How to Ruin a Safe Bet; Did Rockefeller Center Financiers Reach Too Far?
By STEPHANIE STROMPublished: October 5, 1995
If a real estate investment could ever be a sure thing, a stake in Rockefeller Center Properties Inc. seemed to be it.
As the holder of the $1.3 billion mortgage on Rockefeller Center, the real estate investment trust, or REIT, had only one business: to collect interest on its loan and pass most of that income on to shareholders as dividends.
And its was overseen by none other than David Rockefeller, patriarch of the Rockefeller clan, who had surrounded himself with such financial sophisticates as Peter G. Peterson, the former president of Lehman Brothers and a founder of the Blackstone Group, and Claude M. Ballard Jr., head of Goldman, Sachs & Company's real estate finance group.
But now it is abundantly clear that blue-chip names and a star-quality address were no guarantees of success and that the shareholders have been badly bruised. Twice in the last year, the REIT found itself standing on the precipice of insolvency, surviving only by making hasty, expensive deals for cash infusions. And its 40,000 shareholders -- more than half of whom are individual investors -- have seen their stock plummet to as little as $4.25 a share from as high as about $22. It was unchanged yesterday at $8.
What went wrong? In lawsuits against Rockerfeller Center Properties and its board, shareholders are contending that Mr. Rockefeller and financial savants took their simple business and, beginning in 1987, got fancy with it, setting the REIT on a slippery slope toward instability.
The irony is that the tinkering allowed the REIT to be generous and increase its dividends to the same shareholders who are now suffering. But in doing this, the REIT used up cash that would have been its cushion when the real estate market crashed in New York at the end of the 1980's.
"I felt I had real security in investing with David Rockefeller, and I never suspected that anything was happening that would be detrimental to my interests other than the ups and downs of the real estate market," said Harold C. Tint, one of the investors who is suing. Mr. Tint, the former owner of a chain of gasoline stations in New Jersey, bought 38,500 REIT shares in 1992, paying an average of $16 a share.
Mr. Rockefeller declined to comment. His spokesman noted that Mr. Rockefeller, who left the board in 1992, holds stock in the REIT and has shared in the pain -- although his family did make $1.65 billion on the sale of Rockefeller Center.
The other directors on the board at the time did not return calls or declined to comment through spokesmen.
But last week, in what appears to be a last-ditch effort to set things right, Mr. Rockefeller joined one of the investor groups bidding for control. His new allies are Tishman Speyer Properties L.P. and an investment fund managed by Goldman, Sachs. A second group is led by Sam Zell, the Chicago financier, and includes Merrill Lynch, General Electric and Walt Disney. And a third group is led by Gotham Partners L.P., a large shareholder of the REIT.
Whichever group takes over will inherit a legacy of questionable judgments and bad timing, say experts in real estate financing who are familiar with the REIT's public filings.
They say the REIT's problems today can be traced back to December 1987, when the board authorized a debt repurchase program using short-term credit lines. On the advice of its investment bankers at Lehman Brothers, the company decided to buy back its convertible bonds, which were trading at a discount to their face value.
The reasons for the debt repurchase program were solid, experts say. By buying back bonds that were convertible into stock in 2000, the program helped protect shareholders' stake in the REIT. In addition, it increased earnings by capturing the difference between the price a which the REIT was repurchasing bonds and their face value. And it reduced the REIT's long-term interest expenses because the interest rate on the bonds was set to jump to 13 percent from 8 percent on Jan. 1, 1995.
But financing a long-term asset -- the REIT's $1.3 billion mortgage due in 2007 -- with short-term financing is usually a risky strategy, according to corporate finance experts. Should the REIT's financial outlook dim, its ability to roll over those borrowings would diminish.
And since Rockefeller Center Properties was distributing almost all of its incoming cash to shareholders as dividends, it would be hard pressed to pay off those loans if it could not roll them over.
In late 1989, as the Manhattan real estate market faltered and the appraised value of Rockefeller Center slipped, the board apparently arrived at the same conclusion. It borrowed $400 million in the form of letters of credit and paid off its short-term bank loans. The letters of credit had longer maturities than the short-term financing, and the board told shareholders it could renew them.
But in hindsight, the REIT would have been better off with the bank lines it originally used. Their shorter maturities imposed a sort of financial discipline on the REIT, which was forced to pay interest on them out of its cash flow.
