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Executives

Beverly Bergman – Vice President and Director of Investor Relations

Carolyn Tiffany – President

John Garilli – Chief Financial Officer

Michael L. Ashner – Chairman and Chief Executive Officer

Analysts

Craig Maillman – KeyBanc Capital Markets

Mitch Germain – JMP Securities

Winthrop Realty Trust (FUR) Q2 2013 Earnings Conference Call August 2, 2013 12:00 PM ET

Operator

Greetings and welcome to the Second Quarter 2013 Earnings Call for Winthrop Realty Trust. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Beverly Bergman, Vice President for Winthrop Realty Trust. Thank you, Ms. Bergman. You may begin.

Beverly Bergman

Thank you Latonya. Good afternoon, everyone. Thank you for joining us and welcome to the Winthrop Realty Trust conference call to discuss our second quarter 2013 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, August 1, 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 including NAZ analysis, 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. Although our acquisition activity this quarter lessened from that of prior quarters, we are actively evaluating investment prospects and have a very dynamic pipeline.

As Michael will discuss further, despite the high values we are seeing for stabilized well-located assets, the fragile economic environment, and resulting volatility create significant opportunity for us. We will continue to be patient and only execute on the right deals for us. As a result, we have significant uninvested cash reserves during the quarter, which created a drag on earnings. John will discuss this further in our discussion of financial results.

That said we have made new investments. We recently agreed to increase our financial commitment to 701 Seventh Avenue in Times Square to $120 million, up from $68 million and to participate in the future development of the hotel. Concurrently, we increased our preferred equity ownership in the retail component from 45.85% to 61.1%. We contributed an additional $4.9 million in July and we will make a second payment of approximately $4.7 million when the existing debt is refinanced. Winthrop has invested $35.6 million in this investment today. We acquired through a 50-50 joint venture with Marc Realty, a non-performing mortgage loan with an outstanding balance of principal and interest of 14 million, for a purchase price of $6.625 million.

Subsequent to acquisition, the joint venture obtained through an assignment in lieu of foreclosure, the title to the collateral, which is a lease hold interest in 71,000 square foot commercial retail space that comprises the bottom three floors of the James R. Thompson office building in Chicago. The leasehold interest is subject to a lease of the State of Illinois that expired in September 2014, with six automatic by their extension.

Over the next two years, we plan to invest in a redevelopment of the retail space, which we strongly believe was poorly utilized. It’s important to note that we believe these investments will create significant value for Winthrop’s shareholders. The positive impact of these and other of our investments will not be immediately reflected in FFO, the traditional REIT metric, but rather will come into earnings over time and upon the realization of access.

As we discussed in prior quarters, we’re looking at all of our stabilized assets with a view towards divesting and realizing our gains on those assets. The successful execution of an opportunistic strategy includes not just well placed acquisition, but also timely divestitures.

Our effective execution of this can be seen in our earnings with a gain on sale of assets of $9.5 million this year, which is included in our discontinued operations. Included in this is the sale of our Deer Valley, Arizona property for a gross sales proceed of $20.5 million. We originally acquired this property for $10.6 million by foreclosing on a mortgage loan that we purchased in 2010.

We’re currently marketing our Meriden, Connecticut, Newbury multi-family property another property we acquired through foreclosure. As a REIT, we are subject to volume limitations on asset sales in any calendar year, as well as a two-year Safe Harbor holding period. Accordingly, we have been selective about which assets we choose to sell. You can expect that we will continue to review our stabilized assets for sale into 2014.

Not only have realized on property sales, but we have realized on some of our loan assets, most recently the repayment of our MetroTech loan at par on July 29, which resulted in a 38% return to us. The realization of the $2.5 million discount will be reflected in our third quarter earnings.

In addition to the third quarter MetroTech repayment during the second quarter of 2013, we’ve received $17.2 million in loan repayments, approximately $15 million of which was from repayments on our Queensridge loan receivable from the sale of several condominium units, which collateralized the loan.

From these proceeds we made pay downs of approximately $13.7 million on the recourse debt with KeyBanc, which fully satisfied the debt. The balance of the loan repayments received was the result of a payoff at par of our Shea Boulevard loan. All of our dispositions and loan repayments were at prices within our first quarter net asset value range reported in our supplemental financial information in our Investor Relations section on our website.

We continue to report our realized returns on an asset by asset basis in our track record, which you can find on page 12 of our supplemental report and had a pooled weighted average returns equal to approximately 31% for the investments made and liquidated since January 1, 2008.

Turning to continuing property operations, occupancy at our consolidated properties was relatively stable at approximately 88% as of June 30, 2013, compared to 89.6% at December 31, 2012.

