Winthrop Realty Trust is a real estate investment trust (“REIT”) under Sections 856-860 of the Internal Revenue Code (“Code”), formed under the laws of the State of Ohio. We conduct our business through our wholly owned operating partnership, WRT Realty L.P., a Delaware limited partnership, which we refer to as the Operating Partnership. All references to the “Trust”, “we”, “us”, “our”, “WRT” or the “Company” refer to Winthrop Realty Trust and its consolidated subsidiaries, including the Operating Partnership.
We are engaged in the business of owning real property and real estate related assets which we categorize into three operating segments: (i) the ownership of investment properties, which includes properties in joint ventures which we consolidate or account for on a equity basis which we refer to as operating properties; (ii) the origination and acquisition of senior and mezzanine loans and debt securities secured directly or indirectly by commercial and multi-family real property, which we refer to as loan assets; and (iii) the ownership of equity and debt securities in other REITs, which we refer to as REIT securities.
At December 31, 2009 we held (i) interests in properties containing approximately 8.5 million square feet of rentable space, owned either directly by us or through joint ventures; (ii) loan assets totaling $31,774,000; (iii) REIT securities with a market value of $52,597,000 (iv) and cash and cash equivalents of $66,493,000.
We began operations in 1961 under the name First Union Real Estate Equity and Mortgage Investments. Effective December 31, 2003, FUR Investors LLC acquired 32% of our then outstanding Common Shares and FUR Advisors LLC, which we refer to as FUR Advisors or our Advisor, was retained as our external advisor, our Board of Trustees was substantially reconstituted and Michael Ashner was appointed CEO and he entered into an exclusivity agreement with the Trust. Since January 1, 2004, we have been externally managed by FUR Advisors. Both FUR Advisors and FUR Investors LLC are separate entities controlled by and owned by our current executive officers as well as other members of the senior management of AREA Property Partners, formerly known as Apollo Real Estate Advisors Inc., a New York based real estate investment fund.
With our new management, commencing January 1, 2004, we began to seek out more opportunistic investments across the real estate spectrum, whether they be operating properties, loan assets or investments in other REITs. From January 1, 2004 through December 31, 2009 we have increased our asset base from $289,968,000 to its current level of $493,192,000 which is detailed below under “Assets.” In particular, we have engaged in certain portfolio type investments including: (i) the acquisition in November 2004 of 16 triple-net leased properties containing approximately 2.5 million gross square feet; (ii) commencing in April 2005, the making of participating mezzanine loans and acquisition of equity interests in a portfolio of 22 properties located primarily in the Chicago, Illinois area (see “Marc Realty Portfolio” below); and (iii) the formation in March 2006, together with Newkirk Realty Trust, Inc., which we refer to as Newkirk, of Concord Debt Holdings LLC, which we refer to as Concord, an entity formed for the purpose of acquiring and originating loan assets (see “Concord and Lex-Win Concord” below).
On January 1, 2005 we elected to form the Operating Partnership and contributed all of our assets to the Operating Partnership in exchange for 100% of the ownership interests in the Operating Partnership. Our Operating Partnership structure, commonly referred to as an umbrella partnership real estate investment trust or “UPREIT” structure, provides us with additional flexibility when acquiring properties as it enables us to acquire properties for cash and/or by issuing to sellers, as a form of consideration, limited partnership interests in our operating partnership. Although we have not yet issued any limited partnership interests in connection with the acquisition of an asset, we believe that this structure can facilitate our ability to acquire portfolio and individual properties by enabling us to structure transactions which may defer tax gains for a seller while preserving our available cash for other purposes.
Under the terms of the Advisory Agreement between FUR Advisors and us, FUR Advisors administers our affairs including seeking, servicing and managing our investments. For providing these and other services, FUR Advisors receives a base management fee and is entitled to an incentive fee after common shareholders have received a return of equity and a cumulative 7% annual return thereon. See “Employees” below for a description of the fees payable to FUR Advisors.
