Rockefeller Center is one of the grandest office complexes in the world. At the center of Manhattan, fronting Fifth Avenue a few blocks from Central Park, it consists of twelve Art Deco buildings built during the Depression by John D. Rockefeller Jr. From its inception, the Center has been a landmark property in a city of remarkable buildings. As a great commercial success and a significant part of New York's civic life, Rockefeller Center enhanced the wealth and status of the family which built and operated it for over fifty years.
In 1985, the Rockefellers' sold Rockefeller Center to two partnerships owned by Rockefeller Group, Inc. (RGI). Though the transaction was complicated, it essentially allowed the Rockefeller family trusts to liquidify their holdings in the Center while deferring tax liabilities. RGI was owned by Mitsubishi Estate Company and various Rockefeller family trusts. Mitsubishi increased its stake to 51% in 1989 and later to 80%, its current level of participation. This stepped up investment reflected a cumulative investment of $1.4 billion. RGI's purchase of the Center was funded in large part by a 1.3 billion-dollar mortgage held by a newly formed real estate investment trust, Rockefeller Center Properties, Inc. (RCPI). The mortgage had a maturity date of December 2007 but could be converted at RCPI's option to a 71.5% limited partnership interest in December 2000. A 1991 appraisal valued the Center at $1.6 billion.
RCPI had raised capital by offering three types of securities; zero coupon bonds, current coupon debentures and shares of common stock. RCPI issued $215 million of zero coupon bonds which bore an implied rate of 10.25% p.a. The zero's maturity date was December 31, 2000. The REIT also offered $335 million of current pay debentures. These securities bore 8% through December 31, 1994 and 13% thereafter until their maturity on December 31, 2000. Both of the debt issues were convertible into common stock at their maturity. If converted, the zero coupon notes and the current coupons were entitled to a 40% and a 26% share of the REIT respectively. If not converted, the debentures' maturities would be extended to December 2007 with interest adjusted to market rates. RCPI had been retiring these debentures using short term credit lines, reducing their total claim on the REIT to 55.9%. These credit lines were paid off with $400 million in the form of letters of credit from Mitsubishi Bank. In addition to the two debt offerings, RCPI raised $750 million through a public offering of 37.5 million shares of common stock at $20 a share. Shareholders were rewarded with extremely high dividends, paid for by interest income from the mortgage. The dividend payments, in fact, exceeded RCPI's income because the interest expense was accrued rather than paid out in the form of coupons.
While RCPI's only source of income was interest on RGI's mortgage, the REIT was protected, to an extent, from default. RCPI held a $135 million portfolio of marketable securities and was the beneficiary of a $200 million letter of credit. The letter of credit was provided by RGI to: 1) cover interest payments; 3) to fund recording of the mortgage if necessary and ; 3) to fund budgeted capital improvements if the owners did not undertake them as scheduled. The letter of credit was reduced over time.
The midtown Manhattan real estate market in 1985 was in the middle of one of the biggest booms in contemporary history. Rents and prices would continue to rise for the next seven years. Though the Centers' rental and occupancy rates moved in tandem with those of the neighborhood, they were, and remain, significantly higher. To allay the fears investors might have about investing in fifty year old buildings, the Center's management had undertaken a $300 million maintenance and capital improvement program. The program continues today, ensuring that the buildings' information and control systems remain state of the art. For prospective tenants, Rockefeller Center has always offered a prime midtown location and exceptional design, neither of which can be duplicated in new construction.