That meant slightly lower dividends for shareholders, but as long as the REIT kept current on its interest payments, its banks would almost certainly agree to roll over its credit lines.
No payments were due on the letters of credit, however, for at least three years. So the board decided to disperse the cash previously used to pay interest on the REIT's short-term loans to shareholders as a return of capital. A Booming Market For Real Estate
Richard M. Scarlata, the president and chief executive of the REIT, in defending the REIT's actions, said that the board made the decision to buy back bonds and pay out higher dividends to shareholders at a time when the real estate market was booming and when Rockefeller Center had an estimated worth of about $1.8 billion.
Mr. Scarlata said that given those facts, the directors had no reason to believe that the REIT would not be able to roll over its short-term borrowings forever. "No one forecasted the downturn that occurred" in the real estate market, he said. "It was a prudent thing to do at the time."
And he noted that replacing short-term debt with letters of credit, which have a longer maturity, actually reduced risk.
But the letters of credit became a financial time bomb when combined with the REIT's generous dividend policy -- which left it with no cash to repay them when they came due -- and the weakening Manhattan real estate market.
The appraisal value of Rockefeller Center had been plummeting -- ultimately to $1.2 billion in 1994, from $1.6 billion in 1990 -- and rent rolls were also falling, making the REIT's lenders skittish about refinancing.
Realizing it would be unable to repay a $200 million letter of credit held by Credit Suisse by mid-1993, the REIT was forced to stop buying back bonds and reduce dividends to shareholders in return for an extension of the due date. 1992 Annual Report Contained Warning
And in its 1992 annual report, the REIT warned that if it could not replace the other letter of credit, held by Mitsubishi Bank, it would have to turn to a commercial bank for funds -- "and there can be no assurance at this time that such replacement funding would be available."
Sure enough, by last fall, Mitsubishi Bank was playing hardball, refusing to extend its terms. At the same time, Mitsubishi Estate, which paid a trophy price of $1.4 billion to the Rockefeller family for Rockefeller Center in 1989, was threatening to default on the mortgage. That threat tightened the REIT's financial bind.
A default would have eliminated the REIT's biggest source of income by far, so the REIT's investment bankers at Paine Webber began scrambling to find financing to repay the Mitsubishi Bank letter of credit when it expired in June, 1995.
In December, the REIT announced that it had a $225 million rescue package from Goldman, Sachs and its Whitehall Street Real Estate L.P. V, an investment fund that specializes in distressed real estate. (Mr. Ballard, the former Goldman partner who was then chairman of the REIT board, recused himself from the discussions of the Goldman package.)
Though the loan was a lifesaver, its terms were expensive. Moreover, it gave Goldman an unusual degree of influence in the REIT's affairs. Goldman got the right to buy 19.9 percent of the REIT's stock at $5 a share, a potential 20 percent dilution of the existing shareholders' stake. It also got the right to block major decisions, a right that has hampered the REIT's recent efforts to recapitalize itself in preparation for taking ownership of the property.
The board opted for the Goldman financing although it still had six months to repay the Mitsubishi Bank letter of credit and there were two other refinancing offers on the table. At least one of them, from Gotham Partners, would have been far less expensive and onerous. An adviser to the REIT said Gotham lacked financing for its offer. But a a person familiar with the Gotham offer said it was just a matter of days before financing would have been finalized. Suddenly, A Bankruptcy Filing
With the Goldman financing the REIT seemed to be out of the woods. But on May 11, Rockefeller Group Inc. -- the company through which the Rockefeller family trusts and Mitsubishi Estate indirectly own Rockefeller Center -- suddenly sought bankruptcy protection for the property and stopped making mortgage payments.
Once again, the REIT was staring at insolvency, ironically because of a provision in Goldman's loan required it to pay Goldman all of its available cash if the Rockefeller Group went into default. The payment to Goldman was due on Sept. 1, after which the REIT would have been unable to pay interest on its own debt and its employees' salaries, let alone dividends to shareholders.
The REIT suspended its dividend in June while assuring shareholders that Goldman would waive the default provision. But Goldman was not so quick to grant a waiver, perhaps seeing the REIT's crippling financial condition coupled with the bankruptcy of Rockefeller Center's owners as a way to gain control of the property.
