Winthrop Realty Trust Q4 2007 Earnings Call Transcript

Mar.12.08 | About: Winthrop Realty (FUR)

Winthrop Realty Trust (NYSE:FUR)

F4Q07 Earnings Call

March 12, 2008 2:00 pm ET


Beverly Bergman – Vice President & Director of Investor Relations

Peter Braverman – President & Trustee

Thomas Staples – Chief Financial Officer

Michael L. Ashner – Chairman of the Board & Chief Executive Officer


Jeffrey Langbaum – Bear, Stearns & Company


Greetings and welcome to the Winthrop Realty Trust fourth quarter earnings conference call. 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 and Director of Investor Relations for Winthrop Realty Trust. Thank you Ms. Bergman you may begin.

Beverly Bergman

Good afternoon everyone. Welcome to the Winthrop Realty Trust conference call to discuss our fourth quarter and full year 2007 financial results. With us today from senior management are Michael Ashner, Chairman and Chief Executive Officer, Peter Braverman, President, Tom Staples, Chief Financial Officer and other members of the management team. The press release was distributed this morning March 12th and will be furnished on a Form 8K with the SEC. If you did not receive a copy these documents are available on Winthrop’s website at in the investor relations section. Additionally, we are hosting a live webcast of today’s call which you can access in the sites news and events section.

At this time, management would like me to inform you that certain statements made during this conference call which are not historical may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Winthrop believes the expectations reflected in any forward-looking statements are based on reasonable assumptions Winthrop can give no assurance that its expectations will be obtained. 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 Winthrop’s filings with the SEC. Winthrop does not undertake a duty to update any forward-looking statements. Please note that in the press release Winthrop has reconciled all non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg. G requirements. This can be found on page 5 of the press release.

I’d now like to turn the call over to Michael Ashner for his opening remarks. Please go ahead Michael.

Michael L. Ashner

Good afternoon everyone and thank you for joining us on today’s conference call. We are pleased with our overall performance and operational benchmarks achieved for 2007. The company’s results reflect its consistently conservative capital markets approach aligned with the disciplined and opportunistic investment strategy. Tom and Peter will review our financial operating results with you in greater detail as well as highlight certain achievements for the year. Before that however, I would like to comment on our outlook for the marketplace, how we’re positioned within the environment and where we see opportunities going forward.

Wrapping up 2007 I think we can all agree this was a volatile and therefore very challenging year. The rapid declines and resulting lodge in the credit markets culminated in decreased liquidity throughout all real estate markets. For those of us that have seen this type of correction before, this dramatic change is not a surprise. I know that a number of our peers who report that they do not anticipate seeing the return to more rational market conditions in 2008. I agree with this assessment but maybe even more pessimistic. Given our view of current conditions I’m reluctant at this stage to place a timeframe on when the credit markets will restore. Having said that, the question is how does this current market environment impact the company and how we do business.

First, we continue to be extraordinarily patience and persistent in our approach to real estate investment. We have focused only on conservative income producing real estate equity and debt opportunities limiting ourselves to the multifamily, retail, warehouse and office investments. As in the past, we continue to avoid any residential, specialty, developmental, transformational or unconventional real estate investments. We invest only in those assets in which we have historical management expertise and where there’s a large pool of potential buyers. Presently, we have not seen substantial cap rate expansion with respect to types of assets in the markets in which we desire to invest. On the other hand the amount of availability of credit and mortgage debt has created significant opportunities within the debt markets. Ultimately, we anticipate that the credit market dislocation should impact on cap rates, real estate values and thus real estate equity opportunities. Frankly, we prefer to invest in volatile markets dislocated such as this one which is currently emerging.

We have dedicated substantial resources into expanding our Concord debt platform where the absence of liquidity is creating real estate investment opportunities. This is our 50/50 joint venture with Lexington Realty Trust through which we invest in real estate debt. Together with Lexington we have jointly invested approximately $310 million of which $50 million was invested in the fourth quarter 2007. To date, Concord is executing within our expectations and produced a 10% overall return on investment for 2007. We expect that this portfolio of approximately $1.2 billion of loans will provide improved returns as new capital deployed and old capital is recycled at higher yields.

