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Executives

Beverly Bergman

Carolyn Tiffany - President, Trustee and Member of Ethics & Compliance Committee

John Andrew Garilli - Chief Financial Officer

Michael L. Ashner - Chairman and Chief Executive Officer

Analysts

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Charles Fischer

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Mitchell B. Germain - JMP Securities LLC, Research Division

Brett Reiss

Winthrop Realty Trust (FUR) Q4 2012 Earnings Call March 7, 2013 12:00 PM ET

Operator

Greetings, and welcome to the Winthrop Realty Trust Fourth Quarter and Year-End 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Beverly Bergman, Vice President and Director of Investor Relations for Winthrop Realty Trust. Thank you, Ms. Bergman. You may begin.

Beverly Bergman

Thank you, and good afternoon, everyone. Welcome to the Winthrop Realty Trust conference call to discuss our fourth quarter and full-year 2012 financial results. With us today from senior management are Michael Ashner, Chairman and Chief Executive Officer; Carolyn Tiffany, President; John Garilli, Chief Financial Officer; and other members of the management team.

This morning, March 7, we issued a press release and posted on our website supplemental financial information, both of which will be furnished on a Form 8-K with the SEC. Both the press release and the supplemental financial information are available on our website at www.winthropreit.com.

The press release is in the News and Events section and the supplemental financial information is in the Investor Relations section. Additionally, we are hosting a live webcast of today’s call, which you can also access in the website’s News and Events section.

At this time, management would like 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 we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, we can give no assurance that these 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 our filings with the SEC. We do not undertake a duty to update any forward-looking statements.

Please note that in the press release, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. This can be found in the FFO table of the press release. Please note that all per share amounts are on a diluted basis.

I'd now like to turn the call over to Carolyn Tiffany. Carolyn?

Carolyn Tiffany

Thank you, Beverly. Thank you all for joining us this afternoon. 2012 was a productive and good year for us. During the year, we invested over $295 million in new investments, $144.5 million during the fourth quarter alone. In addition, we strengthened the value of our existing portfolio through longer-term leases at 2 of our single tenant properties, as well as add positive leasing activity at a number of our multi-tenanted properties. And as we discussed on our last call, we commenced the disposition of assets that we believe now have limited upside so as to redeploy the proceeds from the sales into new investments, which we believe will have superior, long-term return.

In addition to recycled capital, acquisitions were funded with cash reserves, proceeds raised from the offering of our Series D preferred shares and senior notes, as well as joint venture partner capital. We remain patient-measured investors. Despite our fourth quarter investment activity, we were overweighted to cash, which had a short-term negative impact to our earnings and FFO. Nevertheless, we strongly believe that it is more important to invest deliberately in order to achieve the best long-term performance for our shareholders.

At year-end, we had $97 million of cash reserves available for investment, along with an untapped $50 million line of credit. During the fourth quarter, we made $44.1 million of equity and debt investment in a number of operating properties, including 701 Seventh Ave in Times Square, Lake Brandt, a 284-unit community in Greensboro, North Carolina; Water Ridge, a 62,000 square-foot Class B office building located in Sorrento Mesa, California; and a 187,000 square-foot office building located in Cerritos, California.

We also contributed an additional $750,000 during the fourth quarter of 2012 for a new multi-family development with our partners in our Vintage Housing joint venture.

With respect to loan assets, during the fourth quarter, we originated a $40 million loan, secured by 67 luxury condominiums in Las Vegas, and we acquired for $58.6 million, a $70 million loan secured by a 515,000 square-foot office building located at 1515 Market Street in Philadelphia, which, as described in this morning's release, we subsequently restructured to effectively acquire 89% controlling equity participation in the property.

We continue to see opportunities, both in acquiring performing and non-performing loans, and in the recapitalization of assets held by capital-constraint owners or lenders. I think in the near term, you will see us most actively investing in recapitalizations.

In terms of dispositions and loan asset retainment, during the fourth quarter, we sold to Marc Realty 100% of our equity interest in 180 North Michigan for $7.2 million, $2 million of which was paid in cash and $5.2 million of which was paid in a loan receivable. And during the fourth quarter, our Broward Financial Center and our 2600 West Olive loan assets paid off providing an aggregate of $36.4 million.

