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Winthrop Realty Trust (FUR) Rights Offering


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See http://www.sec.gov/Archives/edgar/data/37008/000119380509001934/e605912_ex99-1.htm .


As I was expecting, Bruce Berkowitz of the Fairholme Fund appears to be using FUR as a platform for taking advantage of the upcoming distress in the commercial real estate market.  From the press release:


The executive officers of the Company, together with affiliates of FUR Advisors, the Company’s external advisor, have indicated that they will subscribe for a minimum of 500,000 Common Shares of which 225,000 shares are allocable to Michael L. Ashner, the Company’s Chairman and Chief Executive Officer.  In addition, the Company has granted an ownership waiver to Fairholme Capital Management, L.L.C. on behalf of its investment advisory clients and affiliates, an affiliate of Bruce R. Berkowitz, our former trustee, which permits Fairholme to acquire up to 24% in the aggregate of our outstanding Common Shares on a fully diluted basis.


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Can you elaborate on the opportunity here if any? 


I.e. 1) what are his plans? and is FUR good value to get into at these prices and why;


2) what is the background (current assets/business model) of FUR and how does that relate to the opportunity ahead - i.e. will current situation be main driver or will his future plans be the main driver of value?

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Here are my last few investment updates on FUR and my most recent thesis for buying. There is also a thread which has a discussion between TX, Myself, and Other Board members which recently discussed FUR.


Short story is the CEO has more ideas then cash and the FAIRX is a strong backer. They want to get more cash into FUR to take advantage of the CRE collapse. He raised up to $100 million and bought shares, preferreds, his own discounted debt, and loans and is now all in. FUR also has 2 joint venture loan platforms which have caused huge writedowns over the last 3 quarters. They are now both at $0 and he is cherry picking assets from one of them.


The next Q should be a great 1 due to no write downs and the huge rebound in Realty Stocks. HRP is another REIT I owned and it is up 100% with a current yield of 7%. FUR has a yield north of 11% and hasnt moved (likely due to the write down). Based on yield, assets, and FFO - I would say FUR is slightly undervalued. The real value is the CEO having $150 million in assets to play with. He is buying realty stocks and mortgage loans, and will move to buildings once there value comes down.


This is interesting because Bruce wants to start an Income Fund and FUR is far too small for him to really be messing with. They keep pumping more and more cash into it however and the CEO owns a huge chunk. If FAIRX goes to 25% then things could get interesting. Also FUR wants to have the ability to issue additional preferreds. I wonder who might be buying those? Maybe Bruce B a former board member who wants to start an income fund.


---- Here are logs from my Investment Log


09.18.2009 - Sold some HRP for FUR. I still like HRP's prospects and love its yield but, I will get a similar cash on cash yield in FUR and FUR has not run up much. FUR has a lower FFO Multiply and has a better chance of generating one time and reoccurring gains on asset management and loan transaction. I see it as having a bit more upside with similar yield.


09.15.2009 - I just relooked at the loan transactions and they have gone from interesting to Brilliant, The loans were bought at 17% YTM and sold at around 9%. So very little capital was tied up and all they do is collect and pay interest to earn this return. I believe they will be able to cherry pick assets from Concord for quite a while and Lexington is still paying shares in dividends and will likely decline to participate.


09.12.2009 - Posted by txlaw on Corner of BRK and FFH, very interesting post. Yeah, the loan transaction you mentioned is definitely interesting.  The return on equity for the loan based solely on collecting and paying interest is close to 40% .  And if everything goes well and the building owner prepays the loan a couple years out, then we're talking about a 3.7x return on the equity invested.  If things go poorly, FUR gets the building, which should cover the amount borrowed if necessary.  Great risk/reward outlook with this transaction.  Clearly a margin of safety there.  


I've been following FUR for two years now and have slowly averaged down in the REIT for my dad's account.  Note that Fairholme owns a stake in FUR, and I wouldn't be surprised if Berkowitz uses FUR as a platform for the coming distressed environment in commercial real estate -- meaning that the REIT may issue new equity to Fairholme and other institutional investors to buy up properties that go into foreclosure.