Of particular importance to us was strengthening Concord’s balance sheet. To that end we focused a substantial amount of our efforts on extending where necessary Concord’s financial obligations in 2007 and 2008. As a result, presently approximately 91% of Concord’s financial obligations are locked in and termed out from between three to nine years. Additionally, and as we’ve communicated we’ve entered into a new three year $100 million revolver to execute on additional opportunities. Consequently, we believe we have taken the necessary steps to ensure both sufficient liquidity and reduce near term exposure to that platform. We think we are where we need to be and are reasonably well positioned to capitalize on the opportunities that become available.

With respect to our investment in Lexington, I will let Tom detail the account treatments which impacted our financial results for 2006 and 2007. We originally received shares in Newkirk Realty Trust which as you may recall was subsequently merged into Lexington valued at $70 million in exchange for $50 million in cash and the assignment of certain exclusivity rights related to net lease assets. The market value of our Lexington shares as of yesterday’s close was $54 million. During 2007 we received dividends on our Lexington shares totaling $12.6 million of which $7.35 related to a onetime special dividend where 25.2% return on the cash portion of our $50 million. Further, assuming Lexington maintains its announced quarterly dividend throughout 2008 we will receive coupon of approximate 9.25% on the cash investment in the shares.

I will now turn the call over to CFO, Tom Staples to provide a review of our financial results.

Thomas Staples

In addition to reviewing our overall financial results, I will also briefly review highlights from each of our business segments. As Michael detailed a number of non-cash items negatively impacted our revenue and net income for 2007 as well as positively impacted similar amounts in 2006. These non-cash items were primarily: one, the recognition at December 31, 2007 of an other than temporary impairment loss of approximately $18.2 million primarily on the company’s shares held in Lexington Realty Trust; two) the recognition at December 31, 2006 of non-cash income of approximately $18.8 million related to the company’s shares held in Lexington; three) $5.5 million related to the company’s 50% share of our $11 million other than temporary non-cash impairment on certain bonds held by Concord which Concord plans to hold to majority; and four) A $2 million reduction related to amortization of certain in place leases.

I want to reiterate that the change in the market value of these investments has always been reflected in our quarterly balance sheet and our Concord bonds are performing from a cash flow standpoint. These items effectively created a negative swing in our earnings of approximately $44.5 million for the comparable year-to-year and quarter-to-quarter periods. Excluding these onetime non-cash items net income was $1.4 million and $28.3 million respectively or $0.02 or $0.43 per share respectively for the quarter and year ended December 31, 2007. Our net income was further reduced as a result of increased interest expense in 2007 compared to 2006 of approximately $2.8 million related to special dividends paid on account of our preferred shares which we account for as debt.

Overall, we reported gross revenues of $10.3 million for the quarter ended December 31, 2007, a decrease from the $14.7 million reported for the quarter ended December 31, 2006. For the year ended December 31, 2007 total gross revenues decrease slightly to $51.6 million compared to $53 million for the prior year. Total cash from operating activities was $22.2 million. In the fourth quarter as a result of the previously mentioned impairments we incurred a net loss of $24.4 million or approximately $0.37 per share. For the year, net income was $2.4 million or $0.04 per share. Total FFO for the fourth quarter 2007 was a -$15.9 million or a -$0.24 per diluted share compared with $19.8 million or $0.25 for the fourth quarter of 2006. FFO for the full year 2007 was $24.8 million or $0.28 per diluted share as compared to $48.6 million or $0.70 per diluted share for the full year 2006. Excluding solely the non-cash impairment charge related to the Lexington Realty shares, FFO would have been approximately $43 million or $0.49 per diluted share or $2.3 million and $0.03 for the quarter ended December 31, 2007.

Net operating income for our properties was approximately $30,705,000 for the year ended December 31, 2007 only slightly below $32,192,000 for the year ended December 31, 2006. This slight decrease was primarily due to accounting incurred on our equity investments in two properties held in ventures with [Sealy] which had positive cash flow but which recognized losses for accounting purposes due to depreciation and amortization charges. Revenue from our loan assets and loan securities increased by $4.4 million to approximately $25,811,000 for the year ended December 31, 2007 from $21,318,000 for the year ended December 31, 2006. This increase was primarily the result of Concord being fully operation in 2007 as opposed to ramping up in 2006 as well as an increase in earnings from preferred equity investments due to sales of two properties in the Marc Realty portfolio which generated a return on equity investment of approximately $6.4 million excluding interest.