As we mentioned in our last quarter's call, in October, we sold for approximately $17.2 million, 3.25 million common shares of Cedar Realty Trust. Winthrop's cost for such shares was approximately $12.4 million. Operationally, as John will discuss further, we experienced increases in our operating income from our properties as a result of favorable results from same-store properties. As of December 31, 2012, our consolidated properties were approximately 90% leased compared to approximately 74% leased at December 31, 2011.

As mentioned on last quarter's call, we extended our lease with Spectra Energy at our Houston Texas property to continue through 2026. The extension provides for a roll-down of brands after 2016, which on a GAAP basis, will reduce revenues with the long lease, where the credit tenant creates substantial value and should allow for a favorable refinancing when the property's debt is eligible to be refinanced in 2016. We also increased our ownership in this property from 8% to 30% through a tender offer for a limited partner unit.

We continue to work to finalize the extension documentation with Ingram Micro, the single tenant at our Amherst, New York property, which entered into a letter of intent with us, indicating that they want to extend their lease for 10 years beyond October 2013's scheduled expiration on the 200,000 square-foot office facility. Similarly, this extension will provide for a roll-down in rents, but will allow for favorable refinancing when the debt matures this year, and perhaps a favorable sale. Leasing activity at our Deer Valley in Crossroads I and II office buildings was also solid during 2012. Deer Valley is currently 98.6% leased, and the Crossroads properties are about 90% leased. These properties were 61% and 66% leased, respectively, when we acquired them in 2010.

Our investment in the Sealy Newmarket, Atlanta property and the Air Park National Property are carried on our balance sheet at 0. We continue to work with our partners towards the debt restructuring with the property's mortgage lenders, but there has been no material progress to date. Our investment in the property at One South State Street, Chicago, which we refer to as Sullivan Center, continues to perform exceptionally well. And the property was 91% leased at December 31, 2012.

As reflected in our net asset value schedule included in our supplemental financial report, we believe that as a result of the leasing that has occurred since our initial investment, there has been a significant embedded value in this asset. Similarly, the Vintage Housing joint venture, which we have invested $39.6 million to date and received distributions of cash flow of $7.6 million since our initial investment in March 2011, has significant indebted value.

These transactions are all indicative of our overall strategic approach to investing, managing and divesting of our assets in each spectrum of the capital stack. As I referred to a few moments ago, we are providing management's range of net asset value estimates to help assist an evaluation of the company. Our estimated range of net asset value as of December 31, 2012 is $12.85 to $15.13 per common share. This information, including the methodologies to calculate the range of value, is included in Pages 7 through 10 in the supplemental financial report available on our website in the Investor Relations section.

This quarter, in our supplemental financial report, we're also providing a 5-year track record of investment performance. For each investment that was made and exited or otherwise disposed of during the period January 1, through 2008 through December 31, 2012, we have reported the internal rate of return on the investment. The pooled weighted average IRR of the investments that were made and realized during that period is 33%. Please refer to Page 12 of the supplemental financial report for the performance table and the details behind the methodology.

As we have said in the past, to the extent our share price is at a significant discount to our calculated net asset value, we will continue to seek to repurchase our common shares pursuant to a share repurchase program approved by our Board of Trustees, which authorizes the repurchase of up to 1.5 million common shares. During the fourth quarter 2012, we repurchased 70,040 common shares.

Looking forward to 2013, I expect that it will be very similar to 2012 and that our portfolio will be dynamic. You will continue to see strategic asset divestitures and expansion of our portfolio as we judiciously deploy our capital.

And with that, I will turn the call over to John Garilli. John?

John Andrew Garilli

Thank you, Carolyn. Good afternoon, everyone. I will be providing an overview of Winthrop's financial results, as well as the review of our business segment's operating results. For the quarter ended December 31, 2012, we reported a net loss attributable to common shares of $4.9 million or a $0.15 per common share, as compared with the net loss of $10.6 million or $0.32 per common share for the quarter ended December 31, 2011.

For the quarter ended December 31, 2012, the company reported funds from operations, referred to as FFO, applicable to common shares of $4.7 million or $0.14 per common share as compared with FFO of $16.2 million or $0.49 per common share for the quarter ended December 31, 2011.

Net income applicable to common shares for the year ended December 31, 2012 was $15.3 million or $0.46 per common share as compared with net income of $10 million or $0.32 per common share for the year ended December 31, 2011.

