | 0.31 | $ | 0.37 | $ | 0.52 | $ | 0.59 | ||||||||
Income (loss) from discontinued operations |
(0.04 | ) | | 0.24 | 0.02 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per Common Share - Basic |
$ | 0.27 | $ | 0.37 | $ | 0.76 | $ | 0.61 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted |
||||||||||||||||
Income from continuing operations |
$ | 12,167 | $ | 15,962 | $ | 23,404 | $ | 25,690 | ||||||||
(Income) loss attributable to non-controlling interest |
995 | (939 | ) | 2,419 | 435 | |||||||||||
Preferred dividend on Series D Preferred Shares |
(2,787 | ) | (2,786 | ) | (8,360 | ) | (6,498 | ) | ||||||||
Dividend on Restricted Shares |
(97 | ) | | (211 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations applicable to Common Shares |
10,278 | 12,237 | 17,252 | 19,627 | ||||||||||||
Income (loss) from discontinued operations |
(1,434 | ) | 85 | 8,025 | 594 | |||||||||||
Allocation of undistributed earnings to Restricted Shares |
(9 | ) | | (24 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income applicable to Common Shares |
$ | 8,835 | $ | 12,322 | $ | 25,253 | $ | 20,221 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic weighted-average Common Shares |
33,076 | 33,075 | 33,047 | 33,064 | ||||||||||||
Stock options (1) |
2 | 1 | 2 | | ||||||||||||
Restricted shares (2) |
70 | | 40 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted weighted-average Common Shares |
33,148 | 33,076 | 33,089 | 33,064 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
$ | 0.31 | $ | 0.37 | $ | 0.52 | $ | 0.59 | ||||||||
Income (loss) from discontinued operations |
(0.04 | ) | | 0.24 | 0.02 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Earnings per Common Share - Diluted |
$ | 0.27 | $ | 0.37 | $ | 0.76 | $ | 0.61 | ||||||||
|
|
|
|
|
|
|
|
(1) | The Trusts outstanding stock options were dilutive for the three and nine months ended September 30, 2013 and 2012. The weighted-average stock options for the nine months ended September 30, 2012 was less than one thousand shares. |
(2) | The Trusts restricted stock was dilutive for the three and nine months ended September 30, 2013. |
For the quarter ended September 30, 2013, the Trust paid a regular quarterly dividend of $0.1625 per Common Share and a regular quarterly dividend of $0.578125 per share of its Series D Cumulative Redeemable Preferred Shares of Beneficial Interest (the Series D Preferred Shares).
10
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Recently Issued Accounting Standards
On February 5, 2013, FASB issued ASU No. 2013-02: Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting the reclassifications of significant amounts out of accumulated other comprehensive income. This guidance requires entities to present the effects on the line items of net income of significant reclassifications from accumulated other comprehensive income, either where net income is presented or in the notes, as well as cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. The new disclosure requirements will be effective for annual reporting periods beginning on or after January 1, 2013. The new disclosures will be required for both interim and annual reporting. The Trust has evaluated this new guidance and its adoption did not have a material impact on its consolidated financial statements.
On December 16, 2011, FASB issued ASU No. 2011-11: Balance Sheet (Topic 210)Disclosures about Offsetting Assets and Liabilities, clarified by ASU No. 2013-1, which requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the financial statements particularly for transactions related to derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The new disclosure requirements will be effective for annual reporting periods beginning on or after January 1, 2013. The new disclosures will be required for all prior comparative periods presented. The Trust has evaluated this new guidance and its adoption did not have a material impact on its consolidated financial statements.
3. | Fair Value Measurements |
REIT securities, loan securities and derivative financial instruments are 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 entitys own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The Trusts Level 3 loan securities carried at fair value primarily consist of non-agency mortgage-related securities. The Trust values the loan securities carried at fair value it holds based primarily on prices received from a pricing service. The techniques used by the pricing service to develop the prices generally are 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 Trusts loan securities include prepayment rates, probability of default, loss severity and yield to maturity percentages.
Recurring Measurements
The table below presents the Trusts assets measured at fair value on a recurring basis as of September 30, 2013 according to the level in the fair value hierarchy within which those measurements fall (in thousands):
Recurring Basis |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Assets and Liabilities |
||||||||||||||||
Securities carried at fair value |
$ | 7,074 | $ | | $ | | $ | 7,074 | ||||||||
Loan securities carried at fair value |
| | 226 | 226 | ||||||||||||
Interest rate hedges |
| (14 | ) | | (14 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 7,074 | $ | (14 | ) | $ | 226 | $ | 7,286 | ||||||||
|
|
|
|
|
|
|
|
11
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below presents the Trusts assets measured at fair value on a recurring basis as of December 31, 2012, according to the level in the fair value hierarchy within which those measurements fall (in thousands):
Recurring Basis |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Assets |
||||||||||||||||
Securities carried at fair value |
$ | 19,694 | $ | | $ | | $ | 19,694 | ||||||||
Loan securities carried at fair value |
| | 11 | 11 | ||||||||||||
Interest rate hedges |
| 8 | | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 19,694 | $ | 8 | $ | 11 | $ | 19,713 | |||||||||
|
|
|
|
|
|
|
|
There were no inter-level transfers of assets or liabilities during the nine months ended September 30, 2013 and September 30, 2012.
The table below includes a roll forward of the balance sheet amounts from January 1, 2013 to September 30, 2013 and from January 1, 2012 to September 30, 2012 including the change in fair value, for financial instruments classified by the Trust within Level 3 of the valuation hierarchy (in thousands). When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the significance of the unobservable factors to the overall fair value measurement.
Loan Securities Carried at Fair Value |
Nine Months Ended September 30, 2013 |
Nine Months Ended September 30, 2012 |
||||||
Fair value, January 1 |
$ | 11 | $ | 5,309 | ||||
Net unrealized gain |
215 | 447 | ||||||
|
|
|
|
|||||
Fair value, September 30 |
$ | 226 | $ | 5,756 | ||||
|
|
|
|
|||||
The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2013 and 2012, respectively |
$ | 215 | $ | 447 | ||||
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
At September 30, 2013 the Trust held only one loan security which is valued at $226,000, or 20% of face value. The valuation reflects assumptions that would be considered by market participants along with managements assessment of collectible future cash flows.
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 three months ended September 30, 2013 the Trust recognized an impairment charge of $2,750,000 on its Lisle, Illinois property which is included in assets held for sale at September 30, 2013. During the nine months ended September 30, 2013 the Trust recognized impairment charges totaling $2,904,000 on its Lisle, Illinois and Denton, Texas properties. The Trust recognized an impairment charge of $698,000 on its Memphis, Tennessee property for the three and nine months ended September 30, 2012.
12
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the quarter ended June 30, 2013 the Trust entered into a purchase and sale agreement on its Denton, Texas property. At June 30, 2013 the purchase deposit was non-refundable and it was probable that the sale would be consummated. As a result the property was classified as held for sale at June 30, 2013. A fair value measurement was prepared based on the purchase contract 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 property was classified as held for sale at September 30, 2013. The Trust has entered into a purchase and sale agreement on this property and, if consummated, the sale is expected to close in the fourth quarter of 2013. A fair value measurement was prepared based on the purchase contract with a third-party market participant, less costs to sell, and a $2,750,000 impairment charge was recorded at September 30, 2013.
The Trusts net lease retail property in Memphis, Tennessee was placed into discontinued operations during the period ended September 30, 2012. The carrying value of the property exceeded the fair value less costs to sell resulting in a $698,000 impairment charge which was recorded at September 30, 2012.
The Table below presents the Trusts assets measured at fair value on a non-recurring basis as of September 30, 2013, according to the level in the fair value hierarchy within which those measurements fall (in thousands):
Non-Recurring Basis |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
Assets |
||||||||||||||||
Assets held for sale |
$ | | $ | | $ | 2,421 | $ | 2,421 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | | $ | | $ | 2,421 | $ | 2,421 | |||||||||
|
|
|
|
|
|
|
|
13
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Instruments Not Reported at Fair Value
The carrying value and estimated fair value of financial instruments not recorded at fair value on a recurring basis but required to be disclosed at fair value were as follows (in thousands):
September 30, 2013 | ||||||||||||||||||||
Fair value hierarchy level | ||||||||||||||||||||
Carrying Amount |
Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Loans receivable |
$ | 108,163 | $ | 122,876 | $ | | $ | | $ | 122,876 | ||||||||||
Secured financing receivable |
30,395 | 30,395 | | | 30,395 | |||||||||||||||
Mortgage loans payable |
308,049 | 296,678 | | | 296,678 | |||||||||||||||
Senior notes payable |
86,250 | 89,666 | 89,666 | | | |||||||||||||||
Secured financings |
29,150 | 29,366 | | | 29,366 | |||||||||||||||
Notes payable |
1,664 | 1,664 | | | 1,664 |
December 31, 2012 | ||||||||||||||||||||
Fair value hierarchy level | ||||||||||||||||||||
Carrying Amount |
Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
Loans receivable |
$ | 211,250 | $ | 222,246 | $ | | $ | | $ | 222,246 | ||||||||||
Mortgage loans payable |
280,576 | 270,923 | | | 270,923 | |||||||||||||||
Senior notes payable |
86,250 | 89,183 | 89,183 | | | |||||||||||||||
Secured financings |
52,920 | 53,253 | | | 53,253 | |||||||||||||||
Notes payable |
1,676 | 1,676 | | | 1,676 |
Loans Receivable, Secured Financing Receivable, Mortgage Loans Payable, Secured Financings and Notes Payable
Fair values of loans receivable, secured financing receivable, mortgage loans payable, secured financings and notes payable are primarily determined by discounting the expected cash flows at current interest rates plus an applicable risk spread, which reflects credit quality and maturity of the loans. The risk spread is based on loans with comparable credit quality, maturities and risk profile. Loans receivable may also be based on the fair value of the underlying real estate collateral less cost to sell, which is estimated using appraised values. These are classified as Level 3.
14
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value Option
The current accounting guidance for fair value measurement provides a fair value option election that allows companies to irrevocably elect fair value as the measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made are recognized in earnings on a quarterly basis based on the then market price regardless of whether such assets or liabilities have been disposed of at such time. The fair value option guidance permits the fair value option election to be made on an instrument by instrument basis when it is initially recorded or upon an event that gives rise to a new basis of accounting for that asset or liability. The Trust elected the fair value option for all loan securities and REIT securities acquired.
There was no change in the fair value of loan securities or in the per share value of the REIT securities for the three months ended September 30, 2013. During the three months ended September 30, 2012, the Trust recognized net unrealized gains of $3,484,000. For the nine months ended September 30, 2013 and 2012, the Trust recognized net unrealized gains of $73,000 and $7,701,000, respectively. The change in fair value of the REIT securities and loan securities for which the fair value option was elected is recorded as an unrealized gain or loss in the Trusts Consolidated Statements of Operations. Income related to securities carried at fair value is recorded as interest and dividend income.
The following table presents as of September 30, 2013 and December 31, 2012 the Trusts financial assets for which the fair value option was elected (in thousands):
Financial Instruments at Fair Value |
September 30, 2013 | December 31, 2012 | ||||||
Assets |
||||||||
Securities carried at fair value: |
||||||||
REIT common shares |
$ | 7,074 | $ | 19,694 | ||||
Loan securities carried at fair value |
226 | 11 | ||||||
|
|
|
|
|||||
$ | 7,300 | $ | 19,705 | |||||
|
|
|
|
The table below presents as of September 30, 2013 the difference between fair values and the aggregate contractual amounts due for which the fair value option has been elected (in thousands):
Fair Value at September 30, 2013 |
Amount Due Upon Maturity |
Difference | ||||||||||
Assets |
||||||||||||
Loan securities carried at fair value |
$ | 226 | $ | 1,130 | $ | 904 |
4. | Acquisitions, Dispositions, Leasing and Financing Activities |
Operating Property Activity:
1515 Market Street Loan Modification and Equity Acquisition - On February 1, 2013 the Trust entered into a loan modification agreement which extended the maturity date to February 1, 2016, increased the loan balance to $71,629,000 (from $70,000,000) and changed the interest rate to be the greater of 7.5% or LIBOR plus 6.5%. The loan balance can be increased through future funding advances up to an aggregate of $6,000,000 to cover tenant improvements, capital expenditures and leasing commissions. For each $500,000 of future advances, the interest rate increases by 0.10%. The loan modification also provides the Trust, in its capacity as the lender, with a 40% participation interest in the case of a capital event.
15
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Simultaneously with the modification of the loan, the Trust acquired, for $10,000, an indirect 49% equity interest in the property. As part of the transaction, the Trust acquired the general partner interest in the property. Management has determined that this entity is a variable interest entity (VIE) and that the Trust is the primary beneficiary of the VIE. As a result, the Trust has consolidated this property as of February 1, 2013. All intercompany transactions have been eliminated in consolidation. For segment reporting purposes, this investment will be classified within the operating properties segment as of February 1, 2013. Prior to consolidation, this investment was part of the loan assets segment. See Note 18 for additional information related to the consolidation of this property.
Atrium Mall LLC Equity Investment - On June 20, 2013 the Trust, through a newly formed 50-50 joint venture with Marc Realty, acquired a non-performing $10,650,000 mortgage loan for $6,625,000. In addition, the joint venture paid $1,137,000 to fund escrows at the closing. The Trust invested a total of $3,935,000 in this joint venture during the quarter ended June 30, 2013 and accounted for this investment using the equity method. The loan was in maturity default at the time of acquisition and was acquired with the intention of foreclosing or working out a consensual assignment with the borrower. The loan was collateralized by a leasehold interest in the Atrium Mall in Chicago, Illinois. The leasehold interest is for 71,000 square feet of commercial/retail space that comprises the bottom three floors of an office building known as the James R. Thompson building of which the lease expires in September 2014 with six automatic five-year extensions which are exercisable at the lessees option. The building is owned by the State of Illinois.
On July 26, 2013 the joint venture entered into an agreement with the borrower pursuant to which the borrower conveyed the leasehold interest to the venture in lieu of foreclosure. Accordingly, the venture now holds the leasehold interest in the property.
701 Seventh Avenue Equity Investment On July 9, 2013 the Trust agreed to increase its ownership in the current joint venture and to participate in the future hotel development. In doing so, the Trust has committed to invest up to an aggregate of $120,000,000 inclusive of contributions already made. During the quarter ended September 30, 2013, the Trust made additional capital contributions to the venture totaling $5,403,000. In October 2013 the Trust made an additional contribution of $16,686,000 to the venture reducing its overall future funding commitment to $67,198,000.
Luxury Residential Property Acquisition On August 13, 2013 the Trust entered into a binding purchase agreement to acquire four recently constructed Class A luxury apartment buildings for an aggregate purchase price of $246,000,000. At signing, the Trust made a $25,500,000 deposit which is non-refundable, except in limited circumstances. On October 7, 2013 the Trust made an additional non-refundable deposit of $7,500,000 to extend the closing date to November 11, 2013. See Note 19 for discussion on activity subsequent to September 30, 2013.
Andover, Massachusetts Property Sale - On March 28, 2013 the Trust sold its Andover, Massachusetts office property to an independent third party for gross sale proceeds of $12,000,000. After costs and pro-rations, the Trust received net proceeds of approximately $11,425,000 and recorded a gain of $2,775,000 on the sale of the property. The results of operations for this property have been classified as discontinued operations for all periods presented in the consolidated financial statements.
Deer Valley, Arizona Property Sale - On June 11, 2013 the Trust sold its Deer Valley, Arizona property to an independent third party for gross sale proceeds of $20,500,000. After costs and pro-rations, the Trust received net proceeds of approximately $19,585,000 and recorded a gain of $6,752,000 on the sale of the property. The results of operations for this property have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.
Denton, Texas Property Sale - On July 2, 2013 the Trust sold its Denton, Texas property to an independent third party for gross sale proceeds of $1,850,000. After costs and pro-rations, the Trust received net proceeds of approximately $1,703,000 and recorded no gain or loss on the sale of the property. The results of operations for all periods have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.
Seabrook, Texas Property Sale - On August 1, 2013 the Trust sold its Seabrook, Texas property to an independent third party for gross sale proceeds of $3,300,000. After costs and pro-rations, the Trust received net proceeds of approximately $3,202,000 and recorded a gain of $1,428,000 on the sale of the property. The results of operations for all periods have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.
16
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Loan Asset Activity:
Playa Vista - On January 24, 2013 the Trust originated a $20,500,000 mezzanine loan collateralized by a 260,000 square foot office campus in the Los Angeles, California area. The loan is subordinate to an $80,300,000 mortgage loan, matures January 23, 2015, bears interest at LIBOR plus 14.25% per annum, with a 0.5% LIBOR floor and requires payments of interest only at a rate of 8.25% with the remaining interest being accrued and added to principal. In connection with the origination, the borrower paid to the Trust an origination fee of $205,000. On March 1, 2013 the Trust sold a 50% pari passu participation interest in the loan for $10,250,000 and gave the transferee a credit of $100,000 from the initial loan origination. No gain or loss was recognized on the sale of the interest.
10 Metrotech Loan LLC Equity Investment Repayment On July 30, 2013 the $40,000,000 loan held by this venture was paid off at par. The venture, which had acquired the loan in August 2012 for $32,500,000, recognized $7,500,000 of discount accretion income in the current period in connection with the payoff at par. As a result of the payoff, the Trust received a distribution of $13,333,000 and recorded equity income of $2,676,000 in connection with its 33.33% ownership interest in the venture.
WRT-Elad One South State Lender LP Equity Investment On August 21, 2013 the Trust closed on an agreement to acquire the additional 50% joint venture interest (Acquired Interest) that was held by its joint venture partner, Elad Canada Inc. (Elad) for $30,000,000 (Acquisition Price). WRT-Elad One South State Lender LP (Lender LP) holds a mezzanine loan indirectly collateralized by the property located at One South State Street, Chicago, Illinois known as the Sullivan Center. The ventures mezzanine loan had an outstanding balance of principal and accrued interest of approximately $56,150,000 at the time of the transaction discussed above. Concurrently, the Trust entered into an option agreement (Option) with Elad granting Elad the option, but not obligation, to repurchase their interest in the venture for the Acquisition Price adjusted for the pro-rata portion of any accrued and unpaid interest and principal payments made by the borrower. Per the terms of the agreements, the Acquired Interest and Option cannot be transferred to parties other than the Trust and Elad. The term of the Option corresponds with Lender LPs mezzanine loan. Given the nature of the Option and the specific rights of Elad, the transaction is accounted for as a secured financing arrangement under ASC 860- Transfers and Servicing. The Trust will recognize interest income on the secured financing receivable in accordance with GAAP, at an annual interest rate of 15%, and will continue to recognize equity income on its previously held 50% interest in the venture.
Financing Activity:
Recourse Secured Financings Loan Payments - During the three and nine months ended September 30, 2013, several of the condominium units collateralizing the Queensridge loan receivable were sold resulting in payments to the Trust of approximately $5,571,000 and $30,648,000, respectively. With the proceeds, the Trust satisfied its recourse debt with KeyBank at June 30, 2013.
