The Wall Street Journal-20080116-Real-Estate Finance- Related-s Ross Stirs a Storm- Return on Centerline Infusion- Dividend Cut Anger Investors While Shares Take Long Fall
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In mid-December, real-estate mogul Stephen M. Ross made a big splash when he lured Goldman Sachs Group Inc. and others to inject a combined $1.4 billion into Related Cos., the closely held real-estate development company of which Mr. Ross is chairman, to help fund an ambitious array of projects.
But two weeks later, when Mr. Ross made an equity infusion in another company he chairs, Centerline Holding Co., investors attacked him bitterly for cutting the dividend and cooking up what they saw as a "sweetheart deal."
Both transactions were designed to give a lift to the companies' respective balance sheets at a time when high leverage is a liability. The capital infusions also were needed to make sure the companies continue to grow during a slowing commercial-real-estate market. While the Related deal was viewed as an example of Mr. Ross's savvy, the Centerline transaction was criticized by some shareholders as an example of greed.
"How could insiders reach such a favorable deal for themselves?" one investor, Patrick Collins, asked in a Dec. 28 shareholder conference call, according to a transcript provided by Thomson Financial. "I would be disgusted if I were you at what you've done. I would be ashamed at what I did."
The transaction in question: Mr. Ross's Related Cos. made a commitment for a $131.3 million investment in Centerline. In return, Related will receive convertible preferred stock that would distribute an annual dividend of 11%. That coupon was deemed "very expensive," by Tony Howard of Hilliard Lyons, the sole remaining analyst who followed the stock. Mr. Howard, who dropped coverage after the announcement, declined to be interviewed.
Mr. Ross didn't return calls seeking comment.
Related Cos. already is the largest shareholder of Centerline, formerly known as CharterMac when it was listed on the stock exchange in 1997 as a publicly traded finance company that would invest in tax- exempt bonds. When it comes time to convert the preferred stock into common shares, shareholders can vote down the conversion. But if they do, Related's annual yield rises higher than 11% -- though management hasn't yet said what the interest rate would be. If the preferred stock is converted into common stock, it would give Related and Mr. Ross as an individual a combined 29% ownership of the company.
During the conference call, Centerline Chief Executive Marc Schnitzer said two other investment banks offered capital at much less favorable terms than Mr. Ross's.
On the same day, Centerline announced the sale of its entire $2.8 billion tax-exempt affordable-housing bond portfolio to Freddie Mac, the McLean, Va., mortgage-finance company. And the company refinanced its corporate debt and reduced its debt load by $120 million. The banks that provided the new debt required the equity commitment that Related made.
Mr. Schnitzer said the moves were designed to transform the company from one that generally made money by collecting interest on investments to a company that charges fees to manage assets. Executives say this business model will be easier for the market to grasp and will lure in more institutional investors who have generally passed on the stock and allow it to take advantage of distress opportunities in the troubled real-estate market.
Yet, Centerline executives angered long-term shareholders by cutting the tax-advantaged dividend by 64% -- from $1.68 to 60 cents annually. That cut, combined with Mr. Ross's potential conflict of interest, caused some shareholders to see the timing of the announcement as suspicious, because many Centerline investors were traveling for the holidays.
Investors who did phone into the call gave management an earful, pointing out that Centerline has lost 70% of its value in 12 months. According to the transcript, Parker Phillips of Bondurant Management said: "You guys have done a terrible job in the last two years, and this just sort of caps it off. So, thanks a lot."
Centerline shares tumbled 25% to $7.70 on the day of the announcement. They fell 16 cents, or 2.6%, to $6.04 as of 4 p.m. yesterday in New York Stock Exchange composite trading.
Some investors say Mr. Ross's transaction was good for Centerline. They say the selloff was predictable when the company cut the dividend, and Mr. Ross stood to lose from the share price's dropping, just like other shareholders. (Mr. Ross owned 476,000 Centerline common shares as of March 31, 2007, according to Thomson Financial.)
Moreover, the "strike price" -- the price at which the preferred stock can be converted -- is $10.75 a share, close to where Centerline shares had traded before the announcement but now far above it.
"What seemed at the time to be an at-the-money price is now in fact deep out of the money, which is why I think it's good for the company," said Ron Lior, a portfolio manager of a long-short global real-estate fund for Weiss Multi-Strategy LLC, a New York hedge fund.
