Winthrop Realty Trust. CEO MICHAEL L ASHNER bought 20000 shares on 1-09-2009 at $11.98
Winthrop Realty Trust (formerly First Union Real Estate Equity and Mortgage Investments), which, together with its subsidiaries, we refer to as the Trust, we, us, and Company, is a real estate investment trust, which we refer to as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, which we refer to as the Code. We are 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 December 15, 2005. Our principal executive offices are at 7 Bulfinch Place, Suite 500, Boston, MA 02114, our telephone number is 617-570-4614, and our website is www.winthropreit.com . Information on our website is not a part of this report.
We are engaged in the business of owning real property and real estate related assets which we categorize into three specific areas: (i) ownership of operating properties, which we refer to as operating properties; (ii) origination and acquisition of loans and debt securities secured directly or indirectly by commercial and multi-family real property, including collateral mortgage-backed securities and collateral debt obligation securities, which we refer to as loan assets and loan securities; and (iii) ownership of equity interests in other REITs, which we refer to as REIT equity interests.
We hold our assets through our wholly-owned operating partnership, WRT Realty L.P. (formerly First Union REIT L.P.), a Delaware limited partnership, which serves as our operating partnership in connection with our umbrella partnership real estate investment trust or "UPREIT" structure. The UPREIT structure provides a method for us to acquire properties by issuing to sellers, as a form of consideration, limited partnership interests in the operating partnership.
We acquire assets through direct ownership as well as through entering into specific strategic alliances and ventures. In particular, we have entered into two significant venture arrangements. Our venture with Marc Realty LLC, which we refer to as Marc Realty, a Chicago area real estate company, is our primary vehicle for investments in the Chicago metropolitan area. In addition, since its formation in March 2006, we acquire substantially all of our loan assets and loan securities through Concord Debt Holdings LLC, which we refer to as Concord, a venture with Lexington Realty Trust, which we refer to as Lexington. The formation of Concord enables us to increase and diversify our loan asset and loan security portfolio as it effectively doubles the capital available for investments in loan assets and loan securities.
We are externally advised by FUR Advisors LLC, which we refer to as our advisor, an entity controlled by and partially owned by our current executive officers. Our advisor is required to administer our affairs including seeking, servicing and managing our investments. For providing these and the other services contemplated by the advisory agreement between us and our advisor, which we refer to as the Advisory Agreement, our advisor receives a base management fee and is entitled to an incentive fee. See âEmployeesâ and âItem 1A. Risk Factors - Risk Relating to Our Managementâ below.
Pursuant to our bylaws, our executive officers are permitted to acquire or dispose of an investment with an aggregate value of $5,000,000 or less without the consent of our Board of Trustees. However, if such transaction is with (i) our advisor (and any successor advisor), Michael Ashner, and any of their respective affiliates; (ii) Lexington, The Lexington Master Limited Partnership, or Apollo Real Estate Investment Fund III, L.P. or any of their respective affiliates; (iii) a beneficial owner of more than 4.9% of our issued and outstanding common shares of beneficial interest, which we refer to as our common shares, either directly or upon the conversion of any of our preferred shares of beneficial interest, which we refer to as our preferred shares; or (iv) a beneficial owner of more than 4.9% of any other entity in which we hold a 10% or greater interest, then regardless of the amount of the transaction, such transaction must be approved by a majority of our independent trustees (acting as members of our Conflicts Committee).
Our Objectives and Strategies
Our business objective is to maximize long-term shareholder value through a total return value approach to real estate investing. We seek to achieve this objective by identifying and investing in discrete real estate investments as well as entering into ventures including arrangements with regional or specialized real estate professionals with extensive experience in a particular market or asset type. In addition, where the opportunity arises we may seek to enter into strategic co-investment ventures managed by us with institutional and high net worth investors to enhance our total return through acquisition, asset management and other fees and a promoted economic interests.
In general, we seek to
acquire operating properties without regard to property type (subject to certain limitations), location or position in the capital structure we believe
present an opportunity to outperform the marketplace while at the same time providing current cash flow, or
will provide superior returns on the investment to the marketplace through an infusion of capital and/or improved management;
acquire and originate loan assets and loan securities primarily through Concord utilizing the same underwriting criteria as used for operating properties and then taking advantage of the financing opportunities to generate attractive risk-adjusted returns;
acquire interests in other REITs we believe to be undervalued; and
retain our advisor which has a large experienced management team that provides us with resources at a cost that we believe to be less expensive than if such persons were employed directly by us.
Except as indicated below or as limited by the restrictions placed on us in order to meet our requirements to maintain our status as a REIT and our own self-imposed restrictions, our investment decisions will not be materially affected by the nature of an investment or where that investment falls in an entityâs capital structure. Generally, we do not acquire operating properties used for special use or healthcare or invest in development projects, single family projects, condominium or condo conversion projects, raw land or, to date, assets located outside of the United States. Also, in connection with our investment in Lexington we have agreed not to make any future direct investments in net lease or single-tenant properties so long as Michael L. Ashner serves as an executive officer or trustee for both us and Lexington; however, as long as we hold our interest in Lexington, we will have a significant investment in single-tenant assets.
We do not limit our investments to a specific type of real estate asset (either direct property investments, loans, office buildings etc.), our strategy is to concentrate our investments in those areas that we believe will generate the best risk-adjusted return on our investments. Accordingly, at such times as we believe that the purchase price for operating properties is purchaser favorable, it is likely that we will focus our investments in operating property acquisitions. Likewise, at such times as we believe that the purchase price for operating properties is high, it is likely that we will focus our investments on loan assets where the hypothetical purchase price for the underlying property collateralizing the loan asset, if acquired on a âlast dollar lossâ basis, is consistent with the purchase price that we would pay to acquire the property which serves to collateralize the loan asset. That is, if we were required to foreclose on our lien, the effective purchase price for the asset would be the then outstanding principal balance and any accrued interest of our loan plus the outstanding principal balance and any accrued interest of any loans senior to our loan.
We intend to fund our investments through one or more of the following: cash reserves, borrowings under our credit facility, property loans or the issuance by us of additional debt and/or equity. Toward that end, we recently filed with the Securities Exchange Commission a registration statement on Form S-3 to enable us to sell 8,845,036 of our common shares pursuant to a rights offering to the existing holders of our common shares and our Series B-1 Cumulative Convertible Redeemable Preferred Shares, which we refer to as our Series B-1 preferred shares. As investments mature in value to the point where we are unlikely to achieve better than a market return on their then enhanced value, it is likely we will seek to exit the investment and redeploy the capital to what we believe will be higher yielding opportunities.
Effective December 31, 2003, FUR Investors LLC, an entity controlled by and partially owned by our current executive officers, acquired 5,000,000 of our common shares pursuant to a tender offer at a price of $2.30 per share. In addition, FUR Investors purchased an additional 5,000,000 newly issued common shares for a price of $2.60 per share. As a result of these purchases, FUR Investors acquired a total of 10,000,000 of the outstanding common shares which represented 32.2% of the then total outstanding common shares.
In connection with the acquisition by FUR Investors of our common shares: (i) our advisor was retained as our external advisor; (ii) Michael L. Ashner was appointed our Chief Executive Officer; (iii) Mr. Ashner entered into an exclusivity agreement with us, which we refer to as the Exclusivity Agreement; (iv) FUR Investors entered into a covenants agreement pursuant to which it agreed not to take certain actions which, among other things, would adversely impact our status as a REIT or the listing of our common shares on the New York Stock Exchange; (v) our Board of Trustees was substantially reconstituted; and (vi) the terms of the members of our Board of Trustees were destaggered.
On November 7, 2005 in a transaction reviewed and approved by our Conflicts Committee which had engaged separate legal counsel, we assigned to Newkirk Realty Trust, Inc., which we refer to as Newkirk, all of our rights under the Exclusivity Agreement with respect to ânet lease assets.â As defined, net lease assets include a property that is either net leased or the tenant leases at least 85.0% of the rentable square footage of the property, and, in addition to base rent, the tenant is required to pay some or all of the operating expenses for the property and, in either case, the lease has a remaining term, exclusive of all unexercised renewal terms, of more than 18 months. Our use of the term net lease assets also includes management agreements and master leases with terms of greater than three years where a manager or master lessee bears all operating expenses of a property and pays the owner a fixed return. The term net lease assets also includes all retenanting and redevelopment associated with net lease properties as well as all agreements, leases and activities incidental thereto. In addition, interests in net lease properties, include, without limitation, securities of companies, whether or not publicly traded, that are primarily invested in net lease assets. In exchange for this assignment, we received 1,250,000 shares of Newkirkâs common stock which, at that time, was valued at $20,000,000.
