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EX-31.1 - Winthrop Realty Trustv192745_ex31-1.htm
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EX-31.2 - Winthrop Realty Trustv192745_ex31-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended:  June 30, 2010
Or

¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____to ____

Commission File Number 1-6249

WINTHROP REALTY TRUST
(Exact name of Registrant as specified in its certificate of incorporation)

Ohio
 
34-6513657
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
     
7 Bulfinch Place, Suite 500, Boston, Massachusetts
 
02114
(Address of principal executive offices)
 
(Zip Code)

(617) 570-4614
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer   ¨                                                     Accelerated filer     x  
Non-accelerated filer    ¨                                                      Smaller reporting company  ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule12b-2). Yes ¨ No x

As of August 1, 2010 there were 21,231,888 Common Shares of Beneficial Interest outstanding.

 
 

 

INDEX

   
Page
Part I.
Financial Information
 
     
Item 1.
Financial Statements (Unaudited):
 
     
 
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
3
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2010 and June 30, 2009
4
     
 
Consolidated Statements of Equity for the Six Months Ended June 30, 2010 and June 30, 2009
5
     
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and June 30, 2009
6
     
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
     
Item 3.
Quantitative and Qualitative Disclosure about Market Risk
45
     
Item 4.
Controls and Procedures
46
     
Part II.
Other Information
 
     
Item 6.
Exhibits
47
     
Signatures
 
47
     
Exhibit Index
 
48

 
2

 

Item 1.  Financial Information

WINTHROP REALTY TRUST
FORM 10-Q – JUNE 30, 2010
CONSOLIDATED BALANCE SHEETS
 
(in thousands, except per share data)
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
ASSETS
           
Investments in real estate, at cost
           
Land
  $ 20,659     $ 20,659  
Buildings and improvements
    229,132       228,419  
      249,791       249,078  
Less: accumulated depreciation
    (33,279 )     (31,269 )
Investments in real estate, net
    216,512       217,809  
                 
Cash and cash equivalents
    37,913       66,493  
Restricted cash held in escrows
    8,574       9,505  
Loans receivable, net
    53,395       26,101  
Accounts receivable, net of allowances of $430 and $565, respectively
    11,870       14,559  
Securities carried at fair value
    43,754       52,394  
Loan securities carried at fair value
    4,673       1,661  
Available for sale securities, net
    -       203  
Preferred equity investment
    3,951       4,012  
Equity investments
    82,907       73,207  
Lease intangibles, net
    23,218       22,666  
Deferred financing costs, net
    1,366       1,495  
Deposits
    4,100       -  
Assets held for sale
    2,180       3,087  
TOTAL ASSETS
  $ 494,413     $ 493,192  
                 
LIABILITIES
               
Mortgage loans payable
  $ 213,375     $ 216,767  
Series B-1 Cumulative Convertible Redeemable Preferred Shares, $25 per share liquidation preference; 852,000 shares authorized and outstanding at June 30, 2010 and December 31, 2009
    21,300       21,300  
Accounts payable and accrued liabilities
    8,670       7,401  
Dividends payable
    3,481       3,458  
Deferred income
    38       48  
Below market lease intangibles, net
    2,514       2,849  
TOTAL LIABILITIES
    249,378       251,823  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
NON-CONTROLLING REDEEMABLE PREFERRED INTEREST
               
Series C Cumulative Convertible Redeemable Preferred Shares, $25 per share liquidation preference, 144,000 and 544,000 shares authorized and outstanding at June 30, 2010 and December 31, 2009, respectively
    3,221       12,169  
Total non-controlling redeemable preferred interest
    3,221       12,169  
                 
EQUITY
               
Winthrop Realty Trust Shareholders’ Equity:
               
Common Shares, $1 par, unlimited shares authorized; 21,181,449 and 20,375,483 issued and outstanding at June 30, 2010 and December 31, 2009, respectively
    21,181       20,375  
Additional paid-in capital
    507,440       498,118  
Accumulated distributions in excess of net income
    (299,584 )     (301,317 )
Accumulated other comprehensive loss
    (73 )     (87 )
Total Winthrop Realty Trust Shareholders’ Equity
    228,964       217,089  
Non-controlling interests
    12,850       12,111  
Total Equity
    241,814       229,200  
TOTAL LIABILITIES AND EQUITY
  $ 494,413     $ 493,192  

See Notes to Consolidated Financial Statements and refer to Note 17 for information regarding variable interest entities (VIEs) including VIEs for which the Trust is the primary beneficiary.

