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, 2015
Or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-6249
WINTHROP REALTY TRUST
(Exact name of Registrant as specified in its certificate of incorporation)
Ohio | 34-6513657 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) | |
7 Bulfinch Place, Suite 500, Boston, Massachusetts | 02114 | |
(Address of principal executive offices) | (Zip Code) |
(617) 570-4614
(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 Rule12b-2). Yes ¨ No x
As of November 1, 2015 there were 36,425,084 Common Shares of Beneficial Interest outstanding.
FORM 10-Q SEPTEMBER 30, 2015
(unaudited)
INDEX
Page | ||||||
Part I. |
||||||
Item 1. |
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3 | ||||||
4 | ||||||
5 | ||||||
Consolidated Statement of Equity (Going Concern Basis) for the Seven Months Ended July 31, 2014 |
6 | |||||
Consolidated Statement of Cash Flows (Going Concern Basis) for the Seven Months Ended July 31, 2014 |
7 | |||||
9 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||||
Item 3. |
29 | |||||
Item 4. |
31 | |||||
Part II. |
||||||
Item 6. |
32 | |||||
33 | ||||||
34 |
2
Part I. | Financial Information |
Item 1. | Financial Statements (Unaudited) |
FORM 10-Q SEPTEMBER 30, 2015
CONSOLIDATED STATEMENTS OF NET ASSETS
(Liquidation Basis)
(unaudited, in thousands)
September 30, 2015 |
December 31, 2014 |
|||||||
ASSETS |
||||||||
Investments in real estate |
$ | 480,898 | $ | 557,325 | ||||
Equity investments |
280,617 | 389,921 | ||||||
Cash and cash equivalents |
56,716 | 127,583 | ||||||
Restricted cash held in escrows |
8,269 | 5,831 | ||||||
Loans receivable |
8,386 | 24,005 | ||||||
Secured financing receivable |
29,197 | 29,210 | ||||||
Accounts receivable |
1,327 | 1,468 | ||||||
Loan securities |
| 918 | ||||||
|
|
|
|
|||||
TOTAL ASSETS |
865,410 | 1,136,261 | ||||||
LIABILITIES |
||||||||
Mortgage loans payable |
223,174 | 296,954 | ||||||
Senior notes payable |
| 71,265 | ||||||
Liability for non-controlling interests |
45,886 | 46,564 | ||||||
Liability for estimated costs in excess of estimated receipts during liquidation |
30,881 | 31,253 | ||||||
Dividends payable |
1,550 | 82,353 | ||||||
Accounts payable, accrued liabilities and other liabilities |
9,490 | 10,794 | ||||||
Related party fees payable |
1,837 | 2,374 | ||||||
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|
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TOTAL LIABILITIES |
312,818 | 541,557 | ||||||
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COMMITMENTS AND CONTINGENCIES (Note 12) |
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Net assets in liquidation |
$ | 552,592 | $ | 594,704 | ||||
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|
|
See Notes to Consolidated Financial Statements.
3
FORM 10-Q SEPTEMBER 30, 2015
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Liquidation Basis)
(unaudited, in thousands)
Nine Months Ended September 30, 2015 |
Period from August 1, 2014 through September 30, 2014 |
|||||||
Net assets in liquidation, beginning of period |
$ | 594,704 | $ | 786,915 | ||||
Changes in net assets in liquidation |
||||||||
Change in liquidation value of investments in real estate |
4,723 | (1,250 | ) | |||||
Change in liquidation value of loans receivable |
| 4,750 | ||||||
Change in liquidation value of loan securities |
(918 | ) | | |||||
Change in liquidation value of equity investments |
499 | | ||||||
Remeasurement of assets and liabilities |
(1,285 | ) | (231 | ) | ||||
Remeasurement of non-controlling interests |
400 | | ||||||
|
|
|
|
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Net increase in liquidation value |
3,419 | 3,269 | ||||||
Liquidating distributions to Series D Preferred Shareholders |
| (121,890 | ) | |||||
Liquidating distributions to holders of Common Shares |
(45,531 | ) | | |||||
|
|
|
|
|||||
Changes in net assets in liquidation |
(42,112 | ) | (118,621 | ) | ||||
|
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Net assets in liquidation, end of period |
$ | 552,592 | $ | 668,294 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements.
4
FORM 10-Q SEPTEMBER 30, 2015
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Going Concern Basis)
(unaudited, in thousands, except per share data)
One Month Ended July 31, 2014 |
Seven Months Ended July 31, 2014 |
|||||||
Revenue |
||||||||
Rents and reimbursements |
$ | 7,085 | $ | 46,313 | ||||
Interest and discount accretion |
1,394 | 9,643 | ||||||
|
|
|
|
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8,479 | 55,956 | |||||||
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|
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Expenses |
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Property operating |
2,546 | 17,127 | ||||||
Real estate taxes |
764 | 5,379 | ||||||
Depreciation and amortization |
2,074 | 15,957 | ||||||
Interest |
1,870 | 13,394 | ||||||
Impairment loss on investments in real estate |
| 9,200 | ||||||
General and administrative |
497 | 4,283 | ||||||
Related party fees |
774 | 5,548 | ||||||
Transaction costs |
17 | 586 | ||||||
Federal, state and local taxes |
(165 | ) | (60 | ) | ||||
|
|
|
|
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8,377 | 71,414 | |||||||
|
|
|
|
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Other income (loss) |
||||||||
Equity in income of equity investments |
2,250 | 12,622 | ||||||
Earnings from preferred equity investments |
11 | 582 | ||||||
Loss of extinguishment of debt, net |
| (564 | ) | |||||
Realized gain on sale of securities carried at fair value |
| 2 | ||||||
Interest and other income |
37 | 244 | ||||||
|
|
|
|
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2,298 | 12,886 | |||||||
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|
|
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Income (loss) from continuing operations |
2,400 | (2,572 | ) | |||||
Discontinued operations |
||||||||
Income from discontinued operations |
84 | 11,235 | ||||||
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|
|
|
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Net income |
2,484 | 8,663 | ||||||
Net loss attributable to non-controlling interests |
395 | 3,818 | ||||||
|
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|
|
|||||
Net income attributable to Winthrop Realty Trust |
2,879 | 12,481 | ||||||
Preferred dividend of Series D Preferred Shares |
(929 | ) | (6,502 | ) | ||||
Amount allocated to Restricted Common Shares |
(11 | ) | (192 | ) | ||||
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|
|
|
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Net income attributable to Common Shares |
$ | 1,939 | $ | 5,787 | ||||
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Per Common Share data - Basic |
||||||||
Income (loss) from continuing operations |
$ | 0.05 | $ | (0.15 | ) | |||
Income from discontinued operations |
| 0.31 | ||||||
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|
|
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Net income attributable to Common Shares |
$ | 0.05 | $ | 0.16 | ||||
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Per Common Share data - Diluted |
||||||||
Income (loss) from continuing operations |
$ | 0.05 | $ | (0.15 | ) | |||
Income from discontinued operations |
| 0.31 | ||||||
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Net income attributable to Common Shares |
$ | 0.05 | $ | 0.16 | ||||
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Basic Weighted-Average Common Shares |
35,825 | 35,821 | ||||||
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Diluted Weighted-Average Common Shares |
35,975 | 35,821 | ||||||
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|
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Comprehensive income |
||||||||
Net income |
$ | 2,484 | $ | 8,663 | ||||
Change in unrealized gain (loss) on interest rate derivative |
445 | (193 | ) | |||||
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|
|
|
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Consolidated comprehensive income |
2,929 | 8,470 | ||||||
Net loss attributable to non-controlling interests |
395 | 3,818 | ||||||
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|
|
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Comprehensive loss attributable to non-controlling interests |
395 | 3,818 | ||||||
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|
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Comprehensive income attributable to Winthrop Realty Trust |
$ | 3,324 | $ | 12,288 | ||||
|
|
|
|
See Notes to Consolidated Financial Statements.
5
FORM 10-Q SEPTEMBER 30, 2015
CONSOLIDATED STATEMENT OF EQUITY
(Going Concern Basis)
(unaudited, in thousands)
Series D Preferred Shares |
Common Shares of |
Additional Paid-In Capital |
Accumulated Distributions in Excess of Net Income |
Accumulated Other Comprehensive Income (loss) |
Non- Controlling Interests |
|||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||||
Balance, December 31, 2013 |
4,820 | $ | 120,500 | 36,401 | $ | 35,809 | $ | 647,121 | $ | (322,432 | ) | $ | (124 | ) | $ | 28,789 | $ | 509,663 | ||||||||||||||||||
Net income attributable to Winthrop Realty Trust |
| | | | | 12,481 | | | 12,481 | |||||||||||||||||||||||||||
Net loss attributable to non-controlling interests |
| | | | | | | (3,818 | ) | (3,818 | ) | |||||||||||||||||||||||||
Distributions to non-controlling interests |
| | | | | | | (711 | ) | (711 | ) | |||||||||||||||||||||||||
Contributions from non-controlling interests |
| | | | | | | 873 | 873 | |||||||||||||||||||||||||||
Increase in non-controlling interest due to consolidation of property |
| | | | | | | 16,391 | 16,391 | |||||||||||||||||||||||||||
Decrease in non-controlling interest due to property sale |
| | | | | | | (3,764 | ) | (3,764 | ) | |||||||||||||||||||||||||
Dividends declared on Common Shares of Beneficial Interest ($0.325 per share) |
| | | | | (11,642 | ) | | | (11,642 | ) | |||||||||||||||||||||||||
Dividends declared on Series D Preferred Shares ($1.348963 per share) |
| | | | | (6,502 | ) | | | (6,502 | ) | |||||||||||||||||||||||||
Dividends declared on Restricted Shares |
| | | | | (192 | ) | | | (192 | ) | |||||||||||||||||||||||||
Change in unrealized loss on interest rate derivatives |
| | | | | | (193 | ) | | (193 | ) | |||||||||||||||||||||||||
Stock issued pursuant to Dividend Reinvestment Plan |
| | 16 | 16 | 162 | | | | 178 | |||||||||||||||||||||||||||
Amortization of Restricted Shares |
| | | | 1,450 | | | | 1,450 | |||||||||||||||||||||||||||
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Balance, July 31, 2014 |
4,820 | $ | 120,500 | 36,417 | $ | 35,825 | $ | 648,733 | $ | (328,287 | ) | $ | (317 | ) | $ | 37,760 | $ | 514,214 | ||||||||||||||||||
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|
See Notes to Consolidated Financial Statements.