1515 Market Street New First Mortgage - On April 25, 2013 the entity that holds title to the property located at 1515 Market Street in Philadelphia, Pennsylvania (the 1515 Market Owner) obtained a $43,000,000 non-recourse first mortgage loan (First Mortgage) from an unaffiliated third party. The First Mortgage bears interest at LIBOR plus 2.0% per annum, requires monthly payments of interest only and matures on May 1, 2016. On the same date, the 1515 Market Owner entered into an interest rate swap agreement which effectively fixes LIBOR at 0.50% for the term of the First Mortgage. The Trust, which held the mortgage loan (Original Mortgage) collateralized by the property at the time of the closing of the First Mortgage, received $38,472,000 of loan proceeds from the First Mortgage financing which reduced the balance on the Original Mortgage to $33,157,000. The Original Mortgage is now subordinate to the First Mortgage, bears interest at an effective rate of 12.9% per annum and is secured by a second mortgage on the property. The Trusts investment in the Original Mortgage has been reduced to $21,098,000 resulting in an effective interest rate on the Trusts cash investment in this asset of 19.6%. Due to the Trusts ownership of a 49% interest, including the general partner interest, in the 1515 Market Owner and an additional 40% profits participation interest in the property, the Trust consolidates the operation of this property and the Original Mortgage, and all intercompany transactions are eliminated in consolidation.
Churchill Financing - On June 28, 2013 the Trust obtained a $5,100,000 first mortgage on its Churchill, Pennsylvania property. The loan bears interest at a rate of 3.5% per annum, requires monthly payments of principal and interest and matures on August 1, 2024. After closing costs, the Trust received net proceeds of approximately $4,922,000.
17
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Public Offering:
On September 30, 2013 the Trust closed a public offering of 2,750,000 Common Shares at a price of $11.45 per share. The Trust received net proceeds of $30,250,000 after the underwriting discount but prior to offering expenses.
5. | Receivables |
Loans Receivable
The following table summarizes the Trusts loans receivable at September 30, 2013 and December 31, 2012 (in thousands):
Carrying Amount | Contractual Maturity Date | |||||||||||||
Description |
Loan Position |
Stated Interest Rate |
September 30, 2013 |
December 31, 2012 |
||||||||||
Renaissance Walk |
Mezzanine | LIBOR + 12.0% (2) | $ | 3,000 | $ | 3,000 | 01/01/14 | |||||||
Hotel Wales |
Whole Loan | LIBOR + 4.0% (3) | 20,097 | 20,101 | 10/05/14 (4) | |||||||||
The Shops at Wailea |
B-Note | 6.15% | 6,037 | 5,376 | 10/06/14 | |||||||||
Legacy Orchard (1) |
Corporate Loan | 15.0% | 9,750 | 9,750 | 10/31/14 | |||||||||
Queensridge |
Whole Loan | LIBOR + 11.5% (5) | 8,214 | 39,170 | 11/15/14 | |||||||||
San Marbeya |
Whole Loan | 5.88% | 27,686 | 27,149 | 01/01/15 | |||||||||
Playa Vista |
Mezzanine | LIBOR + 14.25% (5) | 10,323 | | 01/23/15 | |||||||||
Churchill (1) |
Whole Loan | LIBOR + 3.75% | 685 | 683 | 06/01/15 | |||||||||
Rockwell |
Mezzanine | 12.0% | 364 | 323 | 05/01/16 | |||||||||
500-512 7th Ave |
B-Note | 7.19% | 10,029 | 10,009 | 07/11/16 | |||||||||
Pinnacle II |
B-Note | 6.31% | 4,649 | 4,652 | 09/06/16 | |||||||||
Poipu Shopping Village |
B-Note | 6.62% | 2,028 | 1,948 | 01/06/17 | |||||||||
Wellington Tower |
Mezzanine | 6.79% | 2,790 | 2,687 | 07/11/17 | |||||||||
Mentor Building |
Whole Loan | 10.0% | 2,511 | 2,512 | 09/10/17 | |||||||||
1515 Market |
Whole Loan | (6) | | 58,650 | (6) | |||||||||
127 West 25th Street |
Mezzanine | | | 8,687 | (7) | |||||||||
180 N. Michigan |
Mezzanine | | | 5,237 | (7) | |||||||||
Fenway Shea (1) |
Whole Loan | | | 2,273 | (7) | |||||||||
The Disney Building |
B-Note | | | 9,043 | (8) | |||||||||
|
|
|
|
|||||||||||
$ | 108,163 | $ | 211,250 | |||||||||||
|
|
|
|
(1) | The Trust determined that certain loans receivable are variable interests in VIEs primarily based on the fact that the underlying entities do not have sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support. The Trust does not have the power to direct the activities of the entity that most significantly impact the entitys economic performance and is not required to consolidate the underlying entity. |
(2) | LIBOR floor of 2%. |
(3) | LIBOR floor of 3%. |
(4) | The borrower exercised their one year extension option during the third quarter of 2013. |
(5) | LIBOR floor of 0.5%. |
(6) | This loan was in maturity default at the time of acquisition. The loan was modified on February 1, 2013. The Trust consolidates the operations of the borrower entity and the loan receivable is eliminated in consolidation. |
(7) | The loans were satisfied at par during the nine months ended September 30, 2013. |
(8) | The loan was sold during the nine months ended September 30, 2013. |
The carrying amount of loans receivable includes accrued interest of $563,000 and $1,016,000 at September 30, 2013 and December 31, 2012, respectively, and cumulative accretion of $4,773,000 and $2,527,000 at September 30, 2013 and December 31, 2012, respectively.
18
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At September 30, 2013 and December 31, 2012, the Trusts loans receivable have unamortized discount totaling $7,620,000 and $9,865,000, respectively.
The weighted average coupon as calculated on the par value of the Trusts loans receivable was 6.90% and 7.65% and the weighted average yield to maturity as calculated on the carrying value of the Trusts loan receivable was 11.88% and 11.43% at September 30, 2013 and December 31, 2012, respectively.
The San Marbeya, Hotel Wales and Queensridge loans receivable are part of secured financing transactions, with recourse and non-recourse financings at September 30, 2013. The Trust had outstanding non-recourse secured financings related to the San Marbeya and Hotel Wales loans receivable in the amount of $29,150,000 at September 30, 2013 and December 31, 2012. The Trust had recourse secured financings related to the Queensridge loan receivable in the amount of $23,770,000 at December 31, 2012. As of September 30, 2013 the Trust has fully repaid the recourse secured financing related to the Queensridge loan receivable. No other loans receivable are part of secured financing transactions at September 30, 2013. See Note 8 for additional disclosures regarding the Trusts secured financings.
Loan Receivable Activity
Activity related to loans receivable is as follows (in thousands):
Nine Months Ended September 30, 2013 |
||||
Balance at January 1, 2013 |
$ | 211,250 | ||
Purchase and advances |
22,314 | |||
Interest (received) accrued, net |
(453 | ) | ||
Repayments/ Sale proceeds |
(66,915 | ) | ||
Elimination of 1515 Market in consolidation |
(60,279 | ) | ||
Loan discount accretion |
2,283 | |||
Discount accretion received in cash |
(37 | ) | ||
|
|
|||
Balance at September 30, 2013 |
$ | 108,163 | ||
|
|
The following table summarizes the Trusts interest, dividend and discount accretion income for the three and nine months ended September 30, 2013 and 2012 (in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Interest on loan assets |
$ | 3,011 | $ | 2,985 | $ | 10,912 | $ | 8,130 | ||||||||
Accretion of loan discount |
806 | 425 | 2,283 | 5,984 | ||||||||||||
Interest and dividends on securities |
100 | 312 | 350 | 904 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total interest, dividends, and discount accretion |
$ | 3,917 | $ | 3,722 | $ | 13,545 | $ | 15,018 | ||||||||
|
|
|
|
|
|
|
|
19
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Credit Quality of Loans Receivable and Loan Losses
The Trust evaluates impairment on its loan portfolio on an individual basis and has developed a loan grading system for all of its outstanding loans that are collateralized directly or indirectly by real estate. Grading categories include debt yield, debt service coverage ratio, length of loan, property type, loan type, and other more subjective variables that include property or collateral location, market conditions, industry conditions, and sponsors financial stability. Management reviews each category and assigns an overall numeric grade for each loan to determine the loans risk of loss and to provide a determination as to whether an individual loan is impaired and whether a specific loan loss allowance is necessary. A loans grade of credit quality is determined quarterly.
All loans with a positive score do not require a loan loss allowance. Any loan graded with a neutral score or zero is subject to further review of the collectability of the interest and principal based on current conditions and qualitative factors to determine if impairment is warranted. Any loan with a negative score is 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 estimates 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 underlying collateral and comparing the fair value to the loans net carrying value. If the fair value is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan will be maintained at a level the Trust believes will be adequate to absorb losses.
The table below summarizes the Trusts loans receivable by internal credit rating at September 30, 2013 and December 31, 2012 (in thousands, except for number of loans):
September 30, 2013 | December 31, 2012 | |||||||||||||||
Internal Credit Quality |
Number of Loans |
Carrying Value of Loans Receivable |
Number of Loans |
Carrying Value of Loans Receivable |
||||||||||||
Greater than zero |
13 | $ | 97,840 | 18 | $ | 211,250 | ||||||||||
Equal to zero |
1 | 10,323 | | | ||||||||||||
Less than zero |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
14 | $ | 108,163 | 18 | $ | 211,250 | |||||||||||
|
|
|
|
|
|
|
|
Non-Performing Loans
The Trust considers a loan to be non-performing and places loans on non-accrual status at such time as management determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. While on non-accrual status, based on the Trusts judgment as to collectability of principal, loans are either accounted for on a cash basis, where interest income is recognized only upon actual receipt of cash, or on a cost-recovery basis, where all cash receipts reduce a loans carrying value. If and when a loan is brought back into compliance with its contractual terms, the Trust will resume accrual of interest. As of September 30, 2013 and December 31, 2012, there were no non-performing loans and no past due payments. The Trust did not record any provision for loan loss for the three and nine months ended September 30, 2013.
Secured Financing Receivable
In August 2013 the Trust closed on an agreement to acquire Elads 50% interest in the Lender LP joint venture 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 their 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 August 21, 2013 or an event of default on Lender LPs 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 is accounted for as a secured financing rather than an acquisition. The $30,000,000 acquisition price is recorded as a secured financing receivable. The Trust will recognize 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 $395,000 of interest income during the three and nine months ended September 30, 2013.
20
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. | Securities Carried at Fair Value |
Securities carried at fair value are summarized in the table below (in thousands):
September 30, 2013 | December 31, 2012 | |||||||||||||||
Cost | Fair Value | Cost | Fair Value | |||||||||||||
REIT Common shares |
$ | 6,318 | $ | 7,074 | $ | 15,876 | $ | 19,694 | ||||||||
Loan securities |
161 | 226 | 161 | 11 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 6,479 | $ | 7,300 | $ | 16,037 | $ | 19,705 | |||||||||
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2013, securities carried at fair value were sold for total proceeds of approximately $3,255,000 and $12,345,000, respectively. The Trust recorded a loss on these sales of approximately $31,000 and $133,000, respectively, in the three and nine months ended September 30, 2013.
No securities carried at fair value were sold during the three months ended September 30, 2012. During the nine months ended September 30, 2012, securities carried at fair value were sold for total proceeds of approximately $4,614,000. The Trust recorded a gain on these sales of approximately $41,000 in the nine months ended September 30, 2012.
For purpose of determining gains or losses, the cost of securities is based on specific identification. For the three months ended September 30, 2013 and 2012, the Trust recognized net unrealized losses on securities carried at fair value and loan securities carried at fair value of $0 and $3,484,000, respectively as the result of the change in fair value of the financial assets for which the fair value option was elected. For the nine months ended September 30, 2013 and 2012, the Trust recognized net unrealized gains on securities carried at fair value and loan securities carried at fair value of $73,000, and $7,701,000, respectively.
21
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. | Equity Investments |
The Trusts carrying amounts in its equity investments consist of the following at September 30, 2013 and December 31, 2012 (in thousands):
Venture Partner |
Equity Investment |
Nominal % Ownership at September 30, 2013 |
September 30, 2013 |
December 31, 2012 |
||||||||||
VHH LLC (1) |
Vintage Housing Holding LLC |
75.0 | % | $ | 33,706 | $ | 30,534 | |||||||
Elad Canada Inc. |
WRT-Elad One South State Equity LP |
50.0 | % | | 460 | |||||||||
Elad Canada Inc. |
WRT-Elad One South State Lender LP |
50.0 | % | 24,518 | 24,644 | |||||||||
Mack-Cali |
WRT-Stamford LLC |
20.0 | % | 8,916 | 8,501 | |||||||||
Atrium/Northstar |
10 Metrotech Loan LLC |
33.3 | % | 11 | 10,845 | |||||||||
Atrium Holding |
RE CDO Management LLC |
50.0 | % | 993 | 1,779 | |||||||||
Freed |
Mentor Retail LLC |
49.9 | % | 596 | 551 | |||||||||
Inland |
Concord Debt Holdings LLC |
33.3 | % | | | |||||||||
Inland |
CDH CDO LLC |
24.8 | % | | | |||||||||
Inland (2) |
Concord Debt Holdings LLC |
33.3 | % | 982 | 3,974 | |||||||||
Inland (2) |
CDH CDO LLC |
24.8 | % | 4,181 | 322 | |||||||||
Sealy (1) |
Northwest Atlanta Partners LP |
60.0 | % | 7,741 | 8,104 | |||||||||
Sealy (1) |
Newmarket GP LLC |
68.0 | % | | | |||||||||
Sealy (1) |
Airpark Nashville GP |
50.0 | % | | | |||||||||
Marc Realty (1) |
Brooks Building LLC |
50.0 | % | 8,076 | 7,983 | |||||||||
Marc Realty (1) |
High Point Plaza LLC |
50.0 | % | 2,137 | 2,241 | |||||||||
Marc Realty (1) |
1701 Woodfield LLC |
50.0 | % | 2,052 | 1,977 | |||||||||
Marc Realty (1) |
Enterprise Center LLC |
50.0 | % | 2,440 | 2,679 | |||||||||
Marc Realty (1) |
Atrium Mall LLC |
50.0 | % | 3,904 | | |||||||||
ROIC |
WRT-ROIC Lakeside Eagle LLC |
50.0 | % | 3 | | |||||||||
New Valley/Starwood |
Socal Office Portfolio Loan LLC |
73.0 | % | | 8 | |||||||||
New Valley/Witkoff |
701 7th WRT Investors LLC |
70.6 | % | 36,989 | 28,735 | |||||||||
Fenway |
WRT-Fenway Wateridge LLC |
50.0 | % | 1,816 | 1,522 | |||||||||
|
|
|
|
|||||||||||
$ | 139,061 | $ | 134,859 | |||||||||||
|
|
|
|
(1) | The Trust has determined that these equity investments are investments in VIEs. The Trust has determined that it is not the primary beneficiary of these VIEs since the Trust does not have the power to direct the activities that most significantly impact the economic performance of the VIEs. |
(2) | Represents the interests acquired from Lexington Realty Trust on May 1, 2012. |
22
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table reflects the activity of the Trusts equity investments for the period ended September 30, 2013 (in thousands):
Investment |
Balance at December 31, 2012 |
Contributions | Equity Income (loss) |
Distributions | Sales Price |
Balance at September 30, 2013 |
||||||||||||||||||
Vintage Housing Holding LLC (2) |
$ | 30,534 | $ | | $ | 7,142 | $ | (3,970 | ) | $ | | $ | 33,706 | |||||||||||
WRT-Elad One South State Equity LP (2) |
460 | 1,013 | (1,473 | ) | | | | |||||||||||||||||
WRT-Elad One South State Lender LP (2) |
24,644 | | 2,988 | (3,114 | ) | | 24,518 | |||||||||||||||||
WRT-Stamford LLC |
8,501 | | 701 | (286 | ) | | 8,916 | |||||||||||||||||
10 Metrotech LLC |
10,845 | | 3,284 | (14,118 | ) | | 11 | |||||||||||||||||
RE CDO Management LLC |
1,779 | | 3,710 | (4,496 | ) | | 993 | |||||||||||||||||
Mentor Retail LLC |
551 | | 45 | | | 596 | ||||||||||||||||||
Concord Debt Holdings LLC |
| | 3,041 | (3,041 | ) | | | |||||||||||||||||
CDH CDO LLC |
| | 415 | (402 | ) | (13 | ) | | ||||||||||||||||
701 7th WRT Investors LLC (3) |
28,735 | 7,745 | 2,375 | (1,866 | ) | | 36,989 | |||||||||||||||||
WRT-Fenway Wateridge LLC (2) |
1,522 | 161 | 133 | | | 1,816 | ||||||||||||||||||
CDH CDO LLC (1) |
322 | | 4,274 | (402 | ) | (13 | ) | 4,181 | ||||||||||||||||
Sealy |
8,104 | | (363 | ) | | | 7,741 | |||||||||||||||||
Marc Realty |
14,880 | | (17 | ) | (158 | ) | 14,705 | |||||||||||||||||
Atrium Mall LLC |
| 3,935 | (31 | ) | | | 3,904 | |||||||||||||||||
WRT-ROIC Lakeside Eagle LLC |
| 25 | (22 | ) | | | 3 | |||||||||||||||||
SoCal Office Portfolio Loan LLC |
8 | | (2 | ) | (6 | ) | | | ||||||||||||||||
Concord Debt Holdings LLC (1) |
3,974 | | 49 | (3,041 | ) | | 982 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 134,859 | $ | 12,879 | $ | 26,249 | $ | (34,900 | ) | $ | (26 | ) | $ | 139,061 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Represents the interests acquired from Lexington Realty Trust on May 1, 2012. |
(2) | The Trust has elected to report its share of earnings from the investment on a one month lag period. |
(3) | The Trust has elected to report its share of earnings from the investment on a three month lag period. |
The Trust has determined that the fair value of certain of its investments in the Marc Realty ventures and the Sealy Northwest Atlanta venture marginally exceed their carrying values. While the Sealy Northwest Atlanta venture continues to aggressively market available space for lease and work with existing tenants for lease renewal, which has resulted in an increase in occupancy from 70% at December 31, 2012 to 74% at September 30, 2013, declines in occupancy could cause impairment of this venture that could be material.
WRT-Elad - The Trust holds its mezzanine loan interest in Sullivan Center through WRT One South State Lender LP (Lender LP) and its profits participation interest through WRT-Elad One South State Equity LP (Equity LP). On February 18, 2013 a forbearance agreement was entered into whereby Lender LP agreed to forbear from exercising its rights under the loan documents with respect to the borrowers failure to pay debt service for the period from December 2012 through October 2013. To the extent such debt service is not paid, debt service will accrue and be added to the outstanding principal balance of the mezzanine loan on each applicable monthly payment date. In exchange for the forbearance, Equity LPs future interest in the property increased by 5% to 70%, with a corresponding decrease in the borrowers general partners interest. In consideration for the forbearance the borrower is required to pay a $1,400,000 fee to Lender LP on or prior to November 9, 2013. If the $1,400,000 is not paid, in lieu of payment, then Equity LPs indirect future interest in the property will increase by an additional 6% with a corresponding decrease to the general partners interest.
There is a basis differential of $10,465,000 between the Trusts carrying value of its investments in Equity LP and the basis reflected at the joint venture level, which is amortized over the life of the related assets. The basis differential primarily relates to a bargain purchase gain recognized at the joint venture level upon acquisition.
23
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Concord On February 25, 2013 the Trust sold for $25,000 a 17% interest in the equity of CDH CDO LLC, exclusive of the interest in the entity that holds the collateral management agreement of CDH CDO, to Inland American. The sale of the interest was bifurcated between the Trusts original interest and the interest acquired from Lexington Realty Trust with $12,500 of the sales price being allocated to each interest. The Trust recognized a gain of $12,500 on the sale of its original interest and a loss of $123,000 on the sale of its other interest. The sale of the interest did not affect the voting rights within CDH CDO LLC and did not result in a change in control. The Trust will continue to account for its investments in CDH CDO LLC under the equity method.