 
3

 

WINTHROP REALTY TRUST
FORM 10-Q – JUNE 30, 2010
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)

   
Three Months Ended
   
Six Months Ended
 
   
2010
   
2009
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Revenue
                       
Rents and reimbursements
  $ 9,636     $ 10,105     $ 19,156     $ 20,760  
Interest and dividends
    3,590       2,214       6,799       3,966  
      13,226       12,319       25,955       24,726  
Expenses
                               
Property operating
    1,822       1,643       3,781       3,502  
Real estate taxes
    340       621       1,060       1,294  
Depreciation and amortization
    2,434       2,634       4,796       5,485  
Interest
    3,666       4,301       7,317       8,576  
Provision for loss on loans receivable
    -       1,724       -       2,152  
General and administrative
    1,916       1,875       3,825       3,317  
State and local taxes
    85       147       100       197  
      10,263       12,945       20,879       24,523  
Other income (loss)
                               
Earnings (loss) from preferred equity investments
    85       (3,209 )     168       (2,194 )
Equity in loss of equity investments
    (392 )     (82,249 )     (919 )     (100,412 )
Gain on sale of securities carried at fair value
    78       2,685       773       2,598  
Unrealized (loss) gain on securities carried at fair value
    (750 )     12,580       1,790       1,432  
Impairment loss on real estate loan available for sale
    -       (203 )     -       (203 )
Gain on extinguishment of debt
    -       -       -       5,237  
Unrealized gain on loan securities carried at fair value
    3,625       -       3,012       -  
Interest income
    40       42       77       114  
      2,686       (70,354 )     4,901       (93,428 )
                                 
Income (loss) from continuing operations
    5,649       (70,980 )     9,977       (93,225 )
                                 
Discontinued operations
                               
Loss from discontinued operations
    (898 )     (51 )     (776 )     (68 )
                                 
Consolidated net income (loss)
    4,751       (71,031 )     9,201       (93,293 )
Income attributable to non-controlling interest
    (175 )     (165 )     (420 )     (336 )
Net income (loss) attributable to Winthrop Realty Trust
    4,576       (71,196 )     8,781       (93,629 )
Income attributable to non-controlling redeemable preferred interest
    (58 )     -       (171 )     -  
Net income (loss) attributable to Common Shares
  $ 4,518     $ (71,196 )   $ 8,610     $ (93,629 )
                                 
Comprehensive income (loss)
                               
Consolidated net income (loss)
  $ 4,751       (71,031 )   $ 9,201     $ (93,293 )
Change in unrealized gain (loss) on available for sale securities
    (5 )     9       2       11  
Change in unrealized gain (loss) on interest rate derivative
    (28 )     127       12       265  
Change in unrealized loss from equity investments
    -       26,371       -       26,174  
Comprehensive income (loss)
  $ 4,718     $ (44,524 )   $ 9,215     $ (66,843 )
                                 
Per Common Share data - Basic
                               
Income (loss) from continuing operations
  $ 0.25     $ (4.50 )   $ 0.44     $ (5.92 )
Loss from discontinued operations
    (0.04 )     -       (0.03 )     -  
Net income (loss) attributable to Winthrop Realty Trust
  $ 0.21     $ (4.50 )   $ 0.41     $ (5.92 )
                                 
Per Common Share data - Diluted
                               
Income (loss) from continuing operations
  $ 0.25     $ (4.50 )   $ 0.44     $ (5.92 )
Loss  from discontinued operations
    (0.04 )     -       (0.03 )     -  
Net income (loss) attributable to Winthrop Realty Trust
  $ 0.21     $ (4.50 )   $ 0.41     $ (5.92 )
                                 
Basic Weighted-Average Common Shares
    21,175       15,822       20,888       15,814  
Diluted Weighted-Average Common Shares
    21,177       15,822       21,412       15,814  

See Notes to Consolidated Financial Statements.

 
4

 

WINTHROP REALTY TRUST
FORM 10-Q – JUNE 30, 2010
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
(in thousands, except per share data)

                     
Accumulated
   
Accumulated
             
   
Common Shares
   
Additional
   
Distributions
   
Other
             
   
of Beneficial Interest
   
Paid-In
   
In Excess of
   
Comprehensive
   
Non-Controlling
       
   
Shares
   
Amount
   
Capital
   
Net Income
   
Income (Loss)
   
Interests
   
Total
 
                                           
Balance, December 31, 2009
    20,375     $ 20,375     $ 498,118     $ (301,317 )   $ (87 )   $ 12,111     $ 229,200  
                                                         
Net income attributable to Winthrop Realty Trust
    -       -       -       8,781       -       -       8,781  
Net income attributable to non-controlling interests
    -       -       -       -       -       420       420  
Distributions to non-controlling interests
    -       -       -       -       -       (200 )     (200 )
Contributions from non-controlling interests
    -       -       -       -       -       519       519  
Dividends paid or accrued on Common Shares of Beneficial Interest ($0.325 per share)
    -       -       -       (6,877 )     -       -       (6,877 )
Dividends paid or accrued on Series C Preferred Shares ($0.8125 per share)
    -       -       -       (171 )     -       -       (171 )
Change in unrealized gain on available for sale securities
    -       -       -       -       2       -       2  
Change in unrealized gain on interest rate derivatives
    -       -       -       -       12       -       12  
Conversion of Series C Preferred Shares to Common Shares
    714       714       8,234       -       -       -       8,948  
Stock issued pursuant to dividend reinvestment plan
    92       92       1,088       -       -       -       1,180  
                                                         
