FUR - Winthrop Realty Trust (REIT)

[Guest MarkS]

I pick up shares this morning @12.70.  The current liquidation estimate is $14.18 - which seems pretty solid.  They expect to make another cash distribution prior to the end of August. You also get to participate in any recovery of proceeds recovered in ongoing litigation. The high end of recovery is 200m plus judicial interest minus attorney fees.  The best case litigation recovery appears to be around $3 per share.

Thanks

Mark

[moneyball]

I think I will wait until right before the shares stop trading in August because that provides most upside, I think they conservatively value the Times Square asset and think people will sell due to liquidity concerns.

[Guest MarkS]

If anyone is following,- this just out.

 

BOSTON, Apr 27, 2016 (GLOBE NEWSWIRE via COMTEX) --

 

Winthrop Realty Trust FUR, +0.64% ("Winthrop") announced today that it has consummated the sale to its venture partner of both its mezzanine loan and entire ownership interest in its One South State Street, Sullivan Center venture for an aggregate purchase price of approximately $95.3 million.  The net proceeds received by Winthrop from the sale are consistent with the asset's liquidation value at December 31, 2015.

 

Thanks

Mark

[Guest MarkS]

This just out: 

http://finance.yahoo.com/news/winthrop-realty-trust-issue-2-120000409.html

BOSTON, April 28, 2016-- Winthrop Realty Trust announced today that its Board of Trustees has declared a liquidating distribution of $2.00 per common share payable in cash on May 17, 2016 to common shareholders ...

[indirect]

Moneyball,

 

Buying after august is possible? I am not sure because of lack of past experience. This is the language used by FUR

 

"Trust shareholders are reminded that on August 5, 2016 the Trust will transfer all of its remaining assets into a liquidating trust. As a result, the Trust’s shareholders will receive beneficial interests in the liquidating trust in proportion to shares held in the Trust. As previously disclosed, beneficial interests in the liquidating trust will generally not be transferable except by will, intestate succession or operation of law."

 

Maybe someone from board who has done such arbitrage before can tell us.

[Guest MarkS]

Although the final distribution estimate dropped by .10 cents per share in the latest report, the sell off seems a tad over done. So I added to my position today. Since I'm getting two dollars back in a couple of weeks, at today's price it just seemed attractive.

 

Thanks

Mark

[SnarkyPuppy]

Any ideas why the market is factoring in the $2 distribution today?  The filings are clear that the distribution won't occur until May 16

[Guest MarkS]

Hi Snarkypuppy,

 

As I understand it the ex-dividend date is usually two trading days before the record date, which in this case is the 10th.

 

Thanks

Mark

[SnarkyPuppy]

Thanks - interesting how the market doesn't fully reflect the discount as of yesterday.  We're at 13.85% discount now.

[johnheiderscheit]

I am keeping powder dry for this for the second half of the summer.  If the share price sees $9.50 you are looking at potentially a 25% IRR.  That said, it is not risk free and in no way should have been trading above $13 earlier this year.

 

Anyway, once the assets are transfered to the trust there are no more shares to trade.  The SEC registered shares are cancelled.  All you get is a beneficial interest in a trust.  Although trust interests can trade in the pinks I doubt any brokers will facilitate it in this case.

[ABM]

Anyone know how to think about UBTI on tax-deferred shareholders once assets are transferred into the liquidating trust this coming August ?  The 06/26/14 proxy offers pretty skimp details on what the potential exposure investors could face.

 

Thanks

[Guest MarkS]

Hi ABM,

Most of my investments are held in IRAs.  I have similar interests and concerns. I'm not a CPA or tax attorney. So listening to me can adversely effect your wealth. Having said that I'm modestly confident of the following:  There is a $1000 safe harbor if you will for each ira that you have.  So I tend to spread these around in the various tax deferred accounts that my wife and I have. Second, not all "income" creates a problem.  I also have a position in an mlp. I noticed last year that I had zero unrelated income though  I received a fairly large distribution from the partnership.  It's often connected with debt financing.  Here is a link to a past liquidation. In it they discuss at what to expect from a tax standpoint. http://www.sec.gov/Archives/edgar/data/1464720/000119312515285407/d19969ddefa14a.htm

I don't know if the information contained in the link will apply to FUR.  In fact,  I'm not sure at this point what will be left to transfer to the Grantors/liquidation Trust. It's possible that the majority of the assets will have been distributed by then.  I don't know if this helps you or not -  I suspect that it doesn't.  But I still wanted to reach out.