We’ve already discussed the non-cash items that impacted income from investments in RET equity interests. Excluding these non-cash items for the full year 2007 income from investments and RET equity interests increased by $4 million from 2006. Due to an increase in dividend income of approximately $1.9 million primarily due to dividend income recognized in our investment in Lexington and an increase on gain on sale of real estate securities of nearly $2.1 million. The gain on sale of real estate securities consisted primarily of $9,750,000 from the American First Apartment investor sale in 2007 and $7,839,000 from the sale of the [inaudible] Property investor stock in 2006.

At December 31, 2007 we held RET equity interest that we acquired for an aggregate of $51.8 million in cash plus the assignment of exclusivity rights related to the net lease assets that had a market value at December 31, 2007 of $51.8 million. Turning to liquidity, as of December 31, 2007 the company had cash and cash equivalents of approximately $36.7 million consisting of approximately $30 million in cash and $6.7 million in cash equivalents with maturities of less than 90 days. Additionally, the company had $70 million available under its existing credit facility.

Further, as Peter will discuss momentarily, we also expect to raise additional funds through a rights offering. The company’s board declared a regularly quarterly cash dividend of $0.065 per common share and a special dividend of $0.18 per common share during the fourth quarter 2007 both of which were paid on January 15, 2008. The company currently pays and annualized dividend of $0.26 per share excluding any special dividends.

That concludes our financial review. With that I’ll turn the call over to Peter Braverman.

Peter Braverman

Hello everybody. I’d like to highlight our key achievements for the year. During the year [inaudible] resulting in a gain of $10,187,000 on our original investment of $13,813,000. We received total cash dividends of $12.8 million on investments [inaudible] market value at year end of [inaudible]. We increased the quarterly dividend $0.06 and declared total dividends including special dividends of $0.43.

Now, for some operating highlights. At our Orlando property we extended the lease to 2017 and obtained [inaudible] $40 million. [Inaudible]. In Chicago we acquired [inaudible] square feet of commercial space plus a 133 space indoor parking garage through our Marc Realty joint venture. We also acquired a 6% interest in [inaudible] located in Nashville, Tennessee through our Sealy portfolio. We disposed of two properties in the Marc Realty Portfolio over the course of the year resulting in an overall return of 28.3% on those [inaudible] relating to such properties. Since the formation of that venture we have disposed of six properties for an overall return on those properties of 23.6%. We also earned $562,000 in [inaudible] $9.8 million investment on receivable loan.

At December 31, 2007 our portfolio comprised approximately 9.5 million square feet of space between the properties of the Marc Realty and Sealy portfolios and [inaudible]. The Marc Realty portfolio includes one first mortgage bridge loan, two participating second mortgage loans and 19 convertible Mezzanine loans together with an equity [inaudible]. [Inaudible] these platforms executed with in our expectations and provided a 10% overall return on our investments in 2007. As of December 31, 2007 we and Lexington had both contributed [inaudible] acquired approximately $1.2 billion in assets. During the fourth quarter [inaudible] included $97.5 million [inaudible] and $20 million in Mezzanine loans. The portfolio generated negative [inaudible] including the other than temporary impairment charge. [Inaudible] performing as anticipated and [inaudible] other than our $44 million interest [inaudible] mezzanine loans collateralized [inaudible] to satisfy our loans.

That’s it for the company’s highlights. To conclude for 2007 the company boasts a solid year in operation performance. We have in place a high quality real estate platform [inaudible] our business segments performed well and within our expectations. [Inaudible] to navigate the current market conditions and to realize additional opportunities that result [inaudible] Marc Realty business segment. In January, 2008 the company filed a registration statement with the SEC to propose [inaudible] common shares [inaudible]. Upon the effectiveness of this registration statement the company intends to distribute non-transferable [inaudible] to purchase up to a minimum of 8,845,000 preferred shares. [Inaudible] which has not yet been determined. Further, the company has a shelf registration on file to cover [inaudible] additional equity [inaudible].

Overall we remain committed to a very conservative approach to our operations and opportunistic investment strategy. That’s our signature and that’s where we’re going to stay.

With that I’ll turn the call over to the operator for your questions.

Question-and-Answer Session


(Operator Instructions) One moment while we poll for questions. Our first question comes from Jeff Langbaum with Bear Stearns. Please proceed with your question.

Jeffrey Langbaum – Bear, Stearns & Company

First of all, it was a little bit hard to hear Peter so hopefully I didn’t miss anything and hopefully he didn’t touch on this. Can you talk a little bit more about kind of what the operations are looking like at the property level both within you net lease portfolio and also within the Mark and Sealy JVs? Then, also really a little more detail on kind of what the performance metrics look like with the stuff you hold in Concord?