The boom years of real estate did not, however, change the fact that RGI was highly levered and that its interest expenses were RCPI's primary source of income. When the market took a turn for the worse in 1992, Rockefeller Center was not immune to its effects. RCPI's letters of credit, which were used to fund its debentures repurchase program, became a time bomb. By December 1992, RGI's interest payments exceeded its cash flow of $70 million by $30 million, a number that was to grow in coming years. By Fall 1994, Mitsubishi Bank refused to extend the terms of the letters of credit. Goldman, Sachs Mortgage Co. provided the necessary $225 million to cover the Mitsubishi Bank debt. Goldman's debt, however, was very expensive and could be recalled if RGI ever defaulted on its mortgage. In 1994, 45% of the Center's leases were renewed at depressed market rates and by May 1995, Mitsubishi moved to have the two partnerships owned by RGI file for bankruptcy protection under Chapter 11. On hearing Mitsubishi's intentions, David Rockefeller, the family patriarch, flew to Tokyo to plead with the chairman of Mitsubishi to reconsider. Rockefeller feared (correctly) that Mitsubishi's actions would generate negative publicity regarding the Rockefellers' association with the Center. His pleas were in vain, however, and the situation worsened. After RGI defaulted on its mortgage payment in September, Mitsubishi determined that its investment in the Center was unsalvageable and decided to turn the center over to RCPI. Mitsubishi's decision would effectively end any relationship between Rockefeller Center and the Rockefeller family.
As David Rockefeller worried about salvaging his family's relationship with the Center, RCPI's shareholders were becoming increasingly concerned about a subject more dear to their hearts: their investment. RCPI's fortunes were bound to those of the Center and lately the Center had not been performing well. With RGI defaulting on its mortgage payments, RCPI shareholders could be sure of two things in the near future: a cash shortage and the impending ownership of a money losing property. Initially offered at $20 per share, RCPI had punished its investors since the advent of the 90's with falling share prices, reaching $4 by March 1995. At the same time, RCPI's formerly generous dividend had been eliminated. By September it became apparent that RCPI would be the ultimate owner of the Center and the stock's price rebounded to the $7-8 range.
The Whitehall Group initially included Whitehall Street Real Estate Limited Partnership V, an affiliate of Goldman, Sachs and Tishman Properties. David Rockefeller later resigned his board seat on RGI to join this investor group. The Whitehall group's initial bid of $6.50 a share was rejected by RCPI on September 22, 1995. On October 1st, 1995, the group made a second bid, this time including David Rockefeller and Tishman Speyer Properties LP. This bid offered to purchase all outstanding shares for $7.75 each while assuming approximately $800 million of the REIT's debt. About $191 million of this debt was owed to Whitehall and a Goldman Sachs subsidiary. If liabilities of the RCPI were greater than anticipated, the Whitehall Group reserved the right to reduce its offer. The merger proposal would enable RCPI borrow up to $33 million from Goldman Sachs Mortgage Co. to prepay any debt owed to the Zell/Merril-Lynch group. This initial plan provided a $7.5 million breakup fee to the Goldman group if their proposal was not accepted. The Goldman group contended that their long term association with the property combined with the management expertise of Tishman Speyer would enable it to provide the necessary financial and operational expertise to return the Center to profitability. The involvement of David Rockefeller was touted as evidence of the Goldman group's long term commitment to the property. To a lesser extent, the Goldman group also stressed the importance of the Center being owned by New York based interests. Interestingly, Goldman did not touch on this issue when it facilitated the sale of the property to Mitsubishi Estate in 1985. This original offer expired without being accepted on October 6th, 1995.
By October, investor interest peaked and amid competing offers from Gotham Partners and Zell, Goldman made an new offer for RCPI. Goldman's revised bid included the participation of two new significant investors; the Agnelli family of Italy and the Niarchos family of Greece. In attracting these investors, Goldman projected a return of 20% on their investment. This offer proposed $8 per share of RCPI and assumption of all of the REIT's outstanding liabilities, and it provided up to $45 million in short term financing. This bid expires on March 31, 1996. On November 7, RCPI accepted the agreement pending shareholder approval and announced that it had terminated its agreement with Zell's group. In case the shareholders did not approve of the Goldman offer, RCPI also entered into an agreement which allowed the Goldman group to, at RCPI's request, participate in a rights offering to RCPI shareholders at a price not less that $6 per share, raising $200 million. Goldman, which already had the right to buy up to a 19.9% stake in the REIT, would have been protected from dilution of its stake and would get the right to buy $50 million of stock at $7 to $7.50 a share for three years. Existing shareholders would bear the costs of dilution. Though the shareholders had several months to ratify the deal, it was widely believed that the Goldman bid would succeed if only for the expense associated with extricating RCPI from the agreement. While it was expected that RCPI would take ownership of the Center soon, Mitsubishi had not yet formally turned the property over to the REIT.