6
FORM 10-Q SEPTEMBER 30, 2015
CONSOLIDATED STATEMENT OF CASH FLOWS
(Going Concern Basis)
(unaudited, in thousands)
Seven Months Ended July 31, 2014 |
||||
Cash flows from operating activities |
||||
Net income |
$ | 8,663 | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||
Depreciation and amortization (including amortization of deferred financing costs and fair value of debt) |
11,331 | |||
Amortization of lease intangibles |
6,462 | |||
Straight-line rental income |
1,121 | |||
Loan discount accretion |
(2,086 | ) | ||
Discount accretion received in cash |
5,865 | |||
Earnings of preferred equity investments |
(582 | ) | ||
Distributions of income from preferred equity investments |
565 | |||
Income of equity investments |
(12,622 | ) | ||
Distributions of income from equity investments |
8,755 | |||
Restricted cash held in escrows |
(27 | ) | ||
Gain on sale of securities carried at fair value |
(2 | ) | ||
Gain on sale of real estate investments |
(11,073 | ) | ||
Impairment loss on investments in real estate |
9,287 | |||
Tenant leasing costs |
(1,046 | ) | ||
Equity compensation expenses |
1,450 | |||
Bad debt recovery |
(229 | ) | ||
Changes in assets and liabilities: |
||||
Interest receivable |
(64 | ) | ||
Accounts receivable and other assets |
665 | |||
Accounts payable, accrued liabilities and other liabilities |
(8,234 | ) | ||
|
|
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Net cash provided by operating activities |
18,199 | |||
|
|
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Cash flows from investing activities |
||||
Issuance and acquisition of loans receivable |
(31,492 | ) | ||
Investments in real estate |
(5,575 | ) | ||
Investment in equity investments |
(48,154 | ) | ||
Proceeds from sale of investments in real estate |
56,423 | |||
Proceeds from sale of equity investments |
200 | |||
Return of capital distribution from equity investments |
705 | |||
Return of capital distribution from preferred equity investments |
643 | |||
Purchase of securities carried at fair value |
(73 | ) | ||
Proceeds from sale of securities carried at fair value |
75 | |||
Proceeds from payoff of loan securities |
||||
Restricted cash held in escrows |
2,127 | |||
Collection of loans receivable |
7,784 | |||
Proceeds from sale of loans receivable |
37,052 | |||
Cash from consolidation of properties |
332 | |||
|
|
|||
Net cash provided by investing activities |
20,047 | |||
|
|
(continued on next page)
See Notes to Consolidated Financial Statements.
7
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
CONSOLIDATED STATEMENT OF CASH FLOWS
(Going Concern Basis)
(unaudited, in thousands)
Seven Months Ended July 31, 2014 |
||||
Cash flows from financing activities |
||||
Principal payments of mortgage loans payable |
$ | (5,412 | ) | |
Repurchase of senior notes payable |
(11,178 | ) | ||
Restricted cash held in escrows |
(239 | ) | ||
Deferred financing costs |
(68 | ) | ||
Contribution from non-controlling interest |
873 | |||
Distribution to non-controlling interest |
(711 | ) | ||
Proceeds from issuance of Common Shares under Dividend Reinvestment Plan |
178 | |||
Dividend paid on Common Shares |
(17,461 | ) | ||
Dividend paid on Series D Preferred Shares |
(5,573 | ) | ||
Dividend paid on Restricted Shares |
(71 | ) | ||
|
|
|||
Net cash used in financing activities |
(39,662 | ) | ||
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|
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Net decrease in cash and cash equivalents |
(1,416 | ) | ||
Cash and cash equivalents at beginning of period |
112,512 | |||
|
|
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Cash and cash equivalents at end of period |
$ | 111,096 | ||
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Supplemental Disclosure of Cash Flow Information |
||||
Interest paid |
$ | 15,280 | ||
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|
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Capitalized interest |
$ | 2,457 | ||
|
|
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Taxes paid |
$ | 147 | ||
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|
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Supplemental Disclosure on Non-Cash Investing and Financing Activities |
||||
Dividends accrued on Common Shares and Restricted Shares |
$ | 401 | ||
|
|
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Dividends accrued on Series D Preferred Shares |
$ | 929 | ||
|
|
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Capital expenditures accrued |
$ | 1,736 | ||
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|
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Conveyance of secured financing in settlement of loans receivable |
$ | (29,150 | ) | |
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|
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Forgiveness of loan receivable |
$ | 190 | ||
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Fair value of assets acquired |
$ | 69,140 | ||
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|
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Fair value of liabilities assumed |
$ | 52,687 | ||
|
|
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Contribution to Vintage Housing Holdings LLC |
$ | 450 | ||
|
|
See Notes to Consolidated Financial Statements.
8
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(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.
On April 28, 2014 the Trusts Board of Trustees (the Board) adopted a plan of liquidation which was subject to approval by the holders of a majority of the Trusts common shares of beneficial interest (Common Shares). The plan was approved at a special meeting of shareholders on August 5, 2014 and the Trust adopted the liquidation basis of accounting as of August 1, 2014.
Prior to the plan of liquidation, the Trust was engaged in the business of owning real property and real estate related assets which it categorized into three segments: (i) ownership of investment properties including wholly owned properties and investments in joint ventures which own investment properties (operating properties); (ii) origination and acquisition of loans collateralized directly or indirectly by commercial and multi-family real property, (collectively loan assets); and (iii) equity and debt interests in other real estate investment trusts (REIT securities). Subsequent to the adoption of the plan of liquidation discussed below, the Trust no longer makes operating decisions or assesses performance in separate segments. Accordingly, the Trust has only one reporting and operating segment subsequent to July 31, 2014.
2. | Plan of Liquidation |
The plan of liquidation provides for an orderly sale of the Trusts assets, payment of the Trusts liabilities and other obligations and the winding up of operations and dissolution of the Trust. The Trust is not permitted to make any new investments other than protective acquisitions or advances with respect to the Trusts existing assets. The Trust is permitted to satisfy any existing contractual obligations including any capital call requirements and acquisitions or dispositions pursuant to buy-sell provisions under existing joint venture documentation, pay for required tenant improvements and capital expenditures at its real estate properties, and repurchase its existing Common Shares. The Trust is also permitted to invest its cash reserves in short-term U.S. Treasuries or other short-term obligations.
The plan of liquidation enables the Trust to sell any and all of its assets without further approval of the shareholders and provides that liquidating distributions be made to the shareholders as determined by the Board. Pursuant to applicable REIT rules, in order to be able to deduct liquidating distributions as dividends, the Trust must complete the disposition of its assets by August 5, 2016, two years after the date the plan of liquidation was adopted by shareholders. To the extent that all of the Trusts assets are not sold by such date, the Trust intends to satisfy this requirement by distributing its unsold assets into a liquidating trust at the end of such two-year period, and the holders of interests in the Trust at such time will be beneficiaries of such liquidating trust. Interests in the liquidating trust will not be registered and will not be freely transferable.
The dissolution process and the amount and timing of distributions to shareholders involves risks and uncertainties. Accordingly, it is not possible to predict the timing or aggregate amount which will ultimately be distributed to shareholders and no assurance can be given that the distributions will equal or exceed the estimate of net assets presented in the Consolidated Statements of Net Assets.
The Trust expects to continue to qualify as a REIT throughout the liquidation until such time as any remaining assets, if any, are transferred into a liquidating trust. The Board shall use commercially reasonable efforts to continue to cause the Trust to maintain its REIT status, provided however, the Board may elect to terminate the Trusts status as a REIT if it determines that such termination would be in the best interest of the shareholders.
9
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
3. | Summary of Significant Accounting Policies |
Basis of Presentation
Pre Plan of Liquidation
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, 2014 filed with the SEC. In the opinion of management, all adjustments considered necessary for fair statements have been included, and all such adjustments were of a normal recurring nature. The results of operations for the interim periods were 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. Prior to the adoption of the plan of liquidation, the Trust accounted for all other unconsolidated joint ventures using the equity method of accounting. Accordingly, the Trusts share of the earnings of these joint ventures and companies was included in consolidated net income.