At the time of issuance, one half of the Newkirk shares (625,000 shares) we received were subject to forfeiture. Each month 17,361 shares vested and were no longer subject to forfeiture. In addition, we invested $50,000,000 in Newkirk by purchasing 3,125,000 shares at $16 per share. All of the shares held in Newkirk by us were subject to a lock-up agreement which prohibited us from selling these shares until the earlier of (i) the termination of an advisory agreement between NKT Advisors LLC, an affiliate of our advisor, and Newkirk or (ii) November 7, 2008.
On December 31, 2006, Newkirk was merged into Lexington Corporate Properties Trust (which upon the merger changed its name to Lexington Realty Trust). The merger required our consent and was reviewed and approved by our Conflicts Committee. In connection with the merger, the Newkirk shares held by us were no longer subject to forfeiture or lock-up, and (ii) the assignment of the exclusivity rights with respect to net lease assets was vested in Lexington.
Also in connection with the merger, Michael L. Ashner, our Chairman and Chief Executive Officer and the former Chairman and Chief Executive Officer of Newkirk, became a trustee and Executive Chairman of Lexington pursuant to the terms of an employment agreement between Mr. Ashner and Lexington, also approved by our Conflicts Committee. An agreement was entered into with Mr. Ashner which provides that in the event Lexington makes a real estate investment other than in a net-lease asset, Mr. Ashner is obligated to terminate his employment and other positions with Lexington, unless a majority of our independent trustees consent to his remaining with Lexington. Further, Mr. Ashner is not permitted to agree to certain amendments to his employment agreement without the consent of our Conflicts Committee. Due to Mr. Ashnerâs position with Lexington, all future transactions with respect to the shares held by us in Lexington are subject to approval by our Conflicts Committee.
We make investments in real estate related assets directly and in ventures with third parties. We classify these investments into three segments: (i) operating properties; (ii) loan assets and loan securities; and (iii) REIT equity interests.
At December 31, 2007, our assets consisted of:
Operating properties containing 9,490,000 square feet of space, including the properties in the Marc Realty and Sealy portfolios, and 230 rental units at a multi-family property.
Loan assets directly held having an aggregate principal balance of $85,699,000 and a 50% ownership interest in Concord which held loan assets and loan securities having an aggregate principal balance of $1,178,000,000.
REIT equity interests with a market value of $51,804,000.
See âItem 2. Properties.â
Loan Assets and Loan Securities
Loan assets directly held by us at December 31, 2007 consisted of:
See âMarc Realty Loansâ below for additional information relating to these loans.
Tenant improvement and capital expenditure loans with respect to certain of the properties in the Marc Realty portfolio which mature from July 2012 to November 2013. See âMarc Realty Loansâ below.
Concord Debt Holdings
As described above, in March 2006 we formed a venture with Lexington called Concord Debt Holdings LLC for the purpose of acquiring and originating a diversified portfolio of real estate loans and securities. There are a number of risks associated with our investment in Concord that are set forth below in Item 1A. Risk Factors.
To date, we and Lexington have each committed to invest $162,500,000 in Concord, of which $157,413,000 was contributed at December 31, 2007. In addition to the capital contributions made by us and Lexington, Concord currently finances its loan assets and loan securities, and expects to continue to finance its loan assets and loan securities, through various structures including, repurchase facilities, credit lines, term loans and securitizations. Concord may seek additional capital through sales of preferred or common equity in Concord to institutional or other investors. Concord is managed by WRP Sub-Management LLC, which we refer to as the Concord Advisor, which is an affiliate of, and has substantially the same executive officers as, our advisor. Investments and other material decisions with respect to Concordâs business require the consent of both us and Lexington or our and their representatives on Concordâs investment committee.
Concordâs business is to acquire and originate loan assets and loan securities collateralized by real estate assets including mortgage loans (commonly referred to as whole loans), subordinate interests in whole loans (either through the acquisition of a B-Note or a participation interest), mezzanine loans, preferred equity and commercial real estate securities including collateralized mortgage-backed securities, which we refer to as CMBS, and real estate collateral debt obligations, which we refer to as a CDO. Concord seeks to produce a stable income stream from its investments in loan assets and loan securities by carefully managing credit risk and interest rate risk. The loan assets and loan securities in which it invests are selected based on their long-term earnings potential and credit quality. Concordâs primary objective is to derive earnings from interest income rather than trading gains and, accordingly, intends to hold its loan assets and loan securities to maturity. During the investment process, Concord uses the real estate expertise of its management team, which includes members of our advisor to underwrite and analyze the loan assets and loan securities and properties collateralizing them.
in which it invests so as to control any decision making which might occur with respect to such loan asset in the future.
Following the acquisition of a loan asset or loan security, the Concord Advisor seeks to enhance the return to Concord on such assets by obtaining financing which is accretive to Concord. Concordâs original business model was to ultimately finance its loan assets and loan securities with long-term debt through the issuance of CDOs. To this end, Concord formed its first CDO, Concord Real Estate CDO 2006-1, Ltd., which we refer to as CDO-1, pursuant to which it financed approximately $464,601,000 of its loan assets and loan securities. However, the debt capital markets have experienced an increase in volatility and reduction in liquidity since the second quarter of 2007. This was initially triggered by credit concerns emanating from the single family residential market, particularly those loans commonly referred to as sub-prime loans. Concordâs sole exposure to the single family residential market is with respect to an $11,500,000 investment in a $983,869,000 bond, 21.3% of which is subordinate to Concordâs position. Collateral for this bond can consist of up to 10% of residential loans, with the balance of the collateral consisting of commercial loans. At December 31, 2007, the collateral for the bond consisted of only 3.4% of residential loans. Accordingly, even if all of the residential loans were to be valueless, an additional 17.9% of the value of the remaining loans collateralizing the bond would have to be eliminated before Concord would suffer any actual loss. Notwithstanding the foregoing, Concord elected to take an $11,028,000 other-than-temporary impairment even though the loan security is performing in accordance with its terms and it is Concordâs intention to hold this loan security to maturity.
As a result of the increase in volatility of the debt capital markets, CDO securitizations have become difficult if not impossible to execute. As a result, Concord has continued to finance its acquisition of loan assets and loan securities through repurchase facilities and additional capital from us and Lexington. Concord expects to issue additional CDOs or other types of securitizations at such time, if at all, as such issuances will generate attractive equity returns. CDOs are a securitization structure whereby multiple classes of debt are issued to finance a portfolio of income producing assets, such as loan assets and loan securities. Cash flow from the portfolio of assets is used to repay the CDO liabilities sequentially, in order of seniority. The most senior classes of debt typically have credit ratings of "AAA" through "BBBâ" and therefore can be issued at yields that are lower than the average yield of the assets backing the CDO. That is, the gross interest payments on the senior classes of CDO securities are less than the average of the interest payment received by the CDO from its assets. On its existing CDO, Concord retained, and Concord expects that it will retain on any future CDOs, the equity and the junior CDO debt securities. As a result, assuming the CDOsâ assets are paid in accordance with their terms, Concordâs return will be enhanced as Concord will retain the benefit of the spread between the yield on the CDO loan assets and loan securities and the yield on the CDO debt. The equity and the junior CDO debt securities that Concord holds and intends to retain are the most junior securities in the CDOs' capital structure and are usually unrated or rated below investment grade. Concord also earns ongoing management fees for its management of the CDO collateral. A portion of these management fees is senior to the ââAAAââ rated debt securities of each CDO. In CDO-1, the level of leverage on the underlying assets was approximately 80%. The leverage level of Concordâs future CDOs may vary depending on the composition of the portfolio and market conditions at the time of the issuance of each CDO. Concord may increase or decrease leverage on its investment grade CDOs, at securitization, upward or downward to improve returns or to manage credit risk. In addition to CDOs, Concord may also use other capital markets vehicles to finance its real estate debt portfolio of loan assets and loan securities.
The Concord Advisor provides accounting, collateral management and loan brokerage services to Concord and its subsidiaries, including CDO-1. For providing these services, Concord reimburses the Concord Advisor for the costs incurred by Concord Advisor solely for the benefit of Concord, including salaries of employees dedicated to Concordâs business, which amounted to $2,571,000 in 2007. In order to create an economy of scale, an affiliate of both our advisor and the Concord Advisor provides accounting and other non-loan origination and loan acquisition services for the Concord Advisor. In connection with providing these services, the Concord Advisor reimburses such affiliate for the estimated costs associated with providing these services, which costs we refer to as the Concord Credit Amount. As describe above, we hold a 50% interest in Concord. As a result, we effectively pay 50% of Concord Credit Amount. Accordingly, because the Concord Credit Amount is paid to an affiliate of our advisor, we receive a credit against the advisory fee payable to our advisor equal to 50% of the Concord Credit Amount which credit amounted to $189,000 for 2007.