Valuation as of 07/09


FUR generates FFO (Funds Flow from Operations) of about $31.6 Million dollars each year and was purchased at around $160 Million Dollars. This gives it a value of 5 times FFO. There is also around $100 million dollars in the hands of a capable REIT Investor and 2 loan platforms (Concord and Mark Realty which may not be total zeros). This is another work horse position and I feel comfortable with the purchase price. FUR is below book and has capable focused Management with tons of skin in the game. This is similar to FFH & ORH. I will wait for obvious overvaluation and will watch and learn from management.






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Thanks for the rundown, Myth.


Some additional thoughts:


Plans/Background -- Ashner and senior management acquired control of the REIT in 2004, with Ashner becoming CEO.  At that time, Ashner "entered into an agreement to direct all of my future real estate investment activities, subject to limited specified exceptions, into the Company. Accordingly, as long as I am an executive officer or trustee of the Company, this Company will be the vehicle for substantially all of my real estate investment activities."  He does indeed have skin in the game.


Ashner's approach for FUR is "opportunistic value real estate investing."  There is no focus on geography or specific types of real estate.  The trust has invested in property, loans, REIT securities, and mortgage backed securities.  Ashner has opportunistically bought back the trust's preferred shares at substantial discounts to par.  Ashner also will not hesitate to take an activist investing approach to other REITs.  Investments are structure so that they are for the most part nonrecourse to the trust.


From the very beginning, Ashner has been planning to use FUR as a vehicle to take advantage of an impending property meltdown.  From his first letter as CEO of FUR in 2003:


In our view, only historically low interest rates have prevented a wave of commercial real estate foreclosures from occurring. Nevertheless, the fact that interest rates are historically low and there is excessive investor liquidity serve to restrain the great opportunistic investing we enjoyed in the mid-90’s. As my daily reading of newspapers indicates, no one has yet repealed the laws of cyclicality in real estate. Consequently, I remain confident that the future will be rife with opportunity.


I would suggest going to the FUR website and reading all of Ashner's shareholder letters first before even considering investing in the REIT.  To a large extent, investing in FUR is a jockey-style bet. 


Concord -- With respect to the Concord JV with Lexington, the value of the platform had to be written down due to the CDO market disappearing in 2008.  Like many companies who relied on securitization for long term financing (think ACF), when the securitization markets evaporated, Concord was shit out of luck with respect to the loans acquired through the use of short term warehouse facilities.  As Myth pointed out, Ashner is restructuring the Concord platform, with Winthrop participating and Lexington declining to participate.  This was a major setback, but I will cut Ashner some slack on this one.  At least it was a JV with no recourse to the trust.


Price -- As for the current price, I would say based on a very rudimentary breakdown of the balance sheet, taking into account non-controlling interests and the nonrecourse nature of much of the liabilities, the trust is trading somewhere around liquidiation value if not below liquidation value.  Mind you, it is very difficult to figure out exactly how much all the assets are worth in liquidation because real estate is hard to value without knowing the details and because FUR owns a bunch of real estate securities, so I'm not saying that my estimate is at all accurate.  But you have to start somewhere, and I think the downside risk is low after taking into account the cash that FUR's investments generate.  Also, Ashner bought quite a bit of stock as the price of FUR sank throughout 2008, which is a good sign for the "price you pay" factor.


You might want to look at the breakdown of FUR's properties in their filings and on their website to get a better sense of the quality of these properties.




One more interesting piece of information that will either pique people's interest in Ashner or completely turn them off to Ashner. 


When Bill Ackman was waging his proxy contest against the TGT incumbent directors, one of his nominees for the board was Ashner.  People who followed that contest will remember that Ackman at one time proposed spinning off TGT's real estate into a publicly traded REIT.  I suspect Ashner would have helped assess the value of TGT real estate in forming such a REIT if Ackman had been successful.  Ashner, for his part, would have the benefit of looking under the hood to see what the real estate of a large company like Target would be worth.