The most significant factors in this change in net income were the impairment charges recorded in 2011 of $7.6 million on our consolidated properties and other than temporary impairment charges of $21.1 million on our equity investments.

FFO applicable to common shares for the year ended December 31, 2012 was $46.2 million or $1.40 per common share, as compared with FFO of $58.2 million or $1.85 per common share for the year ended December 31, 2011.

As Carolyn discussed earlier, our heavy cash position has had a short-term drag on our FFO. We paid $9.3 million in dividends on our Series D preferred shares in 2012, which equates to $0.28 per common share for the year. As returns are recognized on our 2012 and 2013 investments, the impact of the Series D dividends on our FFO will be mitigated.

Operating results for the quarter ended December 31, 2012 by business segment were as follows: with respect to our operating properties business segment, which consist of consolidated operating properties and equity investments in operating properties, net operating income was approximately $9.7 million for the 3 months ended December 31, 2012 compared with net operating income of approximately $4 million for the 3 months ended December 31, 2011. Net operating income from our consolidated operating properties was $7.7 million for the quarter ended December 31, 2012, compared to net operating income of $6.5 million for the quarter ended December 31, 2011.

The increase in the net operating income was due to an increase in net operating income of $729,000 from our new store properties located in Memphis, Tennessee; Greensboro, North Carolina; and Cerritos, California; an increase of $345,000 from our Englewood, Colorado properties; and an increase from our Churchill, Pennsylvania property of $483,000. These were partially offset by a decrease in net operating income of $545,000 from our Houston, Texas property.

Equity investments in operating properties generated net income of approximately $2 million for the quarter ended December 31, 2012, compared to a net loss of $2.5 million for the same period in 2011. Operating income from our Vintage portfolio increased by $2.6 million quarter-over-quarter, primarily due to a decrease in amortization expense throughout the portfolio and the addition of 2 new properties. We also recognized $445,000 of income from our new Sullivan Center venture this quarter.

In addition, the operating loss from our Sealy Airpark National investment decreased by $300,000 as a result of having written this investment down to 0 as of December 31, 2012. And the operating losses from our Marc Realty investments decreased by $663,000, primarily as a result of the sale of 6 investments during 2012.

With respect to our loan assets business segment, net operating income was $5.4 million for the 3 months ended December 31, 2012, compared with net operating income of $7.2 million for the 3 months ended December 31, 2011. While our new loan asset acquisitions generated an additional $1 million in interest income for the fourth quarter of 2012 as compared to 2011, this was more than offset by a $2.7 million decrease in earnings from our Concord investment, primarily due to a loan-loss reserve on Concord's thanksgiving tower loan recognized in the fourth quarter of 2012.

Our REIT securities business segment reported a net operating loss of $188,000 for the 3 months ended December 31, 2012, compared with net operating income of approximately $3.9 million during the prior-year period. The decrease in operating income is due primarily to a $3.9 million decrease in unrealized gains quarter-over-quarter. At December 31, 2012, we held REIT securities with a market value of approximately $19.7 million compared to an original acquisition cost of approximately $15.9 million. At December 31, 2012, we had cash and cash equivalents of $97.7 million compared to a balance of $40.9 million at December 31, 2011.

Now I'll turn the call over to Michael Ashner. Michael?

Michael L. Ashner

Thank you, John. I'd like to briefly echo some of Carolyn's comments, emphasizing those which I believe be of particular importance. At the leasing activity, which is the ultimate driver of real estate value. The company enjoyed very strong results during the past year. Of those properties, which our company oversaw the leasing comprising of 2.3 million square feet, occupancy increased to 86% and 92%. Vacancy as of year-end was approximately 194,000 square feet. Inclusive of 1515 Market Street, which was restructured to provide the company with its equity position as well as its net interest in the first quarter of 2013, total commercial space increased to 2.8 million square feet, of which 311,000 is presently vacant. Our goal for 2013 is reduce that to less than 200,000 square feet for 7% vacancy factor. As to our 3 apartment properties, we enjoy a very satisfactory occupancy of approximately 94%. Loan investments continue to outshine, producing superior double-digit returns. Having said that, with the low interest rate environment, as well as the emergence of less risky first, third party capital, is making sourcing quality even better, obviously more difficult. On the other hand, we have of late seen an upward swing in recapitalization opportunities such as orders such as Water's Edge in Vista Playa, California, a development of which we have anticipated for some time. It seems that the company's the first and last stop for many of these complex restructured transactions. In addition, we've decided to pursue select preferred equity redevelopment opportunities, such as Times Square, with only with exceptional partners with projects as one of which had enough capacity to complete the repositioning, if something should go array. Currently, we've added the capital and capital sources, both planned potential opportunities, which should continue through the near term. That being said, the dynamic could change suddenly if and when unplanned opportunities become available. In brief, I am very pleased with the company's operating performance and investment results for 2012. I'm not pleased, however, with our relative stock performance, which is among the issues Carolyn, the Board of Trustees and myself have been, and we will continue to be heavily focused in 2013.