In July, we finalized our 10-year lease renewal with our tenant Ingram Micro at our Amherst New York property for the entire building, which renewal will commence on November 1. And we repaid the $15 million mortgage on that property, which was scheduled to mature in October. We received cash distributions from our joint venture investment in Vintage Housing Portfolio of $1.6 million, during the quarter and the properties continue to maintain a consistent average occupancy of 96%.

Our two Sealy venture properties located in Atlanta, Northwest Business Park and New Market, were leased 72% and 53% at June 30 respectively, as compared to 70% and 50% respectively at December 31, 2012. The New Market property remains in special servicing and it’s carried on our balance sheet at zero.

As we discussed on our last call, the third Sealy property in Nashville, Tennessee is over leveraged and its mortgages and maturities default. We have been unable to reach an agreement with the special servicer and they elect to convey the property to the lender. We carried this investment on our balance sheet at zero as well.

Occupancy at our four Marc Realty properties in which we hold an equity interest remains stable and was 79% at June 30, 2013, as compared to 78% at December 31, 2012. Our loan portfolio is performing well. Concord CDO, in which we hold a 49% interest, resumed distributions to the company in July.

Our securities portfolio continues to be comprised of our shares in Cedar Realty Trust. At June 30, 2013, the shares had a dip in value which resulted in an unrealized loss. Our average cost basis in the Cedar shares is $3.86 per share.

And lastly, our estimated range of net asset value per common share for the quarter ended June 30, 2013 is $13.02 to $15.37. This information, including the methodology used to calculate the range of values is included in pages seven through eleven in the supplemental financial report.

And now I will turn the call over to John Garilli. John?

John Garilli

Thank you, Carolyn. Good afternoon, everyone. I will provide an overview of Winthrop’s financial results, as well as a review of our business segments.

For the quarter ended June 30, 2013, we reported net income of $5.5 million, or $0.17 per common share, compared with net income of $571,000, or $0.02 per common share for the quarter ended June 30, 2012.

Funds from operations or FFO for the second quarter of 2013 was $4.6 million, or $0.14 per common share, compared with FFO of $8.2 million, or $0.25 per common share for the second quarter of 2012. As Carolyn indicated, we have sold certain assets in 2013.

During the quarter ended June 30, 2013, we sold our Deer Valley, Arizona Property to recognize a gain of $6.8 million from the sale, which is included in income from discontinued operations. While the gain is reflected in our overall net income, it does not impact our FFO.

Interest expense is higher for the current year quarter as a result of $1.7 million of interest expense on our senior notes, which were issued in August of 2012. And as Carolyn mentioned, we had a significant uninvested cash reserve balance of $186.1 million at June 30, 2013. These reserves do not contribute any revenue until such time as those cash reserves can be invested.

Operating results by business segments for the quarter ended June 30, 2013, were as follows. With respect to our operating properties business segment, operating income was approximately $12.8 million for the three months ended June 30, 2013, compared with operating income of approximately $7.6 million for the three months ended June 30, 2012. Operating income from our consolidated operating properties increased by $1.5 million, while operating income from our equity investment operating properties increased by $3.7 million during this period.

With respect to our consolidated operating properties, property income from our same-store properties was $6.7 million for the three months ended June 30, 2013, down approximately $500,000 from the comparable period last year. Our new stores generated operating income of $2.3 million in the current period.

Revenue from same-store properties decreased to $10.7 million during the three months ended June 30, 2013, from $11.2 million during the same period in 2012, due to the partial disposition of our Churchill, Pennsylvania property, the amendment to the lease terms of our Houston, Texas property and decreases in occupancy at our River City and 701 Arboretum properties, partially offsetting these items with increased average occupancy at both of our Englewood, Colorado properties.

Same-store properties operating expenses decreased slightly to $3 million due primarily to decreased operating expenses at the Churchill Property as a result of the partial sale in the Westinghouse lease. Our new store properties, which consist of our office properties in Philadelphia, Pennsylvania and Cerritos, California and our residential properties in Memphis, Tennessee and Greensboro, North Carolina generated revenue of $4.9 million in the period.

New store operating expenses were $1.9 million for the current period and real estate tax expense was approximately $600,000. Net operating income from equity investments was $3.7 million for the three months ended June 30, 2013, compared to a net loss of 45,000 for the three months ended June 30, 2012. The increase was due primarily to $2.1 million increase in operating income from our Vintage Portfolio, primarily as a result of a decrease in amortization of lease intangibles.

Additionally, we recognized operating income of $623,000 from our 701 Seventh Avenue Time Square investment, which closed October 16, 2012, and $232,000 in operating income from our WRT Fenway Wateridge investment, which closed December 21, 2012. As well as the $745,000 decrease in operating loss from our Sealy New market investment, primarily as a result of having recognized loses which brought our invest balance to zero at December 31, 2012.