For additional information relating to Concord and its assets, see âItem 7. Management Discussion and Analysis of Financial Conditions and Results of Operations â Off-Balance Sheet Arrangementsâ and âItem 8. Financial Statements and Supplementary Data â Note 8 â Concord Debt Holdings LLC .â
Marc Realty Portfolio
At December 31, 2007, our Marc Realty portfolio consisted of one first mortgage bridge loan, two participating second mortgage loans and 19 convertible mezzanine loans, together with an equity investment in each mezzanine borrower, in the aggregate amount of approximately $73,255,000. Each of the borrowers is owned primarily by the principals of Marc Realty, a Chicago-based real estate company. Each loan is secured by the applicable borrower's ownership interest in a limited liability company, which we refer to as a Property Owner, that in turn owns an office building or complex primarily in the Chicago business district or suburban area. Each borrower holds a 100% interest in the applicable Property Owner other than with respect to one property, in which the borrower holds a 75% interest in the Property Owner. Each loan, other than the first mortgage bridge loan, bears interest at 7.65%, matures on April 18, 2012 and requires monthly payments of interest only. The first mortgage bridge loan, in the amount of $17,669,000, bears interest at 7.32%, requires monthly payments of interest only and matures on June 20, 2008.
In connection with the making of these loans, we acquired an equity interest in each of the borrowers. The equity interest entitles us to participate in capital proceeds derived from the sale or refinancing of the applicable property to the extent such proceeds generate amounts in excess of that required to fully satisfy all of the debt encumbering that property, including our respective loan and a return to the borrower of its deemed equity (the agreed value of the applicable property less all debt encumbering that property including the loan made by us) plus a 7.65% return thereon. During 2007, two of the properties underlying the mezzanine loans were sold. Upon the sale of these two properties, exclusive of interest, we received an aggregate of $17,866,000 on our original investment of $11,333,000.
During 2006, four of the properties underlying the mezzanine loans were sold. Upon the sale of these four properties, exclusive of interest, we received an aggregate of $7,716,000 on our original investment of $6,635,000.
In addition, in connection with the original Marc Realty transaction both us and Marc Realty committed to each provide up to $7,350,000 in additional financing, which we refer to as TI/Capex Loans, to cover the costs of tenant improvements and capital expenditures at the properties underlying the Marc Realty portfolio. During 2007, TI/Capex Loans in excess of the $7,350,000 commitment were required. Accordingly, although neither us nor Marc Realty has committed to provide additional TI/Capex Loans, at December 31, 2007 both us and Marc Realty had each advanced approximately $12,444,000 in TI/Capex Loans. The TI/Capex Loans bear interest of 8.50% per annum and are secured by a subordinate loan on the applicable property.
Set forth below is the business experience of, and certain other information regarding, the nominees for election as trustees as well as Mr. Steven Mandis who is a trustee elected by the holders of the Series B-1 Shares. There are no family relationships among our trustees and executive officers.
Name and year first appointed or nominated as a Trustee
Principal Occupation during the past Five Years
Michael L. Ashner
Mr. Ashner has been the Chief Executive Officer of the Trust since December 31, 2003 and Chairman since April 2004. Mr. Ashner also served as the Executive Chairman and a trustee of Lexington Realty Trust (âLexingtonâ), a New York Stock Exchange listed real estate investment trust, from December 31, 2006 when Newkirk Realty Trust, Inc. (âNewkirkâ) was merged into Lexington to March 20, 2008. Mr. Ashner previously served as a director and the Chairman and Chief Executive Officer of Newkirk until it was merged into Lexington. Mr. Ashner also currently serves as the Chief Executive Officer of Winthrop Realty Partners, L.P., a real estate investment and management company, positions he has held since 1996. Mr. Ashner previously served as a director and Chief Executive Officer of Shelbourne Properties I, Inc., Shelbourne Properties II, Inc. and Shelbourne Properties III, Inc. (collectively, the âShelbourne Entitiesâ), three real estate investment trusts, from August 2002 until their liquidation in April 2004. Mr. Ashner serves on the Board of Directors of NBTY, Inc., a manufacturer and distributor of nutritional supplements as well as Lexington.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are a real estate investment trust, which we refer to as a REIT, engaged in the business of owning real property and real estate related assets. With certain self-imposed limitations, we will seek opportunities to invest in or acquire most types of real estate assets or securities. We operate in three strategic business segments: (i) ownership of operating properties, which we refer to as operating properties; (ii) origination and acquisition of loans and debt securities secured directly or indirectly by commercial and multi-family real property, including collateral mortgage-backed securities and collateral debt obligation securities, which we refer to as loan assets and loan securities; and (iii) ownership of equity interests in other REITs, which we refer to as REIT equity interests. We acquire assets through direct ownership as well as through entering into specific strategic alliances and ventures. In particular, we have entered into two significant venture arrangements. Our venture with Marc Realty LLC, which we refer to as Marc Realty, a Chicago area real estate company, is our primary vehicle for investments in the Chicago metropolitan area. In addition, since its formation in March 2006, we acquire substantially all of our loan assets and loan securities through Concord Debt Holdings LLC, which we refer to as Concord, a venture with Lexington Realty Trust, which we refer to as Lexington. The formation of Concord enables us to increase and diversify our loan asset and loan security portfolio as it effectively doubles the capital available for investments in loan assets and loan securities.
As opportunities present themselves, we will continue to seek to enter into venture arrangements with regional or specialized real estate professionals with extensive experience in a particular market or asset type as well as seeking to enter into strategic co-investment ventures managed by us with institutional and high net worth investors to enhance our total return through acquisition, asset management and other fees and a promoted economic interest.
In view of the foregoing, our near-term investment strategy will be to identify and invest in discrete real estate investments including investments through ventures. As market conditions dictate, we will focus our investment activity in one or more of our business segments and aggressively pursue such opportunities.
We intend to fund these investments through one or more of the following: cash, borrowings under our credit facility, property loans, issuance of debt and equity, and ventures with third parties. For the long-term, as investments mature in value to the point where we are unlikely to achieve better than a market return on their then enhanced value, it is likely we will exit the investment and seek to redeploy the capital to higher yielding opportunities. Therefore, the sale of these investments are an important part of our overall earnings and may result in uneven earnings that may vary greatly from quarter to quarter.
Our business objective is to maximize long-term shareholder value through a total return value approach to real estate investing. We measure our success in meeting this objective by a number of factors, including increases in diluted per share net income, cash returns generated by our investments, increases in shareholder equity and total return to our shareholders. During 2007, 2006 and 2005, our operating results were as follow:
We face substantial competition for our targeted investments. Our ability to grow our investment portfolio depends to a significant degree on our ability to implement our investment policy and operating strategies. We compete with numerous other companies for investments, including other REITs, insurance companies, real estate opportunity funds, pension funds and a multitude of private investors. Many of our competitors have greater resources than we do and for this and other reasons, we may not be able to compete successfully for particular investments. We will continue to capitalize on the acquisition and investment opportunities that our advisor brings to us as a result of its acquisition experience as well as our partners in ventures which serve as platforms to investments in various geographic areas and particular classes of assets. Through its broad experience, our advisorâs senior management team has established a network of contacts and relationships, including relationships with operators, financiers, commercial real estate brokers, potential tenants and other key industry participants.
Interest Rate Environment
Both our loan assets and our loan obligations are customarily based on floating rate indexes, such as LIBOR or US Treasuries, which can fluctuate. With respect to our loan assets, we seek to eliminate this risk by obtaining match financing. That is, we finance a portion of our loan asset acquisitions through financings under which our interest payment obligations are tied to the same index as the loan asset. In this way, we assure that the spread between the interest rate on the loan asset and the interest rate on the loan obligation remains constant. With respect to our loan obligations secured by our operating properties, we may utilize a variety of financial instruments, including interest rate swaps, caps, options, floors and other interest rate exchange contracts, in order to limit the potential negative effects of fluctuations in interest rates on our operations. In the past, we entered into the following agreements in order to limit our exposure to interest rate volatility: (i) an interest rate swap with a $40,000,000 notional amount, that was subsequently negotiated to a notional amount of $26,000,000, that expires December 1, 2009 and effectively converted the interest rate on that portion of principal of our note payable to KeyBank, with an outstanding balance at December 31, 2007 of $28,883,673, secured by certain of our net lease properties, from a floating rate equal to LIBOR plus 1.75% to a fixed LIBOR rate of 4.05% plus 1.75% and (ii) an interest rate swap with a balance guaranty on our Repurchase Agreement with respect to our first mortgage residential whole-pool loan certificates, which bears interest at LIBOR minus 0.002%, effectively fixing our rate at 4.055% on that financing. We do not intend to utilize derivatives for speculative purposes but only for interest rate risk management.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments and other general business needs. We believe that cash flow from operations will continue to provide adequate capital to fund our operating and administrative expenses, regular debt service obligations and all dividend payments in accordance with REIT requirements in both the short-term and long-term. In addition, we anticipate that cash on hand, borrowings under our credit facility and issuance of equity and debt, as well as other alternatives, will provide the necessary capital required for our investment activities. Additionally, to maintain our status as a REIT, we must pay dividends annually in an amount equal to at least 90% of our REIT taxable income. As a result of this dividend requirement, we, like other REITs, are dependent on raising capital through equity and debt issuances to obtain funds with which to expand our business.