Balance, June 30, 2010
    21,181     $ 21,181     $ 507,440     $ (299,584 )   $ (73 )   $ 12,850     $ 241,814  

                     
Accumulated
   
Accumulated
             
   
Common Shares
   
Additional
   
Distributions
   
Other
             
   
of Beneficial Interest
   
Paid-In
   
In Excess of
   
Comprehensive
   
Non-Controlling
       
   
Shares
   
Amount
   
Capital
   
Net Income
   
Income
   
Interests
   
Total
 
                                           
Balance, December 31, 2008
    15,754     $ 15,754     $ 460,956     $ (213,284 )   $ (15,176 )   $ 10,958     $ 259,208  
                                                         
Net loss attributable to Winthrop Realty Trust
    -       -       -       (93,629 )     -       -       (93,629 )
Cumulative effect, change in accounting principle
    -       -       -       11,647       (11,647 )     -       -  
Net income attributable to non-controlling interests
    -       -       -       -       -       336       336  
Distributions to non-controlling interests
    -       -       -       -       -       (743 )     (743 )
Contributions from non-controlling interests
    -       -       -       -       -       723       723  
Dividends paid or accrued on Common Shares of Beneficial Interest ($0.50 per share)
    -       -       -       (7,910 )     -       -       (7,910 )
Change in unrealized gain on available for sale securities
    -       -       -       -       11       -       11  
Change in unrealized gain on interest rate derivatives
    -       -       -       -       265       -       265  
Change in unrealized loss from equity investments
    -       -       -       -       26,174       -       26,174  
Stock issued pursuant to dividend reinvestment plan
    69       69       658       -       -       -       727  
                                                         
Balance, June 30, 2009
    15,823     $ 15,823     $ 461,614     $ (303,176 )   $ (373 )   $ 11,274     $ 185,162  

See Notes to Consolidated Financial Statements.

 
5

 

WINTHROP REALTY TRUST
FORM 10-Q – JUNE 30, 2010
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

   
Six Months Ended
June 30,
 
   
2010
   
2009
 
Cash flows from operating activities
           
Net income (loss)
  $ 9,201     $ (93,293 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization (including amortization of deferred financing costs)
    3,307       3,746  
Amortization of lease intangibles
    1,369       2,461  
Straight-lining of rental income
    708       577  
(Earnings) loss of preferred equity investments
    (168 )     2,929  
Distributions from preferred equity investments
    229       1,855  
Loss of equity investments
    919       100,412  
Distributions from equity investments
    2,254       665  
Restricted cash held in escrows
    1,656       (1,003 )
Gain on sale of securities carried at fair value
    (773 )     (2,598 )
Unrealized gain on securities carried at fair value
    (1,790 )     (1,432 )
Unrealized gain on loan securities carried at fair value
    (3,012 )     -  
Impairment loss on real estate loan available for sale
    -       203  
Impairment loss on real estate held for sale
    1,000       -  
Gain on extinguishment of debt
    -       (5,237 )
Provision for loss on loan receivable
    -       2,152  
Tenant leasing costs
    (2,349 )     (1,806 )
Bad debt recovery
    (250 )     (95 )
Net change in interest receivable
    (113 )     (480 )
Loan discount accretion
    (3,742 )     -  
Net change in other operating assets and liabilities
    3,423       1,082  
Net cash provided by operating activities
    11,869       10,138  
                 
Cash flows from investing activities
               
Issuance and acquisition of loans receivable
    (26,451 )     (11,147 )
Investments in real estate
    (1,753 )     (719 )
Investment in equity investments
    (12,873 )     -  
Investment in real estate loan available for sale
    -       (35,000 )
Purchase of securities carried at fair value
    (1,856 )     (29,889 )
Proceeds from preferred equity investments
    -       60  
Proceeds from sale of securities carried at fair value
    13,174       16,759  
Proceeds from sale of available for sale securities
    205       -  
Proceeds from sale of loans receivable
    3,000       -  
Restricted cash held in escrows
    (2,171 )     2,597  
Deposits on acquisition of loans receivable
    (4,100 )     -  
Collection of loans receivable
    12       6,800  
Net cash used in investing activities
    (32,813 )     (50,539 )
 
(Continued on next page)
See Notes to Consolidated Financial Statements.