 

Thanks

Mark

[SnarkyPuppy]

From my initial DD I recall concluding that this would be taxed similar to other capital gains taxes - i.e. amount greater than cost basis will be taxed as a capital gains consistent with how a common equity gain would be treated

[johnheiderscheit]

I have been speculating with some other interested parties as to why the discount on this has opened so much.  Ex div share price would be $8.30ish on a projected liquidation value of $10.80ish.  Our conclusion is that because the assets going nontradeable are much greater than was generally anticipated six months or a year ago many institutions are prohibited by mandate or the need for liquidity from holding and are starting to sell ahead of the deadline.  Relatedly, the tax aspects may be messier than anticipated six months or a year ago because the trust interest will need to be accounted for in at least two and possibly three tax years.  The more skeptical seem to think that insiders may have slowed realizations a bit to create this buying opportunity.  Other people just think they are slow.

 

Any other thoughts from folks here?  At the current rate of decline this could easily be $8 by August, opening up a base case IRR of over 20%!

[merkhet]

I'm curious as to what would prevent management from dragging out the liquidation to maximize personal interest post-liquidation trust?

[eclecticvalue]

When there is a liquidation trust. The trust is given two year limit to finish the liquidation process. That is part of the Delaware law.

[SnarkyPuppy]

Biggest concern is the leverage on the 701 7th Ave Times Sq. property. 

 

You can reasonably back into the corresponding liability on the property:

 

Assuming they sell it at $1182mm -> the current NAV on the property is $207mm (latest supplementary disclosure).  FUR owns a 61% economic interest in the property.  (latest 10Q)

 

FUR NAV (61%) = 207mm

Total NAV (100%) = 339mm

Total Sale Price (100%) = 1182mm

Total Property Liability (100%) = 1182 - 339 = 831mm

FUR Portion of Liability (61%) = 831 * .61 = 507mm

FUR Portion of Sale Price (61%) = 721mm

 

So... if the entire property gets sold for 831mm (a $351mm (30%) reduction from managements current estimate), the NAV to FUR is $0.  Current NAV for FUR (207mm) comes out to ~ $5.75 per share.  At a price of $9.70 and current NAV of $12.08, backing out the 701 7th Ave property would translate to a 34% loss for shareholders, all else equal.

 

Is it really so far fetched that an abstract valuation on a $1.2bn property is off by 30%?

 

With that said - their incentives favor booking NAV conservatively and historically they have sold at more than NAV more times than not

[merkhet]

When there is a liquidation trust. The trust is given two year limit to finish the liquidation process. That is part of the Delaware law.

 

Do you have a link/cite for this? I can't seem to find the relevant statutory provision for this.

[Guest MarkS]

Hi Merkhet,

It looks to me, just glancing at the statutory framework, that the trust gets as much time as it needs.  But it looks like corporation can only install two people, one as trustee and one as receiver. So the monetary drain should be limited.  Here is the link. If you have a different take let me know.  http://delcode.delaware.gov/title8/c001/sc10/

Thanks

Mark

[merkhet]

Hi Merkhet,

It looks to me, just glancing at the statutory framework, that the trust gets as much time as it needs.  But it looks like corporation can only install two people, one as trustee and one as receiver. So the monetary drain should be limited.  Here is the link. If you have a different take let me know.  http://delcode.delaware.gov/title8/c001/sc10/

Thanks

Mark

 

That was my initial read as well, but if @eclecticvalue knows differently, I'd be interested in seeing it. My thought was that it was just a statutory trust, but there doesn't seem to be a time limit on the entities' life span.

[johnheiderscheit]

Biggest concern is the leverage on the 701 7th Ave Times Sq. property. 

