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Winthrop Realty Trust (NYSE:FUR)

Q2 2014 Earnings Conference Call

August 7, 2014 04:30 PM ET

Executives

Amy Grucan - Investor Relations

Michael Ashner - Chairman and Chief Executive Officer

Carolyn Tiffany - President

John Garilli - Chief Financial Officer

Analysts

Charles Fischer - LF Partners

Michael Kim - CRT Capital Group

Jeremy Kahan - Bow Street

John Power - Redwood Fund

Operator

Greetings, and welcome to the Winthrop Realty Trust's Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A 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 Amy Grucan from Investor Relations. Thank you. You may begin.

Amy Grucan

Good afternoon, everyone. Welcome to the Winthrop Realty Trust conference call to discuss our second quarter 2014 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 7, we issued a press release and posted on our Web site supplemental financial information, both of which will be furnished on form 8-K with the SEC.

Both the press release and the supplemental financial information are available on our Web site 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 Web site'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, might 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 NAV 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 measures in accordance with Regulation G requirements. Please note that all per share amounts are on a diluted basis.

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

Carolyn Tiffany

Thank you, Amy. Good afternoon everyone, thank you all for joining us today. During the second quarter we focused largely on positioning our assets for sale in anticipation of shareholder approval of the Board’s proposed plan of liquidation, which as we reported was received on August 5 at a special shareholder meeting. We closed on a number of previously identified sales including our Amherst New York Property and our Crossroad 1 and 2 properties located in Englewood, Colorado which together provided aggregate net proceeds to the company of 53.3 million.

We terminated our contract for sale on our Jacksonville, Florida property after an unacceptable re-trade was proposed by the buyer upon the announcement of our liquidation, we have not yet gone back to market with this asset. Yesterday we filled our interest in the Wateridge property to our partner for 2.38 million. In addition to our property sales, this week we received full repayment on our Stamford loan and our Wailea loan together which increased our cash reverses by 17 million.

As previously stated in our proxy statement in our last earning call, we are seeking to execute the liquidation of the company as effectively and efficiently as possible. Given the approval of the plan of liquidation you will note that we adjusted our net asset values in the supplement this quarter to reflect our estimate of transaction costs that will be incurred in connection with assets sale, as well as corporate transaction costs such as the advisors base termination fee and incentive fee. These transaction costs are only estimates and will vary depending on price and timing of asset sales. John will discuss the impairments taken on certain assets for GAAP purposes as a result of shortened hold periods had no impact on NAV.

Our net asset value per common share is estimated to be $13.63 to $15.99 at June 30, 2014, compared to $13.79 to $15.79 at March 31, 2014. The March range does not include transaction costs. The NAV this quarter also continues to value our investment and 701 Times Square at our cost basis, accretive preferred 12% return.

While we have not been actively seeking to make new investments, we continue to remain open to opportunities to enhance the value to our common shareholders. Towards that end we purchased for 14 million the remaining 60% interest in the $24.9 million mezzanine loan that’s secured by 100% pledge of the equity interest and the entity that owned a 260,000 square foot two building, Class A office campus constructed in 2002 and located approximately three miles from the LAX airport. The mezzanine loan bears interest at 16.5% and has an equity participation of 25%. With this purchase we now own 100% of the mezzanine loan.

We also purchased a market transaction of 11.2 million of our senior notes which are not eligible to be called until August 2015. With the exception of our 550-650 Corporetum Property located in Lisle, Illinois, which as we discussed last quarter is having a significant lease turnover in 2015 with United Health, our operating properties are stabilized and performing well. Overall our operating property occupancy is 88.7% for our office, retail and warehouse and 93.1% for our multifamily, excluding vintage which is 96.7% occupied.

Our loan portfolio continues to perform under the terms of the loans with the exception of the Rockwell loan, which we continue to carry on our books at zero. In light of the relatively short term scheduled maturities, it’s not likely we will sell this portfolio as we expect to let it wind down through the repayment debt maturity.

Finally, as the result of the approval of the plan of liquidation and in accordance with the company’s declaration of trust and a Series D certificate of designation, the company has suspended dividends to the common shareholders until such time as the liquidating preference is paid to the Series D holders.

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

John Garilli

Thank you, Carolyn. Good afternoon everyone. I'll provide an overview of Winthrop’s financial results, as well as a review of our business segments. Before getting to that there a couple of items that I wanted to point out.