The consolidated financial statements for the periods ended July 31, 2014 were prepared on the going concern basis of accounting, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Post Plan of Liquidation
Liquidation Basis of Accounting
As a result of the approval of the plan of liquidation by the shareholders, the Trust has adopted the liquidation basis of accounting as of August 1, 2014 and for the periods subsequent to August 1, 2014 in accordance with GAAP. Accordingly, on August 1, 2014 assets were adjusted to their estimated net realizable value, or liquidation value, which represents the estimated amount of cash that the Trust will collect on disposal of assets as it carries out its plan of liquidation. The liquidation value of the Trusts operating properties and loan assets are presented on an undiscounted basis. Estimated costs to dispose of assets have been presented separately from the related assets. Liabilities are carried at their contractual amounts due or estimated settlement amounts.
The Trust accrues costs and income that it expects to incur and earn through the end of liquidation to the extent it has a reasonable basis for estimation. These amounts are classified as a liability for estimated costs in excess of estimated receipts during liquidation on the Consolidated Statements of Net Assets. Actual costs and income may differ from amounts reflected in the financial statements because of inherent uncertainty in estimating future events. These differences may be material. See Note 4 for further discussion. Actual costs incurred but unpaid as of September 30, 2015 are included in accounts payable, accrued liabilities and other liabilities on the Consolidated Statements of Net Assets.
In liquidation, the presentation for joint ventures historically consolidated under going concern accounting is determined based on the Trusts planned exit strategy. Those ventures where the Trust intends to sell the property are presented on a gross basis with a payable to the non-controlling interest holder. Those ventures where the Trust intends to sell its interest in the venture, rather than the property, are presented on a net basis and are included in equity investments on the Consolidated Statements of Net Assets. Amounts due to non-controlling interests in connection with the disposition of consolidated joint ventures have been accrued and are recorded as liability for non-controlling interests.
10
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
Net assets in liquidation represents the estimated liquidation value available to holders of Common Shares upon liquidation. Due to the uncertainty in the timing of the anticipated sale dates and the estimated cash flows, actual operating results and sale proceeds may differ materially from the amounts estimated.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in determining the values of assets and liabilities, disclose contingent assets and liabilities at the date of the consolidated financial statements and the amounts of revenue and expenses during the reporting period. Under going concern accounting, the estimates that were particularly susceptible to managements judgment include, but are not limited to, the impairment of real estate, loans and investments in ventures and real estate securities carried at fair value. In addition, estimates were used in accounting for the allowance for doubtful accounts. Under liquidation accounting, the Trust is required to estimate all costs and income that it expects to incur and earn through the end of liquidation including the estimated amount of cash it will collect on disposal of its assets and estimated costs incurred to dispose of assets. All of the estimates and evaluations are susceptible to change and actual results could differ materially from the estimates and evaluations.
Earnings Per Share
Prior to the adoption of the plan of liquidation, the Trust determined basic earnings per share on the weighted average number of Common Shares outstanding during the period and reflected the impact of participating securities. The Trust computed diluted earnings per share based on the weighted average number of Common Shares outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.
11
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
The Trust calculated earnings per share in accordance with relevant accounting guidance for participating securities and the two class method. The reconciliation of earnings attributable to Common Shares outstanding for the basic and diluted earnings per share calculation is as follows (in thousands, except per share data):
One Month Ended July 31, 2014 |
Seven Months Ended July 31, 2014 |
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Basic |
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Income (loss) from continuing operations |
$ | 2,400 | $ | (2,572 | ) | |||
Loss attributable to non-controlling interest |
395 | 3,764 | ||||||
Preferred dividend of Series D Preferred Shares |
(929 | ) | (6,502 | ) | ||||
Amount allocated to Restricted Common Shares |
(11 | ) | (192 | ) | ||||
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Income (loss) from continuing operations applicable to Common Shares |
1,855 | (5,502 | ) | |||||
Income from discontinued operations |
84 | 11,235 | ||||||
Loss attributable to non-controlling interests from discontinued operations |
| 54 | ||||||
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Net income applicable to Common Shares for earnings per share purposes |
$ | 1,939 | $ | 5,787 | ||||
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Basic weighted-average Common Shares |
35,825 | 35,821 | ||||||
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Income (loss) from continuing operations |
$ | 0.05 | $ | (0.15 | ) | |||
Income from discontinued operations |
| 0.31 | ||||||
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Net income per Common Share - Basic |
$ | 0.05 | $ | 0.16 | ||||
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Diluted |
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Income (loss) from continuing operations |
$ | 2,400 | $ | (2,572 | ) | |||
Loss attributable to non-controlling interest |
395 | 3,764 | ||||||
Preferred dividend of Series D Preferred Shares |
(929 | ) | (6,502 | ) | ||||
Amount allocated to Restricted Common Shares |
(11 | ) | (192 | ) | ||||
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Income (loss) from continuing operations applicable to Common Shares |
1,855 | (5,502 | ) | |||||
Income from discontinued operations |
84 | 11,235 | ||||||
Loss attributable to non-controlling interests from discontinued operations |
| 54 | ||||||
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Net income applicable to Common Shares for earnings per share purposes |
$ | 1,939 | $ | 5,787 | ||||
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Basic weighted-average Common Shares |
35,825 | 35,821 | ||||||
Restricted Common Shares (1) |
150 | | ||||||
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Diluted weighted-average Common Shares |
35,975 | 35,821 | ||||||
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Income (loss) from continuing operations |
$ | 0.05 | $ | (0.15 | ) | |||
Income from discontinued operations |
| 0.31 | ||||||
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Net income per Common Share - Diluted |
$ | 0.05 | $ | 0.16 | ||||
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(1) | The Trusts Restricted Common Shares were anti-dilutive for the seven months ended July 31, 2014 and are not included in the weighted-average shares outstanding for the calculation of diluted earnings per Common Share. The Trusts Restricted Common Shares were dilutive for the one month ended July 31, 2014. The amendments to the Restricted Common Shares discussed in Note 14 had no impact on the calculation of earnings per share for the period presented. |
12
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
No dividend was paid for the quarter ended September 30, 2014. On September 15, 2014 the Trust made the full liquidating distribution on its Series D Cumulative Redeemable Preferred Shares (the Series D Preferred Shares) of $25.4815 per Series D Preferred Share, which amount consisted of the $25.00 liquidation preference plus accrued and unpaid dividends to, but excluding, the date of payment. A liquidating distribution of $2.25 per Common Share was paid on January 15, 2015 to common shareholders of record on January 5, 2015. A liquidating distribution of $1.25 per Common Share was paid on June 16, 2015 to common shareholders of record on June 9, 2015.
4. | Liability for Estimated Costs in Excess of Estimated Receipts During Liquidation |
The liquidation basis of accounting requires the Trust to estimate net cash flows from operations and to accrue all costs associated with implementing and completing the plan of liquidation. The Trust currently estimates that it will have costs in excess of estimated receipts during the liquidation. These amounts can vary significantly due to, among other things, the timing and estimates for executing and renewing leases, estimates of tenant improvement costs, the timing of property sales, direct costs incurred to complete the sales, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with the winding up of operations. These costs are estimated and are anticipated to be paid out over the liquidation period.
The change in the liability for estimated costs in excess of estimated receipts during liquidation as of September 30, 2015 is as follows (in thousands):
December 31, 2014 | Cash Payments (Receipts) |
Remeasurement of Assets and Liabilities |
September 30, 2015 | |||||||||||||
Assets: |
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Estimated net inflows from investments in real estate, loans receivable and secured financing receivable |
$ | 25,169 | $ | (9,967 | ) | $ | 276 | $ | 15,478 | |||||||
Liabilities: |
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Sales costs |
(11,840 | ) | 1,012 | (4 | ) | (10,832 | ) | |||||||||
Corporate expenditures |
(44,582 | ) | 10,612 | (1,557 | ) | (35,527 | ) | |||||||||
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(56,422 | ) | 11,624 | (1,561 | ) | (46,359 | ) | ||||||||||
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Total liability for estimated costs in excess of estimated receipts during liquidation |
$ | (31,253 | ) | $ | 1,657 | $ | (1,285 | ) | ($ | 30,881 | ) | |||||
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5. | Net Assets in Liquidation |
Net assets in liquidation decreased by $42,112,000 during the nine months ended September 30, 2015. The primary reason for the decrease in net assets was due to liquidating distributions to holders of Common Shares of $45,531,000, a $1,557,000 increase in estimated corporate expenditures resulting primarily from increases in estimated fees payable to the advisor as a result of increases in liquidation values of certain investments and a $918,000 decrease in the value of the Trusts loan securities resulting from a new appraisal of the collateral underlying the security. These decreases were offset by a $4,723,000 net increase in investments in real estate, a $499,000 net increase in the liquidation value of equity investments and a $400,000 decrease in the liability for non-controlling interests.
The net assets in liquidation at September 30, 2015 would result in liquidating distributions of approximately $15.17 per Common Share. This estimate of liquidating distributions includes projections of costs and expenses to be incurred during the period required to complete the plan of liquidation. There is inherent uncertainty with these projections, and they could change materially based on the timing of sales, the performance of underlying assets and any changes in the underlying assumptions of the projected cash flows.
13
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
6. | Property Dispositions |
44 Monroe, Phoenix, Arizona property sale On April 14, 2015 the venture in which the Trust holds an 83.7% interest sold its apartment building located in Phoenix, Arizona for gross proceeds of $50,650,000. The entire net proceeds, after closing costs and pro-rations, of approximately $49,143,000 were used to pay down the loan collateralized by the remaining properties in the venture. The liquidation value of the property was $50,650,000 at December 31, 2014.