There is a basis differential on the Concord Debt Holdings and CDH CDO LLC interests acquired from Lexington of $5,440,000. This basis differential was a result of the purchase price exceeding the book basis at the venture level for the acquired interest.
RE CDO Management On February 20, 2013 the venture sold its subordinated interests in Sorin CDO III for $2,750,000 and transferred the Sorin CDO III collateral management agreement for $0. On March 8, 2013 the venture sold its C Tranche subordinated interests in Sorin CDO IV for $6,240,000. As a result of the sales, the Trust received distributions of approximately $4,416,000 in the aggregate during the first quarter of 2013. The Trusts share of the gain has been recorded as equity in earnings of this equity investment.
10 Metrotech Loan LLC Equity Investment On July 30, 2013 the $40,000,000 loan held by this venture was paid off at par. The venture, which had acquired the loan in August 2012 for $32,500,000, recognized $7,500,000 of discount accretion income in this current period in connection with the payoff at par. As a result of the payoff in July 2013, the Trust received a distribution from the venture of $13,333,000 and recorded equity income of $2,676,000 in connection with its 33.33% ownership interest in the venture. The venture level balance sheet consisted of total assets of $34,000 and $32,535,000 at September 30, 2013 and December 31, 2012, respectively and no liabilities at September 30, 2013 and December 31, 2012, respectively. The venture reported net income of $8,028,000 and $9,853,000 for the three and nine months ended September 30, 2013.
Sealy On May 30, 2013 the Trust contributed its interest in Newmarket GP LLC and its interest in Airpark Nashville GP to WRT-TRS Management Corp its wholly owned taxable REIT subsidiary. The Trusts carrying value of both investments was zero at the time of the contributions and the transaction had no effect on the financial statements of the Trust.
Atrium Mall LLC Joint Venture Loan Acquisition On June 20, 2013 the Trust, through a newly formed 50-50 joint venture with Marc Realty, acquired a non-performing $10,650,000 mortgage loan for $6,625,000. In addition, the joint venture paid $1,137,000 to fund escrows at the closing. The Trust invested a total of $3,935,000 in this joint venture during the quarter ended June 30, 2013. The loan was in maturity default at the time of acquisition.
On July 26, 2013 the joint venture entered into an agreement with the borrower pursuant to which the borrower conveyed the leasehold interest to the venture in lieu of foreclosure. Accordingly, the venture now holds the leasehold interest in the property.
24
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The summarized balance sheets of the Trusts Vintage Housing Holding LLC venture is as follows (in thousands):
September 30, 2013 | December 31, 2012 | |||||||
ASSETS |
||||||||
Real estate, net |
$ | 360,851 | $ | 340,666 | ||||
Cash and cash equivalents |
5,469 | 6,555 | ||||||
Restricted cash held in escrows |
45,380 | 41,878 | ||||||
Receivables and other assets |
19,964 | 26,681 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 431,664 | $ | 415,780 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS CAPITAL |
||||||||
Mortgage and notes payable |
$ | 313,078 | $ | 298,654 | ||||
Other liabilities |
47,443 | 53,687 | ||||||
Non-controlling interests |
18,006 | 15,997 | ||||||
Members Capital |
53,137 | 47,442 | ||||||
|
|
|
|
|||||
Total Liabilities and Members Capital |
$ | 431,664 | $ | 415,780 | ||||
|
|
|
|
|||||
Carrying value of the Trusts investment in Vintage Housing Holding |
$ | 33,706 | $ | 30,534 | ||||
|
|
|
|
The summarized statements of operations of the Trusts Vintage Housing Holding LLC venture is as follows (in thousands):
For the Three Months Ended September 30, 2013 |
For the Three Months Ended September 30, 2012 |
For the Nine Months Ended September 30, 2013 |
For the Nine Months Ended September 30, 2012 |
|||||||||||||
Total revenue |
$ | 11,048 | $ | 10,328 | $ | 32,451 | $ | 30,928 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Expenses |
||||||||||||||||
Operating |
4,649 | 4,254 | 13,952 | 12,250 | ||||||||||||
Real estate taxes |
128 | 139 | 397 | 442 | ||||||||||||
Interest |
485 | 1,503 | 1,480 | 4,824 | ||||||||||||
Depreciation and amortization |
446 | 978 | 1,137 | 6,605 | ||||||||||||
Other expenses |
1,453 | 1,323 | 4,176 | 4,048 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total expenses |
7,161 | 8,197 | 21,142 | 28,169 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
3,887 | 2,131 | 11,309 | 2,759 | ||||||||||||
Loss attributable to non-controlling interests |
676 | 29 | 1,399 | 791 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to VHH |
$ | 4,563 | $ | 2,160 | $ | 12,708 | $ | 3,550 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Trusts share of net income |
$ | 2,525 | $ | 1,392 | $ | 7,142 | $ | 2,326 | ||||||||
|
|
|
|
|
|
|
|
The Trust records its investments in Vintage Housing Holding LLC on a one month lag, therefore amounts in the Trusts financial statements for the period ended September 30, 2013 are based on balances and results from Vintage Housing Holding LLC for the period ended August 31, 2013.
25
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The summarized balance sheets of the Trusts CDH CDO LLC venture are as follows (in thousands):
September 30, 2013 | December 31, 2012 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 2,031 | $ | 1,885 | ||||
Real estate debt investments carried at fair value |
183,110 | 185,060 | ||||||
Securities carried at fair value |
80,463 | 95,994 | ||||||
Real estate, net |
| 19,909 | ||||||
Interest and other receivables |
1,066 | 1,030 | ||||||
Other assets |
319 | 3,893 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 266,989 | $ | 307,771 | ||||
|
|
|
|
|||||
LIABILITIES AND MEMBERS CAPITAL |
||||||||
Collateralized debt obligation carried at fair value |
153,361 | 191,345 | ||||||
Mortgage note payable |
| 22,293 | ||||||
Interest rate swap liability |
8,270 | 11,413 | ||||||
Other liabilities |
2,727 | 5,423 | ||||||
Non-controlling interests |
102 | 102 | ||||||
Members Capital |
102,529 | 77,195 | ||||||
|
|
|
|
|||||
Total Liabilities and Members Capital |
$ | 266,989 | $ | 307,771 | ||||
|
|
|
|
|||||
Carrying value of the Trusts investments in CDH CDO LLC |
$ | 4,181 | $ | 322 | ||||
|
|
|
|
The summarized statement of operations of the Trusts CDH CDO LLC venture is as follows (in thousands):
For the Three Months Ended September 30, 2013 |
For the Three Months Ended September 30, 2012 |
For the Nine Months Ended September 30, 2013 |
For the Nine Months Ended September 30, 2012 |
|||||||||||||
Interest, dividends and discount accretion |
$ | 4,469 | $ | 4,688 | $ | 12,654 | $ | 13,362 | ||||||||
Expenses |
||||||||||||||||
Interest expense |
1,598 | 1,651 | 4,791 | 5,012 | ||||||||||||
Fees and expenses paid to related party |
250 | 250 | 750 | 750 | ||||||||||||
General and administrative |
328 | 304 | 891 | 964 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total expenses |
2,176 | 2,205 | 6,432 | 6,726 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net investment income: |
2,293 | 2,483 | 6,222 | 6,636 | ||||||||||||
Net property income |
(55 | ) | (5 | ) | (205 | ) | (282 | ) | ||||||||
Loss on sale of real estate |
(2,909 | ) | | (2,909 | ) | | ||||||||||
Gain on extinguishment of debt |
4,827 | | 4,827 | | ||||||||||||
Realized gain (loss) from investments |
13,367 | 1,716 | 13,361 | (1,042 | ) | |||||||||||
Unrealized gain (loss) from investments |
391 | 620 | 5,886 | 7,436 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
17,914 | 4,814 | 27,182 | 12,748 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Trusts share of net income |
$ | 3,367 | $ | 855 | $ | 4,274 | $ | 1,333 | ||||||||
|
|
|
|
|
|
|
|
26
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. | Debt |
Mortgage Loans Payable
The Trust had outstanding non-recourse mortgage loans payable of $308,049,000 and $280,576,000 at September 30, 2013 and December 31, 2012, 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.
On July 26, 2013 the Trust used cash on hand to fully satisfy the $14,943,000 balance outstanding on the first mortgage loan collateralized by its Amherst, New York property which was scheduled to mature in October 2013.
The Trusts mortgage loans payable at September 30, 2013 and December 31, 2012 are summarized as follows (in thousands):
Location of Collateral |
Maturity | Spread Over LIBOR (1) |
Interest Rate at September 30, 2013 |
September 30, 2013 |
December 31, 2012 |
|||||||||||||||
Memphis, TN |
Aug 2014 | Libor + 2.5 | % (2) | 3.00 | % | $ | 13,197 | $ | 13,408 | |||||||||||
Lisle, IL |
Oct 2014 | Libor + 2.5 | % (3) | 2.69 | % | 5,752 | 5,752 | |||||||||||||
Chicago, IL |
Apr 2015 | | 6.25 | % | 8,619 | 8,700 | ||||||||||||||
Chicago, IL |
Mar 2016 | | 5.75 | % | 19,941 | 20,200 | ||||||||||||||
Houston, TX |
Apr 2016 | | 6.05 | % | 48,460 | 52,052 | ||||||||||||||
New York, NY |
May 2016 | Libor + 2.5 | % (4) | 3.50 | % | 51,982 | 51,982 | |||||||||||||
Philadelphia, PA |
May 2016 | Libor + 2.0 | % (5) | 2.50 | % | 42,684 | | |||||||||||||
Greensboro, NC |
Aug 2016 | | 6.22 | % | 14,837 | 15,139 | ||||||||||||||
Lisle, IL |
Mar 2017 | | 5.55 | % | 5,488 | 5,543 | ||||||||||||||
Cerritos, CA |
Jan 2017 | | 5.07 | % | 23,153 | 23,184 | ||||||||||||||
Orlando, FL |
Jul 2017 | | 6.40 | % | 37,138 | 37,580 | ||||||||||||||
Plantation, FL |
Apr 2018 | | 6.45 | % | 10,717 | 10,811 | ||||||||||||||
Meriden, CT |
Oct 2022 | | 3.95 | % | 21,000 | 21,000 | ||||||||||||||
Churchill, PA (6) |
Aug 2024 | | 3.50 | % | 5,081 | | ||||||||||||||
Amherst, NY |
(7) | | 5.65 | % | | 15,225 | ||||||||||||||
|
|
|
|
|||||||||||||||||
$ | 308,049 | $ | 280,576 | |||||||||||||||||
|
|
|
|
(1) | The one-month LIBOR rate at September 30, 2013 was 0.17885%. |
(2) | The loan has a LIBOR floor of 0.5% and an interest rate cap which caps LIBOR at 0.5%. |
(3) | The loan has an interest rate cap which caps LIBOR at 1%. |
(4) | The loan has a LIBOR floor of 1% and an interest rate cap which caps LIBOR at 1.75%. |
(5) | The loan has an interest rate swap which effectively fixes LIBOR at 0.5%. |
(6) | The loan was obtained on June 28, 2013. See Note 4 for details on this transaction. |
(7) | The loan was fully satisfied on July 26, 2013. |
27
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Non-Recourse Secured Financing
The Trusts non-recourse secured financings at September 30, 2013 and December 31, 2012 are summarized as follows (in thousands):
Carrying Value | ||||||||||||||||||||
Collateral |
Maturity | Spread Over LIBOR/ Prime |
Interest Rate at September 30, 2013 |
September 30, 2013 |
December 31, 2012 |
|||||||||||||||
Hotel Wales Loan |
Oct 2014 | LIBOR plus 1.25 | % (1) | 4.25 | % | $ | 14,000 | $ | 14,000 | |||||||||||
San Marbeya Loan |
Jan 2015 | | 4.85 | % | 15,150 | 15,150 | ||||||||||||||
|
|
|
|
|||||||||||||||||
$ | 29,150 | $ | 29,150 | |||||||||||||||||
|
|
|
|
(1) | The loan has a LIBOR floor of 3%. |
Recourse Secured Financing
The Trusts recourse secured financing was repaid in full at September 30, 2013. Details of the recourse secured financing are as follows (in thousands):
Carrying Value | ||||||||||||||||||||
Collateral |
Maturity | Spread Over LIBOR/Prime |
Interest Rate at September 30, 2013 |
September 30, 2013 |
December 31, 2012 |
|||||||||||||||
Queensridge Loan |
Nov 2014 | LIBOR plus 4 | % | N/A | $ | | $ | 23,770 | ||||||||||||
|
|
|
|
|||||||||||||||||
$ | | $ | 23,770 | |||||||||||||||||
|
|
|
|
Notes Payable
In conjunction with the loan modification on the property located in Cerritos, California the Trust assumed a $14,500,000 B Note that bears interest at 6.6996% per annum and requires monthly interest payments of approximately $12,000 with the balance of the interest accruing. The loan modification agreement provides for a participation feature whereby the B Note can be fully satisfied with proceeds from the sale of the property after the Trust receives a 9.0% priority return on its capital during a specified time period, as defined in the loan modification document. As of September 30, 2013 the carrying value of the participating B Note was $864,000 which approximates fair value. The inputs used in determining the estimated fair value of the Trusts Notes Payable are categorized as Level 3 in the fair value hierarchy. See Note 18 for additional information regarding this property.
On October 15, 2012 an entity in which the Trust holds an interest and consolidates, 5400 Westheimer LP, executed a note payable to its partners in the amount of $1,600,000. The note bears interest at 15% per annum and matures on October 15, 2022. Since the Trust holds 50% of the loan, $800,000 of the note payable and associated interest is eliminated in consolidation for accounting purposes. The balance of the note as of September 30, 2013 was $800,000 which approximates fair value.
9. | Revolving Line of Credit |
The Trust has a revolving line of credit in the principal amount of $50,000,000 which bears interest at LIBOR plus 3% and has a maturity date of March 3, 2014 with an option to extend the maturity date to March 3, 2015. The Trust must comply with financial covenants on an ongoing basis. The covenants are tested as of the end of each quarter based upon results for that quarter. The Trust was in compliance of its financial covenants under its revolving line of credit as of September 30, 2013.
28
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The revolving line of credit is collateralized by certain approved assets and since it is recourse to the Trust it is effectively collateralized by all of the Trusts assets. The revolving line of credit requires monthly payments of interest only. To the extent that the amounts outstanding under the facility are in excess of the borrowing base (as calculated per the terms of the loan agreement), the Trust is required to make a principal payment to reduce such excess. The Trust may prepay from time to time without premium or penalty and re-borrow amounts prepaid.
The outstanding balance under the facility was $0 at September 30, 2013 and December 31, 2012. The Trust is required to pay a commitment fee on the unused portion of the line, which amounted to approximately $44,000 and $131,000, respectively, for the three and nine months ended September 30, 2013, and approximately $44,000 and $106,000 for the three and nine months ended September 30, 2012, respectively.
10. | 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 Trust received net proceeds of approximately $83,228,000, after deducting the underwriting discounts, commissions and offering expenses.
The Senior Notes mature on August 15, 2022 and bear interest at the rate of 7.75% per year, payable quarterly in arrears commencing November 15, 2012. The Trust may redeem the Senior Notes, in whole or in part, at any time or from time to time on or after August 15, 2015 at a redemption price in cash equal to 100% of the principal amount redeemed plus accrued and unpaid interest.
The Senior Notes rank senior to all of the Trusts future indebtedness that by its terms is expressly subordinate to the Senior Notes, effectively making the Senior Notes senior to all of the Trusts existing and future unsecured senior indebtedness to the extent of the collateral securing the Senior Notes and pari passu thereafter. The Senior Notes are structurally subordinated to all of the existing and future liabilities of Winthrops subsidiaries, including the Operating Partnership, but will have a security interest in the promissory note of the Operating Partnership to the Trust, which promissory note is pari passu with all existing and future unsecured senior indebtedness of the Operating Partnership.
11. | 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.
The Trusts objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Trust primarily uses interest rate caps and interest rate swaps as part of its interest rate risk management strategy relating to certain of its variable rate debt instruments.
The effective portion of changes in fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is 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 is recognized directly in earnings. During the three and nine months ended September 30, 2013 interest rate caps and swaps were used to hedge the variable cash flows associated with existing variable-rate debt. The Trust also assesses, both at its inception and on an ongoing basis, whether the hedging instrument is highly effective in achieving offsetting changes in the cash flows attributable to the hedged item. The Trust has recorded changes in fair value related to the effective portion of its interest rate hedges designated and qualifying as cash flow hedges as comprehensive loss totaling $150,000 and $20,000 for the three and nine months ended September 30, 2013, and $16,000 and $73,000 for the three and nine months ended September 30, 2012, respectively.
29
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below presents information about the Trusts interest rate caps and interest rate swaps that are included on the consolidated balance sheet that were designated as cash flow hedges of interest rate risk at September 30, 2013 (in thousands):
Maturity |
Strike Rate |
Notional Amount of Hedge |
Cost of Hedge |
Estimated Fair Value of Hedge in Other Comprehensive Income |
Unrealized (Loss) Gain on Hedge in Other Comprehensive Income |
Change in Hedge Valuations Included in Other Comprehensive Income for the Three Months Ended September 30, 2013 |
Change in Hedge Valuations Included in Other Comprehensive Income for the Nine Months Ended September 30, 2013 |
|||||||||||||||||||||
Aug 2014 |
0.50 | % | $ | 13,197 | $ | 22 | $ | 1 | $ | | $ | (3 | ) | $ | (4 | ) | ||||||||||||
May 2016 |
0.50 | % | $ | 42,922 | $ | | $ | (15 | ) | $ | (15 | ) | $ | (147 | ) | $ | (15 | ) |
The table below presents information about the Trusts interest rate caps that were not designated as cash flow hedges at September 30, 2013 (in thousands):
Maturity |
Strike Rate |
Notional Amount of Hedge |
Cost of Hedge |
Estimated Fair Value |
Change in Cap Valuations Included in Interest Expense for the Three Months Ended September 30, 2013 |
Change in Cap Valuations Included in Interest Expense for the Nine Months Ended September 30, 2013 |
||||||||||||||||||
May 2013 |
1.25 | % | $ | | $ | 196 | $ | | $ | | $ | | ||||||||||||
May 2014 |
1.75 | % | 51,982 | 434 | | | | |||||||||||||||||
Oct 2014 |
1.00 | % | 5,753 | 174 | | 1 | 1 |
The table below presents information about the Trusts interest rate caps and interest rate swaps that are included on the consolidated balance sheet that were designated as cash flow hedges of interest rate risk at September 30, 2012 (in thousands):
Maturity |
Strike Rate |
Notional Amount of Hedge |
Cost of Hedge |
Estimated Fair Value of Hedge in Other Comprehensive Income |
Unrealized Gain on Hedge in Other Comprehensive Income |
Change in Hedge Valuations Included in Other Comprehensive Income for the Three Months Ended September 30, 2012 |
Change in Hedge Valuations Included in Other Comprehensive Income for the Nine Months Ended September 30, 2012 |
|||||||||||||||||||||
Aug 2014 |
0.50 | % | $ | 13,478 | $ | 22 | $ | | $ | | $ | | $ | | ||||||||||||||
Oct 2014 |
1.00 | % | $ | 21,000 | $ | 174 | $ | (165 | ) | $ | | $ | (17 | ) | $ | (77 | ) |
30
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The table below presents information about the Trusts interest rate caps that were not designated as cash flow hedges at September 30, 2012 (in thousands):
Maturity |
Strike Rate |
Notional Amount of Hedge |
Cost of Hedge |
Estimated Fair Value |
Change in Cap Valuations Included in Interest Expense for the Three Months Ended September 30, 2012 |
Change in Cap Valuations Included in Interest Expense for the Nine Months Ended September 30, 2012 |
||||||||||||||||||
May 2013 |
1.25 | % | $ | 51,982 | $ | 196 | $ | | $ | | $ | 18 | ||||||||||||
May 2014 |
1.75 | % | 51,982 | 434 | 1 | 5 | 46 |
12. | Non-controlling Interests |
Houston, Texas Operating Property During the first quarter of 2013, a wholly-owned subsidiary of the Trust acquired a quarter-unit limited partner interest, representing 1% of 5400 Westheimer Holding LP (Westheimer), for a purchase price of $75,000. The Trust accounted for this purchase as an equity transaction recording the difference in the $127,000 carrying value of the acquired non-controlling interest and the purchase price as a $52,000 increase in paid-in capital. During the second quarter of 2013, the wholly-owned subsidiary acquired an additional 1% interest in Westheimer for a purchase price of $75,000. The Trust accounted for this purchase as an equity transaction recording the difference in the $126,000 carrying value of the acquired non-controlling interest and the purchase price as a $51,000 increase in paid-in capital. As a result, the Trust now owns 32% of Westheimer.
