Restructuring, Recapitalization, & Securitization

Authors: Lisa Cations and Tomasz Piskorksi (2020)

Stella Reyes, a recent graduate from Columbia Business School, joined a London-based commercial real estate investment company in October 2020, while the world was still in the throes of the COVID-19 global pandemic. In the United States, 40% of its workforce were working from home, leading to significant decreases in commercial real estate values, especially in large cities. In many countries, including the United Kingdom, most estate agents had shut down their offices, with in person viewing of properties banned, and construction of new homes and offices suspended. As a result, commercial real estate investments fell by 29% globally in the first six months of 2020 compared to the previous year.

Facing these challenges, the investment company was forced to reevaluate all of its investments. Reyes was tasked to focus her research on the viability of the co-working business model where companies typically took long term leases and then offered flexible memberships to customers that could rent desks or private offices on a month by month basis. Reyes’ firm had recently signed long-term leases with several co-working operators and the firm leadership wanted to assess the outlook for these investments in these uncertain times.

As she began her assignment, Reyes enumerated the key questions that would direct her research:  How viable was the core business model of co-working? What were the key drivers of its revenue? Could a co-working company’s operations be restructured so that they could survive the pandemic and adapt to a post-pandemic world?

(Lynne B. Sagalyn and Jared Nutt MBA '13, 2014)

For most of 2007, Archstone was the second largest publicly traded apartment real estate investment trust (REIT) in the United States. What challenges did Archstone subsequently face after, it became Lehman Brothers’ largest commercial real estate investment? How might Lehman’s Archstone positions have contributed to its bankruptcy less than one year after the Archstone buyout and what restructuring options would best serve both organizations?

(Lynne B. Sagalyn and Rona Smith MBA '99, 2011)

In 2005 and 2006, the condominium market began to deteriorate and Corus's loan portfolio went along with it. Given the leverage level of the Corus loan portfolio, it didn't take much deterioration to create negative equity in the bank. In September 2009, the FDIC took control of Corus Bank, a source of financing for condo developers in areas such as Miami, Atlanta, Chicago, and Phoenix. When the bank was sold, the real estate portfolio was to be auctioned off. Dune Real Estate principals were interested in the portfolio; however, valuing the portfolio was a challenging task: many locations were still declining in the 2009 market, while others were experiencing some recovery. This case asks students to consider the important factors in assessing the portfolio's value and to provide suggestions on possible loan work-out execution strategies for several of its assets.

(Yasmine Uzmez MBA ’01 and Lynne B. Sagalyn, 2010)

Centro Properties Group grew into Australia’s second-largest shopping center owner through a series of acquisitions, including the April 2007 $6.2 billion purchase of New Plan, a US strip center REIT. Centro had financed the deal with billions in bridging debt, which the company was unable to refinance later in 2007 as the credit markets froze. Centro’s share price plummeted, evaporating billions in market value. The company negotiated several debt extensions while trying to agree to debt restructuring with its 23 lenders. In this case students work on a debt stabilization plan structured around a conversion, liquidation, or recapitalization after considering Centro’s debt maturities, its business model, and income and balance statements.

(Marc Samwick MBA ’97 and Lynne B. Sagalyn, 1999)

The initial Graybar Associates case, written in 1958, is a business-school classic that presents slice-and-dice structured finance applied to real estate. In particular, it details the risk-and-return structure of the multiple equity interests of the Graybar Building on Lexington Avenue in Manhattan, adjacent to and physically linked with Grand Central Terminal. Graybar Revisited reviews these multiple strata of ownership more than 40 years later at a time when S. L. Green, a New York–based REIT focused on Class B office properties, is seeking to acquire several different investment positions, perhaps in an attempt to put the fee interest back together again. The time is 1998, and the REIT has just acquired the suboperating lease position. Students are asked to evaluate the strategic fit of the Graybar Building investment from a portfolio perspective, update the map of the interlocking lease positions encumbering the asset, evaluate each lease position, assess its importance to the REIT’s operating position, and then outline a near-term strategy for action that might be initiated to further the company’s control over the asset.