Again, Paine Webber began searching for new lenders. But no one wanted to commit money to a company whose sole asset was a mortgage secured by a property in bankruptcy and which had no current source of income and was bound to protect the interests of another lender, Goldman, Sachs.
Enter Mr. Zell, a financier famous for buying distressed properties at bargain-basement prices and reaping fat rewards from their turnarounds. In August, Mr. Zell and his group offered an emergency injection of $10 million and a promise of $250 million more in exchange for a 50 percent stake in a new REIT, which would cut existing shareholders' interests in half.
The REIT accepted -- and the deal saved it from bankruptcy, giving it enough cash to function after making its payment to Goldman on Sept. 1. More Problems For Shareholders
But, yet again, a deal approved by the REIT's board threatens to cost its shareholders dearly. Not only would the REIT be selling the Zell group half of itself at a substantial discount to the current market price of its shares, it would also be saddled with the legal costs of fighting Goldman, which has said it would not agree to the deal with the Zell group.
Which brings the next chapter of the REIT saga, which may be its last, right back to Mr. Rockefeller.
The investment group he has joined, which includes Goldman, offered Sunday to buy the entire REIT for $7.75 a share, or a total of $296.5 million, once it takes ownership of Rockefeller Center.
On Tuesday, the REIT's board said it would consider that offer, as well as one from Gotham Partners, despite its pending deal with the Zell group. Mr. Zell is not expected to top Goldman's bid, although he could join forces with Gotham. The Gotham offer would recapitalize the REIT through a rights offering that would raise up to $150 million and allow existing shareholders to maintain their interest in the investment trust.
This time, the final decision rests with shareholders, who could soon cash out with a bit more than they might have expected just a week ago.
But if Mr. Rockefeller and his partners win the keys to Rockefeller Center, the shareholders will quickly be shown the door.
Photo: "I never suspected that anything was happening that would be detrimental to my interests other than the ups and downs of the real estate market," said Harold C. Tint, one of the shareholders of Rockefeller Center Properties Inc. who has filed a lawsuit. (Carrie Boretz for The New York Times)(pg. D11) Graph: "Pieces of Action" shows weekly closing stock prices for Rchefeller Center Properties Inc. from 1986 to 1995. (Source: Datastream)(pg. D1)
http://query.nytimes.com/gst/fullpage.html?res=990CE0D91331F936A35753C1A963958260&pagewanted=all&emc=eta1
By STEPHANIE STROMPublished: October 5, 1995
If a real estate investment could ever be a sure thing, a stake in Rockefeller Center Properties Inc. seemed to be it.
As the holder of the $1.3 billion mortgage on Rockefeller Center, the real estate investment trust, or REIT, had only one business: to collect interest on its loan and pass most of that income on to shareholders as dividends.
And its was overseen by none other than David Rockefeller, patriarch of the Rockefeller clan, who had surrounded himself with such financial sophisticates as Peter G. Peterson, the former president of Lehman Brothers and a founder of the Blackstone Group, and Claude M. Ballard Jr., head of Goldman, Sachs & Company's real estate finance group.
But now it is abundantly clear that blue-chip names and a star-quality address were no guarantees of success and that the shareholders have been badly bruised. Twice in the last year, the REIT found itself standing on the precipice of insolvency, surviving only by making hasty, expensive deals for cash infusions. And its 40,000 shareholders -- more than half of whom are individual investors -- have seen their stock plummet to as little as $4.25 a share from as high as about $22. It was unchanged yesterday at $8.
What went wrong? In lawsuits against Rockerfeller Center Properties and its board, shareholders are contending that Mr. Rockefeller and financial savants took their simple business and, beginning in 1987, got fancy with it, setting the REIT on a slippery slope toward instability.
The irony is that the tinkering allowed the REIT to be generous and increase its dividends to the same shareholders who are now suffering. But in doing this, the REIT used up cash that would have been its cushion when the real estate market crashed in New York at the end of the 1980's.
"I felt I had real security in investing with David Rockefeller, and I never suspected that anything was happening that would be detrimental to my interests other than the ups and downs of the real estate market," said Harold C. Tint, one of the investors who is suing. Mr. Tint, the former owner of a chain of gasoline stations in New Jersey, bought 38,500 REIT shares in 1992, paying an average of $16 a share.
Mr. Rockefeller declined to comment. His spokesman noted that Mr. Rockefeller, who left the board in 1992, holds stock in the REIT and has shared in the pain -- although his family did make $1.65 billion on the sale of Rockefeller Center.