One East Erie/Ontario Operating Property On June 1, 2012 the Trust purchased from Marc Realty its 20% non-controlling interest in FT-Ontario Holdings LLC for $5,850,000. The Trust accounted for this purchase as an equity transaction recording the difference in the $363,000 carrying value of the acquired non-controlling interest and the purchase price as a $5,487,000 reduction in paid-in capital.
Deer Valley Operating Property On March 29, 2012 the Trust purchased the 3.5% non-controlling ownership interest of its consolidated joint venture, WRT-DV LLC, for $400,000. The Trust accounted for the purchase as an equity transaction recording the difference in the $192,000 carrying value of the acquired non-controlling interest and the purchase price as a $208,000 reduction in paid-in capital.
The changes in the Trusts ownership interest in the subsidiaries impacted consolidated equity during the period are as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income attributable to Winthrop Realty Trust |
$ | 11,728 | $ | 15,108 | $ | 33,848 | $ | 26,719 | ||||||||
Increase (decrease) in Winthrop Realty Trusts paid in capital related to purchases of non-controlling interests |
| | 103 | (5,695 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Changes from net income attributable to Winthrop Realty Trust and transfers (to) from non-controlling interests |
$ | 11,728 | $ | 15,108 | $ | 33,951 | $ | 21,024 | ||||||||
|
|
|
|
|
|
|
|
31
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. | Discontinued Operations |
During 2012 the Trusts net lease retail property in Memphis, Tennessee and its office property in Indianapolis, Indiana were sold and are included in discontinued operations. During 2013 the Trusts net lease retail properties in Denton, Texas and Seabrook, Texas and its office properties located in Deer Valley, Arizona and Andover, Massachusetts were sold and are included in discontinued operations for all periods presented. The Trusts office property located at 701 Arboretum in Lisle, Illinois was classified as held for sale as of September 30, 2013 and is included in discontinued operations for all periods presented.
Results for discontinued operations for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2013 |
September 30, 2012 |
September 30, 2013 |
September 30, 2012 |
|||||||||||||
Revenues |
$ | 10 | $ | 1,263 | $ | 1,598 | $ | 4,261 | ||||||||
Termination fee income |
| 592 | | 592 | ||||||||||||
Operating expenses |
(94 | ) | (675 | ) | (1,028 | ) | (2,016 | ) | ||||||||
Interest expense |
| (685 | ) | | (842 | ) | ||||||||||
Depreciation and amortization |
(21 | ) | (657 | ) | (589 | ) | (1,648 | ) | ||||||||
Gain on sale of assets |
1,421 | 945 | 10,948 | 945 | ||||||||||||
Impairment loss |
(2,750 | ) | (698 | ) | (2,904 | ) | (698 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
(Loss) income from discontinued operations |
$ | (1,434 | ) | $ | 85 | $ | 8,025 | $ | 594 | |||||||
|
|
|
|
|
|
|
|
14. | Commitments and Contingencies |
In addition to the initial purchase price of certain loans and operating properties, the Trust has future funding commitments attributable to its 450 W 14th Street property, 701 Seventh Avenue investment and 1515 Market Street loan which total approximately $88,913,000 at September 30, 2013. The Trust has a ground lease related to its property located at 450 W 14th Street, New York, New York which expires on June 1, 2053. As of September 30, 2013, in connection with the ground lease, the Trust has commitments of $337,000; $1,405,000; $1,463,000; $1,592,000; $1,656,000 and $109,419,000 for the years ended December 31, 2013, 2014, 2015, 2016, 2017 and thereafter, respectively.
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 Trusts business activities, these lawsuits are considered routine to the conduct of its business. The result of any particular lawsuit cannot be predicted because of the very nature of litigation, the litigation process and its adversarial nature, and the jury system. 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 its financial condition or results of operations.
Churchill, Pennsylvania In 2011 the Trust was conveyed title to the land underlying the 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 there may be contamination that could require remediation. The Trust believes that based on applicable law and existing agreements any such remediation costs would be the responsibility of a prior owner or tenant.
In connection with the settlement agreement entered into on September 30, 2011 with CBS Corporation (CBS), the Trust was required to market the Churchill, Pennsylvania property for sale and to the extent the property was sold or the Trust received a responsible offer as defined in the settlement agreement from a credit worthy third party in an amount in excess of $6,500,000, net of closing costs, the Trust is required to pay to CBS the sum of 50% of such net proceeds in excess of $6,500,000. In this
32
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
regard, the Trust received an offer on the portion of the property leased to Westinghouse Electric Company LLC which would have resulted in net proceeds in excess of $6,500,000. The Trust did not pursue the sale of the property and as of September 30, 2013 recorded a payable in the amount of $150,000 representing the 50% excess due to CBS. If certain conditions, which are not considered probable as of September 30, 2013, are met in the future, the Trust could be liable to pay an additional contingent fee of approximately $340,000.
15. | Related-Party Transactions |
FUR Advisors The activities of the Trust are administered by FUR Advisors LLC (FUR Advisors) pursuant to the terms of the Advisory Agreement between the Trust and FUR Advisors. FUR Advisors is controlled by and partially owned by the executive officers of the Trust. Pursuant to the terms of the Advisory Agreement, FUR Advisors is responsible for providing asset management services to the Trust and coordinating with the Trusts shareholder transfer agent and property managers. FUR Advisors is entitled to receive a base management fee and in addition, FUR Advisors or its affiliate is also entitled to receive property and construction management fees subject to the approval of the independent Trustees of the Trust.
The following table sets forth the fees and reimbursements paid by the Trust for the three and nine months ended September 30, 2013 and 2012 to FUR Advisors and Winthrop Management L.P. (Winthrop Management) (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2013 |
September 30, 2012 |
September 30, 2013 |
September 30, 2012 |
|||||||||||||
Base Asset Management |
$ | 2,309 | $ | 2,316 | $ | 6,866 | $ | 6,641 | ||||||||
Property Management |
304 | 193 | 895 | 506 | ||||||||||||
Construction Management |
112 | 33 | 381 | 97 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 2,725 | $ | 2,542 | $ | 8,142 | $ | 7,244 | |||||||||
|
|
|
|
|
|
|
|
Base Asset Management Fee FUR Advisors is entitled to receive a base management fee of 1.5% of equity as defined in the Advisory Agreement and in certain instances, a termination fee and/or an incentive fee in accordance with the terms of the Advisory Agreement. Additionally, FUR Advisors receives a fee equal to 0.25% of any equity contributions by unaffiliated third parties to a venture managed by the Trust.
Property Management and Construction Management Winthrop Management, an affiliate of FUR Advisors and the Trusts executive officers, assumed property management responsibilities for various properties owned by the Trust. Winthrop Management receives a property management fee and construction management fee pursuant to the terms of individual property management agreements. Construction management fees are capitalized in accordance with GAAP.
At September 30, 2013 $2,309,000 payable to FUR Advisors and $383,000 payable to Winthrop Management were included in related party fees payable.
16. | Restricted Share Grants |
On February 1, 2013 the Board approved the issuance of 600,000 shares of Restricted Common Shares (Restricted Shares) to the Trusts Advisor, 500,000 of which were subject to the approval of the shareholders to the increase in the number of shares issuable under the Trusts 2007 Stock Option Plan (the SOP). The initial 100,000 Restricted Shares were issued on February 28, 2013. At the May 21, 2013 annual shareholders meeting the increase in shares issuable under the SOP from 100,000 to 1,000,000 was approved by the requisite number of shareholders and the remaining 500,000 shares were issued on May 28, 2013. The Restricted Shares are subject to forfeiture through December 31, 2017. Except in limited circumstances, if the holder of the Restricted Shares does not remain in continuous employment with FUR Advisors or its affiliate through December 31, 2017 (the Forfeiture Period), all of their rights to the Restricted Shares and the associated dividends held in escrow will be forfeited. Dividends will be paid on the issued Restricted Shares in conjunction with dividends on Common Shares not issued under the SOP. However, the recipients of the Restricted Shares will only receive dividends as if the shares vested quarterly over the Forfeiture Period, with the remaining dividends to be placed into escrow and paid to the holders at the expiration of the Forfeiture Period.
33
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Until the awards are no longer subject to forfeiture, the Trust measures stock-based compensation expense at each reporting date for any changes in fair value and recognizes the expense prorated for the portion of the requisite service period completed. Accordingly, the Trust recognized $346,000 and $557,000 in non-cash compensation expense for the three and nine months ended September 30, 2013. As of September 30, 2013 there were no forfeitures of Restricted Shares.
17. | Reportable Segments |
The Financial Accounting Standards Board (FASB) guidance on segment reporting establishes standards for the way that public business enterprises report information about operating segments in financial statements and requires that those enterprises report selected financial information about operating segments in interim financial reports issued to shareholders. Based on the Trusts method of internal reporting, management determined that it has three operating segments: (i) the ownership of operating properties; (ii) the origination and acquisition of loans and debt securities secured directly or indirectly by commercial and multi-family real property collectively, loan assets; and (iii) the ownership of equity and debt securities in other REITs REIT securities.
The operating properties segment includes all of the Trusts wholly and partially owned operating properties. The loan assets segment includes all of the Trusts activities related to real estate loans including loans receivable, loan securities and equity investments in loan related entities. The REIT securities segment includes all of the Trusts activities related to the ownership of securities in other publicly traded real estate companies. In addition to its three business segments, the Trust reports non-segment specific income and expense under corporate income (expense).
The following table summarizes the Trusts assets by business segment for the periods ended September 30, 2013 and December 31, 2012 (in thousands):
September 30, 2013 | December 31, 2012 | |||||||
Assets |
||||||||
Operating properties |
$ | 630,666 | $ | 562,822 | ||||
Loan assets |
154,265 | 239,534 | ||||||
REIT securities |
7,074 | 19,694 | ||||||
Corporate |
||||||||
Cash and cash equivalents |
165,762 | 97,682 | ||||||
Restricted cash |
7,387 | | ||||||
Accounts receivable and prepaids |
574 | 336 | ||||||
Deferred financing costs |
2,757 | 3,095 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 968,485 | $ | 923,163 | ||||
|
|
|
|
|||||
Capital Expenditures |
||||||||
Operating Properties |
$ | 2,835 | $ | 12,417 | ||||
|
|
|
|
The Trust and its management assess and measure segment operating results and allocate resources based on a performance measure referred to as operating income. Operating income for each segment is presented as all items of income and expense directly derived from or incurred by each business segment before depreciation, amortization and interest expense. Interest on cash reserves, general and administrative expenses and other non-segment specific income and expense items are reported under corporate income (expense).
34
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents a summary of revenues from operating properties, loan assets and REIT securities and expenses incurred by each segment for the three and nine months ended September 30, 2013 and 2012 (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Operating Properties |
||||||||||||||||
Rents and reimbursements |
$ | 15,099 | $ | 12,224 | $ | 45,026 | $ | 35,022 | ||||||||
Operating expenses |
(5,272 | ) | (3,335 | ) | (14,697 | ) | (10,643 | ) | ||||||||
Real estate taxes |
(1,705 | ) | (1,160 | ) | (4,184 | ) | (3,116 | ) | ||||||||
Equity in earnings of preferred equity investment in Fenway-Wateridge |
189 | | 576 | | ||||||||||||
Equity in loss of Sealy Northwest Atlanta |
(130 | ) | (109 | ) | (363 | ) | (273 | ) | ||||||||
Equity in loss of Sealy Newmarket |
| (704 | ) | | (2,171 | ) | ||||||||||
Equity in income (loss) of Marc Realty investment |
(26 | ) | 377 | (17 | ) | 33 | ||||||||||
Equity in income (loss) of WRT-Elad |
905 | (57 | ) | 1,515 | 458 | |||||||||||
Equity in income of Vintage |
2,525 | 1,392 | 7,142 | 2,326 | ||||||||||||
Equity in income of 701 Seventh Avenue |
1,055 | | 2,375 | | ||||||||||||
Equity in income of Fenway-Wateridge |
50 | | 133 | | ||||||||||||
Equity in income of Mentor |
12 | 12 | 45 | 18 | ||||||||||||
Equity in loss of Atrium Mall |
(31 | ) | | (31 | ) | | ||||||||||
Equity in income of F-II Co-invest |
| | | 232 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating properties operating income |
12,671 | 8,640 | 37,520 | 21,886 | ||||||||||||
Depreciation and amortization expense |
(4,923 | ) | (4,416 | ) | (14,703 | ) | (11,623 | ) | ||||||||
Interest expense |
(3,272 | ) | (3,126 | ) | (11,131 | ) | (9,230 | ) | ||||||||
Settlement expense |
(16 | ) | | (150 | ) | | ||||||||||
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|
|
|
|
|
|
|
|||||||||
Operating properties net income |
4,460 | 1,098 | 11,536 | 1,033 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Loan Assets |
||||||||||||||||
Interest income |
3,011 | 2,985 | 10,912 | 8,130 | ||||||||||||
Discount accretion |
806 | 425 | 2,283 | 5,984 | ||||||||||||
Unrealized gain on loan securities carried at fair value |
| 371 | 215 | 447 | ||||||||||||
Equity in income of ROIC Riverside |
| 238 | | 706 | ||||||||||||
Equity in loss of ROIC Lakeside Eagle |
(7 | ) | (16 | ) | (22 | ) | (32 | ) | ||||||||
Equity in income of Concord Debt Holdings |
2,970 | 35 | 3,041 | 386 | ||||||||||||
Equity in income of CDH CDO |
265 | 136 | 415 | 670 | ||||||||||||
Equity in income of Concord Debt Holdings (1) |
20 | 2 | 49 | 30 | ||||||||||||
Equity in income of CDH CDO (1) |
3,367 | 855 | 4,274 | 1,333 | ||||||||||||
Equity in income of WRT-Stamford |
256 | 232 | 701 | 548 | ||||||||||||
Equity in income (loss) of SoCal Office Loan Portfolio |
| 10,348 | (2 | ) | 9,710 | |||||||||||
Equity in (loss) income of RE CDO Management |
(51 | ) | 18 | 3,710 | 46 | |||||||||||
Equity in income of 10 Metrotech |
2,676 | 50 | 3,284 | 31 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Loan assets operating income |
13,313 | 15,679 | 28,860 | 27,989 | ||||||||||||
General and administrative expense |
(2 | ) | (15 | ) | (37 | ) | (40 | ) | ||||||||
Interest expense |
(335 | ) | (336 | ) | (1,562 | ) | (1,004 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loan assets net income |
12,976 | 15,328 | 27,261 | 26,945 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
REIT Securities |
||||||||||||||||
Interest and dividends |
100 | 312 | 350 | 904 | ||||||||||||
(Loss) gain on sale of securities carried at fair value |
(31 | ) | | (133 | ) | 41 | ||||||||||
Unrealized gain (loss) on securities carried at fair value |
| 3,113 | (142 | ) | 7,254 | |||||||||||
|
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|
|||||||||
REIT securities net income |
69 | 3,425 | 75 | 8,199 | ||||||||||||
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|
|
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Net income from segments before corporate income (expense) |
17,505 | 19,851 | 38,872 | 36,177 | ||||||||||||
|
|
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|
|
|
|
|
|||||||||
Reconciliations to GAAP Net Income: |
||||||||||||||||
Corporate Income (Expense) |
||||||||||||||||
Interest income |
101 | 242 | 286 | 433 | ||||||||||||
Interest expense |
(1,828 | ) | (954 | ) | (5,482 | ) | (1,326 | ) | ||||||||
General and administrative |
(1,111 | ) | (767 | ) | (3,021 | ) | (2,407 | ) | ||||||||
Related party fees |
(2,309 | ) | (2,316 | ) | (6,866 | ) | (6,641 | ) | ||||||||
Transaction costs |
(106 | ) | (30 | ) | (158 | ) | (335 | ) | ||||||||
State and local taxes |
(85 | ) | (64 | ) | (227 | ) | (211 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
12,167 | 15,962 | 23,404 | 25,690 | ||||||||||||
(Loss) income from discontinued operations attributable to Winthrop Realty Trust |
(1,434 | ) | 85 | 8,025 | 594 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
10,733 | 16,047 | 31,429 | 26,284 | ||||||||||||
Net loss (income) attributable to non-controlling interest |
995 | (939 | ) | 2,419 | 435 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Income Attributable to Winthrop Realty Trust |
$ | 11,728 | $ | 15,108 | $ | 33,848 | $ | 26,719 | ||||||||
|
|
|
|
|
|
|
|
(1) | Represents the interest acquired from Lexington Realty Trust on May 1, 2012. |
35
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
18. | Variable Interest Entities |
Consolidated Variable Interest Entities
Consolidated variable interest entities are those where the Trust is 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 VIEs performance, and 2) the obligation to absorb losses and right to receive the returns from the VIE that could be significant to the VIE. The Trust has identified two consolidated variable interest entities.
Although the Trust holds 100% of the equity interests in the Cerritos office property, the B-Note collateralized by the property enables the senior lender to participate in the entitys expected residual returns, the Trust will need to fund expected losses and infuse additional capital to lease and stabilize property operations. Through its equity interests in the property, the Trust has both the right to the returns of the entity and power to direct the activities of Cerritos. Accordingly, the Trust is the primary beneficiary and has consolidated Cerritos since its acquisition on October 5, 2012.
At September 30, 2013 the carrying value of the Cerritos assets and liabilities included: land and building of $22,079,000 net of accumulated depreciation of $830,000; lease intangibles of $3,435,000 net of accumulated amortization of $627,000; mortgage debt comprised of an A Note totaling $23,153,000 and participating B Note totaling $864,000. The outstanding mortgage debt collateralized by the property is non-recourse to the Trust.
In connection with the loan modification of 1515 Market Street, the Trust acquired a 49% equity interest in the entity that holds the property. This equity interest includes the general partner interest. The Trust determined that the 1515 Market Street entity was a variable interest entity due to the lenders right to participate in the entitys expected residual returns. Through its equity interest, the Trust has both the right to the returns of the entity and power to direct the activities of 1515 Market Street. Accordingly, the Trust is the primary beneficiary and has consolidated the property effective February 1, 2013.