(David Helfand, Equity Investments Group, Lynne B. Sagalyn, 1998)

This case presents the story of MHC’s unsolicited offer to merge with Chateau Properties, Inc., widely considered to be a hostile takeover. Initiated by Sam Zell, chairman of the MHC board, the offer raised a number of significant issues regarding shareholder rights, alignment of interests, and entrenched management, not to mention the economics of what became a bidding war among Chateau’s proposed suitors. The two-tiered structure of the Zell-MHC bid exploited the potential conflict of interest facing directors who wear two hats: managers of the UPREIT and holders of the UPREIT’s operating partnership (OP) units. In dramatic fashion, Zell’s offer cast a spotlight on the issue of corporate governance: What would happen when interests of managers as OP unit holders diverged from the interests of the UPREIT shareholders? Students are expected to gain a thorough understanding, retrospectively, of the key events in this hostile takeover attempt and of the institutional dynamic of the conflict of interest issue. The case presents several viewpoints and includes primary documents, including the tender offer and proxy materials.

(Jeremy FitzGerald MBA ’90, Victor Capital Group, 1997)

Adopting the position as an associate at an advisory firm, students are asked to structure an entity that would take title to three Class A Manhattan office buildings currently owned by a committee of note holders who had purchased the debt on these former Olympia & York assets. After several years of negotiation, the note holders now hold title to the collateral; they want to maximize the value of the equity interests, secure some liquidity for their investment, and preserve flexibility with respect to their ultimate exit strategy. What form should the entity take: limited partnership, limited liability company, C-corp, REIT? Who will manage the properties, the ownership entity? What is the best governance structure for the entity, given the composition of the committee of note holders? How will the minority shareholders be protected? What should the ultimate exit strategy be?

(Joseph Macnow, Vornado Realty Trust, and Ellen M. Reilly MBA ’96, 1996)

In this case students are asked to develop a strategy for raising $275 million needed to reposition the real estate assets of the former retail enterprise, Alexander’s Inc. The repositioning would complete Alexander’s transformation into a real estate company, a process formally begun in 1992 when the company filed for Chapter 11 bankruptcy protection. The real estate underlying the retail stores has always represented premium locations in the New York metropolitan area and, if repositioned for redevelopment and leased to third parties, could become valuable income-producing assets for its owners; at least the projected rental income promises significantly better investment returns than the liquidation alternative. The task should have been relatively easy, but potential conflicts among Alexander’s major stakeholders — Citibank and Interstate Properties/Vornado Realty Trust — and uncertainty about future alternative ownership profiles complicated the decision over a financing package. For each of three ownership profiles presented in the case, students are asked to recommend the most appropriate types of financing instruments, the amount of funding for each instrument and the security/collateral.

(D. Pike Aloian MBA ’80, Ellen M. Reilly MBA ’96 and Lynne B. Sagalyn, 1996)

The problem posed in this second installment of Rockefeller Center Properties (RCP) again focuses on the interplay between property valuation and the corporate-finance problem bedeviling the REIT, which holds a $1.3-billion mortgage on Manhattan’s highest-profile landmark real estate asset. The case is set in 1994, just prior to the expiration of the REIT’s second $200-million letter of credit supporting a like amount of RCP commercial-paper borrowings. Adopting the perspective of the CFO of the REIT and working in groups, students are asked to develop a plan of action — offensively, to deal with the short-term liquidity problem of the expiring letter of credit, and defensively, to manage the long-term implications of any refinancing for RCP, given that there is a distinct likelihood that the owners of the property (Rockefeller Group Interests) will default on the $1.3-billion mortgage held by the REIT. To understand the complex scenarios in this case, students must prepare an analysis showing the effects of an RGI default/bankruptcy on the REIT shareholders and lenders. They are also asked to take the analysis one step further and outline the components of a financial restructuring plan for the REIT, making sure to identify the likely impacts on existing shareholders.