 
6

 

WINTHROP REALTY TRUST
FORM 10-Q – JUNE 30, 2010
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands, continued)

   
Six Months Ended
June 30,
 
   
2010
   
2009
 
Cash flows from financing activities
           
Proceeds from mortgage loans payable
  $ -     $ 49  
Proceeds from loan payable
    -       19,818  
Proceeds from revolving line of credit
    -       35,000  
Principal payments of mortgage loans payable
    (3,392 )     (3,131 )
Restricted cash held in escrows
    1,446       3,938  
Payments of note payable
    -       (9,800 )
Payment of revolving line of credit
    -       (35,000 )
Deferred financing costs
    (164 )     (61 )
Contribution from non-controlling interest
    519       723  
Distribution to non-controlling interest
    (200 )     (743 )
Issuance of Common Shares under Dividend Reinvestment Plan
    1,180       727  
Dividend paid on Common Shares
    (6,746 )     (9,888 )
Dividend paid on Series C Preferred Shares
    (279 )     -  
Net cash (used in) provided by financing activities
    (7,636 )     1,632  
                 
Net decrease in cash and cash equivalents
    (28,580 )     (38,769 )
Cash and cash equivalents at beginning of period
    66,493       59,238  
Cash and cash equivalents at end of period
  $ 37,913     $ 20,469  
                 
Supplemental Disclosure of Cash Flow Information
               
Interest paid
  $ 7,216     $ 8,542  
                 
Taxes paid
  $ 98     $ 129  
                 
Supplemental Disclosure on Non-Cash Investing and Financing Activities
               
Dividends accrued on Common Shares
  $ 3,442     $ 3,956  
Dividends accrued on Series C Preferred Shares
  $ 39     $ -  
Capital expenditures accrued
  $ 165     $ 222  
Redemption of Series B-1 Preferred Shares
  $ -     $ (17,081 )
Deposit on redemption of Series B-1 Preferred Shares
  $ -     $ 17,081  

See Notes to Consolidated Financial Statements.

 
7

 
 
WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Organization

Winthrop Realty Trust (“Winthrop”) is an unincorporated association in the form of a business trust organized in Ohio under a Declaration of Trust dated August 1, 1961, as amended and restated on May 21, 2009, which has as its stated principal business activity the ownership and management of, and lending to, real property and real estate related assets.

Winthrop conducts its business through WRT Realty L.P., a Delaware limited partnership (the “Operating Partnership”). Winthrop is the sole general partner of, and owns directly and indirectly, 100% of the limited partnership interest in the Operating Partnership.  All references to the “Trust” refer to Winthrop and its consolidated subsidiaries, including the Operating Partnership.

The Trust is engaged in the business of owning real property and real estate related assets which it categorizes into three specific areas:  (i) direct or indirect ownership of wholly and partially owned operating properties (“operating properties”); (ii) origination and acquisition of loans and debt securities secured directly or indirectly by commercial real property (collectively “loan assets”), including collateral mortgage-backed securities, and (iii) equity and debt interests in other real estate investment trusts (“REIT securities”).

2.
Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements, although management believes that the disclosures presented herein are adequate to make the accompanying unaudited consolidated interim financial statements not misleading. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated annual financial statements and the notes thereto included in the Trust’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC.  In the opinion of management, all adjustments considered necessary for fair statements have been included, and all such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2010 are not necessarily indicative of the operating results for the full year.

The accompanying unaudited consolidated financial statements represent the consolidated results of Winthrop, its wholly-owned taxable REIT subsidiary, WRT TRS Management Corp., the Operating Partnership, wholly-owned subsidiaries and certain partially-owned entities in which the Operating Partnership owns either (i) a controlling interest or (ii) is the primary beneficiary of a variable interest entity (“VIE”).  All significant intercompany amounts have been eliminated.  The Trust accounts for its investments in companies in which it has the ability to significantly influence, but does not have a controlling interest, by using the equity method of accounting.

Reclassifications

Certain prior year balances have been reclassified in order to conform to the current year’s presentation.  The Trust’s property in Athens, Georgia is included in discontinued operations for the three and six month periods ended June 30, 2010 and 2009.  The Trust’s Creekwood Apartments property in Kansas City, Kansas is included in discontinued operations for the three and six month periods ended June 30, 2009.

Earnings Per Share

The Trust determines basic earnings per share on the weighted average number of Common Shares of Beneficial Interest (“Common Shares”) outstanding during the period and reflects the impact of participating securities.  The holders of the Series B-1 Cumulative Convertible Redeemable Preferred Shares (“Series B-1 Preferred Shares”) and the Series C Cumulative Convertible Redeemable Preferred Shares (“Series C Preferred Shares”) are entitled to receive cumulative preferential dividends on a quarterly basis equal to the greater of (i) $0.40625 per share quarterly (6.5% of the liquidation preference on an annualized basis) or (ii) cash dividends payable on the number of Common Shares into which the Series B-1 Preferred Shares and Series C Preferred Shares (assuming for this purpose that the conversion price of the Series C Preferred Shares equals the conversion price for the Series B-1 Preferred Shares) are convertible.  The Trust computes diluted earnings per share based on the weighted average number of Common Shares outstanding combined with the incremental weighted average effect from all outstanding potentially dilutive instruments.