At September 30, 2013 the carrying value of the 1515 Market Street assets and liabilities include land and building of $42,950,000 net of accumulated depreciation of $590,000 and lease intangibles of $16,624,000 net of accumulated amortization of $1,566,000 and a first mortgage note of $42,683,000. A second mortgage note of $35,040,000 is eliminated in consolidation. The outstanding mortgage debt collateralized by the property is non-recourse to the Trust.
The fair value of the assets and liabilities of the consolidated property was calculated by an independent third party valuation firm and reviewed by management. The following table summarizes the allocation of the aggregate purchase price of 1515 Market Street as of February 1, 2013 (in thousands):
1515 Market Street |
||||
Land |
$ | 18,627 | ||
Building |
23,159 | |||
Other improvements |
73 | |||
Tenant improvements |
1,407 | |||
Lease intangibles |
14,943 | |||
Above market lease intangibles |
2,867 | |||
Net working capital acquired |
1,132 | |||
Below market lease intangibles |
(620 | ) | ||
Other liabilities |
(1,299 | ) | ||
Long term liabilities assumed |
(60,279 | ) (1) | ||
|
|
|||
Net assets acquired |
$ | 10 | ||
|
|
(1) | Long term liabilities assumed as part of this transaction remain legally outstanding but are eliminated in consolidation with the Trusts loan asset purchased on December 12, 2012. |
36
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Intangible assets acquired and intangible liabilities assumed for 1515 Market Street at February 1, 2013 consisted of the following (in thousands):
Carrying Value |
Weighted Average Amortization Period (years) |
|||||||
Intangible assets: |
||||||||
In place lease intangibles |
$ | 6,542 | 6.2 | |||||
Above market lease intangibles |
2,867 | 5.8 | ||||||
Tenant relationship value |
7,388 | 13.3 | ||||||
Lease commissions, legal and marketing fees |
1,013 | 5.4 | ||||||
|
|
|
|
|||||
Total |
$ | 17,810 | 9.0 | |||||
|
|
|
|
|||||
Intangible liabilities: |
||||||||
Below market lease intangibles |
$ | (620 | ) | 4.2 | ||||
|
|
|
|
For the three and nine months ended September 30, 2013, 1515 Market Street contributed revenue of approximately $2,449,000 and $6,942,000, respectively, and contributed net income of approximately $514,000 and $1,586,000, respectively.
The accompanying unaudited pro forma information for the three and nine months ended September 30, 2013 and 2012 is presented as if the consolidation of 1515 Market Street on February 1, 2013 had occurred on January 1, 2012. This unaudited pro forma information is based upon historical consolidated financial information and should be read in conjunction with the consolidated financial statements and notes thereto. This 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 | For the Three Months Ended | For the Nine Months Ended | ||||||||||||||
(In thousands, except for per share data) | September 30, | September 30, | ||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Total revenue |
$ | 18,842 | $ | 18,151 | $ | 59,502 | $ | 57,913 | ||||||||
Consolidated net income |
$ | 10,133 | $ | 16,010 | $ | 30,797 | $ | 26,591 | ||||||||
Net income attributable to Winthrop Realty Trust |
$ | 11,128 | $ | 15,660 | $ | 33,489 | $ | 28,207 | ||||||||
Per common share data - basic |
0.25 | 0.39 | 0.76 | 0.66 | ||||||||||||
Per common share data - diluted |
0.25 | 0.39 | 0.76 | 0.66 |
Variable Interest Entities Not Consolidated
Equity Method and Preferred Equity Investments The Trust has reviewed its various equity method and preferred equity investments and identified 11 investments for which the Trust holds a variable interest in a VIE. Of these 11 interests there are seven investments for which the underlying entities do not have sufficient equity at risk to permit them to finance their activities without additional subordinated financial support. There are four additional entities for which the VIE assessment was primarily based on the fact that the voting rights of the equity holders are not proportional to their obligations to absorb expected losses and rights to receive residual returns of the legal entities. These 11 unconsolidated joint ventures are those where the Trust is not the primary beneficiary of a VIE.
Loans Receivable and Loan Securities The Trust has reviewed its loans receivable and loan securities and four of these assets have been identified as variable interests in a VIE because the equity investment at risk at the borrowing entity level is not considered sufficient for the entity to finance its activities without additional subordinated financial support. There is one investment where the equity holders lack the right to receive returns due to the lenders participation interest in the debt.
37
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Certain loans receivable and loan securities which have been determined to be VIEs are performing assets, meeting their debt service requirements. In these cases the borrower holds legal title to the real estate collateral and has the power to direct the activities that most significantly impact the economic performance of the VIE, including management and leasing activities. In the event of default under these loans, the Trust only has protective rights and its obligation to absorb losses is limited to the extent of its loan investment. The borrower has been determined to be the primary beneficiary for these performing assets.
The Trust has determined that it does not currently have the power to direct the activities of the properties collateralizing any of its loans receivable and loan securities. For this reason, management believes that it does not control, nor is it the primary beneficiary of these properties. Accordingly, the Trust accounts for these investments under the guidance for loans receivable and real estate debt investments.
19. | Subsequent Events |
Sealy Airpark Nashville Foreclosure On October 7, 2013 the lender foreclosed on the loan that was collateralized by the ventures property located in Nashville, Tennessee. The Trust did not recognize a gain or loss in connection with the foreclosure as the investment was carried at $0 for financial reporting purposes.
WRT-Fenway Wateridge Mortgage Loan On October 15, 2013 the venture obtained a $7,000,000 first mortgage loan on its San Diego, California property. The loan bears interest at the greater of 6%, or LIBOR plus 4.5% per annum, requires monthly payments of interest only and matures on November 1, 2016. The venture purchased an interest rate cap which caps LIBOR at 2.5%. In connection with the financing, the Trust received a distribution of $6,255,000 in partial redemption of its preferred equity investment. The Trust retains the balance of its preferred equity interest as well as a 50% equity interest in the venture.
WRT-Elad Equity Mortgage Loan Refinancing On October 18, 2013 the venture which owns the property known as the Sullivan Center located at One South State Street, Chicago, Illinois obtained a new $113,500,000 first mortgage loan. The loan bears interest at a rate of 3.95% per annum, requires monthly payments of interest only and matures on November 6, 2018. The proceeds from the loan were used to repay the existing $110,550,000 first mortgage loan which bore interest at a rate of 11.0% per annum.
Summit Pointe Apartments Equity Investment On October 25, 2013 the Trust contributed $4,933,000 for an 80% preferred equity interest in a newly formed venture. On the same date, the venture acquired a 184 unit garden apartment complex known as Summit Pointe Apartments located in Oklahoma City, Oklahoma for a gross purchase price of $14,500,000. In connection with the acquisition, the venture assumed an existing $9,248,000 first mortgage loan. The loan bears interest at a rate of 5.7% per annum, requires monthly payments of principal and interest and matures in February 2021. Management for the venture has not finalized the acquisition accounting and therefore is not able to provide the disclosures otherwise required by ASC 805.
Pursuant to the terms of the venture agreement, the Trust will hold a preferred equity interest which entitles it to an 8% preferred return from cash flow and, upon disposition of the property, a minimum preferred return equal to a 12% IRR.
Luxury Residential Property Acquisition On October 31, 2013 the Trust closed on its acquisition of four newly constructed Class A luxury apartment buildings for an aggregate purchase price of $246,000,000. The properties are located in Phoenix, Arizona; Stamford, Connecticut; Houston, Texas and San Pedro, California. The acquisition was funded with a $150,000,000 first mortgage loan which is cross collateralized by all four properties. The loan bears interest at a rate of LIBOR plus 2%, requires monthly payments of interest only and matures on October 31, 2016 with two one year extension options. The balance of the purchase was funded from cash on hand. Management has not finalized the acquisition accounting and therefore is not able to provide the disclosures otherwise required by ASC 805.
On November 6, 2013, New Valley LLC (New Valley) contributed approximately $16,350,000 to the entity that acquired the properties in exchange for an indirect 16.3% interest in the properties. Winthrop retained the balance and has the right to make all decisions with respect to each of the properties other than the Stamford, Connecticut property, subject to obtaining New Valleys consent to certain major decisions. With respect to the Stamford, Connecticut property, prior to November 6, 2016 the consent of New Valley is required on all matters other than those that are administrative in nature. New Valley has the right at any time after November 6, 2015 (or in certain instances prior thereto), but on or prior to November 6, 2016, to have its interest in the venture redeemed for a 50% interest in the Stamford, Connecticut property.
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FORM 10-Q SEPTEMBER 30, 2013
ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results, financial condition and business may differ materially from those expressed in these forward-looking statements. You can find many of these statements by looking for words such as approximates, believes, expects, anticipates, intends, plans, would, may or similar expressions in this Quarterly Report on Form 10-Q. 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 in our Annual Report on Form 10-K for the year ended December 31, 2012 under Forward Looking Statements and Item 1A Risk Factors, as well as our other filings with the Securities and Exchange Commission. 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.
Managements Discussion and Analysis of Financial Condition and Results of Operations include a discussion of our unaudited consolidated interim financial statements and footnotes thereto for the three and nine months ended September 30, 2013 as compared with the three and nine months ended September 30, 2012. These unaudited interim financial statements are prepared in conformity with accounting principles generally accepted in the United States of America which 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.
Overview
As a diversified REIT, we operate in three strategic segments: (i) operating properties; (ii) loan assets; and (iii) REIT securities. As value investors we focus and aggressively pursue our investment activity in the segments we believe will generate the greatest overall return to us given market conditions at the time. In prior years we have demonstrated our ability to adjust our business plan to capitalize on evolving marketing conditions both with respect to business segment and capital structure. We will continue to invest in opportunities which we believe will yield superior risk adjusted returns. These investments may have returns weighted towards the back end of the invested life which may negatively impact current earnings. Further, we continue to review our existing portfolio for follow-on opportunities and will seek to timely realize returns on such investments subject to any limitations we determine are necessary to avoid being subject to the REIT 100% tax on gains from dealer transactions under the Internal Revenue Code.
In connection with our strategy, in certain instances, we seek to acquire assets through joint ventures which allows us to employ third party co-investment capital to maximize diversification of risk and reduce capital concentration and in certain instances leverage off of our joint venture partners experience and expertise in specific geographic areas and/or specific asset types.
We continue to review our portfolio with a view towards divesting investments, subject to REIT rule limitations, as they mature in value to the point where these investments may be unlikely to achieve better than market returns and we redeploy capital to what we believe to be higher yielding opportunities.
We invested $31,003,000 in operating property assets and $30,000,000 in new loan assets during the third quarter of 2013. In addition, during the quarter we committed to invest an additional $225,500,000 to complete the acquisition of a garden apartment complex and four luxury residential property assets. See Item 1, Note 4 for a description of our investments that
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WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
closed during the quarter and Item 1, Note 19 for a description of our acquisitions which closed subsequent to September 30, 2013. During the third quarter of 2013 we received $29,960,000 in net proceeds from our issuance of Common Shares, $13,980,000 in return of capital distributions from our equity investments, $4,905,000 in net proceeds from the sale of our Denton, Texas and Seabrook, Texas properties and $5,837,000 from loan repayments. See additional details in our Liquidity and Capital Resources section below.
Loan Assets
During the third quarter of 2013 we closed on an agreement to acquire Elads 50% interest in the WRT-Elad Lender joint venture, for $30,000,000, which is in addition to our previously held joint venture interest of 50%. WRT-Elad Lender holds a mezzanine loan which is indirectly collateralized by the property located at One South State Street, Chicago, Illinois which we refer to as the Sullivan Center. The Sullivan Center mezzanine loan held by the joint venture had an outstanding balance of principal plus accrued interest of approximately $56,150,000 at the time of our additional investment. The mezzanine loan bears interest at 15% per annum and requires monthly payments of interest only. In February 2013 WRT-Elad Lender entered into a forbearance agreement with the borrower allowing the borrower to defer debt service payments on the mezzanine loan through October 9, 2013. To the extent debt service payments were not made, the unpaid debt service payments were added to the outstanding principal balance. In connection with the refinancing of the Sullivan Center first mortgage loan as discussed below, it is anticipated that debt service payments on the mezzanine loan will re-commence on November 9, 2013 as scheduled.
Also during the quarter, the $40,000,000 loan held by our 10 Metrotech Loan joint venture was paid off at par. The venture, of which we own 33.33%, originally acquired the loan in August 2012 for $32,500,000. We received a distribution of $13,333,000 in connection with the payoff of the loan.
Additionally, two of the underlying loans held by our Concord ventures paid off during the quarter. In July 2013 the loan collateralized by the property commonly referred to as Thanksgiving Tower located in Dallas, Texas was satisfied. In August 2013 the loan collateralized by the property referred to as One Riverwalk located in San Antonio, Texas was satisfied. The Trust received an aggregate distribution of $6,470,000 during the quarter as a result of the loan payoffs. As a result of the Thanksgiving Tower loan repayment, Concord Real Estate CDO 2006-1, Ltd, an entity in which we own an effective 49.67% equity interest, satisfied its leverage ratio test and again began making distributions to the CDOs junior tranches of bonds and its equity holder. It is expected that so long as the leverage ratio tests remain satisfied we will receive distributions of approximately $300,000 per month.
During the quarter we received $5,571,000 from the sale of condominium units that collateralize our Queensridge Tower loan receivable.
Operating Properties
Consolidated Operating Properties
During 2013 we have seen increases in our operating income from our operating properties as a result of favorable operating results from same store properties, that is, properties held during both nine month periods, complemented by our new store property operating results, that is, properties not held during both complete nine month periods. The full impact of the improvement is not reflected in continuing operations as certain of our improved properties were sold and are classified as discontinued operations. See our Results of Operations section below for details of our consolidated properties net income. As of September 30, 2013 our consolidated properties were approximately 88.6% leased compared to approximately 89.6% leased at December 31, 2012.
In addition to the sale of our Andover, Massachusetts office property in March 2013 and the sale of our Deer Valley, Arizona property in June 2013, during the third quarter of 2013 we sold the following properties:
Denton, Texas On July 2, 2013 we sold our Denton, Texas property to an independent third party for gross sale proceeds of $1,850,000. After costs and pro-rations, we received net proceeds of approximately $1,703,000. No gain or loss was recorded on the sale of the property. The property was classified as held for sale at June 30, 2013 and the results of operations for the property have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.
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WINTHROP REALTY TRUST
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Seabrook, Texas On August 1, 2013 we sold our Seabrook, Texas property to an independent third party for gross sale proceeds of $3,300,000. After costs and pro-rations, we received net proceeds of approximately $3,202,000 and recorded a gain of $1,428,000 on the sale of the property. The results of operations for all periods have been classified as discontinued operations for all periods presented in the consolidated interim financial statements.
Equity Investments
Vintage Housing During the three and nine months ended September 30, 2013, we recorded net income from our investment in Vintage Housing of $2,525,000 and $7,142,000, respectively, and received cash distributions of $1,705,000 and $3,970,000, respectively. The Vintage properties were 97% occupied at August 31, 2013. We have elected to recognize our earnings on a one month lag.
WRT-Elad Lender Sullivan Center All cash flow at the Sullivan Center property was trapped by the first mortgage lender. As a result, the property was unable to meet its debt service payments on the mezzanine loan held by our venture. Equity LP, our venture which holds a future ownership interest in the property, and Lender LP, collectively our Sullivan JV, entered into a forbearance agreement with the borrower and non-controlling interest owner at our Sullivan Center property. As a result, the Sullivan JV increased its future ownership interest in the property from 65% to 70%. In addition, the Sullivan JV is entitled to receive a $1,400,000 modification fee in November 2013. If the payment is not paid, the Sullivan JVs future ownership interest will increase to 76%.
On October 18, 2013 the property owner obtained a new $113,500,000 first mortgage loan. The loan bears interest at a rate of 3.95% per annum, requires monthly payments of interest only and matures on November 6, 2018. The proceeds from the loan were used to repay the existing $110,550,000 first mortgage loan which bore interest at a rate of 11.0% per annum. The new loan eliminates the requirement for the cash trap with the lender and it is anticipated that the property will re-commence making payments on the mezzanine loan on November 9, 2013 in accordance with the terms of the forbearance agreement.
We recognized $904,000 and $1,515,000 of income on our investment during the three and nine months ended September 30, 2013. The Sullivan Center was 83% leased at August 31, 2013. We have elected to recognize our earnings on a one month lag.
701 Seventh Avenue In October 2012 we entered into a joint venture to acquire and redevelop a 120,000 square foot property and associated air rights located at 701 Seventh Avenue, New York, New York. We made an initial investment of $28,971,000. On July 8, 2013 we agreed to increase our percentage of capital contributions to 70%, increasing, if and when permitted by the lender, to 80% and to participate in the future hotel development. In doing so, on July 23, 2013 the Trust made an additional $4,927,000 capital contribution to the joint venture and increased our commitment to invest up to $120,000,000 in the aggregate. As of September 30, 2013, we have invested a total of $36,170,000 in the venture. During October 2013 we invested an additional $16,686,000.
During the three and nine months ended September 30, 2013, we recorded net income from our investment in 701 Seventh Avenue of $1,055,000 and $2,375,000, respectively and received cash distributions of $671,000 and $1,866,000, respectively. We have elected to recognize our earnings on a three month lag.
WRT-Fenway Wateridge On December 21, 2012 we entered into a venture which acquired for $9,200,000 a 62,152 square foot class B office building located in Sorrento Mesa (San Diego), California. We contributed a total of $7,682,000 of which $6,000,000 is a preferred equity investment which entitles us to a 12% priority return to be paid 8% currently from operating cash flow with the remaining 4% deferred. During the three and nine months ended September 30, 2013, we recorded net income from the investment of $239,000 and $709,000 and received cash distributions of $0 and $123,000. We have elected to recognize our earnings on a one month lag. In October 2013 the venture obtained a first mortgage loan in the amount of $7,000,000 resulting in a distribution to us of $6,255,000 in connection with our preferred equity investment. Subsequent to the distribution, our preferred equity balance is $229,000.
Sealy Two of the investment properties are located in Atlanta, Georgia, (Northwest Business Park and Newmarket), which had occupancies, inclusive of leases signed not yet commenced, of 74% and 57% respectively, at September 30, 2013 as compared to occupancies of 70% and 50%, respectively at December 31, 2012. The third Sealy investment is located in Nashville, Tennessee and was 84% occupied at September 30, 2013 and December 31, 2012.
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WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
The loan collateralized by the Newmarket property continues to be in special servicing. To date, we, together with our venture partner, have been unsuccessful in negotiating a restructuring of the debt with the special servicer. It is unlikely that a restructuring of this loan will be successful. At September 30, 2013, we carry this investment at zero.
On October 7, 2013 the loan collateralized by the Nashville, Tennessee property was foreclosed. We did not recognize any gain or loss on the foreclosure.
Marc Realty As of September 30, 2013 we held equity interests in four properties with Marc Realty which consist of an aggregate of approximately 665,000 rentable square feet of office and retail space which was 79% occupied at September 30, 2013 as compared to 78% occupied at December 31, 2012.
REIT Securities
During the nine months ended September 30, 2013, we sold REIT securities with an original acquisition cost of $9,558,000 for net proceeds of $12,345,000.
As of September 30, 2013 our portfolio of REIT securities had a fair value of $7,074,000 compared to an original acquisition cost of $6,318,000.