First, in light of the approval of the plan of liquidation we will no longer be reporting funds from operations. Second, starting in the third quarter we will discontinue growing concern basis accounting and we’ll instead report financial results on the liquidation basis of accounting.

Turning now to our current results. For the quarter ended June 30, 2014 we reported net income of $6.1 million or $0.17 per common share, compared with net income of $5.5 million or $0.17 per common share for the quarter ended June 30, 2013. We’ve recognized impairment charges during the second quarter of $1.7 million on our northwest Atlanta equity investment and $762,000 on our 223 West Jackson equity investment. These impairments are included in income from continuing operations; they did not result in a reduction to our published NAV from the prior quarter.

During the second quarter of 2014, we disposed of our Crossroads I & II properties located at Englewood, Colorado and our Amherst, New York office property which resulted in a $6.6 million gain on sale of real estate. These gains are included in income from discontinued operations. Operating results by business segment for the quarter ended 30, 2014 were as follows. With respect to our operating properties business segment, operating income was approximately $16.3 million for the three months ended June 30, 2014 compared with approximately $11 million for the three months ended June 30, 2013. Operating income increased by $3.3 million from our consolidated operating properties and $2 million from our equity investment operating properties during this period.

With respect to our consolidated operating properties, operating income from our same store properties was $7.2 million for the three months ended June 30, 2014 compared to $7.3 million from the comparable period last year. Our new store properties which consist of our office property in Norridge, Illinois and our residential properties in Stamford, Connecticut, San Pedro, California, Houston, Texas, Phoenix, Arizona and Oklahoma City, Oklahoma; generated net operating income of $3.4 million for the quarter.

Net operating income from operating property equity investments was $5.7 million for the three months ended June 30, 2014 compared to net income of 3.7 million for the three months ended June 30, 2013. This increase was due to $1.7 million increase in income from our 701 Seventh Avenue Times Square investment, as a result of our increased equity investment throughout 2013 and the first quarter of 2014. Additionally poorly operating income from our Sullivan Center investments increased by 1.1 million from $167,000 to $1.3 million.

Our loan assets and loan securities business segment reported net operating income of $4.2 million for the three months ended June 30, 2014, compared to net operating income of $5.4 million for the three months ended June 30, 2013. This decrease in quarter-over-quarter earnings is primarily the result of the sale of five loan assets and one loan repayment, all of which occurred in the first quarter of this year.

Interest in accretion income was partially offset by $951,000 of interest income on our secured financing receivable and 544,000 of interest income on our Eaton Norridge loan, which we originated in March of this year. Turning to corporate activity, during the quarter we repurchased in open market transactions 11.2 million of our 7.75% senior notes or 11.7 million. These repurchases will result in quarterly interest savings of approximately $217,000 on a going forward basis. And lastly at June 30, 2014 we had cash-and-cash equivalents of $133.6 million compared to a balance of $112.5 million at December 31, 2013.

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

Michael Ashner

Thanks John, by the way great haircut. Most frequently asked questions that we get these days concerning the timing and pace of the plan of liquidation. I think some of my dinner parties were asking my wife how much longer before the guests will be gone. Today we are cautiously optimistic with the pace of liquidation, we’ve moved faster than we initially contemplated prior to our mezzanine proposal. We believe then the pace will correlate more closely with the timing of certain loan conditions rated issues, including the elimination of yield maintenance in prepayment penalties, as well as completion of construction in certain instances and leasing.

Since we’ve experienced favorable indicative pricing with respect to the assets we have been marking, we have elected to accelerate the marking for assets which otherwise we might have held longer. By way of example, we now believe that we may be better off incurring some prepayment costs, if the net cash realized exceeds risk of its reduction in the event the sales environment becomes less favorable to the company. This approach is obviously dictated in large part by the continued low interest rate environment which benefits pricing, offsetting the increase in prepayment costs.

Throughout the process we will however endeavor to transact as accretively as possible, where we can repurchase expected debt or acquire a joint ventures interest in an accretive price, we will do so as we did in Playa Vista. Also, if at some future date our common share price becomes what we consider cheap, the company will effectuate any share repurchases so as to benefit all shareholders rather than management purchasing shares on our own behalf.