Cerritos, California property sale - On September 16, 2015 the Trust sold its office property located in Cerritos, California for gross proceeds of $30,500,000 and received net proceeds of $6,174,000 after satisfaction of third party mortgage debt, closing costs and pro rations. The liquidation value of the property was $29,916,000 at December 31, 2014.
Highgrove, Stamford, Connecticut contract for sale On June 26, 2015 the venture in which the Trust holds an 83.7% interest entered into a contract to sell its apartment building located in Stamford, Connecticut for gross proceeds of $90,000,000. The buyers $2,000,000 deposit under the purchase contract became non-refundable, subject to customary closing conditions, on June 30, 2015. An additional $2,000,000 non-refundable deposit was received from the buyer in October 2015. If consummated, the sale is expected to close in the fourth quarter of 2015. The liquidation value of the property was $84,867,000 at December 31, 2014. The liquidation value at September 30, 2015 is $90,000,000 reflecting the contract for sale.
7. | Loans Receivable |
The Trusts loans receivable at September 30, 2015 and December 31, 2014 are as follows (in thousands):
Carrying Amount (1) | ||||||||||||||||||
Description |
Loan Position |
Stated Interest Rate September 30, 2015 |
September 30, 2015 |
December 31, 2014 |
Contractual Maturity Date |
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Rockwell |
Mezzanine |
12.0% | $ | | $ | | 05/01/16 | |||||||||||
Churchill |
Whole Loan |
LIBOR + 3.75% | | | 08/01/16 | |||||||||||||
Popiu Shopping Village |
B-Note |
6.62% | 2,778 | 2,804 | 01/06/17 | |||||||||||||
Edens Center and Norridge Commons (2) |
Mezzanine |
LIBOR + 12% | (3) | 3,098 | 18,690 | 03/09/17 | ||||||||||||
Mentor Building |
Whole Loan |
10.0% | 2,510 | 2,511 | 09/10/17 | |||||||||||||
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$ | 8,386 | $ | 24,005 | |||||||||||||||
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(1) | The carrying amount represents the estimated amount expected to be collected on disposition of the loan plus contractual interest receivable. |
(2) | Carrying amount includes the par amount plus the estimated amount to be collected on the participation interest of $3,000 and accrued interest of $1. The loan was repaid in full on October 9, 2015. |
(3) | LIBOR floor of 0.5%. |
Edens Center and Norridge Commons On February 5, 2015 the Norridge, Illinois property, which was one of the two properties that collateralized this loan receivable, was sold and the Trust received a principal payment of $15,275,000 plus all accrued and unpaid interest due in connection with the sale. The outstanding principal balance on the loan receivable was $97,000 at September 30, 2015. Upon satisfaction of the loan, the Trust was entitled to a participation interest equal to 30% of the value of both of the properties which collateralized the loan in excess of $115,000,000. On October 9, 2015 the Trust received $3,100,000 in full satisfaction of the loan receivable and the participation interest.
14
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
The carrying amount of loans receivable at September 30, 2015 and December 31, 2014 includes accrued interest of $27,000 and $218,000, respectively.
The weighted average coupon as calculated on the par value of the Trusts loans receivable was 8.05% and 10.55% at September 30, 2015 and December 31, 2014, respectively and the weighted average yield to maturity as calculated on the carrying value of the Trusts loan receivable was 13.73% and 12.78% at September 30, 2015 and December 31, 2014, respectively.
Loan Receivable Activity
Activity related to loans receivable is as follows (in thousands):
Nine Months Ended September 30, 2015 |
Nine Months Ended September 30, 2014 |
|||||||
Balance at beginning of period |
$ | 24,005 | $ | 101,100 | ||||
Purchase and advances |
| 35,992 | ||||||
Interest received, net |
(191 | ) | (81 | ) | ||||
Repayments/sale proceeds/forgiveness |
(15,428 | ) | (81,739 | ) | ||||
Loan discount accretion |
| 2,086 | ||||||
Discount accretion received in cash |
| (5,865 | ) | |||||
Adjustment for conversion to liquidation basis |
| 6,071 | ||||||
Change in liquidation value |
| 4,750 | ||||||
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Balance at end of period |
$ | 8,386 | $ | 62,314 | ||||
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The following table summarizes the Trusts interest and discount accretion income for the one and seven months ended July 31, 2014 (in thousands):
One Month Ended July 31, 2014 |
Seven Months Ended July 31, 2014 |
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Interest on loan assets |
$ | 899 | $ | 5,770 | ||||
Exit fee/prepayment penalty |
| 1,787 | ||||||
Accretion of loan discount |
495 | 2,086 | ||||||
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Total interest and discount accretion |
$ | 1,394 | $ | 9,643 | ||||
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Non-Performing Loans
Prior to adopting the liquidation basis of accounting, the Trust considered a loan to be non-performing and placed loans on non-accrual status at such time as management determined it was probable that it would be unable to collect all amounts due according to the contractual terms of the loan. While on non-accrual status, based on the Trusts judgment as to collectability of principal, loans were either accounted for on a cash basis, where interest income was recognized only upon actual receipt of cash, or on a cost-recovery basis, where all cash receipts reduced a loans carrying value.
As of July 31, 2014, there was one non-performing loan with past due payments. The Trust did not record any provision for loan loss for the one and seven months ended July 31, 2014.
15
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
Secured Financing Receivable
In August 2013 the Trust closed on an agreement to acquire its venture partners (Elad) 50% interest in the mezzanine lender with respect to the One South State Street, Chicago, Illinois property (Lender LP) for $30,000,000. In connection with the transaction, the Trust entered into an option agreement with Elad granting Elad the right, but not obligation, to repurchase the interest in the venture. The option agreement provides Elad, as the transferor, the option to unilaterally cause the return of the asset at any time at the earlier of two years from and after 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. Under the going concern basis of accounting, the Trust recognized interest income on the secured financing receivable on an accrual basis in accordance with GAAP, at an annual interest rate of 15%. The Trust recorded $324,000 and $2,215,000 of interest income during the one and seven months ended July 31, 2014.
8. | Equity Investments |
Under liquidation accounting, equity investments are carried at net realizable value. The Trusts nominal ownership percentages in its equity investments consist of the following at September 30, 2015 and December 31, 2014:
Venture Partner |
Equity Investment |
Nominal % Ownership at September 30, 2015 |
Nominal % Ownership at December 31, 2014 |
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Elad Canada Ltd |
WRT One South State Lender LP |
50.0 | % | 50.0 | % | |||||
Elad Canada Ltd |
WRT-Elad One South State Equity LP |
50.0 | % | 50.0 | % | |||||
Atrium Holding |
RE CDO Management LLC |
50.0 | % | 50.0 | % | |||||
Freed |
Mentor Retail LLC |
49.9 | % | 49.9 | % | |||||
Inland |
Concord Debt Holdings LLC |
66.6 | % | 66.6 | % | |||||
Inland |
CDH CDO LLC |
49.6 | % | 49.6 | % | |||||
Marc Realty |
Atrium Mall LLC |
50.0 | % | 50.0 | % | |||||
New Valley/Witkoff |
701 Seventh WRT Investor LLC |
81.0 | % | 81.0 | % | |||||
RS Summit Pointe (1) |
RS Summit Pointe Apartments LLC |
80.0 | % | 80.0 | % | |||||
Freed (3) |
Edens Plaza Associates LLC |
<1 | % | <1 | % | |||||
Freed (1) (3) |
Irving-Harlem Venture Limited |
<1 | % | <1 | % | |||||
Gancar Trust (2) |
Vintage Housing Holdings LLC |
n/a | 75.0 | % |
(1) | Investment was previously consolidated under going concern accounting. See Note 3 Liquidation Basis of Accounting for further discussion. |
(2) | The Trusts investment was sold during the nine months ended September 30, 2015. |
(3) | The Trusts investment was sold during the fourth quarter of 2015. |
Vintage Housing Holdings On January 2, 2015 the Trust contributed an additional $5,645,000 to the venture to acquire the limited partner interests in two of the underlying properties. During the six months ended June 30, 2015 the Trust received distributions, inclusive of return of capital distributions, totaling $4,959,000 from the venture. On June 1, 2015 the Trust sold its interest in Vintage Housing Holdings LLC to an independent third party and received net proceeds of approximately $82,471,000. The liquidation value of this investment was $82,928,000 at December 31, 2014.
Concord Debt Holdings During May 2015 the Trust received a distribution of $20,173,000 from its Concord Debt Holdings LLC venture. The distribution was in connection with the sale of the luxury hotel assets owned by the MSREF hotel venture in which Concord Debt Holdings LLC holds an interest.
16
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
701 Seventh Avenue The Trust has invested an additional $5,258,000 in this venture in the first nine months of 2015. As of September 30, 2015 the Trust has total invested capital in the venture of $111,882,000. In October 2015 the Trust invested an additional $1,039,000 in this venture bringing its total invested capital in the venture to $112,921,000 at October 31, 2015.
CDH CDO LLC - On June 25, 2015 the venture closed on the sale of four bond assets and one loan asset for gross proceeds of $54,122,000. The proceeds of the sale were utilized to fully satisfy the debt of the venture. Additionally, in June 2015 a loan asset held by the venture was repaid at par, which was consistent with the Trusts liquidation value at December 31, 2014. On July 1, 2015 the Trust received a $6,200,000 distribution from this venture.
Edens Center and Norridge Commons On October 9, 2015, in connection with the repayment in full of the loan receivable collateralized by the Edens Center and Norridge Commons properties, the Trust sold its general partner interests in the two properties for an aggregate price of $493,000 pursuant to the terms of an existing option agreement. The sale price was consistent with the Trusts liquidation value at September 30, 2015.