Our loan assets and loan securities business segment reported net operating income of $5.4 million for the three months ended June 30, 2013, compared to the net operating income of $6.2 million for the three months ended June 30, 2012. This decrease is primarily the result of $1.9 million decrease in discount accretion income due primarily to the payoff at par in May 2012 of our 160 Spear and Magazine loans, which had been acquired at a discount.

The decrease in discount accretion income was partially offset by a $700,000 increase in interest income as a result of our 2012 origination and acquisition activity, primarily from our Queensridge Tower loan, which generated $661,000 of interest income during the three months ended June 30, 2013.

Turning to our REIT securities business segment, operating loss was $1.8 million for the three months ended June 30, 2013, compared with an operating loss of $470,000 for the three months ended June 30, 2012. The increase in REIT securities operating loss for the comparable periods was due to an increase in unrealized loss and securities carried at fair value, primarily as a result of the fluctuations in the market price at our holdings of Cedar Realty Trust shares. While these securities experienced a drop in value during the current quarter, they continue to trade at a price well above our initial cost.

As of June 30, 2013, our securities holdings had a fair value of $10.4 million and an original cost of $8.9 million. And lastly, at June 30, 2013, we had cash and cash equivalents of $186.1 million, compared to the balance of $97.7 million at December 31, 2012.

Now, I’ll turn the call over to my Michael Ashner. Michael?

Michael L. Ashner

Thank you, John. We are doing what we do is as good description of the last quarter as I can give. The flow of new opportunities initially appeared to soften somewhat during the first half of the quarter with a rise in treasury rates in the second half of the quarter and related volatility we saw a significant spike in investment opportunities.

Simultaneously, we were selling our stabilized assets into a strong market improving our cash position so that we are now able to increase both the number and the size of the investments we are currently pursuing. To that end, we have built up our cash position to more than $185 million of unrestricted cash exclusive of our line of credit.

In addition, we, of course, monitor closely developments we expect to our existing investment of portfolio in order to take advantage of opportunities which may occur there. In this regard, we believe that the positive momentum developing in our Time Square investment provided the basis for the company to deploy more capital and commit more capital into that investment last quarter.

In short, we believe the volatile interest rate environment as well as other factors will continue to provide the company with both significant new external investments, as well as the opportunity to reinvest in our existing portfolio in the near-term. A word of caution, however, our investments remain both complex and involve a multitude of parties often taking longer to conclude than more simple direct asset purchases. This result has been and will continue to be investment lumpiness requiring patience from us.

On the other side, sales activity continue to pace. We remain committed to harvesting the profits from our assets, which have fully matured in value, particularly in this otherwise heated environment for stabilized assets. Our experience suggests that under leased assets when restored to full occupancy are more likely to fall 10% in our occupancy than to increase 10%.

The activity will continue through 2014, provided markets remain friendly. Unfortunately, for accounting purposes, the profitability from these transactions does not appear in our FFO, which has diminished in fact in the near-term and must be found in our earnings.

That said, we will continue to harvest our profits, including we see a jaundice like market developing in which interest rate volatility and economic uncertainty has significantly resurrected opportunity requiring us to maintain substantial liquidity, yet substantial third-party liquidity still seeks to acquire well stabilized assets.

Now, let’s open it up to questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now conduct a question-and-answer session. (Operator Instructions) Our first question comes from Craig Maillman with KeyBanc. Please proceed with your question.

Craig Maillman – KeyBanc Capital Markets

Hey, guys, good afternoon. Michael, maybe just to follow up on your comments that investment opportunities sort of rebound in the second half of the quarter, what type – and I know you guys have been seeing good opportunities in the recap side. Is that still the case or did the shift in rates kind of bring other stuff to the forefront that’s now more interesting?

Michael L. Ashner

Well, the existing opportunities, the kinds of opportunities we’re pursuing before are as prevalent if not more prevalent. I think the real issue has been that the perception that a borrower or investor could find all the money in the world whenever you wanted to find it as dissipated somewhat as a result of the rise of interest rates.

A number of people are equipped to put money out and step back a bit, and that has refocused borrower and investor interest in kind of capital that we have to deploy. So I think I’d say is structurally, we’re looking at recap, we are also looking at selective rehashed business opportunities.

Craig Maillman – KeyBanc Capital Markets

With the rise in rates, kind of how do you think or how has it affected your ability to push higher coupons on the debt side of things and sort of how you’re viewing what your return or target return thresholds would be for a recap?