Liquidity and Capital Resources
At September 30, 2013 we held $165,762,000 in unrestricted cash and cash equivalents. In addition, as of September 30, 2013 we had, subject to the value of the assets included in the borrowing base, $50,000,000 available to draw on our revolving line of credit and $7,074,000 in REIT securities.
We believe that cash flow from operations will continue to provide adequate capital to fund our operating and administrative expenses, as well as debt service obligations in the short term. As a REIT, we must distribute annually at least 90% of our REIT taxable income. As a result of this dividend requirement, we, like other REITs, are dependent on raising capital through equity and debt issuances or forming ventures with investors to obtain funds with which to expand our business. Accordingly, we anticipate that capital with which to make future investment and financing activities will be provided from return of capital received from proceeds from loan maturities and prepayment, borrowings, the issuance of additional equity and debt securities, as well as proceeds from sales of existing assets to the extent the taxable gain on such sales is able to be sheltered through the use of capital loss carry forwards. We have capital loss carry forwards of $31,697,000, $14,025,000 which expires in 2014 and $17,672,000 which expires in 2015.
In October 2013 we invested an additional $67,000,000 to complete our acquisition of four luxury apartment buildings. An additional $150,000,000 was provided by a first mortgage loan which is collateralized by the four properties.
Our primary sources of funds include:
| cash and cash equivalents; |
| rents and reimbursements received from our operating properties; |
| payments received under our loan assets; |
| disposition of REIT securities; |
| sale of existing assets; |
| cash distributions from joint ventures; |
| borrowings under our credit facilities; |
| asset specific borrowings; and |
| the issuance of equity and debt securities. |
Public Offering
On September 30, 2013 we closed on a public offering of 2,750,000 Common Shares at a price of $11.45 per share. We received net proceeds of $30,250,000 after the underwriting discount but prior to offering expenses. Offering expenses are estimated to total $290,000.
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WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Contractual Obligations
Future Funding Requirements
We have future funding requirements relating to our 450 W 14th Street property, our 701 Seventh Avenue investment and our 1515 Market Street loan which total approximately $88,913,000 at September 30, 2013. During October 2013 we made an additional contribution of $16,686,000 to our 701 Seventh Avenue investment reducing our overall future funding commitment to $72,227,000.
Debt Maturities
At September 30, 2013 we had consolidated mortgage loans payable of $308,049,000. We have no mortgage debt maturing in 2013, $18,949,000 maturing in 2014, and $8,619,000 maturing in 2015, with the remainder maturing in 2016 or later. On July 26, 2013 we used cash on hand to fully satisfy the $14,985,000 mortgage loan payable collateralized by our Amherst, New York property which was scheduled to mature in October 2013. We have a $14,000,000 secured financing which was scheduled to mature in October 2013. The financing is collateralized by our Hotel Wales loan receivable which was scheduled to mature in October 2013. This loan receivable and secured financing both had a one-year extension option which has been exercised extending the maturity date for both to October 2014. We have a $50,000,000 revolving line of credit which matures in March 2014 with an option to extend to March 2015 subject to our continued compliance with the lines financial covenants. On September 30, 2013, we had no amounts outstanding on the line.
We continually evaluate our debt maturities and except as noted above on our Sealy equity investments, based on our current assessment, we believe there are viable financing and refinancing alternatives for debts as they mature that will not materially adversely impact our liquidity or our expected financial results.
Cash Flows
Our level of liquidity based upon cash and cash equivalents increased by approximately $68,080,000 from $97,682,000 at December 31, 2012 to $165,762,000 at September 30, 2013.
Our cash flow activities for the nine months ended September 30, 2013 and 2012 are summarized as follows (in thousands):
For the Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Net cash flow provided by operating activities |
$ | 25,835 | $ | 37,712 | ||||
Net cash flow provided by (used in) investing activities |
32,634 | (22,205 | ) | |||||
Net cash flow provided by financing activities |
9,611 | 102,792 | ||||||
|
|
|
|
|||||
Increase in cash and cash equivalents |
$ | 68,080 | $ | 118,299 | ||||
|
|
|
|
Operating Activities
For the nine months ended September 30, 2013 our operating activities generated consolidated net income of $31,429,000 and positive cash flow of $25,835,000. Our cash provided by operations reflects our net income adjusted by: (i) a reduction for non-cash items of $23,722,000 representing primarily earnings of equity investments, gains on sales of real estate investments, current period loan discount accretion and unrealized gains on securities carried at fair value offset by adding back depreciation and amortization expenses; (ii) $19,477,000 of distributions from non-consolidated interests; and (iii) a net decrease due to changes in other operating assets and liabilities of $1,349,000. See our discussion of Results of Operations below for additional details on our operations.
Investing Activities
Cash flow provided by investing activities for the nine months ended September 30, 2013 was approximately $32,634,000 as compared to cash flow used in investing activities of approximately $22,205,000 for the comparable period in 2012. This change of approximately $54,839,000 resulted primarily from increased proceeds from the sale of assets in 2013 and fewer investments made in 2013.
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WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Net cash provided by investing activities of $32,634,000 for the nine months ended September 30, 2013 was comprised primarily of the following:
| $47,597,000 in collection of loans receivable; |
| $19,774,000 in proceeds from the sale of our Deer Valley, Arizona office property; |
| $19,318,000 in proceeds from the sale of two loans receivable; |
| $12,345,000 in proceeds from the sale of securities carried at fair value; |
| $11,538,000 in proceeds from the sale of our Andover, Massachusetts office property; |
| $10,834,000 in return of capital distributions from our 10 Metrotech venture; |
| $4,905,000 in proceeds from the sale of two net lease retail properties; |
| $3,041,000 in return of capital distributions from our Concord joint ventures; and |
| $774,000 in return of capital distributions from our RE CDO Management joint venture. |
These sources of cash flow were offset primarily by:
| $30,000,000 for the secured financing transaction related to the purchase of Elad Canada Inc.s 50% interest in WRT-Elad One South State Lender LP; |
| $25,606,000 for the initial deposit and other expenses related to our acquisition of four Class A apartment buildings which were acquired on October 31, 2013; |
| $20,569,000 for our Playa Vista mezzanine loan origination; |
| $7,745,000 for investment in our 701 7th WRT investors joint venture; |
| $6,289,000 for investment in capital and tenant improvements at our operating properties; |
| $3,935,000 for investment in our new Atrium Mall joint venture; and |
| $868,000 of advances made on our 1515 Market Street loan receivable prior to our consolidating this property. |
Financing Activities
Cash flow provided by financing activities for the nine months ended September 30, 2013 was approximately $9,611,000 as compared to approximately $102,792,000 for the comparable period in 2012. This change of approximately $93,181,000 resulted primarily from the issuance of Senior Notes Payable and Series D Preferred Shares in 2012 offset by proceeds from new mortgage loans payable and the issuance of Common Shares in 2013.
Net cash provided by financing activities of $9,611,000 for the nine months ended September 30, 2013 was comprised primarily of the following:
| $43,000,000 in proceeds from a new mortgage loan on our Philadelphia, Pennsylvania office property; |
| $29,960,000 in proceeds from the issuance of Common Shares; |
| $5,100,000 in proceeds from a new mortgage loan on our Churchill, Pennsylvania property; and |
| $861,000 in contributions from non-controlling interests at our New York, New York property. |
These sources of cash flow were offset primarily by:
| $23,770,000 for payments on our recourse secured financing; |
| $20,295,000 for principal payments on our mortgage loans payable; |
| $16,102,000 for dividend payments on our Common Shares; |
| $5,574,000 for dividend payments on our Series D Preferred Shares; |
| $2,786,000 placed in escrow to fund dividends on our Series D Preferred Shares payable October 1, 2013; |
| $789,000 for deferred financing costs; and |
| $150,000 for the acquisition of non-controlling interests on our Houston, Texas property. |
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WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Common and Preferred Share Dividends
As a result of our emphasis on total return, while we seek to achieve a stable, predictable dividend for our shareholders, we do not select or manage our investments for short-term dividend growth, but rather towards achieving overall superior total return. While we intend to continue paying dividends each quarter, the amount of our dividend will depend on the actual cash flow, financial condition, capital requirements, utilization of available capital losses, distribution requirements for REITs under the Internal Revenue Code, and such other factors as our Board of Trustees deem relevant. Subject to the foregoing, we expect to continue distributing our current cash flow from operations after reserving normal and customary amounts to maintain adequate capital reserves. In addition, when deemed prudent or necessitated by applicable dividend requirements for REITs under the Internal Revenue Code, we may make one or more special dividends during any particular year. However, during a favorable investing environment, we expect that we will utilize our carry forward capital losses to shelter gains from the disposition of our assets so we may use the proceeds for investment. We expect to continue applying these standards with respect to our dividends on a quarterly basis which may cause the dividends to increase or decrease depending on these various factors.
For each of the three months ended March 31, 2013, June 30, 2013, and September 30, 2013 we paid a regular quarterly dividend of $0.1625 per Common Share and a regular quarterly dividend of $0.578125 per Series D Preferred Share.
Comparability of Financial Data from Period to Period
The comparability of financial data from period to period is affected by several items including (i) the timing of our property acquisitions and leasing activities; (ii) the purchases and sales of assets and investments; (iii) when material other-than-temporary impairment losses or loss reserves 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
All per share amounts presented in this section are on a diluted basis. Net income attributable to Common Shares was $25,253,000 or $0.76 per Common Share for the nine months ended September 30, 2013 as compared with net income of $20,221,000 or $0.61 per Common Share for the nine months ended September 30, 2012. Funds From Operations (FFO) attributable to Common Shares was $37,527,000 or $1.13 per Common Share for the nine months ended September 30, 2013 as compared to FFO of $41,334,000 or $1.25 per Common Share for the nine months ended September 30, 2012.
Our results are discussed below by business segment:
| Operating Properties our wholly and partially owned operating properties; |
| Loan Assets our loans receivable, loan securities carried at fair value, and equity investments in loan assets; and |
| REIT Securities our ownership of equity and debt securities in other real estate investment trusts. |
Non-segment specific results, which includes interest on cash reserves, general and administrative expenses and other non-segment specific income and expense items, are reported under corporate income (expense).
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FORM 10-Q SEPTEMBER 30, 2013
The following table summarizes our assets by business segment (in thousands):
September 30, 2013 |
December 31, 2012 |
|||||||
Operating properties |
$ | 630,666 | $ | 562,822 | ||||
Loan assets |
154,265 | 239,534 | ||||||
REIT securities |
7,074 | 19,694 | ||||||
Corporate |
||||||||
Cash and cash equivalents |
165,762 | 97,682 | ||||||
Restricted cash |
7,387 | | ||||||
Accounts receivable and prepaids |
574 | 336 | ||||||
Deferred financing costs |
2,757 | 3,095 | ||||||
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|
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|
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Total Assets |
$ | 968,485 | $ | 923,163 | ||||
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|
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Operating property assets increased by $25,500,000 as a result of our deposit on our acquisition of four residential properties, which was pending at September 30, 2013 and by $67,142,000 due to the conversion of our 1515 Market Street property from a loan asset to an operating property as a result of our acquisition of a 49% equity interest, inclusive of the general partner interest, in the property and decreased by $26,307,000 as a result of four property sales in 2013.
The decrease in loan assets was due primarily to the conversion of our 1515 Market Street property to an operating property, the sale of our Disney B Note at par, the payoffs at par of three loans receivable, and the payoff of our Metrotech loan equity investment offset by the acquisition of our venture partners interest in the Sullivan Center mezzanine loan.
The decrease in REIT securities assets was primarily the result of the sale of securities and a decrease in the fair market value of our remaining shares of Cedar Realty Trust.
Comparison of Nine Months ended September 30, 2013 versus Nine Months ended September 30, 2012
The following table summarizes our results from continuing operations by reportable segment and corporate income (expense) for the nine months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Operating properties |
$ | 11,536 | $ | 1,033 | ||||
Loan assets |
27,261 | 26,945 | ||||||
REIT securities |
75 | 8,199 | ||||||
Corporate expenses |
(15,468 | ) | (10,487 | ) | ||||
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|
|
|
|||||
Income from continuing operations |
$ | 23,404 | $ | 25,690 | ||||
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|
|
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WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Operating Properties
The following table summarizes our results from continuing operations for our operating properties segment for the nine months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Rents and reimbursements |
$ | 45,026 | $ | 35,022 | ||||
Operating expenses |
(14,697 | ) | (10,643 | ) | ||||
Real estate taxes |
(4,184 | ) | (3,116 | ) | ||||
Equity in income (loss) of Marc Realty investments |
(17 | ) | 33 | |||||
Equity in loss of Sealy Northwest Atlanta |
(363 | ) | (273 | ) | ||||
Equity in loss of Sealy Newmarket |
| (2,171 | ) | |||||
Equity in income of 701 7th WRT Investors |
2,375 | | ||||||
Equity in income of WRT-Fenway Wateridge |
709 | | ||||||
Equity in income of Vintage |
7,142 | 2,326 | ||||||
Equity in income of WRT-Elad |
1,515 | 458 | ||||||
Equity in income of Mentor |
45 | 18 | ||||||
Equity in loss of Atrium Mall |
(31 | ) | | |||||
Equity in income of F-II Co-invest |
| 232 | ||||||
|
|
|
|
|||||
Operating properties operating income |
37,520 | 21,886 | ||||||
Depreciation and amortization expense |
(14,703 | ) | (11,623 | ) | ||||
Interest expense |
(11,131 | ) | (9,230 | ) | ||||
Settlement expense |
(150 | ) | | |||||
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|
|||||
Operating properties net income |
$ | 11,536 | $ | 1,033 | ||||
|
|
|
|
Operating income from our operating properties, which we define for our consolidated operating properties as all items of income and expense directly derived from or incurred by this segment before depreciation, amortization, interest expense and other non-recurring non-operating items and including our share of income or loss from equity investments, increased by $15,634,000 compared to the prior year period.
47
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
The following table breaks out our operating results from same store properties (properties held throughout both the current and prior year reporting periods) and new store properties (in thousands):
Consolidated Operating Properties
For the Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Rents and reimbursements |
||||||||
Same store properties |
$ | 31,490 | $ | 33,575 | ||||
New store properties |
13,536 | 1,447 | ||||||
|
|
|
|
|||||
45,026 | 35,022 | |||||||
|
|
|
|
|||||
Operating expenses |
||||||||
Same store properties |
8,797 | 10,089 | ||||||
New store properties |
5,900 | 554 | ||||||
|
|
|
|
|||||
14,697 | 10,643 | |||||||
|
|
|
|
|||||
Real estate taxes |
||||||||
Same store properties |
2,513 | 2,951 | ||||||
New store properties |
1,671 | 165 | ||||||
|
|
|
|
|||||
4,184 | 3,116 | |||||||
|
|
|
|
|||||
Consolidated operating properties operating income |
||||||||
Same store properties |
20,180 | 20,535 | ||||||
New store properties |
5,965 | 728 | ||||||
|
|
|
|
|||||
$ | 26,145 | $ | 21,263 | |||||
|
|
|
|
The decrease in operating income for our same store properties was primarily the result of a decrease in revenue of $2,085,000 which was partially offset by a decrease in operating expenses of $1,292,000 and real estate taxes of $438,000.
The decrease in same store revenue was the result of:
| the partial sale of our Churchill, Pennsylvania property which occurred May 14, 2012; |
| an amendment to the lease terms for Spectra Energy at 5400 Westheimer located in Houston, Texas. The modified lease reduced the average annual contractual obligation but extended the term of the lease through April 30, 2026; and |
| a decrease in average occupancy at our Chicago, Illinois property known as River City from 67% to 49% primarily due to the loss of a significant tenant. |
Which were partially offset by:
| increased average occupancy at our property known as Crossroads I located in Englewood, Colorado from 57% to 75%; |
| increased average occupancy at our property known as Crossroads II located in Englewood, Colorado from 81% to 86%; |
| increased average occupancy at our property known as 550/650 Corporetum located in Lisle, Illinois from 72% to 80%; and |
| increased average occupancy at our property known as 450 W. 14th Street located in New York, New York from 82% to 83%. |
New store revenues for the nine months ended September 30, 2013 were as follows:
| $6,939,000 from our office property in Philadelphia, Pennsylvania which is consolidated as of February 1, 2013; |
| $2,580,000 from our residential property in Memphis, Tennessee which was acquired April 17, 2012; |
| $2,261,000 from our office property in Cerritos, California which was acquired October 4, 2012; and |
| $1,756,000 from our residential property in Greensboro, North Carolina which was acquired November 2, 2012. |
48
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Operating expenses increased by $4,054,000 due to expenses at our new store properties of $5,900,000. Same store operating expenses decreased by $1,292,000 due primarily to a decrease of $1,215,000 at our Churchill, Pennsylvania property as a result of the partial sale of the property and the new net lease with Westinghouse.
Real estate tax expense increased by $1,068,000. Real estate tax of $1,671,000 at our new store properties was offset by a decrease of $438,000 at our same store properties. The reduction at our same store properties was a result of the following:
| a decrease of $173,000 at our Crossroads I property due primarily to a prior year tax abatement approved and received in 2013; |
| a decrease of $158,000 at our Crossroads II property due primarily to a prior year tax abatement approved and received in 2013; and |
| a decrease of $96,000 at our Churchill, Pennsylvania property as a result of the partial sale of the property in 2012. |
Depreciation and amortization expense increased by $3,080,000 in 2013 primarily as a result of our new store properties. Interest expenses related to our operating properties increased by $1,901,000 primarily as a result of financing at our new store properties in Memphis, Tennessee; Greensboro, North Carolina and Cerritos, California which were all acquired in 2012, and at our new store property in Philadelphia, Pennsylvania which was acquired in 2013.
