Newport Trusts Put Future in Hands of Finance Firm

Two real estate investment trusts based in Newport Beach may be willing to give a Los Angeles financing company a 47% ownership stake if the firm can turn around their troubled investments.

Wespac Investment Trust II and Wespac Investment Trust III--each of which has about 5,000 shareholders--have arranged an agreement providing them with $5 million in new credit lines.

The agreement also gives U.S. Real Estate Advisors in Los Angeles operational control of the trusts and their 18 properties nationwide and enough warrants that, if exercised, would provide the financing company with 47% of the trusts’ stock.

“The trusts have fallen on hard times,” said U.S. Real Estate President Dudley Muth, who has taken over as president of the Wespac trusts. “They needed an infusion of capital. The dollars are being provided for the beneficial use of the properties--maintenance, restructuring of debts and so forth. It’s the means to make them better performing.”

Hard Times in Oil States

The trusts fell on hard times primarily because they own or owned properties in such farming and energy states as Texas, Oklahoma and Colorado, where shattered economies have caused a flood of bankruptcies and foreclosures.

Wespac II now owns just four properties--three shopping centers and one apartment complex--in four states. At the end of September, its total assets were $52 million and its book value was $2.78 a share, said Gregory McAndrews, a spokesman for the trusts.

Wespac III owns 13 properties--six shopping centers, four hotels, two apartment buildings and one industrial park--in nine states. At the end of September, its total assets were $82 million and its book value was $5.34 a share, McAndrews said.

Trustees have also been notified that Wespac Financial Corp., a separate firm that managed the trust properties until it was relieved of its responsibilities in early December, will file a lawsuit against the trusts, Muth said.

An investment group called East/Wespac Holding Co. bought 80% of the management company in April for $6.2 million. Both companies and Wespac Financial’s two subsidiaries filed Jan. 30 for Chapter 11 protection in a U.S. Bankruptcy Court in Trenton, N.J., according to a notice sent to the trusts.

Muth said he hopes to clear up most of the trusts’ problems in nine months to a year, although the expected lawsuit may affect the timetable.

‘A Real Loss of Confidence’

“The first thing we have to do is get our hands on what’s here,” Muth said. “With the shake-out in the stock market last October, there’s a real loss of confidence by shareholders.”

The stock in each of the trusts sold for $10 a share originally, but Wespac II stock closed Monday at 38 cents a share; Wespac III was trading in a range of 75 cents to $1.25 a share in the over-the-counter markets.

Under the terms of the financing agreement, Wespac II will receive a $1.5-million line of credit, with a $100,000 advance, and Wespac III will receive a $3.5-million line of credit, with a $400,000 advance, McAndrews said.

U.S. Real Estate will receive warrants to buy about 4 million shares of Wespac II at 12.5 cents a share and about 5.3 million shares of Wespac III at 87.5 cents a share. The company can buy 80% of the shares in each trust whenever it wants, but it needs shareholder approval to exercise the remaining warrants, Muth said.

“If we’re correct in out estimation of the assets and we’re able to turn this around, our warrants would have much more value,” he said.

Under the financing agreement, four of the six trustees on the Wespac boards have resigned, though they retain their ownership interests in the trusts, and four U.S. Real Estate officers and directors replaced them.

Those who resigned are Betty Deckard, Samuel Ortiz, James Devine and Kurt Schlesinger, who also resigned as president of the trusts. Deckard is a member of the family that formed the trusts.

The new trustees are Muth, John Hall, Joel Ciniero and Lorraine New.