Description

RECOMMENDATION

Winthrop Realty Trust (FUR) is a REIT that is in the process of liquidation. As an absolute return play, and at the current price of $13.18, I believe that FUR is likely to provide an attractive IRR. It has the potential to provide an outstanding IRR if it is successful in selling its crown jewel investment in a Times Square property at a high price, which I consider to be a very real possibility. As my favorite Omaha investor says: “It’s better to be approximately correct than precisely wrong.” I think it unlikely that one will go wrong with this investment.

SUMMARY AND BACKGROUND

The Series D preferred stock of Winthrop was recommended on VIC by GideonMagnus on 4/29/14, the day the company announced its plans to liquidate. That writeup and the comments thread provide some good background on the company.

Winthrop has investments in real estate operating properties and in real-estate related loans. Most of its assets are upscale properties, both commercial and residential. After exploring alternatives, the board decided to liquidate the company. The plan of liquidation was approved at a shareholder meeting on 8/5/14. At that time the company indicated that they expected to complete the liquidation within 24 months, i.e. by August 2016. It now seems virtually certain that the process will not be finished by then. We can expect FUR to cease trading in six months (i.e. in early August), at which time all of the remaining assets and liabilities will be transferred to a liquidating trust, and interests in the trust will be distributed to shareholders. These trust interests will not be publicly traded, and will be non-transferrable, so bear that in mind if liquidity or a market price are important to you.

Winthrop has been actively marketing its assets since mid-2014, and has been successful in shrinking its balance sheet significantly as can be seen in the table below. It has made three liquidating distributions to date, aggregating $4.50 per share, and management says that they are well ahead of schedule. I believe that most of the company’s assets and liabilities will have been disposed of by the end of 2016. The notable exception is the 701 Seventh Avenue investment in Times Square in New York. My base-case assumption is that that asset will be sold sometime between February 2017 and August 2017, i.e. 12-18 months from now.

As the company has sold assets, it has been paying down the mortgage debt associated with each asset. It has also been paying off other liabilities. In September 2014 Winthrop redeemed its Series D Preferred stock at a cost of $123 million. Also, Winthrop redeemed all of its outstanding 7.75% Senior Notes on 8/15/15 for $72.6 million, including accrued interest. You can see on the balance sheet below that this was carried as a liability of $71.3 million at 6/30/15, but had disappeared at the end of September.

The NAV per share (i.e. estimated future distributions) was $14.17 at 9/30/15 (after deducting $1.00 for a distribution made in November 2015). At the current price of $13.18, expected distributions aggregating $14.17 would result in a total gain of 7.5%. Most of the distributions are likely to happen during the next 12 months, resulting in an IRR higher than 7.5%. And if the Times Square investment sells for a high price, the IRR could be significantly higher.

The Times Square investment is carried on the books at $169 million, or $4.64/share, almost one-third of the remaining NAV of the company.

DISTRIBUTIONS TO DATE

Since the approval of the liquidation plan 18 months ago, three distributions have been made, all in 2015: $2.25 in January (ex-div 12/31/14); $1.25 in June; and $1.00 in November.

I expect the next distribution to come at the end of this calendar quarter or early next quarter. The company is in contract to sell its investment in Sullivan Center in Chicago for $91.6 million, with the transaction expected to close this quarter, and a distribution of between $2.00 and $2.50 will probably be made early next quarter. The amount could be higher if other assets have been sold by that time.

INSIDER OWNERSHIP

Michael L. Ashner, who is Chairman and CEO, owns 3.15 million shares, 8.7% of the outstanding shares. Other insiders own another 1.1%.

REMAINING ASSETS

I won’t dwell much on most of Winthrop’s remaining assets and liabilities, except to make a few comments:

(1) As of 9/30/15 the company had received about $423 million in net proceeds from the sale of operating properties and from real-estate secured loans that had been repaid or sold. This amount exceeded the high end of the estimated range of NAV (as of 12/31/13) of these properties by about 8%, and the low end of the range by about 16%. My sense is that management wants to look good and to deliver significantly more that what they had estimated at the time of the liquidation announcement. I expect that the remaining assets, as a group, should deliver at least the estimated NAV.