Our primary sources of funds for liquidity consist of:
cash and cash equivalents;
cash flow from our operating properties;
payments received from our loan assets and loan securities;
dividends received from our ownership of REIT equity interests;
distributions from ventures;
borrowings under our credit facility; and
equity and debt issuances.
We had cash and cash equivalents of $36,654,000 at December 31, 2007, which consisted of $29,958,000 in cash and $6,696,000 in cash equivalents with maturities of less than 90 days. In addition, we had $70,000,000 available under our credit facility. As noted above, we expect to raise additional funds through debt financing and/or equity offerings. Toward that end, during 2006 we raised approximately $137,936,000 from issuances of our common shares in registered offerings and in January 2008 we filed with the SEC a registration statement on Form S-3 to enable us to sell 8,845,036 of our common shares pursuant to a rights offering to our existing holders of our common shares and our Series B-1 preferred shares. Further, pursuant to our dividend reinvestment and stock purchase plan, which we refer to as our DRIP, which was instituted in 2006 we issued a total of 592,422 common shares resulting in gross proceeds of $3,921,000 in 2007.
Future Cash Requirements
The following table sets forth the timing of our payment obligations related to our off-balance sheet and contractual obligations, including all fixed and variable rate debt obligations, except as otherwise noted, as of December 31, 2007:
The underlying lease agreements require the tenant to pay the ground rent expense.
Base management fee based upon the terms of the Advisory Agreement and equity and assets in place at December 31, 2007, with no effect given to the additional investments or equity issuances after December 31, 2007 or to incentive fee compensation to FUR Advisors. No amounts have been included for subsequent renewal periods of the advisory agreement.
Excludes pending acquisitions that are subject to due diligence.
We carry comprehensive liability and all risk property insurance: (i) fire; (ii) flood; (iii) extended coverage; (iv) âacts of terrorism,â as defined in the Terrorism Risk Insurance Act of 2002; and (v) rental loss insurance with respect to our operating properties where coverage is not provided by our net lease tenants. Under the terms of our net leases, the tenant is obligated to maintain adequate insurance coverage.
Our debt instruments, consisting of mortgage loans secured by our operating properties (which are generally non-recourse to us) contain customary covenants requiring us to maintain insurance. Although we believe that we have adequate insurance coverage under these agreements, we may not be able to obtain an equivalent amount of coverage at reasonable costs in the future. Further, if lenders insist on greater coverage than we are able to obtain at reasonable costs, it could adversely affect our ability to finance and/or refinance our properties and expand our portfolio.
Our level of liquidity based upon cash and cash equivalents decreased by approximately $52,809,000 during the year ended December 31, 2007. The decrease resulted from $100,072,000 of cash used in financing activities, which was partially offset by $22,154,000 of cash provided by our operating activities and $25,109,000 of cash provided by our investing activities.
Cash provided by operating activities of $22,154,000 was comprised of (i) net income of $2,481,000; (ii) net positive adjustments for non-cash items of $22,961,000, and (iii) a net negative change in operating assets and liabilities of $3,288,000. The adjustments for non-cash items were comprised of increases due to (i) non-cash other-than-temporary impairment loss on our REIT equity interests of $18,218,000; (ii) depreciation and amortization of $15,759,000; (iii) minority interest expense of $578,000; (iv) provision for loss on loan receivable of $1,266,000; (v) loss on early extinguishment of debt of $369,000; (vi) a decrease in interest receivable on loans of $435,000; and (vii) bad debt expense of $71,000. The decreases in non-cash items were due to (i) net gains on sale of securities available for sale of $10,187,000; (ii) the effect of straight-lining of rental income of $1,825,000; (iii) equity in earnings of equity investments in excess of distributions of $1,563,000; (iv) interest earned on restricted cash of $148,000; and (v) earnings of preferred equity investments in excess of distributions of $12,000. See âResults of Operationsâ below for additional details on our operations.
Cash provided by investing activities consisted of $64,360,000 of collections of loan receivables, $38,694,000 of proceeds received from repayment on our whole pool mortgage-backed securities available for sale, $24,004,000 of proceeds from the sale of real estate securities, $16,162,000 of proceeds from preferred equity investments, $10,000,000 of return of capital distributions on our equity investments, return of capital distribution from available for sale securities of $10,047,000 and $1,347,000 of cash received upon foreclosure of property.
We used cash for investing activities in 2007 as follows: (i) $76,071,000 for investment in our Concord venture and $22,130,000 for investment in our other equity investments; (ii) $17,669,000 for investment in our preferred equity investment; (iii) $9,716,000 for operating property acquisitions and capital improvements to our existing operating properties; (iv) $9,224,000 to issue new loans receivable; (v) $3,172,000 to purchase available for sale securities; and (vi) $1,523,000 to increase restricted cash held in escrow.
We used cash for financing activities in 2007 as follows: (i) $20,012,000 for dividend payments on our common shares; (ii) $36,736,000 for repayment of borrowings under repurchase agreements; (iii) $47,536,000 for mortgage loan repayments; (iv) $21,438,000 for distributions to minority interests; (v) $887,000 for payment of deferred loan costs; and (vi) $30,004,000 for repayment of loans.
Cash provided by financing activities in 2007 was the result of $51,693,000 of mortgage loan proceeds, $3,921,000 of proceeds from our DRIP, $787,000 of contributions from minority partners and $140,000 decrease in restricted cash held in escrow.
Results of Operations
As discussed earlier, one of the factors used to measure managementâs performance is net operating income. We define net operating income for each segment presented as the segmentâs revenue and other income less operating expenses. We have determined that we have three reportable operating segments: Operating Properties, Loan Assets and Loan Securities and REIT Equity Interests. The reportable segments were determined based on our method of internal reporting. The Operating Properties segment includes all of our wholly and partially owned operating properties. The Loan Assets and Loan Securities segment includes all of our activities related to senior and mezzanine real estate loans. The REIT Equity Interests segment includes all of our activities related to the ownership of securities in other publicly traded real estate companies. In addition to our three business segments, we report our non-segment specific income and expenses under Corporate Activities.
2007 Versus 2006
Net income decreased by $40,455,000 to $2,481,000 for the year ended December 31, 2007 from $42,936,000 for the year ended December 31, 2006. As described in greater detail below, the decrease was due primarily to the recognition at December 31, 2007 of other than temporary non-cash losses attributable to our REIT equity interests and certain loan securities held by Concord and the recognition at December 31, 2006 of non-cash gains attributable to our REIT equity interests.
Net operating income from our operating properties decreased by 1,487,000 to $30,705,000 for the year ended December 31, 2007 from $32,192,000 for the year ended December 31, 2006. The changes in net operating income from our operating properties were the result of the following:
rental income increased by $1,648,000 to $40,470,000 due to an increase of $3,156,000 from operating properties acquired during 2006 and 2007 and a decrease of $1,508,000 from operating properties held for all 12 months ended December 31, 2007 and 2006:
$988,000 increase at our Chicago, Illinois (Ontario) property resulting primarily from a $1,123,000 lease termination in June 2007
$416,000 decrease at our Jacksonville, Florida property due primarily to a $1,093,000 stock settlement received in December 2006 from Winn-Dixie which vacated the property in November 2005. Without giving effect to the stock settlement, rental income at this property increased by $677,000 in 2007 due to increased occupancy at the property
$23,000 increase at our Circle Tower property
$700,000 decrease at our Orlando, Florida property due to a lease modification effective January 1, 2007
$1,333,000 increase at our Lisle, Illinois properties, which were acquired during the first quarter of 2006
$744,000 of rental revenue from our Creekwood Apartments property, which was acquired at the end of the first quarter of 2007
$1,079,000 of rental revenue from our River City property which we acquired through a foreclosure sale on October 2, 2007.