We'd now like to open for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Joshua Barber with Stifel.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Michael, in light of some of your comments about -- that it's getting increasingly difficult to find some of the off-the-run opportunities that you guys typically like to invest in, could you talk a little bit more about your moves into the development of Times Square and buying condo loans now, which are 2 asset classes that Winthrop's historically stayed away from? And that do you see you guys getting little bit more out on the risk curve now that the market's getting a bit frothier? Or how were you thinking about the investment strategy today?

Michael L. Ashner

Well, I think I was trying to be very direct with how we look at the redevelopment opportunities, which is the first part of your question. I'm not sure that it's, with the right partners, I'm not sure that it's necessarily more risky than buying into a distressed debt situation, which may, which has senior financing and a difficult borrower. I mean the outcomes are uncertain there. There's, to some extent, uncertainty with the development project. But this is certainly with whatever you do. Having said that, I was trying to be very pointed, the Winthrop growth is a very impressive group. They're among the smartest people we've dealt with, and we felt comfortable between the completion guarantees, the quality of our partner and pursuing that opportunity. When we talk about other development opportunities, what I really have in mind is either something like that with the kind of partner, the quality that Winthrop or a redevelopment of an existing building structure that, as the sponsor, our partner is unable to complete. We are capable of completing. And I think you've seen us do that with 450 West 14th Street. It was a 90% completed, 110,000 square-foot office building with retail. We came in, we completed it and we leased up -- we've completed the leasing of all of the office space up to 100%. So there's -- what I was trying to point to was both the first and the second category. Pure ground-up development with people that we don't know, or not, don't have the [indiscernible] structure from which we can base our projections on. It's not something we're going to be doing. At the condominiums, the key, the situation in Las Vegas is one in which we are senior debt. We like the basis that we're in. The borrower is either going to -- he's going to sell those units and pay us down or not. In this case, the loan has worked out very well. As the loans have been out to for 4 months, 16% of it, of the loan has been paid down in 4 months, 8 of the 67 units have been sold. So I'm not unhappy with that, and I would do more of that. But with respect to condominiums, it would probably only be either the best, the best of the best, because the best of the best can be sold in most markets, or something that can be reconverted back and do the standard rental multi-family. So we look at that, but I'm not sure that it's farther out in the risk curve. It's some of the things we look at, at that point in time in the stress set category. I mean, we didn't have -- we couldn't predict the outcome of the Southern Cal alone. We made it. It worked out well. Of course, Or the other loans, Marc, but they did work out for us. So that's my feelings as to that.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that's helpful. Can you talk about coupling that also with buying things like the Greensboro apartments, which just seems to be, I don't know, straight up the middle single, a good accretive opportunity, but it's not the typically opportunistic investment that Winthrop would be making. Is that -- am I thinking about that right? Are you guys moving into more of the stabilized apartment buildings?

Michael L. Ashner

No, no. Well, our IAR was not a single-digit IAR. When we underwrote the deal, the IAR was much more generous than that. And it had to do with the fact that there was a non-defeasible loan. And I think the loan, correct me if I'm wrong, can't be defeased in 2016 or something like that. So that we have a current close to a double-digit return on our equity. And then when the loan gets refinanceable, we can perhaps either increase our return or sell. That was sort of a unique situation, so -- but you're right, that -- you're right in the sense that we're not going to stray from those higher returns. It's just happened to be in that particular case of the nature of the debt allowed us to achieve the returns you want and comparable to those that we get when we foreclose our apartment buildings.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And last question, I guess, when it comes to things like River City or Sealy, Marc, where either there's asset sales or some sort of impairment-- there's something every quarter -- Is there, or for the last year or so, is there -- you guys, I guess, thinking about it, is there a point or a price point that which you would prefer to sort of rip off the band aid there and...