The other directors on the board at the time did not return calls or declined to comment through spokesmen.
But last week, in what appears to be a last-ditch effort to set things right, Mr. Rockefeller joined one of the investor groups bidding for control. His new allies are Tishman Speyer Properties L.P. and an investment fund managed by Goldman, Sachs. A second group is led by Sam Zell, the Chicago financier, and includes Merrill Lynch, General Electric and Walt Disney. And a third group is led by Gotham Partners L.P., a large shareholder of the REIT.
Whichever group takes over will inherit a legacy of questionable judgments and bad timing, say experts in real estate financing who are familiar with the REIT's public filings.
They say the REIT's problems today can be traced back to December 1987, when the board authorized a debt repurchase program using short-term credit lines. On the advice of its investment bankers at Lehman Brothers, the company decided to buy back its convertible bonds, which were trading at a discount to their face value.
The reasons for the debt repurchase program were solid, experts say. By buying back bonds that were convertible into stock in 2000, the program helped protect shareholders' stake in the REIT. In addition, it increased earnings by capturing the difference between the price a which the REIT was repurchasing bonds and their face value. And it reduced the REIT's long-term interest expenses because the interest rate on the bonds was set to jump to 13 percent from 8 percent on Jan. 1, 1995.
But financing a long-term asset -- the REIT's $1.3 billion mortgage due in 2007 -- with short-term financing is usually a risky strategy, according to corporate finance experts. Should the REIT's financial outlook dim, its ability to roll over those borrowings would diminish.
And since Rockefeller Center Properties was distributing almost all of its incoming cash to shareholders as dividends, it would be hard pressed to pay off those loans if it could not roll them over.
In late 1989, as the Manhattan real estate market faltered and the appraised value of Rockefeller Center slipped, the board apparently arrived at the same conclusion. It borrowed $400 million in the form of letters of credit and paid off its short-term bank loans. The letters of credit had longer maturities than the short-term financing, and the board told shareholders it could renew them.
But in hindsight, the REIT would have been better off with the bank lines it originally used. Their shorter maturities imposed a sort of financial discipline on the REIT, which was forced to pay interest on them out of its cash flow.
That meant slightly lower dividends for shareholders, but as long as the REIT kept current on its interest payments, its banks would almost certainly agree to roll over its credit lines.
No payments were due on the letters of credit, however, for at least three years. So the board decided to disperse the cash previously used to pay interest on the REIT's short-term loans to shareholders as a return of capital. A Booming Market For Real Estate
Richard M. Scarlata, the president and chief executive of the REIT, in defending the REIT's actions, said that the board made the decision to buy back bonds and pay out higher dividends to shareholders at a time when the real estate market was booming and when Rockefeller Center had an estimated worth of about $1.8 billion.
Mr. Scarlata said that given those facts, the directors had no reason to believe that the REIT would not be able to roll over its short-term borrowings forever. "No one forecasted the downturn that occurred" in the real estate market, he said. "It was a prudent thing to do at the time."
And he noted that replacing short-term debt with letters of credit, which have a longer maturity, actually reduced risk.
But the letters of credit became a financial time bomb when combined with the REIT's generous dividend policy -- which left it with no cash to repay them when they came due -- and the weakening Manhattan real estate market.
The appraisal value of Rockefeller Center had been plummeting -- ultimately to $1.2 billion in 1994, from $1.6 billion in 1990 -- and rent rolls were also falling, making the REIT's lenders skittish about refinancing.
Realizing it would be unable to repay a $200 million letter of credit held by Credit Suisse by mid-1993, the REIT was forced to stop buying back bonds and reduce dividends to shareholders in return for an extension of the due date. 1992 Annual Report Contained Warning
And in its 1992 annual report, the REIT warned that if it could not replace the other letter of credit, held by Mitsubishi Bank, it would have to turn to a commercial bank for funds -- "and there can be no assurance at this time that such replacement funding would be available."
Sure enough, by last fall, Mitsubishi Bank was playing hardball, refusing to extend its terms. At the same time, Mitsubishi Estate, which paid a trophy price of $1.4 billion to the Rockefeller family for Rockefeller Center in 1989, was threatening to default on the mortgage. That threat tightened the REIT's financial bind.