9. | Debt |
Mortgage Loans Payable
Mortgage loans payable are carried at their contractual amounts due under liquidation accounting. The Trust had outstanding mortgage loans payable of $223,174,000 and $296,954,000 at September 30, 2015 and December 31, 2014, respectively. The mortgage loan payments of principal and interest are generally due monthly, quarterly or semi-annually and are collateralized by applicable real estate of the Trust.
The Trusts mortgage loans payable at September 30, 2015 and December 31, 2014 are summarized as follows (in thousands):
Location of Collateral |
Maturity |
Spread Over LIBOR (1) |
Interest Rate at September 30, 2015 |
September 30, 2015 | December 31, 2014 | |||||||||||||
Chicago, IL |
Mar 2016 | | 5.75 | % | $ | 19,201 | $ | 19,491 | ||||||||||
New York, NY |
May 2016 | Libor + 2.5% | (2) | 3.50 | % | 50,674 | 51,034 | |||||||||||
Greensboro, NC |
Aug 2016 | | 6.22 | % | 13,600 | 13,600 | ||||||||||||
Lisle, IL |
Oct 2016 | Libor + 2.5% | 2.69 | % | 5,500 | 5,713 | ||||||||||||
Stamford, CT (4)(5) |
Oct 2016 | Libor + 2.0% | (3) | 2.69 | % | 33,448 | 44,923 | |||||||||||
Houston, TX (4)(5) |
Oct 2016 | Libor + 2.0% | (3) | 2.69 | % | 44,319 | 59,524 | |||||||||||
Lisle, IL |
Mar 2017 | | 5.55 | % | 5,330 | 5,392 | ||||||||||||
Orlando, FL |
Jul 2017 | | 6.40 | % | 35,843 | 36,347 | ||||||||||||
Plantation, FL |
Apr 2018 | | 6.48 | % | 10,443 | 10,550 | ||||||||||||
Churchill, PA |
Aug 2024 | | 3.50 | % | 4,816 | 4,918 | ||||||||||||
Phoenix, AZ (4)(5) |
n/a | | n/a | | 22,462 | |||||||||||||
Cerritos, CA (6) |
n/a | | n/a | | 23,000 | |||||||||||||
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$ | 223,174 | $ | 296,954 | |||||||||||||||
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(1) | The one-month LIBOR rate at September 30, 2015 was 0.1930%. The one-month LIBOR rate at December 31, 2014 was 0.17125%. |
(2) | The loan has a LIBOR floor of 1%. |
(3) | The loan has an interest rate swap which effectively fixes LIBOR at 0.69%. |
(4) | These properties are cross-collateralized. Proceeds from property sales go 100% to repay the mortgage loan. |
(5) | A portion of the loan was satisfied during 2015 in connection with the sale of a property. |
(6) | The loan was satisfied during 2015 in connection with the sale of the property. |
17
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
Notes Payable
In conjunction with the 2012 loan modification on the property located in Cerritos, California the Trust assumed a $14,500,000 B Note that bore interest at 6.6996% per annum and required monthly interest payments of approximately $12,000 with the balance of the interest accruing. The loan modification agreement provided for a participation feature whereby the B Note could be fully satisfied with proceeds from the sale of the property after the Trust received a 9.0% priority return on its capital, during a specified time period as defined in the loan modification document. As a result of the loan modification, the B Note did not have a contractually specified settlement amount. As such, the B Note was recorded at the estimated settlement amount based on an estimated sale of the property. As discussed in Note 6 Property Dispositions, the property was sold on September 16, 2015. No payment was due to the holder of the B Note in connection with the sale. The liquidation value of the B Note was $0 at December 31, 2014.
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. Pursuant to its securities repurchase plan, as of August 15, 2015 the Trust had acquired $14,995,000 of its outstanding Senior Notes in open market transactions for an aggregate price of $15,707,000. The Trust redeemed the Senior Notes in full effective August 15, 2015. The aggregate redemption price paid was $72,635,000 (or $25.484375 per $25.00 face amount Senior Note) which represents the face amount of the Senior Notes not owned by the Trust plus accrued and unpaid interest to, but not including, August 15, 2015.
11. | Non-controlling Interests |
Under going concern accounting, consolidated joint ventures are recorded on a gross basis with an allocation of equity to non-controlling interest holders. Under liquidation accounting, the presentation for joint ventures historically consolidated under going concern accounting is determined based on the Trusts planned exit strategy. Those ventures in which the Trust intends to sell the underlying property are presented on a gross basis with a payable to the non-controlling interest holder. Those ventures in which the Trust intends to sell its interest in the venture, rather than the property, are accounted for as an equity investment and are presented on a net basis without a non-controlling interest component. In this regard, the Trusts investments in the Norridge, Illinois property and Summit Pointe Apartments, which were consolidated under going concern accounting, are accounted for as equity investments under liquidation accounting.
12. | 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 701 Seventh Avenue investment which total approximately $13,118,000 at September 30, 2015 with the option to fund additional capital calls in excess of the Trusts $125,000,000 commitment.
The Trusts venture which owns the property located at 450 W 14th Street, New York, New York is subject to a ground lease which expires on June 1, 2053. As of September 30, 2015, in connection with the ground lease, the venture has commitments of $383,000, $1,592,000, $1,656,000, $1,791,000, $1,844,000 and $105,784,000 for the years ending December 31, 2015, 2016, 2017, 2018, 2019 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.
18
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
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 as a laboratory that analyzes components and machinery that were utilized at nuclear power plants, it is possible that there may be contamination that could require remediation.
13. | 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 a termination fee and/or an incentive fee in accordance with the terms of the Advisory Agreement. In addition, FUR Advisors or its affiliate is 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, 2015 and 2014 to FUR Advisors and Winthrop Management LP (Winthrop Management) (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, 2015 |
September 30, 2014 |
September 30, 2015 |
September 30, 2014 |
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Base Asset Management Fee (1) |
$ | 1,540 | $ | 2,296 | $ | 4,859 | $ | 7,070 | ||||||||
Property Management Fee |
248 | 381 | 793 | 1,038 | ||||||||||||
Construction Management Fee |
10 | 38 | 107 | 227 | ||||||||||||
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$ | 1,798 | $ | 2,715 | $ | 5,759 | $ | 8,335 | |||||||||
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(1) | Includes fees on third party contributions of $7 and $7 for the three months ended September 30, 2015 and 2014, respectively, and of $20 and $14 for the nine months ended September 30, 2015 and 2014, respectively. |
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 a termination fee and/or 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. Under going concern accounting, base management fees were expensed and classified as related party fees in the Consolidated Statement of Operations.
In connection with the adoption of the plan of liquidation, the Trust accrues costs it expects to incur through the end of the liquidation. In this regard, at September 30, 2015 the Trust has accrued, based on its estimates of the timing and amounts of liquidating distributions to be paid to Common Shareholders, base management fees of $7,650,000, exclusive of the $1,540,000 included in related party fees payable, termination fees of $9,496,000 and incentive fees of $15,334,000. These amounts are included in liabilities for estimated costs in excess of estimated receipts during liquidation. Actual fees incurred may differ significantly from these estimates due to inherent uncertainty in estimating future events.
Incentive Fee / Termination Fee - The incentive fee is equal to 20% of any amounts available for distribution in excess of the threshold amount and is only payable at such time, if at all, (i) when holders of the Trusts Common Shares receive aggregate dividends above the threshold amount or (ii) upon termination of the Advisory Agreement if the net value of the Trusts assets exceeds the threshold amount based on then current market values and appraisals. That is, the incentive fee is not payable annually but only at such time, if at all, as shareholders have received dividends in excess of the threshold amount (set at $569,963,000 on December 31, 2014 plus an annual return thereon equal to the greater of (x) 4% or (y) the 5 year U.S. Treasury Yield plus 2.5%, which equated to 4% for the third quarter of 2015, (such return, the Growth Factor) less any dividends paid from and after January 1, 2015). The incentive fee will also be payable if the Advisory Agreement is terminated, other than for cause (as defined) by the Trust or with cause by the Trusts Advisor, and if on the date of termination the net value of the Trusts assets exceeds the threshold amount. At September 30, 2015 the threshold amount required to be
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(Unaudited)
distributed before any incentive fee would be payable to FUR Advisors was $459,143,000, which was equivalent to $12.82 per Common Share. At September 30, 2015, based on the Trusts estimate of liquidating distributions, it is estimated that the Advisor would be entitled to an incentive fee of $15,334,000 in connection with the liquidation. This amount has been accrued and is included in liabilities for estimated costs in excess of estimated receipts during liquidation.
With respect to the termination fee, it is only payable if there is (i) a termination of the Advisory Agreement for any reason other than for cause (as defined) by the Trust or with cause by the Trusts Advisor, (ii) a disposition of all or substantially all of the Trusts assets, or (iii) an election by the Trust to orderly liquidate the Trusts assets. The termination fee, if payable, is equal to the lesser of (i) the base management fee paid to the Trusts Advisor for the prior twelve month period or (ii) either (x) in the case of a termination of the Advisory Agreement, 20% of the positive difference, if any between (A) the appraised net asset value of the Trusts assets at the date of termination and (B) the threshold amount less $104,980,000, or (y) in the case of a disposition or liquidation, 20% of any dividends paid on account of the Trusts Common Shares at such time as the threshold amount is reduced to $104,980,000, which will be achieved at such time as aggregate distributions of approximately $9.89 per Common Share in excess of the Growth Factor have been paid. For example, if the Trust had been liquidated at September 30, 2015, the termination fee would only have been payable if total dividends of approximately $9.89 per Common Share had been paid, and then only until the total termination fee paid would have equaled $9,496,000 (the base management fee for the twelve months prior to the approved plan of liquidation), which amount would be achieved when total dividends paid per Common Share equaled approximately $10.93. At September 30, 2015 it is estimated that the Advisor will be entitled to a termination fee of $9,496,000 in connection with the liquidation. This amount has been accrued and is included in liabilities for estimated costs in excess of estimated receipts during liquidation.