There are a lot of very smart people preparing for the upcoming CRE disaster.


-BPO has raised money for a U.S. real estate fund.  Bruce Flatt and team are among the best.

-IRSA (Eduardo Elsztain) has made a strategic investment in a U.S. listed REIT as a platform for entering the U.S. real estate market

-Pabrai owns both BPO and IRSA (via CRESY)

-Berkowitz is using FUR as a CRE platform

-Wilbur Ross is getting ready to buy CMBS when the "pretending" is over and the shit hits the fan

-The Chinese are planning to buy U.S. real estate with their dollar holdings (we've been slowly selling off the family farm, as Buffett would point out)


And people say there isn't value to be found . . .



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I think I've raised this before, but isn't FUR EXTERNALLY managed REIT by Asner???


Does this not make many of your uncomfortable?  This is a GP / LP type structure, not a Buffett, Prem, Biglari structure.


Not saying it's the kiss of death, but the fact it's never discussed makes me feel like the crazy guy... or maybe that was back in the day when I researched FUR, and not the case today.


Would love to know.  If FUR was internally managed, I'd be a buyer at liquidation... externally managed would probably make me push my bid down to 0.6x book or something, regardless of where the high watermark is.


Just my 2 cents, but I'd love to hear some thoughts from the owns (thanks for the rundown above by the way).



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I think you are right but, the key thing for me is Ashner has a significant amount on the line in the form of shares. He may be playing both sides of the fence but, that doesnt bother me as much. He owns 2.5 Million shares and Bruce may eventually own 24% of the company. Bruce used to be a board member, so I consider him an insider.


I am thinking of investing in NEN which was posted on VIC and one of the GPs is playing both sides. I just want to make sure they dont have a huge heavily incentive to completely screw me over.

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I think I've raised this before, but isn't FUR EXTERNALLY managed REIT by Asner???


Does this not make many of your uncomfortable?  This is a GP / LP type structure, not a Buffett, Prem, Biglari structure.





You're right to be wary of externally managed REITs.  I'm attaching a Moody's handout that discusses the corporate governance risks associated with externally managed REITs.


All I can say is that you have to look at the risk mitigating factors, including the management agreement , ownership position, directorship, and fee structure, in order to make your own judgment about whether management is going to treat the shareholders fairly.  Berkowitz being on board is an additional factor that makes me think that they will treat us well, but I could be wrong.  Don't know much about David Abrams, but since he worked for Baupost, he's probably another good guy to count on to keep management honest.



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Thanks for the link. After reading it im not worried at all. I have the upmost respect for Bruce Berkowitz and he used to sit on the board and may own up to 24% of the company. I also believe just about all of Ashner's recent share purchases are underwater and think he has enough money on the line to move the share price. I dont know what would motivate him to screw over shareholders. They have been raising money since late 2008 in preparation for this and so far the money has been put to use at 17% YTM. I dont like equity issuing but, he cant do preferreds and is leveraged a bit. Ashner has also backstopped just about every offer which tells me that he is putting his money where his mouth is. I wont be buying shares and I like that he has pledged to pick those up.


You have properties and securities which pretty much justify the buy. You then have a man who has been doing this for a while investing money into an asset class he knows well that is significantly undervalued and will be for some time. He was in REITs a bit early but, quickly moved to preferreds and so far has made money oh just about all his transactions. Concord hasnt worked out too well but, I see value there and I get 10% to watch him work. Seems like a good.

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Leon Cooperman got it right when he impliedly criticized FUR mgt for the Concord finance "mismatch", which gives me pause as to Ashner's investment judgment.  Does he actually walk the talk about conservative investing?  Why is he being given a reprieve by investors for going into CDO syndication in 2006 and 2007 at the top of a frothy debt market?   

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