Our decision to eliminate the NAV disclosure and future filings results from some experiences in which real estate brokers and buyers suggested that the upward pricing was based on the -- their upward pricing was based on review of our evaluation of the asset in our NAV disclosure. Simply put, we want as much as we can get from the sale of our assets, not pricing based on our own conservative valuations. Obviously, we would rather be wrong and get more money than be right and get less. Parenthetically for me the relationship between the company’s conversion to liquidation accounting and our current use of NAV is that, for both there’s a fundamental similarity with respect to asset valuation.

With a diverge, however it is that liquidation accounting seeks to include in its analysis the positive or negative differences between asset generated cash flow during each assets projected holding period on the one hand and corporate level expenses in capital expenditures on the other hand which NAV does not do. On a personal note, its' somewhat bitter-sweet for me to liquidate the company that we have managed for 10 years especially to learn somewhat abruptly, that market believes that we are worth more significantly more dead than alive.

Nevertheless we understand we are essentially money managers representing the interest of our shareholders and continue to believe strongly as the markets supports that this is the best course for the company. With that I will open the call to questions.

Question-and-Answer Session

Operator

At this time we will be conducting a question and answer session. (Operator Instructions) Our first question is coming from the line of Charles Fischer with LF Partners. Please proceed with your question.

Charles Fischer - LF Partners

Good afternoon. First of all, I'd like to say to Michael and Tiffany and the rest of the team, I don't think you're worth more dead than alive. So I like you guys a lot. So let's keep it that way. Can you talk, Michael, a little bit about the small step paying off the preferred? It looks like you have almost enough cash to do it now. Can you just kind of go through how that mechanism will work?

Michael Ashner

Well, I’m not an attorney but we will probably structure so we would take out all of the preferred in one fell swoop.

Charles Fischer - LF Partners

You'll do a redemption notice or something, I imagine?

Michael Ashner

Yes, I mean in consistent with the venture, venture provision, but I think we’re going to take it all out in one fell swoop.

Carolyn Tiffany

Under the terms of the certificate of designation, we are required to give 30 to 60 day notice. But it is as Michael mentioned our intention to pay that as soon as possible.

Charles Fischer - LF Partners

And is it your thought that once you pay that back, you would then go to a quarterly kind of stated dividend or is it more, you're thinking after that it will just be the lumpy distributions that you generate from the liquidation process?

Michael Ashner

At the risk of being wrong and changing our minds it should be least semi angle once we can resume distributions, but it may well be lumpy, I mean if you sell something you get $50 million payment I don’t it’s any good reason for it to sit there for six months.

Charles Fischer - LF Partners

Sure. Makes perfect sense to me. On the manager incentive fee payments that you have on the NAV, my recollection was that you needed to get over $16 and change to hit some of those incentive fees. Do those incentive fees assume that there might be more than $16 of liquidation? I know that's kind of counter to the NAV, but I was wondering if that math includes some sort of assumption like that.

Carolyn Tiffany

The hurdle rate actually it moved, depending on distributions that have been made. So I think it was originally 16. It’s actually come down a little bit, it’s 15.75 at June 30.

John Garilli

Also in the K there’s a description about the termination fee and the other termination fees, so there were just fees, the incentive and the termination, they’re both in the K.

Charles Fischer - LF Partners

Okay, that sounds great, John. I'll go take a look at those. Can you guys give us any update on how the luxury apartments are doing? Last month the NOIs had a nice jump and also always on the 701?

Michael Ashner

Well as we mentioned at our shareholder meeting, San Pedro was currently under contract for sale at a price that we cannot disclose until due diligence is finished, we never disclose pricing or generally contracts even, unless all conditions are concluded. But we did mention it at our annual meet, so that one’s for sale. We are considering the marketing of one or more of the other properties right now, but bear in mind that with respect to C residential, the business thesis was that we had bought relatively new condominium constructed properties, high rises, at a replacement cost which was significantly under market which provided optionality on our exit. So we’re looking at what is the best thing, we’re still looking at what is the best execution for these individual assets and no final determination has been made. As to 701, I was in there three weeks ago, it was sweltering hot. There was no ventilation, the guys are working, they’re working, constructions going on. So if we think about it, there’s a series of milestones there. Permitting, financing, commencement of construction and the acquiring a hotel, they’re all done.