 

You can reasonably back into the corresponding liability on the property:

 

Assuming they sell it at $1182mm -> the current NAV on the property is $207mm (latest supplementary disclosure).  FUR owns a 61% economic interest in the property.  (latest 10Q)

 

FUR NAV (61%) = 207mm

Total NAV (100%) = 339mm

Total Sale Price (100%) = 1182mm

Total Property Liability (100%) = 1182 - 339 = 831mm

FUR Portion of Liability (61%) = 831 * .61 = 507mm

FUR Portion of Sale Price (61%) = 721mm

 

So... if the entire property gets sold for 831mm (a $351mm (30%) reduction from managements current estimate), the NAV to FUR is $0.  Current NAV for FUR (207mm) comes out to ~ $5.75 per share.  At a price of $9.70 and current NAV of $12.08, backing out the 701 7th Ave property would translate to a 34% loss for shareholders, all else equal.

 

Is it really so far fetched that an abstract valuation on a $1.2bn property is off by 30%?

 

With that said - their incentives favor booking NAV conservatively and historically they have sold at more than NAV more times than not

 

The property level debt on 701 7th as of the March 10K was $494ml.  See page 19.  What am I missing there. I couldn't find management's current estimate of the sale price . . . where are you getting that?  Sorry to be dense.

 

[merkhet]

The total amount of debt on 701 is going to be $815 million. I think Snarky was trying to back into the valuation given the equity split -- but remember, the way it works is, there's:

 

(1) Debt that gets repaid

(2) A certain amount of committed equity from Winthrop & friends to be paid

(3) Then a split of the remaining equity along 15.28% for Winthrop

 

Management has not provided an estimate of the sale price.

[smj]

Capital structure looks like this.

 

$815 MM Debt

$125 MM FUR Equity (61%)

$80MM Witkoff/NV Equity (39%)

 

If I am understanding this correctly, $815MM debt gets paid off, FUR gets 75% of distributions until it receives its $125MM back, then 61% of distributions until its earned a 12% IRR, then 30.5% going forward up to a $1.1B sale price. If sales prices exceeds $1.1B FUR receives 15% of the excess. I guess we can try and back into the $207MM liquidation value they are reporting to get the estimated sales proceeds by just plugging to the 12% IRR from when capital was invested.  We would need to go through old filing to see when capital was contributed.

 

http://investor.winthropreit.com/releasedetail.cfm?ReleaseID=819353

 

In connection with entering into the loans, Winthrop made an additional contribution to the venture of $32.5 million bringing its current aggregate capital contributions to the venture to $85.9 million. Winthrop has agreed to contribute 61.1% of the aggregate capital for completion of the project up to a maximum of $125 million. Although the ownership structure of the property is rather complex, as more fully disclosed in a Current Report on Form 8-K filed by Winthrop with the Securities and Exchange Commission on November 26, 2013, Winthrop is entitled to receive 75.42% of all distributable cash flow from the property, which reduces to 61.1% at such time as Winthrop has received a return of its entire capital contributions, which is further reduced to 30.57% at such time as Winthrop has received a return of its entire capital contributions plus a 12% internal rate of return thereon. By way of example, based on the current ownership structure and assuming that the property is sold on October 1, 2017 and at such time the then existing debt encumbering the property is $815 million, Winthrop has made aggregate capital contributions of $100 million and all proceeds are distributed, Winthrop would expect to receive:

 

on priority basis a return of its entire preferred capital contributions of $100 million together with a 12% internal rate of return thereon at a net sales price of approximately $1.031 billion; and

for each dollar of purchase price in excess of approximately $1.103 billion, an additional $0.1528 cents.

[SnarkyPuppy]

Yep - I was totally off in my initial simple calculation. 

 

I did some work based on my interpretation of the joint venture equity structure. 

 

Some inputs for transparency:

-Reading through the recent disclosures it seems they expect to reach the $125mm maximum investment.

-I assumed a time period of 3 years for IRR (2014->2017) for simplicity

 

Here you go:

https://www.dropbox.com/s/jcshscso9xeg2r2/d%20-%20fur%20calc.xlsx?dl=0

 

Could have made some mistakes - let me know if so

[smj]

Assuming they fund the balance of the $125MM in 2016 the capital contributions were as follows:

 

2016 - $9,512

2015 - $8,865

2014 - $53,187

2013 - $24,465

2012 - $28,971

 

Assuming a simple IRR calc with a 2017 exit I calculated a $60MM profit on the $125MM investment to reach the 12% hurdle.