Peter Braverman

Well, let’s start with our overall occupancy across the board including Sealy and Mark and the consolidated properties is just slightly less than 90%. The consolidated properties are actually close to 96%, the Sealy portfolio is around 89% and the Mark portfolio is between 80 and 84% keeping in mind that many of the properties that we have there are acquired with a turnaround nature. So, the stabilized properties are performing well and the other ones are performing as expected but don’t tend to bring down the overall average but that is with an expectation that is within our goal. Our tenant base is strong at the consolidated properties. We actually have in excess of 57 tenants are investment grade. So, across the border in our real estate properties I think they’re performing well, I think they are performing at or better than budget. With respect to 2008 I think it looks like a solid year.

You asked the question in regards to the Marc portfolio and the Sealy portfolio, the Sealy portfolio is performing as expected and has been a pleasant investment for us and we look forward to other types of investments like that. With respect to the Marc portfolio as I stated that is performing quite well and it is working as we had expected. The business sized properties, we convert them and then move forward.

Michael L. Ashner

Was there a specific question you had, is there more color we can give you on Marc? March has been one of the best performing investments that we have had. It is a business platform [inaudible] underperforming assets is very low plus price. You invest in leasing them up, you then finance your equity out or sell the assets and it really has been a platform which is the gift that keeps on giving. Sealy is a turnaround joint venture partner. They are doing very well, we are on budget and on track with them.

Jeffrey Langbaum – Bear, Stearns & Company

What does the outlook look like within Marc though in terms of you just mentioned the finance your equity out or sell the assets. I’m guessing that’s not very easy to do right here.

Michael L. Ashner

Right now I guess Marc is like any other business, we’re looking to expand Marc because in this credit environment we think there should be more opportunities just regardless. There will be net buyers ability I suspect the net couple of years with Marc.

Thomas Staples

Keeping in mind that with respect to the Marc portfolio the structure we have is that it is mezzanine loan, equity interest position. So, it provides a current return each year on a consistent basis regardless of sale or non-sale of properties. The viability of that asset is not one that is creating us having to sell, it’s recurring income for us.

Jeffrey Langbaum – Bear, Stearns & Company

The coverage on that Mez in those preferred positions is good with existing customers?

Thomas Staples

Marc, the leverage ahead of us is very modest. I suspect, don’t hold me exactly to it, but I would expect the investment is exclusive of our mezzanine loans less than 50% leverage across the board. The last question I believe you asked with respect to Concord, I think the key metric may be that we earned 10% on cash-on-cash this year. You have to understand one thing about Concord, Concord is in essence, in 2007 was a startup. Substantially all of our startup costs were expensed in 2007 so a 10% return after building almost from scratch a $1.2 billion platform is one in which we take some level of pride. We expect the return to continue to grow in 2008 because as I stated, in the first case those cost will be non occurring let alone non-recurring and as we recycle and redeploy capital we’re doing it at higher yields.

Jeffrey Langbaum – Bear, Stearns & Company

Within the securities held in the portfolio obviously you had the one write down this quarter, are there any performance issues on the specific securities that you hold in there?

Thomas Staples

No. All of our bonds are performing, there is nothing in default except as Peter mentioned the macro loan. But, as someone who follows us when the Mez line clashed so we’re very confident we’re going to be paid in full. But, look and candidly, the last thing we learned is in this market bonds get dinged.

Michael L. Ashner

With respect to our bond portfolio, 92% is investment grade as rated by one of the agencies.

Jeffrey Langbaum – Bear, Stearns & Company

Okay. One final housekeeping question, when do you expect the K to be filed?

Michael L. Ashner



(Operator Instructions) There are no further questions at this time. I would now like to turn the floor back over to management for any closing comments.

Michael L. Ashner

I want to thank everyone again for joining us this afternoon. We appreciate your participation and support. In addition, management welcomes your input and questions concerning the company and its business. Feel free to call me at any time or Peter, or Tom for that matter. If you would like to receive our quarterly supplemental package please contact Bev Bergman at our offices. You’ll find her very helpful. You’ll also find additional information about us at our website In addition, please feel free to contact myself or other members at any time as you care to. Have a good afternoon. Thank you.


This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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