The next milestone is I guess getting the retail tenant and that will take some time because it’s a three year construction process intended for these kinds of assets generally look, don’t rush to do something, three years in advance, they will think about it 18 months, 24 months in advance. But I would say the next milestone, completion of construction which should be done roughly three years, that would be the milestone following that, the stabilization of the hotel and the retail tenant follows that. At each milestone we would and will consider marketing our interest and give it for sale. And of course you know we’ll consider any unsolicited offers that we receive, but I’m not a construction maiden but things are moving and I think the Witcop group is doing an excellent job. They're really doing an excellent job.

Charles Fischer - LF Partners

That's really helpful, Michael. What is the process -- during post liquidation voting, are you allowed to make new investments or any limitations to that? How does that process work?

Michael Ashner

No, we’re not allowed to make any new investments, it’s a very restricted in the advances we can make. We can obviously make capital through this existing investments, we can repurchase those shares and to the extent we have a right under an existing joint venture agreement, we can exercise those rights. So that’s what we can do and obviously we can hold the cash in short term strategies, whatever, but no we cannot make new investments on behalf of the -- new investments which are not already in our portfolio at this point in time.

Charles Fischer - LF Partners

Terrific. If I could ask one more, Michael; this has been really helpful. This is kind of a softball, but what have been the biggest challenges as you've gone through the last couple months of the liquidation as you think about the challenges that lie ahead?

Michael Ashner

It’s not a softball. Carolyn, why don’t you first start with that.

Carolyn Tiffany

Ah well, I guess the challenges would just be in terms of just making sure that we time these asset sales to maximize the return to our shareholders, you know as Michael mentioned initially we had thought about holding off on some assets, because of repayment penalties but we know we’re in a such a tailwind market right now, it is really, you certainly don’t want to try to time the market but you want to be able to take advantage of the conditions that we’re right now. So, I would say the biggest challenge is really choosing which assets to market and when.

Michael Ashner

I would supplement that, I guess there’s two issues that I see. One is, to Carolyn’s point, overall even though you've taken a path, the path has lots of tributaries. The river has lots of tributaries, and you have to maintain flexibility in your thinking, things change. And you have to be able to change your views, what is you’re going to do, if you’re going to try to do it as accretively as possible.

On the other hand I think the biggest long term challenge in any liquidation is for its alone. But any liquidation which we involve is that last dollar. You end up spending as much time almost to smaller assets as you do with larger assets and that last dollar is a valuable dollar and so here it comes to $37 million and how do we get that last dollar regardless of where we are. Whether we’re at $15 to $17, how so you get that dollar, how you'll harvest it most effectively. That I think is always the biggest challenge in liquidation.

Charles Fischer - LF Partners

Terrific. Thanks, Michael. And behalf of my family and I, I appreciate all your whole team's hard work. Thanks a lot.

Michael Ashner

You’re very kind.

Operator

Thank you, the next question is from the line of Michael Kim with CRT Capital Group, please proceed with your question.

Michael Kim - CRT Capital Group

Hi, everyone. Thanks for taking my question. Just a question on the NAV range estimate. You know, it seems like most of that $12 million net increase in NAV, and I know it's not comparable, but just that change from the prior quarter came from via the luxury residential portfolio where the cap rate range was changed from 4.63% to a range of 4.1% to 4.2%, just kind curious the thought process in terms of?

Michael Ashner

That’s not exactly so -- we had nothing to do with cap rates changes, what really happened is when we backward model and we backward model because we only change ST Residentials as a result of something that is known. And the marketing of San Pedro and some of the other market information that was more than just market information that we got on one or more specific assets in ST Residential was such that we needed to incorporate that information into our pricing, it had nothing to do with pure -- it was not pure cap rate revenue in that sense, but something happened. One thing obviously happened was the contract on San Pedro. But if you look closer if I’m correct you’ll see some other asset benefited I think Fenway benefited which was paid off yesterday. I think Northwest Atlanta may have benefited in its pricing but the increase had to do with other things as well.

Carolyn Tiffany

I’ll also point out Michael that, you may recall that through last quarter we were basically including the ST portfolio on any in the NAV at our cost, during we close fourth quarter of 2013 last quarter we were still sort of going through getting our strategy and then as Michael indicated this quarter we basically had some additional third-party information that warranted the increase.