Michael L. Ashner

I think we pretty much ripped off the band aid. We've written Sealys down to 0, except for the one that we hold. Marc is pretty much written down except through the assets we think, the 2 or the 3 that we have remaining value. We bought from Marc 1 asset that we really liked. We think the River City has -- we still believe the River City has potential, so does the one in Jackson, too, so we haven't written it down. What else is the band aid on? I mean, there's not much left to do. We've pretty much taken all the impairments that we have, that we can. It's one or more of the suburban office in Marc building like you'd have a small impairment, sure. but I mean, it's not meaningful. It's not even close the material on our balance sheet, nor to NAVs. We own the assets. We try to value them. And so I was just much there to revisit. And Carolyn, correct me if I'm wrong.

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

No, the question was more is it still worth the headache at this point?

Michael L. Ashner

You know what, it was mine to be made. That's what the shareholders pay me to do, all right, they pay this management team to do. And they make as much money as we can from both new investments and old investments. And it's always worth the headache if you can make $1. That's my view.

Carolyn Tiffany

Josh, as I mentioned, we are looking to divest to some of the assets, as the markets that they're in are starting to stabilize. And we've actually seen improved leasing activity even, for instance, in some of the Sealy stuff that whereas it's on our books at 0, first things that we've taken impairments on the past like our 550 or 701 Arboretum at Lisle, Illinois. So we are starting to see activity. And as we do, we always consider whether or not it's the right time to sell. We have had some asset sales this year, our Circle Tower property in Indianapolis. So once the assets are in a position where we think that there is a limited return, you will see us -- our limited potential for upside. You will see us start to divest to those.

Michael L. Ashner

I think, Josh, the right question is in whether or not it's a headache because typical assets were always headaches, whether they're good and strong, but whether or how we look at those assets. And those assets in which we think have de minimis value, are we going to put new money in after old money? And the answer to that is no, we're not, we're not, we're only going to do it if there's restructuring and there's new valuation and recapitalization. It's not going to happen. So that should be the concern, I think, of investors, not that the concerns shouldn't whether we're spending time trying to extract more value from the old legacy, but rather whether we're blinded by the old investments such that we would put new money into something that's not necessarily going to create a return on that capital.

Operator

Our next question comes from Charles Fischer with Ellis Partners.

Charles Fischer

A couple of comments and a question. First of all, I think the flexibility that you guys have and moving the different asset classes is a big strength of the company, and I wouldn't be deterred by previous comments. I also, you guys know this, but maybe other people don't, that Lake Brandt is probably in Greensboro's battleground area, which is probably the best neighborhood in the city. So that's going to be a good asset for a long time. Can you update us on any developments at Seventh Avenue? I did note on the Starwood Capital call that they said that they were offering a premium for their participation interest on a loan maybe this one, has anything happened there in the last 4 months?

Michael L. Ashner

Well, yes. we can't discuss it. Having said that, I think that's going to be a very, very strong former for us. The -- how we look at it is a very difficult line. We want to give NAV information, which is accurate as possible. But we like to do it in a sense in which we had this absolutely discernible information, which to base it on. So I really can't go much farther than that at this point in time. But we're extremely comfortable and pleased with this investment.

Carolyn Tiffany

Yes. I think you should note that the 701 investments, we carry that on our NAV at the cost, that which we invested. And we've given no increase in value on our net NAV, to Michael's point, until there is something that is concrete that we can point to. We'll continue to hold it on our NAV costs. But we do -- clearly we believe that there will be a nice return on that investment. We just haven't reflected it yet in the NAV.

Unknown Analyst

Yes. And I know if I offered you $50 million more than your investment, you wouldn't take it. So we'll leave it at that. And those are my words, not yours. Can you tell us a little bit about the investment thesis at 1515 Market? What is sort of -- what your thinking is on that? It's a good location.