$1,403,000 decrease from properties held for all 12 months due to an out of period adjustment recognised in the fourth quarter of 2007 as described in Note 2 of the Financial Statements
operating expenses increased by $1,797,000 to $5,851,000 due to an increase of $271,000 from operating properties held for all 12 months ended December 31, 2007 and 2006 and an increase of $1,526,000 from operating properties acquired during 2006 and 2007:
$188,000 increase at our Chicago, Illinois (Ontario) property
$70,000 increase at our Circle Tower property
$718,000 of expense at our Creekwood Apartments property which was acquired at the end of the first quarter of 2007
$446,000 of expense at our River City property which was acquired in October 2007
$362,000 increase at our Lisle, Illinois properties which were acquired during the first quarter of 2006.
Real estate tax expense increased by $260,000 to $2,139,000 due to:
$77,000 increase at our Lisle, Illinois properties which were acquired during the first quarter of 2006
$119,000 decrease at our Chicago, Illinois (Ontario) property as a result of receiving a final valuation from the county and a lower tax rate
$71,000 of expense increase at our Creekwood Apartments property which was acquired during the first quarter of 2007
$224,000 of expense at our River City property which was acquired in October 2007
Interest expense related to our operating properties increased by $65,000 to $14,369,000 for the year ended December 31, 2007 compared to $14,304,000 for the year ended December 31, 2006
Depreciation and amortization expense related to our operating properties increased by $1,497,000 to $12,713,000 for the year ended December 31, 2007 compared to $11,216,000 for the year ended December 31, 2006 as a result of property acquisitions during 2007 and 2006 and the recognition of an out of period adjustment in the fourth quarter of 2007 of approximately $645,000 as described in Note 2 of the Financial Statements
Equity in loss on our investment in Sealy Northwest Atlanta, L.P., acquired in December 2006, and Sealy Airpark Nashville, acquired in April 2007, was $1,406,000 for the year ended December 31, 2007 as a result of depreciation and amortization exceeding net operating income for these properties
Loss on extinguishment of debt was $369,000 for the year ended December 31, 2007 compared to $646,000 for 2006. The loss in 2007 was primarily due to a $40,000,000 paydown on our debt secured by certain of our net lease properties, and the loss in 2006 was due to the refinancing of certain first mortgage debt on more favorable terms.
Loan Assets and Loan Securities
Revenue from our loan assets and loan securities increased by $4,340,000 to $25,491,000 for the year ended December 31, 2007 from $21,151,000 for the year ended December 31, 2006. The changes were the result of the following:
equity investment in Concord (entered into on March 31, 2006) generated $5,098,000 of equity income during the year ended December 31, 2007 as compared to equity income of $1,340,000 for the year ended December 31, 2006. The increase is due primarily to our investing in Concord in April 2006 and Concord ramping up operations during 2006
MANAGEMENT DISCUSSION FOR LATEST QUARTER
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 âapproximates,â âbelieves,â âexpects,â âanticipates,â âintends,â âplans,â âwould,â âmayâ 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/A Amendment No. 1 for the year ended December 31, 2007 under âForward Looking Statementsâ and âItem 1A. Risk Factors,â as well as our other filings with the SEC. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise. Accordingly, investors should use caution in relying on forward-looking statements, which are based on information, judgments and estimates at the time they are made, to anticipate future results or trends.
Managementâs Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our consolidated financial statements for the three and nine months ended September 30, 2008 as compared to the three and nine months ended September 30, 2007. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
This item should be read in conjunction with the financial statements, footnotes thereto and other items contained elsewhere in this report.
Winthrop Realty Trust, which together with its subsidiaries we refer to as the Trust, we, us, and Company, is a real estate investment trust, which we refer to as a REIT, engaged in the business of owning real property and real estate related assets. With certain self-imposed limitations, we seek opportunities to invest in or acquire most types of real estate assets or securities. We operate in three strategic business segments: (i) Operating Properties; (ii) Loan Assets and Loan Securities; and (iii) REIT Equity Interests. We acquire assets through direct ownership as well as through entering into specific strategic alliances and ventures. In particular, we have entered into two significant venture arrangements. Our venture with Marc Realty LLC, which we refer to as Marc Realty, a Chicago area real estate company, is our primary vehicle for investments in the Chicago metropolitan area. In addition, since its formation in March 2006, we have acquired substantially all of our loan assets and loan securities through Lex-Win Concord, LLC (f/k/a Concord Debt Holdings LLC), which we refer to as Lex-Win Concord or Concord, a venture with Lexington Realty Trust, which we refer to as Lexington, and, effective August 2, 2008, a subsidiary of Inland American Real Estate Inc., which we refer to as Inland.
Our business objective is to maximize long-term shareholder value through a total return value approach to real estate investing. We seek to achieve this objective by identifying and investing in discrete real estate investments as well as entering into ventures including arrangements with regional or specialized real estate professionals with extensive experience in a particular market. In addition, we seek to enter into strategic co-investment ventures managed by us with institutional and high net worth investors to enhance our total return through acquisition, asset management and other fees, and a promoted economic interest. As opportunities present themselves and as market conditions dictate, we will focus our investment activity in one or more of our business segments and aggressively pursue such opportunities. Pursuant to the terms of our agreement with Lexington, we will not make any future direct investments in net lease or single-tenant properties through December 31, 2008.
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2008
In light of the change in the economic environment that has taken place since the third quarter of 2007 and the subsequent disruption of the capital and credit market which have limited the availability of financing and the ability to raise capital through equity issuances, during the first nine months of 2008 we continued to focus our attention primarily on protecting against and preparing for the rigors and opportunities of this changed environment. In particular, we have sought to maximize our liquidity and reduce our exposure to short-term debt. In this regard, at September 30, 2008 we had $179,774,000 of unrestricted cash and cash equivalents.
With respect to our debt exposure, each of our investment platforms and investments is essentially a stand alone business such that any potential problems or liabilities which might occur are limited to that specific platform or investment. Consequently, our exposure is in each case limited to our equity in that particular investment and not to us as a whole. Inclusive of extension rights, the secured debt of our wholly owned assets has no debt maturing in 2008, approximately $9,500,000 or 4% of the total outstanding debt maturing in 2009, and the balance of approximately $224,208,000 or 96% of our total debt maturing in 2011 or later. In July 2008 we drew down the entire $70,000,000 available under our credit facility and on October 22, 2008, we repaid approximately $33,700,000 of this borrowing. This credit facility has a maturity of December 16, 2008 and an option to extend for one year subject to certain conditions. On October 10, 2008, we notified KeyBank that we were electing to extend the term of the credit facility. One of the conditions to our extension is an absence of a general material adverse change in the credit markets condition which may be waived by KeyBank. Accordingly, given the current economic climate, there can be no assurance that KeyBank will honor our extension request.
In addition to maximizing our cash and limiting our exposure to short term debt, with the significant decline in the stock prices in general and REIT shares in particular, we assessed whether acquiring our own shares was a prudent use of our cash. In this regard, on September 25, 2008 we announced that our Board had approved a stock repurchase plan pursuant to which we can acquire up to 5,000,000 of our Common Shares. As of November 3, 2008 we had acquired a total of 350,000 Common Shares pursuant to the repurchase plan. Further, on October 29, 2008, we acquired 944,000 of our Series B-1 Preferred Shares at a discount of 27% from their liquidation value.
The disruption in the capital and credit markets has had a more immediate impact on Concord as margin calls have increased on loan securities in general and the ability to issue collateral debt obligations and the availability of new financing has effectively been eliminated. In light of the limited financing alternatives, Concord continued its efforts to reduce its exposure to maturing debt. In this regard, in January 2008 Concord obtained a $100,000,000 credit facility from KeyBank. Further, in August 2008 Inland was admitted as a member in Concord and agreed to contribute, subject to certain conditions, up to $100,000,000 to Concord, which contributions are to be used primarily for new acquisitions and, if Inland, agrees, satisfaction of margin calls and repayments on credit facilities. In October 2008, Concord obtained $43,500,000 from Inland and reduced the outstanding balance on one of its repurchase agreements by $42,600,000 and extended the maturity date on the line from March 30, 2009 to March 30, 2011.
During the first nine months of 2008, Concord acquired loan securities issued by its Concord Real Estate CDO 2006-1, which we refer to as CDO-1, with a face value of approximately $25,100,000 for a total purchase price of approximately $12,100,000. After giving effect to the acquisition of the CDO-1 loan securities, the total obligations remaining to third parties by CDO-1 were $351,525,000, which obligations mature in December 2016. See âConcord Debt Holdingsâ below for additional information relating to Concord. After giving effect to the extensions, with respect to Concordâs debt obligations exclusive of its obligations under CDO-1, Concord currently has $38,874,000 of debt maturing in the next 12 months, and $98,516,000 maturing in the following 12 months with the remaining balances maturing thereafter.