Pursuant to our bylaws, our executive officers are permitted to acquire or dispose of an investment with an aggregate value of $5,000,000 or less without the consent of our Board of Trustees. However, if such transaction is with (i) our Advisor (and any successor advisor), Michael Ashner, or any of their respective affiliates; (ii) certain stated entities which are, or were, affiliated with us; (iii) a beneficial owner of more than 4.9% of our outstanding Common Shares, either directly or upon the conversion of any of our Series B-1 Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest, which we refer to as our Series B-1 Preferred Shares, or Series C Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest, which we refer to as our Series C Preferred Shares; or (iv) a beneficial owner of more than 4.9% of any other entity in which we hold a 10% or greater interest, then regardless of the amount of the transaction, such transaction must be approved by a majority of our independent trustees, acting in their capacity as members of our Conflicts Committee.
Investment, Operating and Capital Strategy
Our business objective is to maximize long-term shareholder value through the acquisition of assets which we believe can generate an overall risk adjusted superior return based on current market conditions through a combination of appreciation as well as recurring or potentially recurring cash flow. As a result of our emphasis on total return, while we seek to achieve a stable, predictable dividend for our shareholders, we do not select or manage our investments for short-term dividend growth, but rather towards achieving overall superior total return. We believe this approach will ultimately result in long term increased share value.
In light of our emphasis on total return risk adjusted investing, we are an opportunistic investor and, with the exception of certain self-imposed restrictions as described below, do not limit ourselves to the type, class or specific location of real estate investments. As such, from time to time the types of real estate investments we will acquire may vary and are not predicatable. In this regard, as opportunities present themselves and as market conditions dictate, we will focus our investment activity in one or more of our business segments and aggressively pursue such opportunities. That is, subject to economic and credit market conditions, we will seek to:
acquire operating properties of specific property types and locations that we believe:
present an opportunity to outperform the marketplace while providing recurring current or potentially recurring cash flow, or
can provide superior returns through an infusion of capital and/or improved management;
acquire portfolios or interests in portfolios at properties within characteristics similar to the above;
acquire loan assets utilizing the same criteria for operating properties;
acquire securities issued by other REITs we believe are undervalued; and
divest investments as they mature in value to the point where we may be unlikely to achieve better than market returns and redeploy capital to what we believe to be higher yielding opportunities. Consistent with our total return approach to investing, it is not possible to predict when we will exit any particular investment.
By way of example, with the significant decline in stock prices during 2008 and early 2009 in general, and REIT shares in particular, we determined that the better utilization of our capital was in undervalued equity and debt securities of other REITs as well as repurchasing our own Series B-1 Preferred Shares. In this regard, through December 31, 2009, we have acquired 2,041,000 Series B-1 Preferred Shares at a combined 26.2% discount from their liquidation value. In addition, we hold equity (primarily preferred shares) and debt securities of other REITs, which we acquired for an aggregate purchase price of $36,266,000 and had a market value of approximately $52,597,000 at December 31, 2009. Further to this point, towards the end of 2009, we acquired loan assets at a discount that we believed to have a strong current return together with appreciation potential and secured by assets we believe to have a large upside.
Another example, during July 2009 we restructured our preferred equity investments with Marc Realty. In doing so, we effectively transferred our interest in several suburban Chicago properties, which in our view were not likely to recover in the near term, and required future capital investment and riskier potential returns. In exchange, we received an increased overall interest in five downtown Chicago properties we considered to be opportunities of a lower risk profile with a better return potential and more aligned with our investment strategy.
Based on current market conditions, we expect to concentrate our investment activity primarily in major metropolitan cities in the United States as we believe that as the economy and real estate values recover, these locations will experience recovery first and most significantly increase in market value. Similarly, we expect to currently concentrate our investment activities in assets that we believe are higher quality office, retail and multi-family properties along with high-end hospitality assets as we expect these too will be the first to recover. We do not pursue those investments in which there is a significant component of raw land, development risk, specialty real estate or condominiums, unless the condominium project can be converted to a conventional multi-family property.