Michael L. Ashner

That is not hard at all. That came on to market. You look at market comps for what buildings that are not in distress, that is under foreclosure, better foreclosure doing. You realize quickly that they have no -- they didn't have money to lease it up, the visibility is 3x. It's easily leasable , good location. My view was that it was worth at least the full amount of the debt. You need, I think it's, what, 21% -- it's 21% vacant. Lease it up, fill it up and sell it is what we're going to do. That's the investment thesis. So I think I believe we'll sell it for more than the debt, which will be, I think -- which would be obviously profitalized. I think also, we'll have the capacity to sell off the senior participation. When we did the recapitalization, which is interesting, it gave us the ability to sell off, to sell down our position and create an accretive B-note for the company, as well as on the equity participation. It was a little bit like the Sullivan Center in that regard.

Operator

[Operator Instructions] Our next question comes from Bob Syverson [ph] from Glen Oak Capital [ph].

Unknown Analyst

Can you give me your idea on the share buyback in terms of can you disclose the price, the average price you bought back the shares in the fourth quarter? And if there's a guideline you look at in terms of share buyback versus any other uses of capital?

Michael L. Ashner

Yes, we know exactly. We are -- we don't buy back our shares to pump up the stock. We don't buy back our shares to sort of get some sort of leasance play [ph] for the day. We look at our share price. We have a view as to what the underlying value is, we have a view as to-- what it is we can reinvest capital, and to the extent that we believe that the share price of the given moment is less than we can make new investments, we'll buy stock back. I can't tell you the price because I'm going to have to kill you because you would buy it for $0.01 less than that every time it approach that. But yes, we look at it strictly like as an investment.

Unknown Analyst

But can you -- are you able to disclose where on average you bought back your shares in the fourth quarter or no?

Michael L. Ashner

I don't know. I don't know the answer to that.

Carolyn Tiffany

We haven't published it yet, but the informations will be in our 10-K.

Unknown Analyst

Okay. And then just, and I think you've sort of covered it, but just to confirm, with respect to the FFO decline, it's sort of the negative arbitrage we have between the new preferred shares being out there and holding cash while you look for new investments. Is that the fairest way to look at, if you would, respect to the year-over-year FFO decline, where you're just holding more cash than you typically have and has been paying the new preferred D dividend?

Carolyn Tiffany

Yes, that's correct.

Operator

Our next question comes from Craig Mailman with KeyBanc Capital.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

You guys are highlighting the recapitalization prospects of sort of the best investment opportunity right now. Is it just a function of it's hard to find the debt investments and that's why the recaps are really the highlight? Or has there been acceleration in sort of the volume of opportunities you're seeing on the recap side?

Michael L. Ashner

It's both, but it's a natural evolution, if you think about it. So if you think through that, let's assume the building was bought in 2010 for $12 million and an $8 million loan on it. And then in 2007, let's assume also that the value plummeted dramatically to $6 million, $5 million, but no one does anything at that point in time. Unless the bank, which holds the deck, has to do something, in which and at that point in time, we would buy -- have bought the debt. But if there's no one at the bank doesn't have to sell, and the loan is relatively current. As value approaches, the level of the debt, then the -- and the lender can now receive back all of its principal, it becomes more at statistic with respect to the borrower. The borrower now has to find capital to take out the debt. So that building, let's assume has gone up in value to $8.5 million. Inevitably, the lender is likely -- is bringing down his net. You've got to recapitalize it. It's not worth $10 million or $12 million, and that's where it's a natural evolution thing. And that's the point when there's a recap. There's a new -- you can get a new loan to say, $6 million. If somebody needs the borrowing to $2.5 million, then it's in a sense no difference in buying the stressed debt. It's just a different means of investing based on the timeline. Is that clear, Craig?

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Yes, yes. No, no, no. I actually know you guys have tried to do this a couple of years ago, and a lot of people raised money for distressed opportunities or this type of opportunities. I'm just surprised that now we're starting to see this be highlighted. And I thought I was just trying to see if there's just-- because, yes there are [ph] other opportunities have tailed off a bit or whether this is actually increase there, because I'm just curious...

Michael L. Ashner

By the way, my response to that point is in a sense anecdotal, it's what we're experiencing. I don't know what other people are experiencing. It just seems that we're getting that. Whereas 2 years ago, we were just buying the debt and then working it out with the borrower or whatever. Now I would say at least 50%, 60% of these kinds of transactions, we're getting recaps. It's just -- and then we weren't getting very many recaps back then.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

And you guys aren't seeing that much competition on this front or you're just playing in markets that maybe that capital is not going after?