(John S. Moody, Deutsche Bank Realty Advisors, Inc., 1995)

This case offers students an opportunity to evaluate a strategic problem faced by Deutsche Bank Realty Advisors (DBRA): bank regulatory issues and an inability to grow the portfolio due to a failed equity offering in the German retail market that has created a highly uncertain future for the bank’s foreign-traded REIT, American Realestate Investment Company (ARICO). After much deliberation and outside advice from lawyers and an investment banking firm, the CEO of DBRA is about to propose a restructuring and recapitalization of ARICO. (ARICO’s main assets included three of the finest “trophy” office buildings in the United States, which at their completion at the end of the 1980s were valued at approximately $600 million.) Before he takes the proposal to the Deutsche Bank Board of Directors, he wants another set of opinions. Adopting the role of outside consultant, students are asked to provide an independent and thorough critique of the restructuring plan prepared by Merrill Lynch. In addressing this task, students need to evaluate the viability of the other options: status quo, liquidation, merger with an existing company.

(Nancy Lashine MBA ’81, The O’Connor Group, 1994)

The Retail Property Trust (RPT) is a private real estate investment trust (REIT) formed in 1986 to acquire interests in high-quality regional malls. At year-end 1992, its gross assets and net worth are valued at $980 million and $739 million, respectively. Its investors are large pension plans, foundations, and endowments that have invested in RPT as part of an overall portfolio strategy to gain exposure to the real estate asset class. Recent events in both property and asset markets have caused significant changes in the way real estate is being financed, and the strategic question facing RPT is how best to serve the majority of its shareholders over the next three to five years. Students are asked to analyze the two options framed by management and the board of directors: to remain as a REIT financed by the private capital markets or to reorganize as an operating company and access the public-equity and debt markets. In addition, they must analyze the implications for the O’Connor Group, as a business entity and a fiduciary managing pension funds. In particular, would the interests of the shareholders with respect to the first issue interfere or conflict with the principals’ interest in growing the O’Connor Group’s business?

(Barbara Chu MBA ’87, Mortgage Capital Company, 1993)

This case concerns a lender’s refinancing decision for a portfolio of retail property loans. The key elements of the case — valuation and capital structure for the Mullin loan — are straight-forward, though the business issues for Mortgage Capital Company (MCC) are far from clear cut. The calculus behind the decisions MCC has to make regarding its investment cannot be made without considering the bigger event of which the project refinancing is a part, that is, the REIT conversion. The case assignment is to consider what impact the REIT event (given a likely scenario for the REIT: capital structure, dividend yield) will have on the pricing and terms of MCC’s loan. In pricing this particular transaction, MCC is making a strategic business decision, not just refinancing a loan. Because of the size of the loan, $325 million, the refinancing will have significant portfolio implications for MCC.

(D. Pike Aloian MBA ’80, Rothchild Realty, Inc., 1993)

This case asks students to recommend whether the current investor should sell (or possibly buy) its debentures and/or common-stock holdings in this mortgage REIT. The time is 1992, and having altered its original capital structure, Rockefeller Center Properties now faces the refinancing risk of rolling over its commercial paper; the property market is depressed, and the value of underlying collateral for the $1.3-billion mortgage loan that makes up the REIT’s main asset is uncertain. In their evaluation, students need to integrate security analysis with an analysis of the fundamentals of the underlying real estate. Also, they need to understand how strategy shaped the initial decision of the Rockefeller Group Interests to go public and the REIT’s subsequent decision to restructure its debt.

(Coopers & Lybrand and Kidder Peabody, 1992)

The Resolution Trust Corporation (RTC) is in the process of liquidating several billion dollars worth of real estate assets acquired from failed savings-and-loan and thrift institutions. A large portion of the RTC’s assets are nonperforming real estate mortgages on commercial properties. The case deals with the practical and market considerations involved in purchasing pools of assets from the RTC. Working in groups, students are asked to submit bids for purchase of a portfolio of assets and to specify if the buy will be on an all-cash basis or will use RTC financing. The RTC is to select the winning bidder using a derived investment value (DIV) methodology, which gives some preference to all-cash bids.