Sam Zell's first recapitalization proposal was accepted by RCPI earlier in the fall, before other parties expressed substantial interest. The agreement stipulated that he purchase 50% of the trust for $250 million at $5.50 a share. Zell was promised a breakup fee of $11 million if the agreement was not executed. The agreement also allowed RCPI to cause the Zell group to purchase a 9.7% stake in the REIT for $10 million, thereby providing additional working capital. The advantage of his group, Zell claimed, lay in the value each participant could offer the Center. General Electric would lend its sterling credit rating to the Center, significantly reducing interest expense. Zell claimed this would reduce debt from its then blended rate of 11.27% to 7.76%, thereby reducing interest expense by $35.6 million per year. The Walt Disney Company, already in the process of looking for a foothold in midtown, offered the potential for a world class entertainment tenant. Merrill Lynch would assure the Center access to capital Accompanying all of Zell's different proposals was his contention that shareholders had only been exposed to the downside of the REIT and ought to have participated in the rebound of the property. What most interested the board of RCPI, however, was that the Zell agreement would save it from bankruptcy and provide sufficient cash to function after making a required payment to Goldman Sachs.
As RCPI's share price rose and other suitors presented recapitalization proposals, the board's commitment to Zell began to wane. Analysts criticized the Zell plan because it allowed Zell to purchase shares at a significant discount while diluting the existing shareholders' stake to as little as 30%. RCPI did not exercise its option compelling Zell to purchase $10 million of stock. Declining additional capital at a time when it was desperately needed indicated that the board anticipated recapitalization soon and probably without the help of Zell. After Goldman's October 1st bid, Zell proposed a number of modifications to his original plan. Significant aspects of the new proposal included the following:
Zell would provide $150 million for a 32.5% share of the REIT. Existing shareholders would get a 50% stake in the REIT and have the right buy an additional 17.5% at $5.50 per share. These rights would be transferable and Zell would take up all rights that were not exercised. An offer to pay Whitehall $30 million in cash in consideration of the cancellation by Whitehall of its rights and repayment of all Goldman, Sachs Mortgage Co. Debt at par. Zell contended that this would give Goldman a 50% return on its investment. If the recapitalization proposal was not palatable to the board, Zell offered to purchase the $1.3 billion mortgage from RCPI for a mutually agreeable price to be paid in either cash or a combination of cash and participating debt.
1.) What does the future hold for Rockefeller Center's performance judged according to rent and occupancy rates?
2.) What risk would the owner of the Center be exposed to? Would all potential owners of the Center (Zell, Whitehall, current shareholders) bear the same types and degree of risk?
3.) Is the Center more likely to thrive under one ownership group than another?
4.) Dr. Linneman said the Goldman proposal "maximizes value for shareholders" CST, 11/8/95. Is this true? How do you interpret Dr. Linneman's statement that "any additional value comes at a higher risk than the typical REIT shareholder would want to take"11/8/95 NYT.
5.) Now that David Rockefeller has surrendered his board seat, is there a conflict between his role as an owner of RGI and as a participant in the bid for RCPI?
6.) Is there any way for Sam Zell to take ownership of Rockefeller Center?
7.) Comment on RCPI's policy of purchasing its debentures when they traded below par.
8.) After David Rockefeller's departure, is there any leadership left at RGI? Is RGI surprised by the competing interests, or was it an anticipated strategy to reduce their losses in the eventual transaction?
9.) Will Mitsubishi's willingness to suffer a large "book loss" and public loss of face lead the way for other Japanese real estate investors to exit the U.S. market? What would your approach be, as an adviser to the U.S. based investor community, relative to this matter?
10.) Are these three investor groups real estate investors or financial opportunists? What is the difference, if any?
SEC RCPI SEC Filings
1995 RCPI 1994 10-K
1995 RCPI 9/95 10-Q