 
8

 
 
WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
The Trust has calculated earnings per share in accordance with relevant accounting guidance for participating securities and the two class method.  The reconciliation of earnings attributable to Common Shares outstanding for the basic and diluted earnings per share calculation is as follows (in thousands, except per share data):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Basic
                       
Income (loss) from continuing operations
  $ 5,649     $ (70,980 )   $ 9,977     $ (93,225 )
Income attributable to non-controlling interest
    (175 )     (165 )     (420 )     (336 )
Preferred dividend of Series C Preferred Shares
    (58 )     -       (171 )     -  
Income (loss) from continuing operations applicable to Common Shares
    5,416       (71,145 )     9,386       (93,561 )
Loss from discontinued operations
    (898 )     (51 )     (776 )     (68 )
Net income (loss) applicable to Common Shares for earnings per share purposes
  $ 4,518     $ (71,196 )   $ 8,610     $ (93,629 )
                                 
Basic weighted-average Common Shares
    21,175       15,822       20,888       15,814  
                                 
Income (loss) from continuing operations
  $ 0.25     $ (4.50 )   $ 0.44     $ (5.92 )
Loss from discontinued operations
    (0.04 )     -       (0.03 )     -  
Net income (loss) per Common Share
  $ 0.21     $ (4.50 )   $ 0.41     $ (5.92 )
                                 
Diluted
                               
Income (loss) from continuing operations
  $ 5,649     $ (70,980 )   $ 9,977     $ (93,225 )
Income attributable to non-controlling interest
    (175 )     (165 )     (420 )     (336 )
Preferred dividend of Series C Preferred Shares
    (58 )     -       -       -  
Income (loss) from continuing operations applicable to Common Shares
    5,416       (71,145 )     9,557       (93,561 )
Loss from discontinued operations
    (898 )     (51 )     (776 )     (68 )
Net income (loss) applicable to Common Shares for earnings per share purposes
  $ 4,518     $ (71,196 )   $ 8,781     $ (93,629 )
 
                               
Basic weighted-average Common Shares
    21,175       15,822       20,888       15,814  
Series B-1 Preferred Shares (1)
    -       -       -       -  
Series C Preferred Shares (2)
    -       -       522       -  
Stock options (3)
    2       -       2       -  
Diluted weighted-average Common Shares
    21,777       15,822       21,412       15,814  

(Continued on next page)      
 
9

 
WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Income (loss) from continuing operations
  $ 0.25     $ (4.50 )   $ 0.44     $ (5.92 )
Loss from discontinued operations
    (0.04 )     -       (0.03 )     -  
Net income (loss) per Common Share
  $ 0.21     $ (4.50 )   $ 0.41     $ (5.92 )

 
(1)
The Series B-1 Preferred Shares were anti-dilutive for the three and six months ended June 30, 2010 and 2009 and are not included in the weighted-average shares outstanding for the calculation of diluted earnings per Common Share.
 
(2)
The Series C Preferred Shares were issued November 1, 2009, were anti-dilutive for the three months ended June 30, 2010 and were dilutive for the six months ended June 30, 2010.
 
(3)
The Trust’s outstanding stock options are dilutive for the three and six months ended June 30, 2010.  The stock options were anti-dilutive for the three and six months ended June 30, 2009 and are not included in the weighted average shares outstanding for the calculation of diluted earnings per Common Share for 2009.

Recently Issued Accounting Standards

In January 2010 the FASB issued an amendment to the accounting and disclosure requirements for fair value measurements. This amendment requires more robust disclosure of valuation techniques and inputs into fair value measurements and requires amounts and reasons for significant transfers between levels in the fair value hierarchy to be reported along with disclosure of a company’s policy for recognizing such transfers. This amendment is effective for the Trust beginning on January 1, 2010, except for Level 3 sensitivity disclosures, which are effective for the Trust beginning in fiscal 2011. The Trust has adopted this standard which did not have a material impact on its consolidated financial statements.

3.
Fair Value Measurement

Cash equivalents, derivative financial instruments, available for sale securities and certain securities are reported at fair value.  The fair value measurements are determined based on the assumptions that market participants would use in pricing the applicable asset or liability. As a basis for considering market participant assumptions in fair value measurements, the standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2010, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

Recurring Basis
 
Quoted Prices in Active
Markets for Identical Assets
and Liabilities (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Total
 
                         
Assets
                       
Cash and cash equivalents
  $ 37,913     $ -     $ -     $ 37,913  
Restricted cash held in escrow
    8,574       -       -       8,574  
Securities carried at fair value
    43,754       -       -       43,754  
Loan securities carried at fair value
    -       -       4,673       4,673  
    $ 90,241     $ -     $ 4,673     $ 94,914  
                                 
Liabilities
                               
Derivative liabilities
  $ -     $ 73     $ -     $ 73  

 
10

 
 
WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The table below presents the Trust’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2009, according to the level in the fair value hierarchy within which those measurements fall (in thousands):

Recurring Basis
 
Quoted Prices in Active
Markets for Identical Assets
and Liabilities (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
 
Total
 
                         
Assets
                       
Cash and cash equivalents
  $ 66,493     $ -     $ -     $ 66,493  
Restricted cash held in escrow
    9,505       -       -       9,505  
Available for sale securities
    203       -       -       203  
Securities carried at fair value
    51,702       -       692       52,394  
Loan securities carried at fair value
      -         -         1,661        1,661  
    $ 127,903     $ -     $ 2,353     $ 130,256  
Liabilities
                               
Derivative liabilities
  $ -     $ 84     $ -     $ 84  

The table below includes a roll forward (in thousands) of the balance sheet amounts from January 1, 2010 to June 30, 2010, including the change in fair value, for financial instruments classified by the Trust within Level 3 of the valuation hierarchy.  When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, it is based upon the significance of the unobservable factors to the overall fair value measurement.

 
Six Months Ended  June 30, 2010
 
Securities Carried 
at Fair Value
   
Loan Securities
Carried at Fair Value
 
             
Fair value, January 1, 2010
  $ 692     $ 1,661  
Purchases, issuances and settlements, net
    (692 )     -  
Unrealized gain, net
    -       3,012  
Fair value,  June 30, 2010
  $ -     $ 4,673  

Non-recurring Measurements

The table below presents as of June 30, 2010 the Trust’s assets and liabilities measured at fair value as events dictate (non-recurring measurements) according to the level in the fair value hierarchy within which those measurements fall (in thousands):

Non-Recurring Basis
 
Quoted Prices in
Active Markets for
Identical Assets and
Liabilities (Level 1)
   
Significant Other
Observable
Inputs (Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Total
 
                         
Assets held for sale
  $ -     $ -     $ 2,180     $ 2,180  
    $ -     $ -     $ 2,180     $ 2,180  

 
11

 
 
WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value Option

The current accounting guidance for fair value measurement provides a fair value option election that allows companies to irrevocably elect fair value as the measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made are recognized in earnings on a quarterly basis based on the then market price regardless of whether such assets or liabilities have been disposed of at such time.  The fair value option guidance permits the fair value option election to be made on an instrument by instrument basis when it is initially recorded or upon an event that gives rise to a new basis of accounting for that asset or liability.  The Trust elected the fair value option for all securities acquired subsequent to September 30, 2008.

The Trust recognized a net unrealized gain of $2,875,000 and $4,802,000 for the three and six months ended June 30, 2010, respectively, and a net unrealized gain of $12,580,000 and $1,432,000 for the three and six months ended June 30, 2009 respectively, as a result of the change in fair value of the securities for which the fair value option was elected, which is recorded as an unrealized gain or loss in the Trust’s statements of operations.  Income related to securities carried at fair value is recorded as interest and dividend income.

The following table presents as of June 30, 2010 and December 31, 2009 the Trust's financial assets for which the fair value option was elected (in thousands):

Financial instruments, at fair value
 
June 30, 2010
   
December 31, 2009
 
             
Assets
           
Securities carried at fair value:
           
Debentures
  $ 15,907     $ 18,794  
Preferred shares
    25,922       23,950  
Common shares
    1,925       9,650  
Loan securities carried at fair value
    4,673       1,661  
    $ 48,427     $ 54,055  

The table below presents as of June 30, 2010 the difference between fair values and the aggregate contractual amounts due for which the fair value option has been elected (in thousands):

   
Fair Value at
June 30, 2010
   
Amount Due
Upon Maturity
   
Difference
 
Assets
                 
Securities carried at fair value:
                 
Debentures
  $ 15,907     $ 16,290     $ 383  
Loan securities carried at fair value
    4,673       7,494       2,821  
    $ 20,580     $ 23,784     $ 3,204  

The table below presents as of December 31, 2009 the difference between fair values and the aggregate contractual amounts due for which the fair value option has been elected (in thousands):

   
Fair Value at
December 31, 2009
   
Amount Due
Upon Maturity
   
Difference
 
Assets
                 
Securities carried at fair value:
                 
Debentures
  $ 18,794     $ 21,191     $ 2,397  
Loan securities carried at fair value
    1,661       7,494       5,833  
    $ 20,455     $ 28,685     $ 8,230  

 
12

 
 
WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
4.
Acquisitions, Dispositions and Other Activity

Acquisitions of Loans

Driver Building, San Diego, California – First Mortgage Loan - On May 14, 2010 the Trust acquired at par a non-performing $6,540,000 first mortgage loan. The loan is collateralized by an 80,300 square foot office building referred to as the Robert F. Driver Building located in San Diego, California. This loan which bears interest at 7.47% and matured on March 1, 2010, is in maturity default.  Subsequent to June 30, 2010 the Trust has commenced foreclosure on the property with a foreclosure sale expected to occur in September 2010.