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. Prior to the adoption of the plan of liquidation, construction management fees were capitalized in accordance with GAAP.
On September 1, 2015 the Operating Partnership entered into a services agreement with Winthrop Management whereby the Operating Partnership will now perform leasing services to certain properties. The agreement will result in a net reduction in the property management fees paid by the Trust.
At September 30, 2015 $1,540,000 payable to FUR Advisors and $297,000 payable to Winthrop Management were included in related party fees payable.
14. | 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 2007 Plan). 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 2007 Plan from 100,000 to 1,000,000 was approved by the requisite number of shareholders and the remaining 500,000 Restricted Shares were issued on May 28, 2013. The Restricted Shares are subject to forfeiture through May 5, 2016 (the Forfeiture Period). Except in limited circumstances, if the holder of the Restricted Shares does not remain in continuous employment with FUR Advisors or its affiliate through 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 2007 Plan. 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.
Under going concern accounting, until the awards were no longer subject to forfeiture, the Trust measured stock-based compensation expense at each reporting date for any changes in fair value and recognized the expense prorated for the portion of the requisite service period completed. Accordingly, the Trust recognized $120,000 and $1,450,000 in non-cash compensation expense for the one and seven months ended July 31, 2014. Under liquidation accounting, compensation expense is no longer recorded as the vesting of the Restricted Shares does not result in cash outflow for the Trust.
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In connection with the adoption of the plan of liquidation, the Trusts compensation committee authorized amendments to the grant agreements to provide for an early expiration of the Forfeiture Period which now expires on May 5, 2016 and the reissuance of forfeited shares. In this regard, 10,000 Restricted Shares, which had previously been forfeited, were issued on September 5, 2014. Additionally, the Trusts compensation committee agreed to fully vest 8,750 Restricted Shares held by non-executive officers whose employment was terminated in connection with the plan of liquidation. As a result, there were 591,250 Restricted Shares issued and outstanding at September 30, 2015.
15. | Reportable Segments |
The 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 reportable segments in interim financial reports issued to shareholders.
Prior to the approval of the plan of liquidation, based on the Trusts method of internal reporting, management determined that it had three reportable 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. Subsequent to the adoption of the plan of liquidation, the Trust no longer makes operating decisions or assesses performance in separate segments. Accordingly, the Trust has only one reporting and operating segment subsequent to July 31, 2014.
16. | Variable Interest Entities |
Consolidated Variable Interest Entities
Under going concern accounting, 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. At July 31, 2014, the Trust had identified two consolidated variable interest entities; its Cerritos, California office property and 1515 Market Street, its office property located in Philadelphia, Pennsylvania. The 1515 Market Street property was sold on December 2, 2014. The Cerritos, California property was sold on September 16, 2015.
Variable Interest Entities Not Consolidated
Equity Method and Preferred Equity Investments Under going concern accounting, the Trust reviewed its various equity method and preferred equity investments and identified six investments for which the Trust held a variable interest in a VIE at September 30, 2014. Of these six interests there were two investments for which the underlying entities did not have sufficient equity at risk to permit them to finance their activities without additional subordinated financial support. There were four additional entities for which the VIE assessment was primarily based on the fact that the voting rights of the equity holders were not proportional to their obligations to absorb expected losses and rights to receive residual returns of the legal entities. These unconsolidated joint ventures were those where the Trust was not the primary beneficiary of a VIE.
Loans Receivable and Loan Securities Under going concern accounting, the Trust reviewed its loans receivable and loan securities and at September 30, 2014 two of these assets were identified as variable interests in a VIE because the equity investment at risk at the borrowing entity level was not considered sufficient for the entity to finance its activities without additional subordinated financial support. There was one investment where the equity holders lacked the right to receive returns due to the lenders participation interest in the debt.
Certain loans receivable and loan securities which had been determined to be VIEs were performing assets, meeting their debt service requirements. In those cases the borrower held legal title to the real estate collateral and had the power to direct the activities that most significantly impacted the economic performance of the VIE, including management and leasing activities. In the event of default under those loans, the Trust only had protective rights and its obligation to absorb losses was limited to the extent of its loan investment. The borrower was determined to be the primary beneficiary for those performing assets.
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The Trust determined that it did not have the power to direct the activities of the properties collateralizing any of its loans receivable and loan securities. For this reason, management believed that it did not control, nor was it the primary beneficiary of these properties. Accordingly, the Trust accounted for these investments under the guidance for loans receivable and real estate debt investments.
17. | Subsequent Events |
Edens Center and Norridge Commons On October 9, 2015 the Trust received repayment in full of the loan receivable collateralized by the Edens Center and Norridge Commons properties and sold its general partner interests in the two properties immediately following the loan repayment. See Note 7 Loans Receivable for details on the loan repayment and Note 8 Equity Investments for details on the sale of the general partner interests.
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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, 2014 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. 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
On April 28, 2014 our Board of Trustees adopted a plan of liquidation. The plan, which provides for an orderly liquidation of our assets, was approved by holders of a majority of our common shares of beneficial interest (Common Shares) at a special meeting of shareholders on August 5, 2014. As a result of the adoption of the plan of liquidation, we are not permitted to make any new investments other than to make protective acquisitions or advances with respect to our existing assets. We will, however, be able to satisfy any existing contractual obligations including any capital call requirements and acquisitions or dispositions pursuant to buy-sell provisions under existing joint venture documentation, pay for required tenant improvements and capital expenditures at our real estate properties and repurchase our existing Common Shares. In addition, we will be able to invest our cash reserves in short-term U.S. Treasuries or other short-term obligations.
We are a diversified REIT, and prior to the adoption of the plan of liquidation, we operated in three strategic segments: (i) operating properties; (ii) loan assets; and (iii) REIT securities. As value investors we focused and aggressively pursued our investment activity in the segment we believed would generate the greater overall return to us given market conditions at the time. Under the plan of liquidation, our focus is on selling our assets in a manner that maximizes the return to our holders of Common Shares. We will continue to actively manage our remaining assets throughout the liquidation process.
In order to comply with applicable tax laws, any of our assets not sold by August 5, 2016 will be distributed into a liquidating trust. If we transfer our assets to a liquidating trust, our shareholders will receive beneficial interests in the liquidating trust equivalent to those held in the Trust, which beneficial interests will not be registered and will generally not be transferrable.
The timing and amount of the liquidating distributions to the shareholders will be determined by our Board of Trustees. The dissolution process and the amount and timing of distributions to shareholders involve risks and uncertainties. As such, it is impossible at this time to determine the ultimate amount of liquidation proceeds that will actually be distributed to holders of Common Shares or the timing of such payments. To date, liquidating distributions have been paid totaling $3.50 per Common Share.
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(Unaudited)
Although we expect that our Common Shares will continue to be traded on the New York Stock Exchange until our assets are either disposed of or transferred to a liquidating trust, under New York Stock Exchange rules it is possible that as we sell our assets we may not meet the listing standards of the New York Stock Exchange. If this occurs, our Common Shares could be delisted.
Consolidated Operating Properties
As of September 30, 2015 our consolidated properties were approximately 95.6% leased compared to approximately 92.1% leased at December 31, 2014.
Equity Investment Activity
Vintage Housing Holdings We invested an additional $5,645,000 in this venture in the first quarter of 2015. The capital contribution was used to acquire the limited partnership interest in two of the underlying partnerships. During the first half of 2015 we received distributions totaling $4,959,000 from the venture. On June 1, 2015 we sold our interest in the venture and received net proceeds of approximately $82,471,000. The liquidation value of this investment was $82,928,000 at December 31, 2014.
Concord Debt Holdings During May 2015 we received a distribution of $20,173,000 from our Concord Debt Holdings LLC venture. The distribution was in connection with the sale of the luxury hotel assets owned by the MSREF hotel venture in which Concord Debt Holdings LLC holds an interest.
701 Seventh Avenue We invested an additional $5,258,000 in this venture in the first nine months of 2015 bringing our total invested capital to $111,882,000 at September 30, 2015. In October 2015 we invested an additional $1,039,000 in this venture.
During the second quarter of 2015 the indebtedness encumbering the asset held by the venture was modified to (i) provide for an additional one year extension option potentially extending the final maturity on the loan, if fully extended, to January 31, 2020 and (ii) permit up to $200,000,000 in 5.9% EB-5 financing (of which $98,000,000 has been funded to date), with a corresponding reduction in the existing mezzanine loan borrowing, thereby resulting in interest savings to the venture.
CDH CDO LLC - On June 25, 2015 the venture closed on the sale of four bond assets and one loan asset for gross proceeds of $54,122,000. The proceeds of the sale were utilized to fully satisfy the debt of the venture. Additionally, in June 2015 a loan asset held by the venture was repaid at par which was consistent with our liquidation value. On July 1, 2015 we received a $6,200,000 distribution from this venture.