Michael L. Ashner

It hasn’t really affected it that much, because we’re always very expensive. We never were an expensive, so I don’t know that 100 basis point increase in the – in treasures or even if there were to be in the future another 200 basis points would necessarily increase the returns that we want unless we are being pushed into a more risky position in the capital stack. That being said, obviously, the higher cost of senior capital to the bars means that the position that we are in as a – both from security and the capital stack, allows us to charge more, but it’s more related to the reduced debt service coverage that we may be getting through our position, not necessarily to the qualities on underlying assets.

Craig Maillman – KeyBanc Capital Markets

Okay. And then where does the pipeline stand today? I know it moves around, but just generally in terms of value?

Michael L. Ashner

Our pipeline ranges between at any given weekend, because we put together every weekend for our Board to look at. Our Board has to approve everything that we do, ranges probably in the low-end at $250 million and the high-end is $500 million and currently with the high-end of our pipeline range.

Craig Maillman – KeyBanc Capital Markets

Okay. And I know you don’t love news reports out there. but just curious, there’s been a recent one that you guys are looking at a condo deal in Miami. In general, what about a condo deal would be interesting to you at this point or whether maybe you’d want to stick in the debt stack of that?

Michael L. Ashner

Well, we do not as a matter of policy and a matter of practice, discuss anything that we are not contractually, there’s not an obligatory contract outstanding. That being said, I’ve often stated that opportunity has a number of different elements. It has the stress element, it has volatility elements, it offers optionality and I am of the view that this company can acquire very high quality assets and a market discount replacing in cost which can be finance provider a positive return, so that we can hold those assets on a durational basis, then we’re getting to pay a very cheap option on the upside and what those assets would be worth, assuming argue when they were condo assets. That optionality when coupled with a current return is something that we would find attractive.

Craig Maillman – KeyBanc Capital Markets

Great. Thank you.

Michael Ashner

You’re welcome.

Operator

(Operator Instructions). Our next question comes from Mitch Germain with JMP Securities. Please proceed with your question.

Mitch Germain – JMP Securities

Good afternoon. I guess Carolyn, did I hear that you guys have just one asset on the market today or are there a couple others and you just highlighted the Meriden, Connecticut asset?

Carolyn Tiffany

I just highlighted the Meriden as we discussed. We also have our Denton, Kroger asset – I’m sorry, our Seabrook asset on the market and we’re looking at some of other stabilized assets to put on the market.

Michael Ashner

Right, great. If I can add just that, I mean as Carolyn also pointed out, we’re bumping up against the disposition rules, so that anything else we would want to sell, we may have to push into 2014.

Carolyn Tiffany

The certain other assets within the concrete portfolio that whether there is potential for sales transactions there as well.

Mitch Germain – JMP Securities

And is there, based on Michael’s comment, is that suggesting there could be a special dividend or if they can’t be 1031?

Carolyn Tiffany

Well, as we’ve discussed in the past, we have capital loss carry-forwards that as long as we continue to see opportunity in the market and believe that we’ll be able to redeploy the capital, we will likely shelter the capital income net results from these sales with the capital loss carry-forwards that we have. So I guess that’s, as of right now we continue to see opportunity and don’t expect to be issuing a special dividend.

Mitch Germain – JMP Securities

Great. And the 701, how did that opportunity come about for you to take a more meaningful position there?

Michael L. Ashner

Well, how can I describe this without – it’s a complex and complicated development. And we are active participants in what’s going on there. And as we monitor events, we have determined that the opportunity has improved.

Unfortunately, as I said before, our practice and policy is until those events are inked – are fully inked to paper, I really can’t comment on them. I mean, there is rumors on the street, but we don’t comment on those rumors. So there’s not more that I can add at this point, but hopefully, we will have more to add by the end of the third quarter.

Mitch Germain – JMP Securities

Can I at least ask what’s going on with regards to the redevelopment? I mean, are you guys meeting with prospects and hotel operators?

Michael L. Ashner

The answer is yes, yes we are doing that. Actually in fact the Witkoff Group is taking the lead with respect to the hotel operators. And the Witkoff Group is also taking the lead with respect to potential tenants, which is a structure of the deal.

Mitch Germain – JMP Securities

Thank you.

Operator

(Operator Instructions) There are no further questions in our queue at this time. So I’d like to turn the floor back over to Mr. Ashner for closing comments.

Michael L. Ashner

Hold on, till I get the script. Okay. Again, we appreciate you joining us on today’s call. And if you would like receive additional information about us, please contact Beverly Bergman at our offices, or you can also find additional information about us on our website. And feel free to contact myself or any other member of our management at your convenience with any questions you may have. Our phone numbers are listed. Thank you all, and have a good afternoon.

Operator

Thank you. And this concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

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