We intend to fund our future investments through one or more of the following: cash, borrowings under our credit facility, property loans, issuance of debt and equity, and ventures with third parties. As investments mature in value to the point where we are unlikely to achieve better than a market return on their then enhanced value, it is likely we will exit the investment and seek to redeploy the capital to higher yielding opportunities. Therefore, the sale of these investments is an important part of our overall earnings and may result in uneven earnings that may vary greatly from quarter to quarter.
Capital and Credit Market Deterioration
As the capital and credit market deterioration has worsened, we have performed additional assessments to determine our exposure to bankruptcies, limited availability of financing and equity offerings, decline in stock prices in general and REITs in particular and declining values for our Loan Assets and Loan Securities. We have further reviewed our risk associated with counterparties to our hedging instruments and credit facilities. Although we have described in more detail throughout this Item 2 where we believe our greatest risk to operating results and liquidity is today, the recent unprecedented volatility in capital and credit markets may create additional risks in the upcoming months and possibly years.
In particular, the significant decline in stock prices in general, and REITs in particular, could impair our ability to raise capital through equity and debt offerings thereby requiring us to obtain additional capital through other means. Further, the declining availability of financing has had, and will likely continue to have, an impact on our ability to finance additional acquisitions and ultimately, the value of real estate generally. If financing continues to be limited and rates rise, the value of real estate will likely fall thereby creating potential additional opportunities. The inability of our and Concordâs borrowers to obtain replacement financing could lead to more loan defaults and/or negotiated extensions to existing loans beyond their current expirations. In addition, tenant defaults at the properties underlying the Concord portfolio could negatively impact our Loan Asset and Loan Security business segment. We note further that the current capital and credit market deterioration has caused Loan Assets and Loan Securities to trade at substantial discounts.
We utilize interest rate swaps both directly and indirectly through our investment in Concord. At September 30, 2008, we had $26,000,000 of notional amounts and Concord had $203,262,000 of notional amounts of hedges.
The three counterparties of these arrangements are major financial institutions (Credit Suisse International, KeyBank National Association and Bear Stearns Capital Management) with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties.
We measure our success in meeting this objective by a number of factors, including increases in diluted per share net income, cash returns generated by our investments, cash flow from operating activities, shareholder equity and total return to our shareholders. As described in more detail under results of operations below, our net income and earnings per share have been significantly negatively impacted by Concordâs recognition of other-than-temporary impairments and loan loss reserves which aggregated $7,205,000 and $65,221,000 for the three and nine months ended September 30, 2008, respectively. We are a 50% common equity owner of Concord through our investment in Lex-Win Concord.
Our activities are administered by FUR Advisors LLC, which we refer to as our advisor, an entity controlled by and partially owned by our executive officers. Pursuant to the terms of an advisory agreement, our advisor is entitled to receive a base management fee and an incentive fee. In addition, our advisor or its affiliate is also entitled to receive property and construction management fees at commercially reasonable rates as determined by our independent Trustees. The incentive fee is only payable at such time, if at all, when holders of our Common Shares receive aggregate distributions above a threshold amount as defined. At September 30, 2008, the threshold amount was $378,275,000 which was equivalent to $3.87 per Common Share-diluted. Accordingly, if the Trust had been liquidated at September 30, 2008, our advisor would have been entitled to receive 20% of any amounts available for distribution, if any, in excess of such threshold amount. At such time as shareholdersâ equity exceeds the threshold amount, we will record a liability, in accordance with GAAP, equal to approximately 20% of the difference between shareholdersâ equity and the threshold amount.
Since July 1, 2008, we have entered into the following transactions:
On July 7, 2008, we made a $1,050,000 mezzanine loan on a newly acquired property in the Marc Realty portfolio. The property is located at 180 North Wacker, Chicago, Illinois. The loan bears interest at 8.5%, requires monthly payments of interest only and matures on April 18, 2012. In connection with the loan, we acquired an equity interest in the borrower which entitles us to share in operating cash flow and capital proceeds.
On July 28, 2008, we received a distribution of $10,000,000 from our equity investment in Concord.
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2008
On August 2, 2008, we, together with Lexington, restructured Concord and admitted Inland as a member in Concord with a redeemable 10% preferred membership interest. In connection with this transaction, we formed with Lexington a new entity known as Lex-Win Concord LLC (âLex-Win Concordâ). Both we and Lexington contributed all of their interests in Concord and WRP Management, LLC, the entity that provides collateral management services to Concord Real Estate CDO 2006-1, Ltd. (âCDO-1â), to Lex-Win Concord. As a result, each of us and Lexington holds a 50% ownership interest in Lex-Win Concord. Immediately following such contribution, Inland contributed $20,000,000 to Concord and was admitted as a member of Concord. Inland further agreed to contribute up to an additional $80,000,000 to Concord. Inlandâs contributions are to be used primarily for additional investments by Concord, and if Inland agrees, to satisfy any future margin calls or prepayments on Concordâs credit facilities. In connection with its investment in Concord, Inland is entitled to receive a priority return of 10% on its contributed and unreturned capital.
On August 6, 2008, Lex-Win Acquisition sold all of its shares of Piedmont Office Realty Trust for an aggregate price of $32,289,000. We received a distribution of our pro-rata share of $9,041,000 in connection with this sale.
On August 20, 2008, we acquired through a venture with Sealy & Company Inc., which we refer to as Sealy, a six building office-flex campus containing approximately 470,000 square feet in Northwest Atlanta, Georgia. The campus is both similar to and adjacent with the twelve building office-flex campus containing approximately 472,000 square feet previously acquired in a venture with Sealy in Northwest Atlanta, Georgia. The purchase price for the property was $47,000,000, inclusive of assumed debt. The venture assumed an existing $37,000,000, 6.12% first mortgage loan encumbering the property which matures in November 2016. Our initial percentage ownership in the new venture is 68%.
During October 2008, we acquired through several share repurchases 350,000 of our Common Shares at an average price of approximately $2.66 per Common Share aggregating $930,000.
On October 28 and November 3, 2008, we acquired a total of 1,024,000 of our Series B-1 Preferred Shares for a gross price of approximately $18,583,000, which represents an approximately 27.4% discount from their liquidation value.
On October 28, 2008, we acquired in a privately negotiated transaction 3,500,000 shares of common stock in Lexington at a purchase price of $5.60 per share and obtained seller non-recourse financing equal to 50% of the purchase price, which financing has a term of three years, bears interest at a rate of 3-month LIBOR plus 250 basis points and requires margin calls only at such time as the loan amount equals or exceeds 60% of the value of the shares.
On October 31, 2008, Concord reduced the balance on its repurchase line with Column Financial by $42,600,000 and extended the maturity of the line through March 2011.
On October 10, 2008, Concord extended the maturity date on a repurchase agreement with Greenwich Capital Financial which was scheduled to expire December 15, 2008 for a period of one year.
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2008
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, 2007. Other than the partial adoption of SFAS No. 157 (see âItem 1. Financial Statements - Note 3â), there have been no significant changes to those policies during 2008.
Recently Issued Accounting Standards
See âItem 1. Financial Statements - Note 2.â
Results of Operations
As discussed earlier, one of the factors used to measure managementâs performance is net operating income. We report our operations by each of our three strategic business segments to provide a measure of our performance in these segments. We define net operating income for each segment as that segmentâs revenue and other income less operating expenses. In addition to our three business segments, we include interest on cash reserves, general and administrative expenses and other non-segment specific income and expense items in Corporate Activities. (See âItem 1. Financial Statements - Note 12.â)
Results of Operations - Nine Months Ended September 30, 2008 Versus September 30, 2007
Net Earnings (loss)
Net loss was $15,516,000 for the nine months ended September 30, 2008, a decrease in earnings of $42,363,000 from net income of $26,847,000 for the nine months ended September 30, 2007. As described in greater detail below, the decrease was due primarily to decreases in net income from our Loan Assets and Loan Securities business segment as well as our REIT Equity Interests business segment.
WINTHROP REALTY TRUST
FORM 10-Q SEPTEMBER 30, 2008
Net operating income from our operating properties was $23,469,000 for the nine months ended September 30, 2008 as compared to $23,843,000 for the nine months ended September 30, 2007. This decrease in net operating income of $374,000 from our Operating Properties was the result of the following:
Rental Income - Overall, rental income increased by $1,817,000 to $32,533,000. With respect to properties owned during both nine month periods, rental income decreased by $1,162,000 due primarily to a $1,123,000 tenant lease buyout in June 2007 at our Chicago, Illinois (Ontario) property. This decrease was more than offset by increased rental income of $2,979,000 from properties acquired during and after the nine months ended September 30, 2007 due to income of $2,808,000 from our River City property which we acquired in foreclosure on October 2, 2007 and an increase of $171,000 at Creekwood Apartments, which was acquired on March 29, 2007. Average occupancy at our operating properties (other than Creekwood Apartments) was 96.3% for the nine months ended September 30, 2008 compared to 97.0% for the nine months ended September 30, 2007.