We further seek to limit risk by seeking to make our investments through discrete single purpose entities in which we do not guaranty, other than customary environmental and recourse carve-out guarantees, the debt of our single purpose subsidiaries, thereby limiting the risk of loss to that particular investment or joint venture. To enhance our total return, we utilize leverage. In addition, strategic co-investment ventures managed by us with institutional and high net worth investors may enhance our total return with asset management and other fees, and promoted economic interests and appreciation.
Since December 2005, we have paid regular dividends to our shareholders. In paying dividends we have always sought to have our dividends track recurring cash flow from operations. As a result, while we intend to continue paying dividends each quarter, future dividend declarations will be at the discretion of our Board of Trustees and will depend on our actual cash flow, financial condition, capital requirements, utilization of available capital losses and net operating loss carryforwards, distribution requirements for REITs under the Code, and such other factors as our Board of Trustees deem relevant. Subject to the foregoing, we expect to continue distributing our recurring current cash flow from operations after reserving normal and customary amounts thereby allowing us to maintain our capital. In addition, when deemed prudent or necessitated by applicable distribution requirements for REITs under the Code we may make one or more special distributions during any particular year. In light of the foregoing, in 2009 we reduced our quarterly dividend from $0.325 per share to $0.25 per share for the first three quarters of 2009 and, as a result of the issuance of additional Common Shares during the fourth quarter of 2009 from our rights offering, the proceeds of which have not yet been invested in accretive investments, we reduced it again to $0.1625 for the fourth quarter of 2009. This represents our existing budgeted recurring cash flow generated by assets currently owned and excludes any potential future cash flow generated from the investment of the substantial cash and cash equivalents on hand. Additionally, during a favorable investing environment, we expect that we will utilize our capital loss carryforwards to shelter capital gains from dispositions of our assets so that we may use the proceeds for reinvestment. We expect to continue applying these standards with respect to our dividends on a quarterly basis which may cause the dividends to increase or decrease depending upon cash flow.
As a REIT, we are dependent primarily on external financing to fund the growth of our business because one of the requirements for a REIT is that it distribute at least 90% of its annual REIT taxable income, subject to certain adjustments, to its shareholders. We have historically used the public equity markets and secured financing as our primary sources of capital including raising capital through rights offerings to our then existing shareholders as we did in November 2009. We expect to continue to fund our investments through one or a combination of: cash reserves, borrowings under our credit facility, redeployment of capital from timely asset sales, property loans, the issuance of debt or equity or the formation of joint ventures. Finally, we maintain a stock purchase and dividend reinvestment plan which enables our existing shareholders to reinvest their dividends as well as purchase additional shares at a discounted price.
On June 1, 2009, we acquired from Concord for $38,409,000 a $73,796,000 first mortgage loan collateralized by a 19 story, 289,000 square foot office building located at 160 Spear Street, San Francisco, California, which we refer to as the 160 Spear Loan. In connection with our acquisition of the 160 Spear Loan, we agreed to make additional advances to the borrower in equal quarterly installments of $600,000 over the next two years up to a maximum of $4,800,000.
On July 14, 2009, we split the 160 Spear Loan into a $35,000,000 A Note which bears interest at 9.75% and a $38,796,000 B Note which bears interest at 6.48% and may be satisfied at a discounted payoff amount of $15,000,000. In addition, our $4,800,000 future funding obligation was restructured into a mezzanine loan which bears interest at 15% per annum. Simultaneously with the restructuring, we sold to an unrelated third party the A Note at par resulting in us having a remaining $3,409,000 investment in the 160 Spear Loan together with a commitment to advance up to $4,800,000. As of December 31, 2009 we had advanced $1,200,000 to the borrower.
Both the first mortgage loan and the mezzanine loan require monthly payments of interest only and mature on June 9, 2012, subject to a one-year extension which extension requires the payment of an $850,000 extension fee.