Edens Center and Norridge Commons sale of interest On October 9, 2015, in connection with the repayment of the loan receivable discussed below, we sold our general partner interests in the two entities for an aggregate price of $493,000 pursuant to the terms of an existing option agreement. The sale price was consistent with our liquidation value at September 30, 2015.
Loan Activity
Edens Center and Norridge Commons loan pay down On February 5, 2015 the Norridge, Illinois property was sold, and we received a principal payment of $15,275,000 in connection with the sale. The outstanding principal balance on the loan receivable was $225,000 following the repayment. Additional payments on the loan have been received reducing the outstanding principal balance to $97,000 at September 30, 2015. Upon satisfaction of the loan, we were entitled to a participation interest equal to 30% of the value of both of the properties which collateralized the loan in excess of $115,000,000. On October 9, 2015 we received $3,100,000 in full satisfaction of the loan receivable, accrued and unpaid interest, and the participation interest.
Disposition Activity
44 Monroe - property sale - On April 14, 2015 the venture in which we hold an 83.7% interest sold its apartment building located in Phoenix, Arizona for gross proceeds of $50,650,000. The entire net proceeds, after closing costs and pro-rations, of approximately $49,143,000 were used to pay down the loan collateralized by the remaining properties in the venture. The liquidation value of this property was $50,650,000 at December 31, 2014.
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FORM 10-Q SEPTEMBER 30, 2015
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Cerritos, California property sale - On September 16, 2015 we sold our office property located in Cerritos, California for gross proceeds of $30,500,000 and received net proceeds of $6,174,000 after satisfaction of third party mortgage debt, closing costs and pro rations. The liquidation value of the property was $29,916,000 at December 31, 2014.
Highgrove, Stamford, Connecticut contract for sale On June 26, 2015 the venture in which we hold an 83.7% interest entered into a contract to sell its apartment building located in Stamford, Connecticut for gross proceeds of $90,000,000. The buyers $2,000,000 deposit under the purchase contract became non-refundable, subject to customary conditions, on June 30, 2015. An additional $2,000,000 non-refundable deposit was received from the buyer in October 2015. If consummated, the sale is expected to close in the fourth quarter of 2015. The liquidation value of the property was $84,867,000 at December 31, 2014. The liquidation value at September 30, 2015 is $90,000,000 reflecting the contract for sale.
Liquidity and Capital Resources
At September 30, 2015 we held $56,716,000 in unrestricted cash and cash equivalents. Our total assets and net assets in liquidation were $865,410,000 and $552,592,000, respectively at September 30, 2015. Our ability to meet our obligations is contingent upon the disposition of our assets in accordance with our plan of liquidation. We estimate that the proceeds from the sale of assets pursuant to the plan of liquidation will be adequate to pay our obligations, however, we cannot provide any assurance as to the prices or net proceeds we will receive from the disposition of our assets.
We believe that cash flow from operations along with sale proceeds will continue to provide adequate capital to fund our operating and administrative and other expenses incurred during liquidation, as well as debt service obligations in the short term. As a REIT, we must distribute annually at least 90% of our REIT taxable income.
Our primary sources of funds include:
| cash and cash equivalents; |
| rents and reimbursements received from our operating properties; |
| payments received under our loan assets; |
| sale of existing assets; and |
| cash distributions from joint ventures. |
Contractual Obligations
Future Funding Requirements
We have future funding requirements relating to our 701 Seventh Avenue investment which total approximately $13,118,000 at September 30, 2015 with the option to fund additional capital calls in excess of our $125,000,000 commitment if we believe the additional investment would be accretive to the holders of our Common Shares. We, through our investment in WRT One South State Lender LP, have future funding commitments related to tenant improvements and capital expenditure needs at the property located at One South State Street, Chicago, Illinois. We have committed to fund 100% of retail tenant improvement and capital expenditure needs and 80% of office tenant improvement and capital expenditure needs that are not met by current operating cash flow of the property. In October 2015 we funded $1,367,000 for tenant improvements. Based on recent lease signings at the property, we anticipate funding an additional $5,488,000 over the next six months in connection with this commitment. Any amounts funded pursuant to this commitment will be considered additions to the mezzanine loan and will accrue interest at the rate of 15% per annum.
Debt Maturities
At September 30, 2015, our statement of net assets contains mortgage loans payable of $223,174,000. We have no mortgage debt maturing in 2015 and $166,742,000 maturing in 2016, with the remainder maturing in 2017 or later. We redeemed our Senior Notes in full effective August 15, 2015. The aggregate redemption price paid was $72,635,000 (or $25.484375 per $25.00 face amount Senior Note) which represented the face amount of the Senior Notes not owned by us plus accrued and unpaid interest to, but not including, August 15, 2015. We continually evaluate our debt maturities and, based on our current assessment, we believe that, to the extent we are unable to sell an asset prior to a loans maturity, there are viable financing and refinancing alternatives for debts as they mature that will not materially adversely impact our liquidity or our expected financial results.
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FORM 10-Q SEPTEMBER 30, 2015
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Cash Flows
Our level of liquidity based upon cash and cash equivalents decreased by approximately $70,867,000 from $127,583,000 at December 31, 2014 to $56,716,000 at September 30, 2015.
The holders of Common Shares approved a plan of liquidation on August 5, 2014 and we adopted the liquidation basis of accounting effective August 1, 2014. We did not make any acquisitions in new investments in 2015, and in accordance with the plan of liquidation, no further acquisitions are expected.
Our primary sources of non-operating cash flow for the nine months ended September 30, 2015 include:
| $83,886,000 in sale proceeds and return of capital distributions from our Vintage Housing Holdings equity investment; |
| $21,570,000 in distributions from our Concord Debt Holdings equity investment from the payoff of underlying loan assets; |
| $15,402,000 in principal repayments on our Edens Center and Norridge Commons loan receivable; |
| $6,200,000 in distributions from our CDH CDO equity investment from the sale and payoff of underlying loan assets; and |
| $6,174,000 in net proceeds from the sale of our Cerritos, California property after satisfaction of third party mortgage debt, closing costs and pro rations. |
Our primary non-operating uses of cash flow for the nine months ended September 30, 2015 include:
| $127,488,000 for payment of liquidating distributions to our holders of Common Shares; |
| $71,255,000 for redemption in full of our Senior Notes; |
| $5,258,000 for additional contributions to our 701 Seventh Avenue equity investment; and |
| $5,645,000 for additional contributions to our Vintage Housing Holdings equity investment. |
Common and Preferred Share Dividends
As a result of the adoption of the plan of liquidation, as required by the terms of our Series D Preferred Shares, dividends on our Common Shares were suspended until the liquidation preference on our Series D Preferred Shares was satisfied. The liquidation preference on our Series D Preferred Shares was satisfied on September 15, 2014. Accordingly, we are no longer restricted by the terms of Series D Preferred Shares from paying dividends on our Common Shares. It is our Board of Trustees present expectation that dividends will be paid no less frequently than semi-annually beginning in 2015. However, the actual amount and timing of, and record dates for, dividends on our Common Shares will be determined by our Board of Trustees and will depend upon the timing and proceeds of the sale of our assets and the amounts deemed necessary by our Board of Trustees to pay or provide for our liabilities and obligations and REIT requirements. Any such dividends on the Common Shares will be deemed a return of capital until the applicable holder has received dividends totaling its cost basis.
A liquidating distribution of $2.25 per Common Share was paid on January 15, 2015 to holders of Common Shares of record on January 5, 2015. A liquidating distribution of $1.25 per Common Share was paid on June 16, 2015 to holders of Common Shares of record on June 9, 2015.
Comparability of Financial Data from Period to Period
Under going concern accounting, the comparability of financial data from period to period was affected by several items including (i) the timing of our property acquisitions and leasing activities; (ii) the purchases and sales of assets and investments; (iii) when material other-than-temporary impairment losses on assets in our portfolio are taken; (iv) fluctuations in the fair value of our securities and loan securities carried at fair value; and (v) the reclassification of assets.
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FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
Results of Operations
In light of the adoption of liquidation basis accounting as of August 1, 2014, the results of operations for the current year periods are not comparable to the prior year periods. In addition, prior to the adoption of the plan of liquidation, we were engaged in the business of owning real property and real estate related assets which we categorized into three reportable segments: (i) operating properties, (ii) loan assets and (iii) REIT securities. Subsequent to the adoption of the plan of liquidation, we no longer classify our assets in these separate segments to make operating decisions or assess performance. Accordingly, we have only one reporting and operating segment subsequent to July 31, 2014. Changes in liquidation values of our assets are discussed below under Changes in Net Assets in Liquidation.
Our remaining assets continue to perform in a manner that is relatively consistent with prior reporting periods. We have experienced no significant changes in occupancy or rental rates and, with the exception of our Rockwell loan receivable, our loan assets continue to perform in accordance with their terms.
Due to the adoption of the plan of liquidation we are no longer reporting funds from operations as we no longer consider this to be a key performance measure.