Michael L. Ashner

I don't know. I -- do we define much competition?

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Well, you said that you guys are kind of...

Michael L. Ashner

I don't know the answer to that question. I know that those things that we pursue and are fairly priced we end up getting. Those things that are priced at an unreasonable level, we don't get. I mean, I don't know really -- the market's relatively efficient from a noise standpoint. This is efficient from the standpoint. Is it a fully efficient level ways? It's probably not. I think also, I should add that people do reach out for us very further, particularly complex transaction where there is multi -- lots of different lenders or different complicated capital stack or the borrower is perceived to be or the sponsor's perceived to be a problematic individual, that kind of stuff. I mean, I meant what I said. The complicated stuffs seems to come to us more than to other people. I don't know.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

No,no, and that's definitely helpful. Just curious, so you guys did almost $300 million of investments in '12, kind of as the pipeline shaping up now, do you think '13 could be a similar magnitude type year or could it kind of trail off a bit as you look for more of these recap opportunities?

Michael L. Ashner

Well, our business is by its nature lumpy. I said it before, Monday, Wednesdays and Fridays, we don't have enough deal flow. Tuesdays, Thursdays and Saturdays, there aren't enough capital for the deal flow that we have. And Sundays, I watch football. So we have that. We have more than adequate deal flow today, and we have adequate capital. Can I project what it's going to be like in December? No, I can't, but I haven't seen a material falloff in what it is we're pursuing, if that's helpful. So with respect to your considering how much we're going to put out, there's been no material falloff.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Okay. No, no, that is helpful. And then just lastly, you guys modified the external management agreement. Any significant changes other than just the extension of the term?

Michael L. Ashner

Carolyn, you want to answer that? I mean, basically, they wanted Carolyn to stay for 5 years. If she did, she'll only stay if I stay, too.

Carolyn Tiffany

The -- no, there's not really -- the other modification was that the return at the hurdle on amount, which you recall is about $16 a share for the incentive fee to be paid. Shareholders receive $16 plus the 7% return going forward. That return was reduced slightly to basically equivalent to what our dividend is, and I'll keep that threshold. They're not relatively stable relatively. So we expect that we'll keep it relatively stable. The other -- that's really -- there were some changes to the termination provisions, but nothing really material. It's in the 10-K, if you look. I know the 10-K, we filed an 8-K.

Michael L. Ashner

And they gave Carolyn a stock grant if she stays 5 years, thinking that it would actually persuade her to stay for 5 years.

Carolyn Tiffany

There is another goal before the shareholders in May a restricted stock grant to me to Michael and some other members of senior management.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Okay. But on the incentive hurdle basically now, it's going to stay flat in perpetuity or...

Carolyn Tiffany

Well, it does. It has the same. It was -- I'm trying to find it. I think it's 4%, the lower 4% or LIBOR plus...

John Andrew Garilli

2.5.

Carolyn Tiffany

2.5. Thank you, John.

Michael L. Ashner

It's worked out the $0.64 annual dividend. Otherwise, it wasn't growing at 7% a year, and which would make it very elusive and despiriting to all of us. We wanted it to be spirited.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

It's still a hurdle though?

Carolyn Tiffany

Oh, yes.

Unknown Analyst

It's spiriting, but still aspirational?

Carolyn Tiffany

Still, cash has to go out the door to our shareholders.

Operator

[Operator Instructions] Our next question comes from Mitch Germain with JMP Securities.

Mitchell B. Germain - JMP Securities LLC, Research Division

We saw our west coast skewing in investments in the quarter. Was that on purpose to kind of play the momentum in those markets or just a function of the inventory that you guys had in underwriting at this point in time?

Michael L. Ashner

It's basically, it's more -- it's in part coincidental, it's part non-coincidental. We've determined that we want to be -- play in major markets, as opposed to less than major markets. So California, obviously, is a major market. So to the extent that it landed in California and landed in one of our major market areas. But other than that, it was intentionally sensitive. We are only focusing. It's what we call major markets.