A default would have eliminated the REIT's biggest source of income by far, so the REIT's investment bankers at Paine Webber began scrambling to find financing to repay the Mitsubishi Bank letter of credit when it expired in June, 1995.
In December, the REIT announced that it had a $225 million rescue package from Goldman, Sachs and its Whitehall Street Real Estate L.P. V, an investment fund that specializes in distressed real estate. (Mr. Ballard, the former Goldman partner who was then chairman of the REIT board, recused himself from the discussions of the Goldman package.)
Though the loan was a lifesaver, its terms were expensive. Moreover, it gave Goldman an unusual degree of influence in the REIT's affairs. Goldman got the right to buy 19.9 percent of the REIT's stock at $5 a share, a potential 20 percent dilution of the existing shareholders' stake. It also got the right to block major decisions, a right that has hampered the REIT's recent efforts to recapitalize itself in preparation for taking ownership of the property.
The board opted for the Goldman financing although it still had six months to repay the Mitsubishi Bank letter of credit and there were two other refinancing offers on the table. At least one of them, from Gotham Partners, would have been far less expensive and onerous. An adviser to the REIT said Gotham lacked financing for its offer. But a a person familiar with the Gotham offer said it was just a matter of days before financing would have been finalized. Suddenly, A Bankruptcy Filing
With the Goldman financing the REIT seemed to be out of the woods. But on May 11, Rockefeller Group Inc. -- the company through which the Rockefeller family trusts and Mitsubishi Estate indirectly own Rockefeller Center -- suddenly sought bankruptcy protection for the property and stopped making mortgage payments.
Once again, the REIT was staring at insolvency, ironically because of a provision in Goldman's loan required it to pay Goldman all of its available cash if the Rockefeller Group went into default. The payment to Goldman was due on Sept. 1, after which the REIT would have been unable to pay interest on its own debt and its employees' salaries, let alone dividends to shareholders.
The REIT suspended its dividend in June while assuring shareholders that Goldman would waive the default provision. But Goldman was not so quick to grant a waiver, perhaps seeing the REIT's crippling financial condition coupled with the bankruptcy of Rockefeller Center's owners as a way to gain control of the property.
Again, Paine Webber began searching for new lenders. But no one wanted to commit money to a company whose sole asset was a mortgage secured by a property in bankruptcy and which had no current source of income and was bound to protect the interests of another lender, Goldman, Sachs.
Enter Mr. Zell, a financier famous for buying distressed properties at bargain-basement prices and reaping fat rewards from their turnarounds. In August, Mr. Zell and his group offered an emergency injection of $10 million and a promise of $250 million more in exchange for a 50 percent stake in a new REIT, which would cut existing shareholders' interests in half.
The REIT accepted -- and the deal saved it from bankruptcy, giving it enough cash to function after making its payment to Goldman on Sept. 1. More Problems For Shareholders
But, yet again, a deal approved by the REIT's board threatens to cost its shareholders dearly. Not only would the REIT be selling the Zell group half of itself at a substantial discount to the current market price of its shares, it would also be saddled with the legal costs of fighting Goldman, which has said it would not agree to the deal with the Zell group.
Which brings the next chapter of the REIT saga, which may be its last, right back to Mr. Rockefeller.
The investment group he has joined, which includes Goldman, offered Sunday to buy the entire REIT for $7.75 a share, or a total of $296.5 million, once it takes ownership of Rockefeller Center.
On Tuesday, the REIT's board said it would consider that offer, as well as one from Gotham Partners, despite its pending deal with the Zell group. Mr. Zell is not expected to top Goldman's bid, although he could join forces with Gotham. The Gotham offer would recapitalize the REIT through a rights offering that would raise up to $150 million and allow existing shareholders to maintain their interest in the investment trust.
This time, the final decision rests with shareholders, who could soon cash out with a bit more than they might have expected just a week ago.
But if Mr. Rockefeller and his partners win the keys to Rockefeller Center, the shareholders will quickly be shown the door.
Photo: "I never suspected that anything was happening that would be detrimental to my interests other than the ups and downs of the real estate market," said Harold C. Tint, one of the shareholders of Rockefeller Center Properties Inc. who has filed a lawsuit. (Carrie Boretz for The New York Times)(pg. D11) Graph: "Pieces of Action" shows weekly closing stock prices for Rchefeller Center Properties Inc. from 1986 to 1995. (Source: Datastream)(pg. D1)
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