Non-Consolidated Operating Properties: Equity Investments
Net operating income from equity investments was $11,375,000 for the nine months ended September 30, 2013 compared to net income of $623,000 for the nine months ended September 30, 2012. The increase was due primarily to:
| operating income from our Vintage portfolio increased by $4,816,000 primarily as a result of a decrease in amortization of lease intangibles; |
| operating income from our 701 Seventh WRT Investors investment, which closed October 16, 2012, was $2,375,000; |
| operating loss from our Sealy Newmarket investment decreased by $2,171,000 primarily as a result of having previously recognized losses in 2012 which brought our investment balance to zero at December 31, 2012 which triggered the suspension of recognition of additional losses during 2013; |
| operating income from our WRT Fenway-Wateridge investment, which closed December 21, 2012, was $709,000; and |
| operating income from our WRT-Elad investments increased by $1,057,000 primarily as a result of a reduction in the allocated losses from the property. |
49
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Loan Assets
The following table summarizes our results from our loan assets segment for the nine months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Interest |
$ | 10,912 | $ | 8,130 | ||||
Discount accretion |
2,283 | 5,984 | ||||||
Equity in earnings of Concord Debt Holdings |
3,041 | 386 | ||||||
Equity in earnings of CDH CDO |
415 | 670 | ||||||
Equity in earnings of Concord Debt Holdings (1) |
49 | 30 | ||||||
Equity in earnings of CDH CDO (1) |
4,274 | 1,333 | ||||||
Equity in earnings of WRT-Stamford |
701 | 548 | ||||||
Equity in earnings of SoCal Office Portfolio Loan |
(2 | ) | 9,710 | |||||
Equity in earnings of 10 Metrotech |
3,284 | 31 | ||||||
Equity in earnings of RE CDO Management |
3,710 | 46 | ||||||
Equity in earnings of ROIC-Riverside LLC |
| 706 | ||||||
Equity in earnings (loss) of ROIC-Lakeside Eagle LLC |
(22 | ) | (32 | ) | ||||
Unrealized gain on loan securities carried at fair value |
215 | 447 | ||||||
|
|
|
|
|||||
Loan assets operating income |
28,860 | 27,989 | ||||||
General and administrative expense |
(37 | ) | (40 | ) | ||||
Interest expense |
(1,562 | ) | (1,004 | ) | ||||
|
|
|
|
|||||
Loan assets net income |
$ | 27,261 | $ | 26,945 | ||||
|
|
|
|
(1) | Represents the interest acquired from Lexington Realty Trust on May 1, 2012. |
Operating income from loan assets, which we define as all items of income and expense directly derived from or incurred by this segment before general and administrative and interest expense, increased by $871,000 as compared to the prior year period. The increase was due primarily to:
| a $5,360,000 increase in net earnings from our Concord equity investments resulting from the payoffs of two of the underlying loan assets during the third quarter of 2013; |
| a $3,664,000 increase in net earnings from our RE CDO Management equity investment which resulted from the sale of subordinated interests in collateralized debt obligation entities held by this venture; |
| a $3,253,000 increase in net earnings from our 10 Metrotech equity investment as a result of the underlying loan asset being paid off at par in July 2013; and |
| a $2,782,000 increase in interest income as a result of our 2012 origination and acquisition activity, primarily our Queensridge Tower loan which generated $2,018,000 of interest income during the nine months ended September 30, 2013. |
Partially offset by:
| a $9,712,000 decrease in earnings from our SoCal Office Portfolio Loan investment as a result of the payoff of the underlying loan asset at par in September 2012; and |
| a $3,701,000 decrease in discount accretion due primarily to the payoff at par in May 2012 of our 160 Spear and Magazine loans which had been acquired at a discount. |
50
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
REIT Securities
The following table summarizes our results from our REIT securities segment for the nine months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Interest and dividends |
$ | 350 | $ | 904 | ||||
Gain (loss) on sale of securities carried at fair value |
(133 | ) | 41 | |||||
Unrealized gain (loss) on securities carried at fair value |
(142 | ) | 7,254 | |||||
|
|
|
|
|||||
REIT securities operating income |
$ | 75 | $ | 8,199 | ||||
|
|
|
|
Operating income from REIT securities, which we define as all items of income and expense directly derived from or incurred by this segment before interest expense, decreased by $8,124,000 as compared to the prior year period. The decrease was primarily due to a decrease in unrealized gain on securities carried at fair value primarily as a result of fluctuations of our holdings in, and the market price of, shares of Cedar Realty Trust.
Corporate
The following table summarizes our results from our non-segment specific income and expense items for the nine months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Interest income |
$ | 286 | $ | 433 | ||||
General and administrative |
(3,021 | ) | (2,407 | ) | ||||
Related party fees |
(6,866 | ) | (6,641 | ) | ||||
Transaction costs |
(158 | ) | (335 | ) | ||||
Interest expense |
(5,482 | ) | (1,326 | ) | ||||
State and local taxes |
(227 | ) | (211 | ) | ||||
|
|
|
|
|||||
Operating loss |
$ | (15,468 | ) | $ | (10,487 | ) | ||
|
|
|
|
The decrease in corporate operations for the comparable periods was due primarily to $4,178,000 increase in interest expense on our 7.75% Senior Notes (Senior Notes) issued in August 2012, an increase in the base management fee of $225,000 as a result of an increase in the outstanding equity on which the fee is calculated and $557,000 in compensation expense associated with the issuance of Restricted Shares in 2013 which is reflected in general and administrative expense.
State income taxes were $227,000 and $211,000 for the nine months ended September 30, 2013 and 2012, respectively, due primarily to our anticipated taxable income for state purposes, after deductions for dividends paid and after the utilization of net operating loss carryforwards, where applicable.
Discontinued operations
During 2012 the Trusts retail property in Memphis, Tennessee and its office property in Indianapolis, Indiana were sold and the operating results for these properties are included in discontinued operations for the nine months ended September 30, 2012.
During 2013 the Trusts net lease retail properties in Denton, Texas and Seabrook, Texas and its office properties located in Deer Valley, Arizona and Andover, Massachusetts were sold and are included in discontinued operations at September 30, 2013. Operating results for all four properties are included in income from discontinued operations for the nine months ended September 30, 2013 and 2012.
51
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Income from discontinued operations for the nine months ended September 30, 2013 was $8,025,000 as compared to income of $594,000 for the nine months ended September 30, 2012. The increase was primarily due to a net gain of $10,948,000 recognized on the sales of the Deer Valley, Arizona, Andover, Massachusetts and Seabrook, Texas properties in 2013 partially offset by a $2,750,000 impairment charge recognized on our Lisle, Illinois property in 2013. The Lisle property was classified as held for sale at September 30, 2013.
Comparison of Three Months ended September 30, 2013 versus Three Months ended September 30, 2012
The following table summarizes our results from continuing operations by reportable segment and corporate income (expense) for the three months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Operating properties |
$ | 4,460 | $ | 1,098 | ||||
Loan assets |
12,976 | 15,328 | ||||||
REIT securities |
69 | 3,425 | ||||||
Corporate expenses |
(5,338 | ) | (3,889 | ) | ||||
|
|
|
|
|||||
Income from continuing operations |
$ | 12,167 | $ | 15,962 | ||||
|
|
|
|
Operating Properties
The following table summarizes our results from continuing operations for our operating properties segment for the three months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Rents and reimbursements |
$ | 15,099 | $ | 12,224 | ||||
Operating expenses |
(5,272 | ) | (3,335 | ) | ||||
Real estate taxes |
(1,705 | ) | (1,160 | ) | ||||
Equity in income (loss) of Marc Realty investments |
(26 | ) | 377 | |||||
Equity in loss of Sealy Northwest Atlanta |
(130 | ) | (109 | ) | ||||
Equity in loss of Sealy Newmarket |
| (704 | ) | |||||
Equity in income of 701 7th WRT Investors |
1,055 | | ||||||
Equity in income of WRT-Fenway Wateridge |
239 | | ||||||
Equity in income of Vintage |
2,525 | 1,392 | ||||||
Equity in income (loss) of WRT-Elad |
905 | (57 | ) | |||||
Equity in income of Mentor |
12 | 12 | ||||||
Equity in loss of Atrium Mall |
(31 | ) | | |||||
|
|
|
|
|||||
Operating properties operating income |
12,671 | 8,640 | ||||||
Depreciation and amortization expense |
(4,923 | ) | (4,416 | ) | ||||
Interest expense |
(3,272 | ) | (3,126 | ) | ||||
Settlement expense |
(16 | ) | | |||||
|
|
|
|
|||||
Operating properties net income |
$ | 4,460 | $ | 1,098 | ||||
|
|
|
|
Operating income from our operating properties, which we define for our consolidated operating properties as all items of income and expense directly derived from or incurred by this segment before depreciation, amortization, interest expense and other non-recurring non-operating items and including our share of income or loss from equity investments increased by $4,031,000 compared to the prior year period.
52
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
The following table breaks out our operating results from same store properties (properties held throughout both the current and prior year reporting periods) and new store properties (in thousands):
Consolidated Operating Properties
For the Three Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Rents and reimbursements |
||||||||
Same store properties |
$ | 11,355 | $ | 12,224 | ||||
New store properties |
3,744 | | ||||||
|
|
|
|
|||||
15,099 | 12,224 | |||||||
|
|
|
|
|||||
Operating expenses |
||||||||
Same store properties |
3,410 | 3,335 | ||||||
New store properties |
1,862 | | ||||||
|
|
|
|
|||||
5,272 | 3,335 | |||||||
|
|
|
|
|||||
Real estate taxes |
||||||||
Same store properties |
1,150 | 1,160 | ||||||
New store properties |
555 | | ||||||
|
|
|
|
|||||
1,705 | 1,160 | |||||||
|
|
|
|
|||||
Consolidated operating properties operating income |
||||||||
Same store properties |
6,795 | 7,729 | ||||||
New store properties |
1,327 | | ||||||
|
|
|
|
|||||
$ | 8,122 | $ | 7,729 | |||||
|
|
|
|
The decrease in operating income for our same store properties was primarily the result of a decrease in revenue of $869,000.
The decrease in same store revenue was the result of:
| an amendment to the lease terms for Spectra Energy at 5400 Westheimer located in Houston, Texas. The modified lease reduced the average annual contractual obligation but extended the term of the lease through April 30, 2026; and |
| a decrease in average occupancy at our Chicago, Illinois property known as River City from 57% to 49% primarily due to the loss of a significant tenant. |
Which were partially offset by:
| increased average occupancy at our property known as Crossroads I located in Englewood, Colorado from 57% to 90%; and |
| increased average occupancy at our Chicago, Illinois property known as Ontario from 91% to 97%. |
New store revenues for the three months ended September 30, 2013 were as follows:
| $2,447,000 from our office property in Philadelphia, Pennsylvania which is consolidated as of February 1, 2013; |
| $700,000 from our office property in Cerritos, California which was acquired October 4, 2012; and |
| $597,000 from our residential property in Greensboro, North Carolina which was acquired November 2, 2012. |
Operating expenses increased by $1,937,000 due primarily to expenses at our new store properties of $1,862,000. Same store operating expenses increased by $75,000.
Real estate tax expense increased by $545,000 due primarily to real estate tax expense at our new store properties of $555,000.
53
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Depreciation and amortization expense increased by $507,000 in 2013 primarily as a result of our new store properties. Interest expenses related to our operating properties increased by $146,000 primarily as a result of financing at our new store properties in Greensboro, North Carolina and Cerritos, California which were both acquired in 2012 and at our new store property in Philadelphia, Pennsylvania which was acquired in 2013. Interest expense at our new store properties was partially offset by the capitalization of $600,000 of interest in connection with our 701 Seventh Avenue equity investment.
Non-Consolidated Operating Properties: Equity Investments
Net operating income from equity investments was $4,549,000 for the three months ended September 30, 2013 compared to net income of $911,000 for the three months ended September 30, 2012. The increase was due primarily to:
| operating income from our Vintage portfolio increased by $1,133,000 primarily as a result of a decrease in amortization of lease intangibles; |
| operating income from our 701 Seventh WRT Investors investment, which closed October 16, 2012 was $1,055,000; |
| operating loss from our Sealy Newmarket investment decreased by $704,000 primarily as a result of having previously recognized losses during 2012 which brought our investment balance to zero at December 31, 2012 which triggered the suspension of recognition of additional losses during 2013; |
| operating income from our WRT-Elad investments increased by $962,000; and |
| operating income from our WRT-Fenway Wateridge investment, which closed December 21, 2012, was $239,000. |
Loan Assets
The following table summarizes our results from our loan assets segment for the three months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Interest |
$ | 3,011 | $ | 2,985 | ||||
Discount accretion |
806 | 425 | ||||||
Equity in earnings of Concord Debt Holdings |
2,970 | 35 | ||||||
Equity in earnings of CDH CDO |
265 | 136 | ||||||
Equity in earnings of Concord Debt Holdings (1) |
20 | 2 | ||||||
Equity in earnings of CDH CDO (1) |
3,367 | 855 | ||||||
Equity in earnings of WRT-Stamford |
256 | 232 | ||||||
Equity in earnings of SoCal Office Portfolio Loan |
| 10,348 | ||||||
Equity in earnings of 10 Metrotech |
2,676 | 50 | ||||||
Equity in earnings (loss) of RE CDO Management |
(51 | ) | 18 | |||||
Equity in earnings of ROIC-Riverside LLC |
| 238 | ||||||
Equity in loss of ROIC-Lakeside Eagle LLC |
(7 | ) | (16 | ) | ||||
Unrealized gain (loss) on loan securities carried at fair value |
| 371 | ||||||
|
|
|
|
|||||
Loan asset operating income |
13,313 | 15,679 | ||||||
General and administrative expense |
(2 | ) | (15 | ) | ||||
Interest expense |
(335 | ) | (336 | ) | ||||
|
|
|
|
|||||
Loan assets net income |
$ | 12,976 | $ | 15,328 | ||||
|
|
|
|
(1) | Represents the interest acquired from Lexington Realty Trust on May 1, 2012. |
Operating income from loan assets, which we define as all items of income and expense directly derived from or incurred by this segment before general and administrative and interest expense, decreased by $2,366,000 as compared to the prior year period. The decrease was due primarily to:
| a $10,348,000 decrease in earnings from our SoCal Office Portfolio loan which was fully repaid in 2012. |
54
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Partially offset by:
| a $5,594,000 increase in earnings from our Concord equity investments as a result of the payoff of two of the underlying loans; and |
| a $2,626,000 increase in earnings from our 10 Metrotech Loan LLC equity investment as a result of the payoff of the underlying loan asset. |
REIT Securities
The following table summarizes our results from our REIT securities segment for the three months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Interest and dividends |
$ | 100 | $ | 312 | ||||
Loss on sale of securities carried at fair value |
(31 | ) | | |||||
Unrealized gain on securities carried at fair value |
| 3,113 | ||||||
|
|
|
|
|||||
REIT securities operating income |
$ | 69 | $ | 3,425 | ||||
|
|
|
|
Operating income from REIT securities, which we define as all items of income and expense directly derived from or incurred by this segment before interest expense, decreased by $3,356,000 as compared to the prior year period. The decrease was primarily due to a decrease in unrealized gain on securities carried at fair value primarily as a result of the fluctuations of our holdings in, and the market price of, shares of Cedar Realty Trust shares.
Corporate
The following table summarizes our results from our non-segment specific income and expense items for the three months ended September 30, 2013 and 2012 (in thousands):
2013 | 2012 | |||||||
Interest income |
$ | 101 | $ | 242 | ||||
General and administrative |
(1,111 | ) | (767 | ) | ||||
Related party fees |
(2,309 | ) | (2,316 | ) | ||||
Transaction costs |
(106 | ) | (30 | ) | ||||
Interest expense |
(1,828 | ) | (954 | ) | ||||
State and local taxes |
(85 | ) | (64 | ) | ||||
|
|
|
|
|||||
Operating loss |
$ | (5,338 | ) | $ | (3,889 | ) | ||
|
|
|
|
The increase in operating loss for the comparable periods was due primarily to an $836,000 increase in interest expense on our Senior Notes issued in August 2012 and $345,000 in compensation expense associated with the issuance of Restricted Shares in 2013 which is reflected in general and administrative expense.
State income taxes were $85,000 and $64,000 for the three months ended September 30, 2013 and 2012, respectively, due primarily to our anticipated taxable income for state purposes, after deductions for dividends paid and after the utilization of net operating loss carryforwards, where applicable.
Discontinued Operations
During 2012 the Trusts retail property in Memphis, Tennessee and its office property in Indianapolis, Indiana were sold and the operating results for these properties are included in discontinued operations for the three months ended September 30, 2012.
55
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
During 2013 the Trusts net lease retail properties in Denton, Texas and Seabrook, Texas and its office properties located in Deer Valley, Arizona and Andover, Massachusetts were sold and are included in discontinued operations at September 30, 2013. Operating results for all four properties are included in income from discontinued operations for the three months ended September 30, 2013 and 2012. Also included in discontinued operations for all periods presented are the operations of our office property in Lisle, Illinois which is currently under contract to be sold and is classified as held for sale at September 30, 2013.
Loss from discontinued operations for the three months ended September 30, 2013 was $1,434,000 as compared to income of $85,000 for the three months ended September 30, 2012. The change was primarily due to a $2,750,000 impairment change on our Lisle, Illinois property in 2013 which was partially offset by a gain of $1,428,000 recognized on the sale of our Seabrook, Texas property in 2013.
Funds From Operations
We have adopted the revised definition of Funds from Operations (FFO), adopted by the Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT). Management considers FFO to be an appropriate measure of performance of a REIT. We calculate FFO by adjusting net income (loss) (computed in accordance with GAAP, including non-recurring items), for gains (or losses) from sales of properties, real estate related depreciation and amortization, and adjustment for unconsolidated partnerships and ventures and impairments. Management believes that in order to facilitate a clear understanding of our historical operating results, FFO should be considered in conjunction with net income as presented in the consolidated interim financial statements included elsewhere herein. Management considers FFO to be a useful measure for reviewing our comparative operating and financial performance because, by excluding gains and losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization (which can vary among owners of identical assets in similar condition based on historical cost accounting and useful life estimates), FFO can help one compare the operating performance of a companys real estate between periods or as compared to different companies.
Our calculation of FFO may not be directly comparable to FFO reported by other REITs or similar real estate companies that have not adopted the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently. FFO is not a GAAP financial measure and should not be considered as an alternative to net income (loss), the most directly comparable financial measure of our performance calculated and presented in accordance with GAAP, as an indication of our performance. FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not a measure of liquidity or an indicator of our ability to pay dividends. We believe that to further understand our performance, FFO should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our consolidated interim financial statements.
Based on the October 31, 2011 and January 6, 2012 updated guidance on reporting FFO, we have excluded impairment losses on depreciable real estate as well as other-than-temporary impairment on real estate equity method joint ventures in the calculations of FFO and have restated prior period calculations to be consistent with this presentation. The other-than-temporary impairments have been excluded as they relate to decreases in the fair value of depreciable real estate held by the investee.
56
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
The following presents a reconciliation of net income to funds from operations for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share amounts):
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Basic |
||||||||||||||||
Net income attributable to Winthrop Realty Trust |
$ | 11,728 | $ | 15,108 | $ | 33,848 | $ | 26,719 | ||||||||
Real estate depreciation |
3,153 | 2,903 | 9,665 | 8,165 | ||||||||||||
Amortization of capitalized leasing costs |
1,791 | 2,169 | 5,626 | 5,106 | ||||||||||||
Trusts share of real estate depreciation and amortization of unconsolidated interests |
2,762 | 2,976 | 7,471 | 10,630 | ||||||||||||
Impairment loss on investments in real estate |
2,750 | 698 | 2,904 | 698 | ||||||||||||
Gain on sale of real estate |
(1,421 | ) | (945 | ) | (10,948 | ) | (945 | ) | ||||||||
(Gain) loss on sale of equity investments |
| (165 | ) | 110 | (271 | ) | ||||||||||
Trusts share of loss on sale of real estate of unconsolidated interests |
722 | | 722 | | ||||||||||||
Less: Non-controlling interest share of depreciation and amortization |
(1,504 | ) | (699 | ) | (3,242 | ) | (2,144 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Funds from operations attributable to the Trust |
19,981 | 22,045 | 46,156 | 47,958 | ||||||||||||
Preferred dividend on Series D Preferred Shares |
(2,787 | ) | (2,786 | ) | (8,360 | ) | (6,498 | ) | ||||||||
Amount allocated to restricted shares |
(129 | ) | | (269 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
FFO applicable to Common Shares - Basic |
$ | 17,065 | $ | 19,259 | $ | 37,527 | $ | 41,460 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average Common Shares |
33,076 | 33,075 | 33,047 | 33,064 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
FFO Per Common Share - Basic |
$ | 0.52 | $ | 0.58 | $ | 1.14 | $ | 1.25 | ||||||||
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|
|
|
|
|
|
|
|||||||||
Diluted |
||||||||||||||||
Funds from operations attributable to the Trust |
$ | 19,981 | $ | 22,045 | $ | 46,156 | $ | 47,958 | ||||||||
Preferred dividend on Series D Preferred Shares |
(2,787 | ) | (2,786 | ) | (8,360 | ) | (6,498 | ) | ||||||||
Amount allocated to restricted shares |
(129 | ) | | (269 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
FFO applicable to Common Shares |
$ | 17,065 | $ | 19,259 | $ | 37,527 | $ | 41,460 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average Common Shares |
33,076 | 33,075 | 33,047 | 33,064 | ||||||||||||
Stock options |
2 | 1 | 2 | | ||||||||||||
Restricted shares |
70 | | 40 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted weighted-average Common Shares |
33,148 | 33,076 | 33,089 | 33,064 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
FFO Per Common Share - Diluted |
$ | 0.51 | $ | 0.58 | $ | 1.13 | $ | 1.25 | ||||||||
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|
|
|
|
|
|
|
Critical Accounting Policies and Estimates
A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2012.