Mitchell B. Germain - JMP Securities LLC, Research Division

And then looking at your asset sales program, should we -- I mean, obviously, you've been pretty clear about your thoughts with Marc and Sealy. I mean, how should we look at your property list?

Michael L. Ashner

Well, we're marketing right now Deer Valley. We're marketing right now, not all of the Krogers, pretty much all the Krogers. We're marketing, I assume, that come summertime, we'll probably be marketing Crossroads when the Amherst lease is done, I love it, but I'll miss it. Churchill is being marketed right now. What else is being marketed?

Carolyn Tiffany

Andover and Newbury.

Michael L. Ashner

And our apartment project in Newbury and our office loft in Andover. So yes, we're marketing assets. They've fixed their maturity and we love them, but we'll miss them.

Mitchell B. Germain - JMP Securities LLC, Research Division

And any tax applications? Do you have the 1031 of proceeds or...

Carolyn Tiffany

No. We've got some capital loss carry forwards that we are eligible to shelter any capital gains that we have. They start to expire in 2014 and 2015.

Mitchell B. Germain - JMP Securities LLC, Research Division

Great. And then do you have the average lease term on 1515 of the leases that are in place there?

Michael L. Ashner

I don't have that handy.

Carolyn Tiffany

I don't have that information off the top of my head.

Operator

[Operator Instructions] Our next question comes from Brett Reiss with Janney Montgomery Scott.

Brett Reiss

Mike, my question is on the net asset value figure. I mean, it basically remains flat sequentially quarter-to-quarter. And I know probably some of it's due to just the nature of the lumpiness of what you guys do. And you mentioned Time Square. You're sticking in there at cost and it might very well be worth more. But I was -- at what point, if we don't start to see real growth in that NAV figure, should I get concerned?

Michael L. Ashner

Not for a while. Look, we do our -- we try to do the NAV extremely conservatively. Any optionality that exists in the assets, we don't give any value to. Anything that has a potential, but I can't disclose something, there is no doubt a finalized document. We're not going to include that as value. It's got to be real. It's got to be something that if my father were alive, he would say yes, the value, that value is there. On the other hand, we don't -- we're unhappy with some -- we're getting ready to get rid of it. If Carolyn calls you up and says I think we should do this. We'll do it. It's not a debate. We're not trying to manage -- we don't manage our earnings, and we don't manage our NAV. I don't think that there was any material that happened. There was just nothing that demonstrable that we could do, could show to investors that would change the material. Carolyn, you're the one that works in this.

Carolyn Tiffany

Yes. I mean -- and right. Realistically, you shouldn't expect to see enormous volatility in our real estate assets. It, to Michael's point, is a property, if Times Square starts to become developed or as properties that are vacant starts to have leases in place, you will start to see that. But by and large, I would expect that you would see slow and steady growth in that NAV and not enormous volatility.

Michael L. Ashner

The thing is, that John's pointed before, Starwood, I was aware was offered more than it had paid for its position. Our position is a better position from a standpoint of profitability. But we don't, we won't give any value to that, all right. Yes, but events will unfold and that value will then be reflected in the NAV. But that's with other assets, too. For example, on -- here's another example. We bought the 1515 Market, basically paid around $60 million of cold cost. I believe we will realize at least $70 million of full phase of the loans, is my expectation from the investment. We didn't -- we don't click to pull that additional $10 million on NAV in time as the building lease is up. We will bring that into NAV.

Brett Reiss

I appreciate all of that. But when you say the internal rate of return over the last 5 years was north of 30%. And then each quarter, you list a lot of the very wonderful things you're doing, at some point, like a year from now, will you be surprised to see NAV is not materially higher where it is now?

Michael L. Ashner

I would be. I actually would be disappointed. Yes, that I would say I would be disappointed.

Operator

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to Mr. Ashner for closing comments.

Michael L. Ashner

I have to go back to my script here if I had to close this out. There is-- actual we're supposed to say. Again, we appreciate you joining us today on today's call. If would you like to receive additional information about us, please contact Beverly at our offices. She's showing up there after 4:00, so you have to get earlier. You can also find additional information about us on our website. Feel free to contact myself or any other member of our management team at your convenience with any questions you have. I want to emphasize, by the way, we're serious about that. We're accessible. If you have questions, call us. I thank you all, and have a good afternoon.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.

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