Thank you, Chris, and good afternoon everyone. Welcome to the Winthrop Realty Trust conference call to discuss our third quarter 2008 financial results. With us today from senior management are Michael Ashner, Chairman and Chief Executive Officer; Peter Braverman, President; John Garilli [ph], Chief Accounting Officer, and other members of the management team. Tom Staples, our Chief Financial Officer is unable to be with us today due to a death in his family.
A press release was issued this morning, November 6th, and will be furnished on a Form 8-K with the SEC. These documents are available on Winthropâs Web site at www.winthropreit.com in the Investor Relations section. Additionally, we are hosting a live webcast of todayâs call, which you can access in the site's News and Events section.
At this time, management would like me to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although, Winthrop believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, Winthrop can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in the press release, and from time to time in Winthropâs filings with the SEC.
Winthrop does not undertake a duty to update any forward-looking statements. Please note that in the press release, Winthrop has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with the Reg G requirements. This can be found on page five of the press release.
Iâd now like to turn the call over to Michael Ashner for his opening remarks. Please go ahead, Michael.
Thank you, Beverly. Good afternoon, everyone. And thank you for joining us today at todayâs conference call. Today, Winthrop announced financial results for the third quarter, a period in which all of us experience a continuing difficult market condition. By now, you should have all received a copy of our earnings press release. Momentarily, Iâll turn the call over to our Chief Accounting Officer, John Garilli, substituting for Tom Staples, whoâll review our third quarter performance results. After that, our President, Peter Braverman, will present our operational highlights for the quarter.
First, Iâd like to discuss where we see the marketplace and how we are positioning ourselves within the marketplace environment. Simply stated, the collapse of global credit markets, together with both the reality perception and imminent economic downturns, significantly devalued real estate equity and debt related securities. While pricing levels with specific assets have not fallen significantly yet, we believe that itâs only a matter of time before we do (inaudible) demand, and the inability to refinance debt to prior levels will significantly raise capitalization rates, resulting in price reductions.
Consequently, our current investment activities are primarily focused on real estate equity and debt securities with the exception of expanding, where appropriate, our joint ventures with our existing seasoned partners are not strictly considered a form of opportunistic investing. We believe that the repurchase of our own senior debt in equity securities, when valued and underwritten in the same manner as we would a third party investment, is a form of investing, which offers superior risk adjusted returns, which we will pursue when applicable. The principle difference is, of course, the benefit of reduced underwriting risk with respect to purchase of our own securities to our superior knowledge of the underlying assets.
So much for the right side of our balance sheet, in order to take advantage of these emerging opportunities and investor needs liquidity. To that end, and as we will â be discussed more fully momentarily, the company significantly improved its liquidity from the start of the year, increasing cash, cash equivalents, and restricted cash to approximately $219 million in September 30th, 2008 from $42.6 million of December 2007, inclusive of $70 million in borrowings and our credit line with KeyBanc. As a result, we believe we are presently relatively well positioned to take advantage of the increasing flow of investment opportunities that are being presented to us.
Enough of my brief (inaudible) to Alan Greenspan speak that supplied where weâre going to the companyâs recent events.
As stated, pricing for specified assets (inaudible) not yet fallen to the levels we believe we will see in 2009. The only specific property related investments made by us during the quarter were with our existing joint venture partners, Marc Realty and the Sealy Group, who share our approach to investing. Specifically, the acquisition of a six building Office-Flex campus for a new venture with the Sealy Group contained approximately 470,000 square feet in Northwest, Atlanta. The propertyâs adjacent to our existing holding. And the purchase price for the property is $47 million inclusive, of extremely attractive assume of debt of $37 million. A non-recourse loan bears interest at 6.12%, and matures in November of 2016. Our companyâs initial ownership percentage of the new venture is 68%. The property is presently 83% occupied, and will be jointly owned and managed with its sister venture.
Pursuant to the terms of the joint venture arrangement, Sealy oversees the day-to-day operations of the joint venture. We underwrote the new venture to yield an initial estimated current return of 10% to 11% (inaudible) equity. We also made a $1.5 million, participating mezzanine loan of the newly acquired property for the Marc Realty portfolio located in 180 North Wacker in Chicago. The loan bears interest at 8.5%, requires monthly payments of interest only, and matures on April 18th, 2012. And contains equity conversion features similar to our existing mezzanine loans with Marc Realty.
Consistent with our views of real estate, equity securities are starting to provide attractive opportunities. We recently acquired, in a privately negotiated transaction, $3.5 million shares of common stock of Lexington Realty Trust for $5.60 per share. In so doing, the sale of the shares provided Winthrop with non-recourse financing equal to 50% of the purchased price for term of three years at an interest rate of 3-month LIBOR plus 250 basis points. No margin costs maybe made by the lender until such times the loan amount equals or exceed 60% of the reduced values of the shares, the equivalent of a $4.67 stock price presently.
In underwriting this investment, we assumed the possibility that Lexington might reduce its dividends significantly, which at a level that would likely provide Winthrop with a 20% plus current returns after giving effective financing, without any benefits from stock appreciation. Because we reviewed our holdings in Piedmont Office Realty Trust as non-core with little near term upside, we determined, together with our partners, to sell our position back to Piedmont for an aggregate purchase price of $32.3 million. In connection with the sale, we received a distribution of our pro-rata share equal to $9 million. In so doing, we realized the cash lost was approximately $1 million, which in all likely would have been greater, but for the four-year stand still agreement we entered into with Piedmont.
During the quarter, we continue to focus our efforts on accretion liquidity and de-levering our balance sheet. As mentioned, at September 30th, we had over $218 million in cash, cash equivalents, and restricted cash, including the $70 million borrowing from KeyBanc, compared with $42.6 million at the end of 2007. The increase in cash came from a variety of sources including the sale of $3.5 million Lexington shares in March for approximately $52.8 million, approximately $37 million from our shareholder rights offering in May, a $10 million distribution from our Concord investment, the aforementioned sale by Lex-Win of our Piedmont shares, and a $70 million of borrowings on our KeyBanc line. It should be noted that we recently repaid $33.7 million of the KeyBanc line.
Accretive de-leveraging of our company is, in our view, a potentially superior risk adjusted return on our capital because of the yield presently realizable, the enhanced strengthening of our balance sheet, and the reduced underwriting risk we have with respect to our own assets.
To this end, Winthrop recently acquired a total of $1 million and $24,000 of its Series B-1 preferred shares for a gross price of $18.6 million, inclusive of transaction costs, which represents a 27.4% discount from their redemption costs in March 2012. In September, Winthropâs Board of Trustees approved the share repurchase plan, which the company may repurchase up to $5 million of its outstanding common shares. During October 2008, the company repurchased $350,000 of its common shares at an average price of approximately $2.66 per common share for approximately $930,000. In administering the stock repurchase program, it is our intention to only repurchase shares on our company on the same dates as we evaluate any common stock investments.
On August 2nd, 2008, a subsidiary of Inland American Real Estate Trust, Inc. agreed to contribute up to $100 million in preferred capital over the next 18 months to Concord Capitals, our debt platform, to be used primarily for new investments by Concord, and if Inland agrees, to satisfy any future obligations and or repayments of Concord's credit facility. In connection with this investment with Concord, Inland is entitled to receive a priority return of 10% on its contributed and unreturned capital.
Coincident with the closing, Winthrop received the aforementioned distribution of $10 million form our equity investment in Concord. In a series of transactions, Concord has reduced the said obligations from $849 million at December 31st, 2007 to $689 million on October 31st, 2008.
On October 31st, 2008, Concord reduced the balance on its repurchase line with Column Financial by $42.6 million, and extended the line through March 2011. In addition, Concord extended one of its repurchase lines that with RBS Credits, which was scheduled to expire December 15th, 2008 for a period of one year, and reduced the outstanding balance of $21.5 million by way of repayments.
Finally, Concord repurchased approximately $2 million of its Class E and $2 million of its Class F bonds issued by the Concord Real Estate CDO 2006-1 for an aggregate purchase price of $1 million, representing a discount of 75%. As a result, the aggregate internal leverage ratio with Concord improved in 76% to 68% through November 4th. Once again, it is our view that de-leveraging to Concord is an effective and protective use of its capital in this credit constrained market.
Managing the debt platform amidst a credit crisis, such as we are experiencing, is somewhat similar to an endless rollercoaster ride. On the one hand, new loans come with both outside yields and a superior risk profile compared to year ago offerings. On the other hand, the potential stress of the income levels for both new and all loans as well as declining loans to value ratios resulting from increased capitalization rate spell caution.