Michael Kim - CRT Capital Group

I see. Okay. I appreciate that. And then my second question, just regarding the vintage housing portfolio. Just kind of curious, what is your expectation for the stabilized NOI once the Washington assets are completed? And I guess how do you think it will take to get to stabilization for those two remaining properties?

Carolyn Tiffany

We haven’t put out any forecast as it relates to those, but I can tell you that the Kilsada, as you noticed the Tacoma property we’ve moved into the overall portfolio was converted and the Kilsada is expected to be done next probably by the end of this year and urban center will be done converted next year fully stabilized.

Michael Kim - CRT Capital Group

And you think the profile of kind of rents per unit will be similar to the other properties, or is that--?

Carolyn Tiffany

I can’t answer that question, of the top of my head.

Michael Kim - CRT Capital Group

Okay.

Michael Ashner

I think what Carolyn said is that the question -- we never answer those kinds of questions. That’s really what she saying in the nicest way. Michael we have never given projections about what things will be, but I think it is fair to say there's nothing that distinguishes those three properties some of the other 28 or so in the portfolio whatever it is.

Michael Kim - CRT Capital Group

Okay, understood. I appreciate that. Thank you.

Operator

Thank you. The next question is coming from the line of Jeremy Kahan with Bow Street. Please proceed with your question.

Jeremy Kahan - Bow Street

Hi. Can you just comment on the change in value for the Concord debt piece? Thank you.

Michael Ashner

We no more, simply we no more, about it. The debt markets have moved more dramatically than even the equity markets in the sense because it's senior in the capital stack when we value the debt positions, always there was historically a significant thing they move tighter. We have real time information with the bond portion of the CDO is or that’s easy to do. We have a much stronger sense of how the long portion of the CDO will do. We can pretty much value the range in that and then upside is somewhat kept. The only place there there is some movement theoretically, further upward, but we don’t have any information that would allow us to go higher at this point with respect to it. That much I can say.

Carolyn Tiffany

We had some long payoffs in the CDO this quarter as well. So to Michael's point, there has been an improvement in terms of the loans, in their performance.

Michael Ashner

This is not unique to us, I would suspect that everyone who has managed the CDO has gotten some benefit over the last, particularly in last year as the value what is that they have. But the assets just have greater value and more likely to be repaid, then we just price that in.

Jeremy Kahan - Bow Street

Understood. And then slight decline in adjusted NOI at luxury residential, was that isolated to a particular property or was that across the four properties?

Carolyn Tiffany

That was related somewhat to Mosaic where we have higher than we budgeted real estate taxes. We do have an abatement that we’re currently in the process of pursuing, but that I would say is probably one of the more significant, in addition the high growth property that we just recently transitioned the parking. We had a contract that was little bit more expensive, so we expect that that will turnaround little bit as well, those are the big drivers.

Michael Ashner

I think maybe there is one other minor driver that we realign the rents in penthouses in Mosaic.

Jeremy Kahan - Bow Street

Perfect. Thank you very much.

Operator

Thank you. (Operator Instructions) Our next question is coming from the line John Power with Redwood Fund. Please proceed with your question.

John Power - Redwood Fund

Good morning. How are you today?

Michael Ashner

Good.

John Power - Redwood Fund

A quick question for you, can you clarify the redemption price on the preferred, is that at par or is there a premium?

Michael Ashner

Its par plus any accrued dividend at time of redemption.

John Power - Redwood Fund

Okay, okay. Understood, thank you. And then if we had any interest in a particular asset, what’s the best course for who should we contact?

Michael Ashner

I guess either Jay Cramer in Boston or John Alba in New York, although John is on vacation this week.

John Power - Redwood Fund

Great. And thank you very much.

Operator

Thank you. It appears we have no further questions at this time. I would like to turn the floor back over to Mr. Ashner for any additional concluding comments.

Michael Ashner

We have a little problem here my script doesn’t include the usual concluding remarks, so I'm going to wing it based on historical memory. We thank you all for attending our call today. As you know management is more than welcome to any any questions you may have and you want to direct to us personally, Carolyn, Jay Cramer and John Garelli, are always welcome and take your calls as well as I am. You know the phone numbers -- www.winthropreit.com. There you are and we thank you for your indulgence and your patience.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your participation. And you may disconnect your lines at this time.

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Source: Winthrop Realty Trust's (FUR) CEO Michael Ashner on Q2 2014 Results - Earnings Call Transcript

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