Crossroads Building, Englewood Colorado– First Mortgage Loan - On June 11, 2010 the Trust acquired for $8,100,000 a $10,031,000 non-performing first mortgage loan. The loan is collateralized by an 118,200 square foot office building referred to as the Crossroads II at Meridian, located in Englewood, Colorado, a suburb of Denver. This loan is in default and the Trust has commenced foreclosure on the property with a foreclosure sale expected to occur in the fourth quarter of 2010.

Deer Valley Medical Center, Deer Valley, Arizona – First Mortgage Loan - On June 28, 2010 the Trust, through WRT-DV LLC (“WRT-DV”), a newly formed wholly owned subsidiary, acquired for $10,257,000 a $20,491,000 non-performing first mortgage loan. The loan is collateralized by a newly constructed 85,600 square foot office building with its own 4-story enclosed parking garage referred to as the Deer Valley Medical Center located in Deer Valley, Arizona, a suburb of Phoenix. In connection with the purchase of the loan, WRT-DV also assumed a tenant improvement capital obligation not to exceed $2,500,000 with respect to a lease with a division of United Healthcare.  This loan was in maturity default and the property was foreclosed on August 6, 2010.  In July 2010, in exchange for a capital contribution of $157,000, the Trust admitted Fenway VI LLC (“Fenway”), an unrelated third party, as a member of WRT-DV.

Riverside Shopping Center, Riverside, California – On June 28, 2010 the Trust and Retail Opportunity Investment Corp. (“ROIC”) each contributed $7,800,000 and formed a 50%-50% joint venture entity which acquired at par a 12% $15,600,000 B participation in a performing $70,000,000 first mortgage loan.  The first mortgage loan is collateralized by a 405,000 square foot retail center located in Riverside, California and matures on December 1, 2012.  The B participation is subordinate to $54,400,000 A participation.

Acquisitions & Dispositions of REIT Securities

During the quarter ended June 30, 2010 the Trust sold debentures and received net proceeds of approximately $1,767,000. The Trust recognized a net gain on the sale of these securities of approximately $78,000 exclusive of any interest or dividends earned.

Financing

In April 2010, the Trust exercised its one-year option to extend the loan with KeyBank collateralized by 14 properties (the “KeyBank loan”) through June 2011.

 
13

 
 
WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5.
Loans Receivable

The following table summarizes the Trust’s loans receivable at June 30, 2010 and December 31, 2009 (in thousands):

               
Carrying Amount
 
Property
 
Location
 
Interest Rate
 
Maturity
 
June 30,
2010
   
December
31, 2009
 
                         
180 North Michigan (1)
 
Chicago, IL
    8.5 %
May 2016
  $ 1,070     $ 717  
160 Spear (1)
 
San Francisco, CA
    (2 )
June 2012
    5,253       4,281  
160 Spear – Mezzanine (1)
 
San Francisco, CA
    15.0 %
June 2012
    2,422       1,212  
Siete Square (3)
 
Phoenix, AZ
    (3 )
June 2012
    2,486       5,505  
Beverly Hilton (1)
 
Beverly Hills, CA
 
Libor + 1.74%
 
August 2010
    6,502       5,384  
Wellington Tower (1)
 
New York, NY
    6.79 %
July 2017
    2,406       2,364  
Metropolitan Tower (1)
 
New York, NY
 
Libor + 1.5%
 
Nov 2010
    8,244       6,638  
Deer Valley (1) (5)
 
Deer Valley, AZ
    (4 )
April 2009
    10,256       -  
Crossroads (1) (5)
 
Englewood, CO
    6.07 %
July 2013
    8,134       -  
Driver (1) (5)
 
San Diego, CA
    7.47 %
March 2010
    6,622       -  
                  $ 53,395     $ 26,101  

(1)
The Trust determined that these loan receivables were deemed to be variable interests in VIEs primarily based on the fact that the underlying entities do not have sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support.  The Trust does not have the power to direct the activities of the entity that most significantly impact the entity’s economic performance.
(2)
The Trust holds a B Note in this loan.  Interest on the B Note equals the difference between (i) interest on the entire outstanding loan principal balance ($73,796 at June 30, 2010) at a rate of 6.48215% per annum less (ii) interest payable on the outstanding principal balance of the A Note ($35,000 at June 30, 2010) at a rate of 9.75% per annum.  As a result, the effective yield on the Trust’s $3,410 cash investment is 40.8%.
(3)
The borrower has notified the Trust of its intent to pay off this loan in full in August 2010 at the discounted payoff amount of $2,500.
(4)
The loan bears interest at a rate of 9.25% with respect to $18,200 and 10% with respect to $2,100 of face value.
(5)
Loan is in default and the contractually required payments receivable include the total outstanding principal of the loan, stated interest as noted above, default interest on the outstanding principal and applicable late fees.