Recently Issued Accounting Standards
See Item 1 Note 2.
57
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
ITEM 3. | 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 partially mitigate the potential negative effects of interest rate fluctuations on our cash flow and earnings.
Our liabilities include both fixed and variable rate debt. We seek to limit our risk to interest rate fluctuations through match financing on our loan assets as well as through hedging transactions.
The table below presents information about the Trusts derivative financial instruments at September 30, 2013 (in thousands):
Type |
Maturity | Strike Rate | Notional Amount of Hedge |
Cost of Hedge | Estimated Fair Value of Hedge |
|||||||||||||
Cap |
October 2014 | 1.00 | % | $ | 5,753 | $ | 174 | $ | | |||||||||
Cap |
May 2014 | 1.75 | % | 51,982 | 434 | | ||||||||||||
Cap |
August 2014 | 0.50 | % | 13,197 | 22 | 1 | ||||||||||||
Swap |
May 2016 | 0.50 | % | 42,922 | | (15 | ) |
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 less than its carrying value by $11,155,000 and $9,320,000 at September 30, 2013 and December 31, 2012, respectively. The fair value of our Senior Notes, based on quoted market prices, was greater than its carrying value by $3,416,000 and $2,933,000 at September 30, 2013 and December 31, 2012, respectively.
The following table shows what the annual effect a change in the LIBOR rate would have on interest expense based upon the balances in variable rate debt at September 30, 2013 (in thousands):
Change in LIBOR (2) | ||||||||||||||||
-0.18% | 1% | 2% | 3% | |||||||||||||
Change in consolidated interest expense |
$ | (10 | ) | $ | 140 | $ | 437 | $ | 462 | |||||||
Pro-rata share of change in interest expense of debt on non-consolidated entities (1) |
(21 | ) | 101 | 68 | 102 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Increase) decrease in net income |
$ | (31 | ) | $ | 241 | $ | 505 | $ | 564 | |||||||
|
|
|
|
|
|
|
|
(1) | Represents our pro-rata share of a change in interest expense in our Marc Realty, Sealy and 701 Seventh equity investments. |
(2) | The one-month LIBOR rate at September 30, 2013 was 0.17885%. |
58
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
The Trusts equity investment in Vintage, which is reported on a 30 day lag, holds floating rate debt of approximately $170,820,000 and bears interest at a rate indexed to the Securities Industry and Financial Markets Association Municipal Swap Index (SIFMA). The following table shows what the annual effect a change in the SIFMA rate would have on property level interest expense based upon the balances in variable rate debt at August 31, 2013 (in thousands):
Change in SIFMA (1) | ||||||||||||||||
-0.06% | 1% | 2% | 3% | |||||||||||||
Pro-rata share of change in interest expense on Vintage debt |
$ | (55 | ) | $ | 919 | $ | 1,837 | $ | 2,756 | |||||||
|
|
|
|
|
|
|
|
|||||||||
(Increase) decrease in net income |
$ | (55 | ) | $ | 919 | $ | 1,837 | $ | 2,756 | |||||||
|
|
|
|
|
|
|
|
(1) | The one-month SIFMA rate at August 31, 2013 was 0.06%. |
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 September 30, 2013 (in thousands):
Change in LIBOR (1) | ||||||||||||||||
-0.18% | 1% | 2% | 3% | |||||||||||||
Change in consolidated interest income |
$ | (3 | ) | $ | 73 | $ | 178 | $ | 343 | |||||||
Pro-rata share of change in interest income of loan assets in non-consolidated entities |
(18 | ) | 100 | 200 | 300 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Increase (decrease) in net income |
$ | (21 | ) | $ | 173 | $ | 378 | $ | 643 | |||||||
|
|
|
|
|
|
|
|
(1) | The one-month LIBOR rate at September 30, 2013 was 0.17885%. |
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.
59
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
ITEM 4. | CONTROLS AND PROCEDURES |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
As of September 30, 2013 an evaluation was performed under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934). Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective as of September 30, 2013.
Other Matters
There have been no changes in our internal controls over financial reporting during the most recent quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
60
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
ITEM 6. | EXHIBITS |
Exhibits required by Item 601 of Regulation S-K are filed herewith or incorporated herein by reference and are listed in the attached Exhibit Index.
61
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, the Trust has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Winthrop Realty Trust | ||||||
Date: November 8, 2013 | By: | /s/ Michael L. Ashner | ||||
Michael L. Ashner | ||||||
Chief Executive Officer | ||||||
Date: November 8, 2013 | By: | /s/ John A. Garilli | ||||
John A. Garilli | ||||||
Chief Financial Officer | ||||||
(Principal Financial Officer and Principal Accounting Officer) |
62
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
Exhibit |
Description |
Page Number | ||
3.1 | Second Amended and Restated Declaration of Trust as of May 21, 2009 - Incorporated by reference to Exhibit 3.1 to the Trusts Quarterly Report on Form 10-Q for the period ended June 30, 2009. | - | ||
3.2 | By-laws of Winthrop Realty Trust as amended and restated on November 3, 2009 - Incorporated by reference to Exhibit 3.1 to the Trusts Current Report on Form 8-K filed November 6, 2009. | - | ||
3.3 | Amendment to By-laws - Incorporated by reference to Exhibit 3.1 to the Trusts Current Report on Form 8-K filed March 6, 2010. | - | ||
4.1 | Form of certificate for Common Shares of Beneficial Interest. Incorporated by reference to Exhibit 4.1 to the Trusts Annual Report on Form 10-K for the year ended December 31, 2008. | - | ||
4.2 | Agreement of Limited Partnership of WRT Realty L.P., dated as of January 1, 2005 - Incorporated by reference to Exhibit 4.1 to the Trusts Form 8-K filed January 4, 2005. | - | ||
4.3 | Amendment No. 1 to Agreement of Limited Partnership of WRT Realty, L.P., dated as of December 1, 2005 incorporated by reference to Exhibit 4.4 to the Trusts Form 10-K filed March 15, 2012. | - | ||
4.4 | Amendment No. 2 to Agreement of Limited Partnership of WRT Realty, L.P., dated as of November 28, 2011 Incorporated by reference to the Trusts Form 8-K filed November 28, 2011. | - | ||
4.5 | Amendment No. 3 to Agreement of Limited Partnership of WRT Realty, L.P., dated as of March 23, 2012 Incorporated by reference to the Trusts Form 8-K filed March 23, 2012 | |||
4.6 | Amended and restated Certificate of Designations of 9.25% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest - Incorporated by reference to the Trusts Form 8-K filed March 23, 2012. | - | ||
4.7 | Form of Specimen Certificate for the 9.25% Series D Cumulative Redeemable Preferred Shares of Beneficial Interest - Incorporated by reference to Exhibit 4.2 to Trusts Form 8-A filed with the Securities and Exchange Commission on November 23, 2011. | - | ||
4.8 | Indenture, dated August 6, 2012 between the Trust and The Bank of New York Mellon, as trustee Incorporated by reference to the Exhibit 4.1 to the Trusts Form 8-K filed August 9, 2012. | - | ||
4.9 | First Supplemental Indenture, dated August 15, 2012, between the Trust and the Bank of New York Mellon, as trustee and collateral agent Incorporated by reference to Exhibit 4.1 of the Trusts Form 8-K filed August 15, 2012. | - | ||
10.1 | Stock Purchase Agreement between the Trust and FUR Investors, LLC, dated as of November 26, 2003, including Annex A thereto, being the list of Conditions to the Offer - Incorporated by reference to Exhibit 10.1 to the Trusts Form 8-K filed December 1, 2003. | - |
63
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
10.2 | Second Amended and Restated Advisory Agreement dated March 5, 2009, between the Trust, WRT Realty L.P. and FUR Advisors LLC. Incorporated by reference to Exhibit 10.3 to the Trusts Annual Report on Form 10-K for the year ended December 31, 2008. | - | ||
10.3 | Amendment No. 1 to Second Amended and Restated Advisory Agreement - Incorporated by reference to Exhibit 10.30 to the Trusts Quarterly Report on Form 10-Q for the period ended March 31, 2009. | - | ||
10.4 | Amendment No. 2 to Second Amended and Restated Advisory Agreement - Incorporated by reference to Exhibit 10.1 to the Trusts Form 8-K filed January 29, 2010. | - | ||
10.5 | Amendment No. 3 to Second Amended and Restated Advisory Agreement - Incorporated by reference to Exhibit 10.1 to the Trusts Form 8-K filed March 2, 2012. | - | ||
10.6 | Exclusivity Services Agreement between the Trust and Michael L. Ashner - Incorporated by reference to Exhibit 10.4 to the Trusts Form 8-K filed December 1, 2003. | - | ||
10.7 | Amendment No. 1 to Exclusivity Agreement, dated November 7, 2005 - Incorporated by reference to Exhibit 10.7 to the Trusts Form 8-K filed November 10, 2005. | - | ||
10.8 | Covenant Agreement between the Trust and FUR Investors, LLC - Incorporated by reference to Exhibit 10.5 to the Trusts Form 8-K filed December 1, 2003. | - | ||
10.9 | Amended and Restated Omnibus Agreement, dated March 16, 2005, among Gerald Nudo, Laurence Weiner and WRT Realty L.P. - Incorporated by reference to Exhibit 10.1 to the Trusts Form 8-K filed March 18, 2005. | - | ||
10.10 | Agreement, dated as of July 1, 2009, among Gerald Nudo, Laurence Weiner and WRT Realty L.P. Incorporated by reference to Exhibit 10.14 to the Trusts Form 10-Q for the period ended June 30, 2009 filed August 10, 2009. | - | ||
10.11 | Winthrop Realty Trust 2007 Long Term Stock Incentive Plan - Incorporated by reference to the Trusts Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 30, 2007. | - | ||
10.12 | Amended and Restated Loan Agreement, dated as of March 3, 2011, between WRT Realty L.P. and KeyBank, National Association. Incorporated by reference to Exhibit 10.19 to the Trusts 10-K filed March 16, 2011. | - | ||
10.13 | Guaranty from Winthrop Realty Trust and certain of its Subsidiaries in favor of KeyBank, National Association. Incorporated by reference to Exhibit 10.20 to the Trusts 10-K filed March 16, 2011. | - | ||
31 | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | (1) | ||
32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | (1) | ||
101.INS | XBRL Report Instance Document | (1) | ||
101.SCH | XBRL Taxonomy Extension Schema Document | (1) | ||
101.CAL | XBRL Taxonomy Calculation Linkbase Document | (1) | ||
101.LAB | XBRL Taxonomy Label Linkbase Document | (1) | ||
101.PRE | XBRL Presentation Label Linkbase Document | (1) | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | (1) |
64
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2013
(1) | filed herewith |
65
Exhibit 31.1
CERTIFICATION
I, Michael L. Ashner, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Winthrop Realty Trust; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any changes in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: November 8, 2013 | /s/ Michael L. Ashner | |||
Michael L. Ashner | ||||
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, John A. Garilli, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Winthrop Realty Trust; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; |
4. | The Registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
(c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any changes in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Date: November 8, 2013 | /s/ John A. Garilli | |||
John A. Garilli | ||||
Chief Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Winthrop Realty Trust (the Company) for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael L. Ashner, Chief Executive Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
By: | /s/ Michael L. Ashner | |
Name: | Michael L. Ashner | |
Chief Executive Officer | ||
November 8, 2013 |
Exhibit 32.2
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Winthrop Realty Trust (the Company) for the period ended September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, John A. Garilli, Chief Financial Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
By: | /s/ John A. Garilli | |
Name: | John A. Garilli | |
Chief Financial Officer | ||
(Principal Financial Officer and Principal Accounting Officer) |
November 8, 2013
Variable Interest Entities - The Allocation of the Aggregate Purchase Price (Detail) (USD $)
|
Sep. 30, 2013
|
Jun. 01, 2012
|
Jan. 31, 2013
1515 Market Street [Member]
|
Jan. 31, 2013
Lease Intangibles [Member]
1515 Market Street [Member]
|
Sep. 30, 2013
Above Market Lease Intangibles [Member]
|
Jan. 31, 2013
Above Market Lease Intangibles [Member]
1515 Market Street [Member]
|
Sep. 30, 2013
Below Market Lease [Member]
|
Jan. 31, 2013
Below Market Lease [Member]
1515 Market Street [Member]
|
---|---|---|---|---|---|---|---|---|
Finite-Lived Intangible Assets [Line Items] | ||||||||
Land | $ 18,627,000 | |||||||
Building | 23,159,000 | |||||||
Other improvements | 73,000 | |||||||
Tenant improvements | 1,407,000 | |||||||
Above market lease intangibles | 17,810,000 | 14,943,000 | 2,867,000 | 2,867,000 | (620,000) | (620,000) | ||
Net working capital acquired | 1,132,000 | |||||||
Other liabilities | (1,299,000) | |||||||
Long term liabilities assumed | (60,279,000) | |||||||
Net assets acquired | $ 363,000 | $ 10,000 |
Non-controlling Interests - Schedule of Changes in Trust's Ownership Interest in Subsidiaries (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 9 Months Ended | ||
---|---|---|---|---|
Sep. 30, 2013
|
Sep. 30, 2012
|
Sep. 30, 2013
|
Sep. 30, 2012
|
|
Trusts Ownership Interest In Subsidiaries [Abstract] | ||||
Net income attributable to Winthrop Realty Trust | $ 11,728 | $ 15,108 | $ 33,848 | $ 26,719 |
Increase (decrease) in Winthrop Realty Trust's paid in capital related to purchases of non-controlling interests | 103 | (5,695) | ||
Changes from net income attributable to Winthrop Realty Trust and transfers (to) from non-controlling interests | $ 11,728 | $ 15,108 | $ 33,951 | $ 21,024 |
Commitments and Contingencies - Additional Information (Detail) (USD $)
|
9 Months Ended |
---|---|
Sep. 30, 2013
|
|
Property, Plant and Equipment [Line Items] | |
Expire date of ground lease | Jun. 01, 2053 |
CBS [Member]
|
|
Property, Plant and Equipment [Line Items] | |
Percentage of net proceeds | 50.00% |
Payable amount of sale of property | $ 150,000 |
Additional contingent fee | 340,000 |
Minimum [Member] | CBS [Member]
|
|
Property, Plant and Equipment [Line Items] | |
Amount in excess of net of closing cost | 6,500,000 |
Ground Lease [Member]
|
|
Property, Plant and Equipment [Line Items] | |
Future funding commitments | 88,913,000 |
Ground Lease Commitments, 2013 | 337,000 |
Ground Lease Commitments, 2014 | 1,405,000 |
Ground Lease Commitments, 2015 | 1,463,000 |
Ground Lease Commitments, 2016 | 1,592,000 |
Ground Lease Commitments, 2017 | 1,656,000 |
Ground Lease Commitments, Thereafter | $ 109,419,000 |
Derivative Financial Instruments
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9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sep. 30, 2013
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Derivative Instruments And Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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. The Trust’s objective in using interest rate derivatives is to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Trust primarily uses interest rate caps and interest rate swaps as part of its interest rate risk management strategy relating to certain of its variable rate debt instruments. The effective portion of changes in fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is 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 is recognized directly in earnings. During the three and nine months ended September 30, 2013 interest rate caps and swaps were used to hedge the variable cash flows associated with existing variable-rate debt. The Trust also assesses, both at its inception and on an ongoing basis, whether the hedging instrument is highly effective in achieving offsetting changes in the cash flows attributable to the hedged item. The Trust has recorded changes in fair value related to the effective portion of its interest rate hedges designated and qualifying as cash flow hedges as comprehensive loss totaling $150,000 and $20,000 for the three and nine months ended September 30, 2013, and $16,000 and $73,000 for the three and nine months ended September 30, 2012, respectively.
The table below presents information about the Trust’s interest rate caps and interest rate swaps that are included on the consolidated balance sheet that were designated as cash flow hedges of interest rate risk at September 30, 2013 (in thousands):
The table below presents information about the Trust’s interest rate caps that were not designated as cash flow hedges at September 30, 2013 (in thousands):
The table below presents information about the Trust’s interest rate caps and interest rate swaps that are included on the consolidated balance sheet that were designated as cash flow hedges of interest rate risk at September 30, 2012 (in thousands):
The table below presents information about the Trust’s interest rate caps that were not designated as cash flow hedges at September 30, 2012 (in thousands):
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Receivables - Additional Information (Detail) (USD $)
|
3 Months Ended | 9 Months Ended | 12 Months Ended | 9 Months Ended | 3 Months Ended | 9 Months Ended | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2013
|
Sep. 30, 2012
|
Sep. 30, 2013
|
Sep. 30, 2012
|
Dec. 31, 2012
|
Sep. 30, 2013
Elad Canada Inc [Member]
|
Sep. 30, 2013
WRT-Elad One South State Lender LP [Member]
|
Aug. 21, 2013
WRT-Elad One South State Lender LP [Member]
|
Sep. 30, 2013
WRT-Elad One South State Lender LP [Member]
Elad Canada Inc [Member]
|
Sep. 30, 2013
WRT-Elad One South State Equity LP [Member]
|
Sep. 30, 2013
WRT-Elad One South State Equity LP [Member]
|
Sep. 30, 2013
WRT-Elad One South State Equity LP [Member]
Elad Canada Inc [Member]
|
Sep. 30, 2013
Recourse Secured Financings [Member]
|
Dec. 31, 2012
Recourse Secured Financings [Member]
|
|
Receivables [Line Items] | ||||||||||||||
Loans receivable accrued interest | $ 563,000 | $ 563,000 | $ 1,016,000 | |||||||||||
Cumulative accretion of loans receivable | 4,773,000 | 4,773,000 | 2,527,000 | |||||||||||
Loans receivable, exclusive of interest receivable | 7,620,000 | 7,620,000 | 9,865,000 | |||||||||||
Weighted average coupon rate on loans receivable | 6.90% | 7.65% | ||||||||||||
Weighted average yield to maturity | 11.88% | 11.43% | ||||||||||||
Non recourse secured financings | 29,150,000 | 29,150,000 | 29,150,000 | |||||||||||
Secured financings | 29,150,000 | 29,150,000 | 52,920,000 | 23,770,000 | 23,770,000 | |||||||||
Non performing loans | 0 | 0 | 0 | |||||||||||
Past due payments | 0 | 0 | 0 | |||||||||||
Provision for loan loss | 0 | 0 | ||||||||||||
Nominal % Ownership | 50.00% | 50.00% | 50.00% | 50.00% | ||||||||||
Secured financing receivable | 30,395,000 | 30,395,000 | 30,000,000 | |||||||||||
Interest income | $ 101,000 | $ 242,000 | $ 286,000 | $ 433,000 | $ 395,000 | $ 395,000 | ||||||||
Period for the return of Asset | 2 years | |||||||||||||
Annual Interest rate | 15.00% |
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