Moreover, at the leverage debt platform, which itself has the ability to repurchase its own debt at a discount would again reduce underwriting risks. It is suggestive of an alternative investment direction. Finally, the uncertainty of obtaining replacement financing in 2011 also requires careful consideration. All of these options and concerns are being carefully considered by us as well as our partners, Lexington and Inland, in reviewing the future growth and direction of Concord.
To summarize, these are volatile and heady times, which provide our companies with what we believe to be a much improved investment environment, but which also will require the most focused balance sheet diligence in order to mine these opportunities. With that I will now turn the call over to our Chief Accounting Officer, John Garilli to review our financial results. John?
Thank you, Michael. Good afternoon, everyone. Iâll present an overview of our financial results for the third quarter as well as highlights from each of our business segments.
For the three months ended September 30th, 2008, Winthrop reported a net income of $2.2 million, or $0.03 per share, compared with net income of $5.4 million, or $0.08 per share, for the quarter ended September 30th, 2007. The decrease in income for the comparable periods was primarily the result of $1.9 million decrease in revenues with respect to the companyâs preferred equity in the Marc Realty portfolio as the 2007 results included equity participating income of $1.5 million relating to the sale of a property. Additionally, interest income decreased by approximately $900,000 as a result of the sale of our mortgage bank securities in February 2008.
For the nine-month ended, September 30th, 2008. We reported a net loss of $15.5 million, or a loss of $0.21 per share, a decrease of $42.3 million from net income of $26.8 million, or $0.36 per share for the nine-month ended September 30th, 2007. The decreased on earnings for the nine-month period is primarily the result of the following, the decrease in earnings from our investment in Concord of approximately $21.5 million due to impairment charges on its available for sale securities of approximately $57 million; a loan loss provision of $8.2 million, which was partially offset by an increase at net interest earnings of $9.7 million. This increase in net interest earnings is the result of significant investment activity during the first nine months of 2007.
Additionally, Concord recognized a gain on extinguishment of debt of approximately $13 million relating to the acquisition of debt issued by its CDO-1 with the face value of $25.1 million for $12.1 million. We recognized our 50% share of each of these items.
With respect to the companyâs preferred equity in the Marc Realty portfolio, earnings decreased by approximately $7.9 million, primarily as a result of a decrease in participating equity income of $5.4 million and an impairment loss of approximately $2 million. Additionally, gain on sale of risk securities decreased by approximately $8 million.
Total FFO for the third quarter of 2008 was $5.3 million, or $0.07 per diluted common share, compared with FFO of $10.2 million, or $0.12 per diluted common share for the third quarter of 2007. The company reported a loss of FFO for the nine-month ended September 30th, 2008 of $6.5 million or a loss of $0.09 per diluted common share as compared with FFO of $40.7 million or $0.46 per diluted common share for the nine-month ended September 30th, 2007. The decreases in FFO are primarily due to the same factors, which negatively impacted net earnings noted earlier.
With respect to our operating properties business segment, net operating income was $7.7 million for the three-month ended September 30th, 2008, compared with approximately $7.2 million for the three-month ended September 30th, 2007. For the nine-month ended September 30th, 2008, net operating income was approximately $23.5 million, compared with approximately $23.8 million for the nine-month ended September 30th, 2007. The decrease in net operating income during the nine-month period is due primarily to increased operating and real estate tax expenses of $2.4 million, which were partially offset by an increase in rental income of $1.8 million.
Net operating income from our loan assets and loan securities business segment was approximately $4.4 million for the three months ended September 30th, 2008, as compared with net income of $7.2 million for the three months ended September 30th, 2007. As previously mentioned the decrease is primarily the result of a $1.9 million decrease related to the Marc Realty portfolio and a $900,000 decrease in interest income.
For the nine-month ended September 30th, 2008, the company reported a net operating loss from our loan assets and loan securities business segment of $9.8 million, compared with net operating income of $23.4 million for the nine-month ended September 30th, 2007. This decrease was primarily due to a decrease in earnings from our investment in Concord of $21.5 million, a decrease in earnings from our investment in Marc Realty of $7.9 million, and a decrease in interest earnings of $5.5 million.
The REIT equity interest business segment reported income of $37,000 for the three months ended September 30th, 2008m compared with income of approximately $1.3 million during the prior year period. This was primarily due to a decrease of $1.2 million in dividend income and a decrease of $135,000 from the equity earnings of Lex-Win acquisition, LLC. The decrease in dividend income is primarily from the sale of our Lexington shares earlier this year.
For the nine-month ended September 30th, 2008, income from our re-equity interest business segment decreased by approximately $12.6 million to $1.04 million, from $13.6 million for the nine months ended September 30th, 2007. The decrease in earnings was due primarily to a decrease in the gain on sale of real estate securities of approximately $8 million, a decrease in dividend income of $3.5 million as well as an increase in equity loss in Lex-Win acquisition, LLC of $839,000 and a $207,000 impairment loss recognized in 2008 on available for sale securities.
At September 30th, 2008, we held re-equity interest having the aggregate value of $1.2 million, compared with $71.4 million at December 31st, 2007. The primary change in the balance from December 31, 2007 is due to the sale of our shares in Lexington Realty Trust, which took place during the first quarter of this year, and the sale of our interest in Piedmont Realty Trust, which took place during the third quarter of 2008.
Turning to liquidity, for the nine months ending September 30th, 2008, our cash and cash equivalents increased by approximately $143.1 million. The increase was a result of approximately $24.9 million of cash generated by operating activities and $144.5 million of cash provided by our investing activities. This was partially offset by $26.3 million of cash used in financing activities.
At September 30th, 2008, we had cash, cash equivalence, and restricted cash of $218.8 million. This includes $70 million borrowed under the companyâs revolving line of credit with KeyBanc. This facility matures December 16th, 2008 with the option to extend for one additional year. More recently, on October 22nd, 2008, we repaid $33.7 million on that line of credit.
Lastly, a quick review of our dividends, our Board of Trustees declared a regularly â regular quarterly cash dividend of $6.50 per common share during the third quarter of 2008, which was paid on October 15th, 2008. To date this year, we have paid regular quarterly dividends of $6.50 per common share and $40.625 per Series B-1 share.
In addition, during the first quarter of 2008, we paid a special dividend for the year ended December 31, 2007 of $0.18 per common share and $76.39 per Series B-1 share. That concludes my financial review for the period. Now, Iâll turn the call over to Peter Braverman. Peter?
Thank you, John, and good afternoon, everyone. Iâd like to talk about the key operational issues that have occurred since July. At September 30th, 2008, our portfolio accomplished approximately 9.7 million square feet of space, including properties in the Marc Realty and Sealy portfolios and 230 rental units at multi-family assets.
The Marc Realty portfolio consisted of two participating second mortgage loans and 19 participated convertible mezzanine loans, together with an equity investment in each mezzanine borrower and the aggregate investment amounts, including accrued interest of approximately $56 million $173,000.
As of September 30th, 2008, our wholly owned portfolio had a blended occupancy rate of 97%, which was consistent with the 97% occupancy rate of September 30th, 2007. With respect to the properties with our Marc Realty venture, the blended occupancy rate as of September 30th, 2008 was 82% as compared to 85.5% of September 30th, 2007.
While the suburban properties have experienced a softening in the leasing market, Downtown Chicago remains strong, and maybe set to be improving.
Our Sealy venture properties have a blended occupancy rate of 87% as of September 30th, 2008 as compared to 90% of September 30th, 2007. The 3% decreased in occupancy at the Sealy properties from the prior year period is primarily attributable to a recent vacancy at the Nashville, Tennessee properties. We are experiencing strong leasing interest for the Nashville vacancy.
Turning to the topic portfolio, as of September 30th 2008, Winthrop and Lexington had each contributed $162.5 million to Concord, which has acquired approximately $1.05 billion in assets. And each has received total distributions of $14.6 million, and earned a $9.93 percent annualized return on invested capital during the nine months ended September 30th, 2008.
At this time, the companyâs portfolio has only one non-performing bond and four loans, which a loan that Winthrop hasnât taken. One of which, the Columbus apartment loan, is in default. A receiver is in place at Columbus, and Concord has commenced foreclosure proceedings.
While the platform continues to perform within our current expectations, this is not the time to get high concern over liquidity and future performance of the real estate on relying on our loans.
So to conclude, Winthrop had had a stable quarter in terms of operating performance. Weâve identified some interesting opportunities as demonstrated by our recent repurchase (inaudible), and continue to deliver our projected â to deliver as projected in regards to returns on invested capital. Our balance sheet and liquidity are solid. And we believe we are well positioned to continue to capitalize on the unique opportunities that were presented by this market. With that letâs open up for questions. Operator?