The carrying amount of loans receivable includes accrued interest of $310,000 and $197,000 at June 30, 2010 and December 31, 2009, respectively, and accretion of discount of $4,763,000 and $1,021,000 at June 30, 2010 and December 31, 2009, respectively.  For the three and six months ended June 30, 2010, the Trust recorded discount accretion into interest income of $2,001,000 and $3,742,000, respectively.  There was no discount accretion for the three and six months ended June 30, 2009.  The fair value of the Trust’s loans receivable, exclusive of interest receivable, was approximately $73,810,000 at June 30, 2010.

 
14

 
 
WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
Loan Revenue Recognition
 
Interest income on performing loans is recognized over the life of the investments using the effective interest method and recognized on the accrual basis.  Costs of acquiring loans are expensed as incurred.
 
Certain of the Trust's loans provide for accrual of interest at specified rates that differ from current payment terms. Interest is recognized on such loans at the accrual rate subject to management's determination that accrued interest and outstanding principal are collectible, based on the underlying collateral and operations of the borrower.
 
The Trust considers a loan to be non-performing and places loans on non-accrual status at such time as: management determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. While on non-accrual status, based on the Trust's judgment as to collectability of principal, loans are either accounted for on a cash basis, where interest income is recognized only upon actual receipt of cash, or on a cost-recovery basis, where all cash receipts reduce a loan's carrying value.
 
For the three and six months ended June 30, 2010 and 2009, the Trust did not recognize any interest income on impaired loans subsequent to the date of their impairment.  There were no cash payments received on impaired loans for the three and six months ended June 30, 2010.  As of June 30, 2009, the Trust received $9,000 which was recorded as a cash recovery on impaired loans.
 
Loan Losses
 
The Trust performs an analysis for loan losses in instances where it is deemed probable that the Trust may be unable to collect all amounts of principal and interest due according to the contractual terms of the loan. If, upon completion of the valuation, the estimated fair value of the underlying collateral securing the loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level the Trust believes is adequate to absorb losses.

There was no provision for loan loss recorded during the three and six months ended June 30, 2010.  During the three and six months ended June 30, 2009, the Trust recorded a provision for loan loss of $1,724,000 and $2,152,000 respectively related to loans on several properties in the Marc Realty portfolio.
 
6.
Securities Carried at Fair Value And Loan Securities Carried at Fair Value

Securities carried at fair value are comprised of debentures, preferred shares, and common shares for which the Trust has elected the fair value option.

Securities carried at fair value and loan securities carried at fair value at June 30, 2010 are summarized in the table below (in thousands):

   
Cost
   
Fair Value
 
             
Debentures
  $ 11,045     $ 15,907  
Preferred shares
    14,868       25,922  
Common shares
    1,660       1,925  
      27,573       43,754  
                 
Loan securities
    1,661       4,673  
    $ 29,234     $ 48,427  

For the three and six months ended June 30, 2010, the Trust recognized unrealized gains on securities carried at fair value of $2,875,000 and $4,802,000 respectively.  For the three and six months ended June 30, 2009, the Trust recognized unrealized gains on securities carried at fair value of $12,580,000 and $1,432,000 respectively.

 
15

 

WINTHROP REALTY TRUST
FORM 10-Q JUNE 30, 2010

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Securities carried at fair value and loan securities carried at fair value at December 31, 2009 are summarized in the table below (in thousands):

   
Cost
   
Fair Value
 
             
Debentures
  $ 13,597     $ 18,794  
Preferred shares
    14,231       23,950  
Common shares
    8,234       9,650  
      36,062       52,394  
                 
Loan securities
    1,661       1,661  
    $ 37,723     $ 54,055  

During the three and six months ended June 30, 2010 securities were sold for total proceeds of approximately $1,767,000 and $13,174,000, respectively.  The Trust recognized gains of $78,000 and $773,000 respectively on the sale of these securities.

During the three and six months ended June 30, 2009 securities were sold for total proceeds of approximately $9,792,000 and $16,759,000, respectively. The Trust recognized gains of $2,685,000 and $2,598,000 respectively on the sale of these securities.

The Trust utilizes the specific identification method for calculating gain or loss on the sale of securities.

7.
Preferred Equity Investments – Marc Realty

The Trust recognized earnings from preferred equity investments of $85,000 and $168,000 for the three and six months ended June 30, 2010 and recognized loss from preferred equity investments of $3,209,000 and $2,194,000 respectively for the three and six months ended June 30, 2009 which included impairment losses of $2,186,000 in the second quarter of 2009.  The results for the six months ended June 30, 2010 reflect the effects of the restructuring of the preferred equity investment with Marc Realty in July 2009.   Effective with the third quarter of 2009, 12 of the investments with Marc Realty were deemed to be equity investments for which the Trust began recognizing its pro-rata share of income or loss subsequent to June 30, 2009.  Prior to June 30, 2009, the Trust accounted for these 12 investments as preferred equity investments.

8.