(2) In June 2015, Winthrop reached an agreement to sell its Highgrove Apartments building in Stamford, CT for $90 million. They were given a $2 million non-refundable deposit, which increased to $5 million over the next six months as the buyer extended the closing date. The buyer, Glen Nelson of Matrix Realty Group, died in a Lamborghini car crash in late December, and the sale was cancelled. Winthrop will keep the $5 million deposit, and the building is back on the market.

(3) Earlier this month, Winthrop reached an agreement to sell its 50% stake and the mezzanine loan in the Sullivan Center building in Chicago, with the transaction expected to close by the end of this quarter. The buyer is Elad Canada, its joint venture partner in the investment, and the aggregate sale price is $91.6 million. I expect a distribution of perhaps $2.00 to $2.50 per share to follow the closing—the company may withhold some cash for future expenses. It is very unlikely that this deal will fall through.

The one asset worth discussing is Winthrop’s investment in 701 Seventh Avenue, in Times Square. The project includes 110,000 square feet of retail space, a 20,000 square foot state-of-the-art LED billboard, and a 452-room Marriott hotel to be constructed above the retail space. Construction began in October 2015, and is on track to be completed in early 2017.

FUR has a preferred equity investment in this asset. This preferred equity was valued at $169 million at 9/30/15, based on an estimated value of $1.17 billion for the entire property. If the property is sold for more than $1.182 billion, the company will receive 15.28% of the excess sale price. So if it were sold for $100 million more than the $1.182 billion value, the company will get $15.28 million. The manager of the REIT, FUR Advisors, which is controlled by CEO Michael Ashner, will get 20% of this incremental amount, so the net amount to shareholders will be $12.2 million, or about $0.335 per share.

This asset is very difficult to value. Winthrop and its partners in the project are working to lease the retail space and the billboard. There is apparently a lot of interest in the space from large companies interested in having a presence in Times Square. Winthrop will only sell its investment after the space has been leased, which is expected to happen over the next few months.

FUTURE DISTRIBUTIONS

It is not possible to predict with any precision the timing and amounts of future distributions. For purposes of this analysis, I assume equal distributions over the next few quarters followed by a final larger distribution of the proceeds of the Times Square investment in 12 – 18 months. In the table below, I assume total distributions of $14.17 per share, i.e. the current NAV. I divide the distributions into two groups based on their book value: $4.64/sh for Times Square, and $9.53/sh for the net proceeds of all the other assets and liabilities. The first column assumes equal payments of the $9.53 over 4 quarters, with Times Square proceeds being distributed in the final quarter (i.e. on 2/1/17). The second column spreads out the payments over 6 quarters, again with Times Square in the final quarter.

The table below estimates the per share impact on NAV if the 701 Seventh Avenue property sells for $100 million (Column A) and $400 million (Column B) above the $1.182 billion hurdle, or for approximately $1.3 billion and $1.6 billion, respectively. Winthrop will receive 15.28% of the excess over the hurdle. The advisor to Winthrop gets 20% of proceeds above a certain level of distributions (as its incentive fee/termination fee), and shareholders get the remaining 80%. So, for example, if Times Square sells for $100 million over the hurdle, Winthrop will get an additional $15.28 million, and shareholders will get $12.22 million of that.

It is difficult to anticipate what someone would pay for this unique trophy property, but I believe that the $1.3 - $1.6 billion range is well within the realm of possibilities. A person at the company made an off-the-cuff remark that they fantasize internally about getting $2 billion. Not being a real-estate expert, I don’t know whether this is plausible.

The table below calculates the absolute return and IRRs under two scenarios. Each assumes that the net assets excluding 701 Seventh Ave are distributed in four equal quarterly payments of $2.38 each starting 5/1/16, and that the 701 Seventh Ave proceeds are distributed with the fourth payment on 2/1/17. The first scenario assumes that the property is bought for about $1.3 billion; the second assumes about $1.6 billion. You can create your own assumptions of amounts and timing.

RISKS

·      Delays in selling assets and/or receiving prices lower than expected.

·      An economic downturn in real-estate or an increase in interest rates, which would affect valuations.

Catalyst

·      Additional distributions in coming months.

·      Additional disclosure by the company with its next earnings release and conference call later this month.

·      A successful sale of the Times Square investment at a high price.