Changes in Net Assets in Liquidation
Period from January 1, 2015 through September 30, 2015
Net assets in liquidation decreased by $42,112,000 during the period January 1, 2015 through September 30, 2015. The decrease in net assets in liquidation was the result of $45,531,000 of liquidating distributions to holders of our Common Shares partially offset by a $3,419,000 net increase in liquidation values. The primary reasons for the increase in liquidation values were as follows:
| a $5,133,000 increase in the liquidation value of our Stamford, Connecticut residential property based on the contract for sale, partially offset by a corresponding $866,000 increase in the liability for non-controlling interest in this property, plus a $119,000 increase in estimated receipts at the property due to a change in the anticipated holding period of the property; |
| a $3,975,000 increase in the liquidation value of our Chicago, Illinois (One East Erie) property based on recent marketing efforts. The anticipated holding period for the property has been extended until the mortgage loan can be pre-paid without penalty. The extended hold period results in a $1,397,000 increase in estimated receipts at the property; |
| a $3,642,000 increase in estimated receipts from our Jacksonville, Florida property due to a longer anticipated holding period of the property; |
| a $2,181,000 increase in the liquidation value of our WRT One South State Lender equity investment due to additional interest to be earned on anticipated future loan advances; |
| a $1,707,000 increase in the liquidation value of our 550 Corporetum property located in Lisle, Illinois as a result of new tenant leases, partially offset by a $1,193,000 decrease in estimated receipts at the property due to increased leasing costs and tenant improvements; |
| a $1,551,000 increase in the liquidation value of our WRT-Elad One South State Equity investment due to new lease signings at the property; |
| a $1,053,000 increase in estimated distributions from our Concord Debt Holdings equity investment primarily as a result of the sale of the MSREF hotel assets; |
| a $584,000 increase in the liquidation value of our Cerritos, California office property based on the contract for sale, partially offset by a $302,000 decrease in estimated receipts due to flood damage that occurred prior to the sale of the property; and |
| a $344,000 increase in estimated future distributions from our Atrium Mall equity investment due to a change in the estimated holding period of the investment. |
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Primarily offset by:
| a $6,676,000 decrease in the liquidation value of our Houston, Texas residential property due to unfavorable changes in the Houston real estate market plus a $1,146,000 decrease in estimated receipts due to a change in the anticipated holding period of the property, partially offset by a $1,267,000 corresponding decrease in the liability for non-controlling interest in this property; |
| a $5,339,000 decrease in the liquidation value of our CDH CDO equity investment as a result of a decrease in the estimated underlying collateral value of one of the loan assets held by the venture partially offset by a $1,704,000 increase in estimated future receipts based on the collection of an old receivable; |
| a $1,577,000 decrease in estimated receipts at our Churchill, Pennsylvania property due to a shorter anticipated holding period of the property; |
| a $1,558,000 increase in the estimated fees payable to our advisor over the duration of the liquidation; |
| a $1,143,000 decrease in receipts from our Vintage Housing Holdings equity investment due to a shorter holding period and increased costs associated with the sale; and |
| a $918,000 decrease in the liquidation value of our loan securities resulting from reduced net operating income and a lower appraisal of the underlying collateral. |
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, 2014.
Recently Issued Accounting Standards
None that are applicable to the Trust given the application of liquidation basis accounting.
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FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
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.
The table below presents information about the Trusts derivative financial instruments at September 30, 2015 (in thousands):
Type |
Maturity |
Strike Rate | Notional Amount of Hedge |
Cost of Hedge |
||||||||||
Swap |
October 2016 | 0.69 | % | $ | 77,767 | $ | | |||||||
Cap |
November 2017 | 4.00 | % | 50,000 | 165 | |||||||||
Cap |
November 2018 | 5.00 | % | 50,000 | 220 |
The fair value of our mortgage loans payable and secured financings as of the applicable date, 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 $223,370,000 and $297,376,000 at September 30, 2015 and December 31, 2014, respectively. The fair value of our Senior Notes outstanding as of the applicable date, based on quoted market prices, was $73,859,000 at December 31, 2014.
The following table shows what the annual effect a change in the LIBOR rate would have on interest expense based upon our variable rate debt at September 30, 2015 taking into consideration the effect of our derivative financial instruments (in thousands):
Change in LIBOR (2) | ||||||||||||||||
-0.19% | 1% | 2% | 3% | |||||||||||||
Change in consolidated interest expense |
$ | (11 | ) | $ | 153 | $ | 714 | $ | 1,276 | |||||||
Pro-rata share of change in interest expense of debt on non-consolidated entities (1) |
| 2 | 4 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
(Increase) decrease in net income |
$ | (11 | ) | $ | 155 | $ | 718 | $ | 1,282 | |||||||
|
|
|
|
|
|
|
|
(1) | Represents our pro-rata share of a change in interest expense in our 701 Seventh Avenue, Norridge Commons and Edens Center equity investments. |
(2) | The one-month LIBOR rate at September 30, 2015 was 0.1930%. |
29
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
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, 2015 (in thousands):
Change in LIBOR (1) | ||||||||||||||||
-0.19% | 1% | 2% | 3% | |||||||||||||
Change in consolidated interest income |
$ | (1 | ) | $ | 4 | $ | 8 | $ | 13 | |||||||
Pro-rata share of change in interest income of loan assets in non-consolidated entities |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Increase (decrease) in net income |
$ | (1 | ) | $ | 4 | $ | 8 | $ | 13 | |||||||
|
|
|
|
|
|
|
|
(1) | The one-month LIBOR rate at September 30, 2015 was 0.1930%. |
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.
30
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
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, 2015 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 the CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2015.
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.
31
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
(Unaudited)
PART II. | OTHER INFORMATION |
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.
32
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
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 6, 2015 | By: | /s/ Michael L. Ashner | ||||
Michael L. Ashner | ||||||
Chief Executive Officer | ||||||
Date: November 6, 2015 | By: | /s/ John A. Garilli | ||||
John A. Garilli | ||||||
Chief Financial Officer | ||||||
(Principal Financial Officer and Principal Accounting Officer) |
33
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
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 Current Report on 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. | - | ||
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. | - | ||
10.2 | Third Amended and Restated Advisory Agreement dated February 1, 2013, between the Trust, WRT Realty L.P. and FUR Advisors LLC - Incorporated by reference to Exhibit 10.1 to the Trusts Current Report on Form 8-K filed February 4, 2013. | - | ||
10.3 | 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. | - | ||
10.4 | 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. | - | ||
10.5 | Amendment No. 2 to Exclusivity Agreement, dated February 1, 2013 - Incorporated by reference to Exhibit 10.2 to the Trusts Current Report on Form 8-K filed February 4, 2013. | - |
34
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
10.6 | 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. | - | ||
10.7 | Amendment No. 1 to Covenant Agreement, dated February 4, 2013 - Incorporated by reference to Exhibit 10.3 to the Trusts Current Report on Form 8-K filed February 4, 2013. | - | ||
10.8 | 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. | - | ||
10.9 | Restricted Share Award Agreement, dated February 1, 2013, between Winthrop Realty Trust and Michael L. Ashner - Incorporated by reference to Exhibit 10.4 to the Trusts Current Report on Form 8-K filed February 4, 2013. | - | ||
10.10 | Restricted Share Award Agreement, dated February 1, 2013, between Winthrop Realty Trust and Carolyn Tiffany - Incorporated by reference to Exhibit 10.4 to the Trusts Current Report on Form 8-K filed February 4, 2013. | - | ||
31 | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | (1) | ||
32 | Certifications 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) |
(1) | filed herewith |
35
Exhibit 31.1
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
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 (the Registrants fourth fiscal quarter in the case of an annual report) 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 6 , 2015 | /s/ Michael L. Ashner | |||
Michael L. Ashner | ||||
Chief Executive Officer |
Exhibit 31.2
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
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 (the Registrants fourth fiscal quarter in the case of an annual report) 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 6, 2015 | /s/ John A. Garilli | |||
John A. Garilli | ||||
Chief Financial Officer | ||||
(Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
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, 2015 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 6, 2015 |
Exhibit 32.2
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2015
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, 2015 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 6, 2015 |
Loans Receivable - Summary of Trust's Loans Receivable (Parenthetical) (Detail) - USD ($) |
9 Months Ended | 12 Months Ended |
---|---|---|
Sep. 30, 2015 |
Dec. 31, 2014 |
|
Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
Loans receivable, accrued interest | $ 27,000 | $ 218,000 |
Edens Center and Norridge Commons [Member] | Mezzanine [Member] | ||
Accounts, Notes, Loans and Financing Receivable [Line Items] | ||
Amount to be collected on participating interest of loans | 3,000,000 | 3,000,000 |
Loans receivable, accrued interest | $ 1,000 | $ 1,000 |
LIBOR floor, percentage | 0.50% |
Reportable Segments - Additional Information (Detail) - Segment |
7 Months Ended | 14 Months Ended |
---|---|---|
Jul. 31, 2014 |
Sep. 30, 2015 |
|
Segment Reporting [Abstract] | ||
Number of reportable segments | 3 | 1 |
Number of operating segments | 3 | 1 |
Senior Notes Payable - Additional Information (Detail) - USD ($) |
Aug. 15, 2015 |
Sep. 30, 2015 |
Aug. 31, 2015 |
---|---|---|---|
Debt Instrument [Line Items] | |||
Senior notes payable | $ 86,250,000 | ||
Senior notes issue price | 100.00% | ||
Senior notes interest rate | 7.75% | ||
Aggregate redemption price paid | $ 72,635,000 | ||
Redemption price of Senior Note per $25 face amount | $ 25.484375 | ||
Face amount of Senior Note redeemed | $ 25.00 | ||
Securities Repurchase Plan [Member] | |||
Debt Instrument [Line Items] | |||
Senior notes payable | $ 14,995,000 | ||
Aggregate price of outstanding notes | $ 15,707,000 |
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