Seemingly Sound Real Estate Trust Files Chapter 11 : Troubled Firm: Mortgage & Realty Trust in Burbank files for bankruptcy protection despite being profitable and solvent.


Mortgage & Realty Trust is a real estate investment trust that has nearly $600 million in assets, is profitable and solvent. It’s also in bankruptcy proceedings.

Two weeks ago the trust, which is based in Elkins Park, Pa., but has executive offices in Burbank, went to federal court in Los Angeles and filed for reorganization under Chapter 11 of the federal bankruptcy laws.

How could this happen to a seemingly healthy company?

The trust, with $403 million in total debt, blamed the credit-rating agency Standard & Poor’s Corp. for downgrading its credit, which caused it to miss $105 million in debt payments that came due in March. S&P; blames the banks and financial markets for overreacting to its action. And some of Mortgage & Realty’s major creditors blame the trust for jumping into bankruptcy court too quickly.


Regardless of who’s right, it appears that Mortgage & Realty operated on a too-thin margin of cash. The trust makes loans for others to acquire or build offices, apartments and other real estate, and makes those loans mainly with cash it borrows from lenders and investors. It also invests in property. As a REIT, Mortgage & Realty’s income is not taxed at the corporate level because it distributes nearly all of its income to its stockholders.

REITs in general have often disappointed investors because of problems associated with the ups and downs of the national real estate market. And even though Mortgage & Realty is considered to have relatively sound assets in its portfolio, the trust’s cash needs and the current sluggish real estate market made for a toxic combination.

The trust already has begun changing since filing for Chapter 11 on April 12, under which the trust will keep operating without fear of creditors’ lawsuits while it works out a plan to pay its debts. The trust has stopped making new loans and probably will have to sell some assets to raise cash.

Meanwhile the trust’s stock, which climbed to nearly $19 a share last year, had been sinking for some time before its bankruptcy filing and closed Monday at $5.25 share on the New York Stock Exchange. The trust also suspended its dividend, the last of which was 45 cents a share paid in the quarter ended Dec. 31.

The trouble began two months ago as Mortgage & Realty Trust was trying to arrange a new bank line of credit so that it could, among other things, meet a $13-million debt payment due March 13.

Nothing seemed to indicate Mortgage & Realty would have trouble meeting the debt payment. The trust earned $20 million in its fiscal year that ended last Sept. 30 on gross income of $65.6 million.

The trust’s total debt is about twice its net worth, which “is not extraordinarily high” for its business, said William Acheson, a REIT analyst with Value Line Investment Survey, a securities research firm in New York. Mortgage & Realty also was “renowned” for matching the amount of borrowing it needed to finance its loans to others, he said.

But Mortgage & Realty was not prepared for an unexpected jolt that hit the trust one day before its $13-million debt payment was due.

S&P;, which rates companies’ ability to pay back their debts, announced that it had downgraded its opinion of Mortgage & Realty’s commercial paper, a type of short-term unsecured debt that is sold to investors and that makes of up about half of Mortgage & Realty’s debt.

Joseph Franzetti, vice president of S&P;'s real estate finance group in New York, said it was “an appropriate action” to lower Mortgage & Realty’s commercial paper rating because S&P; perceived that with soft real estate markets in much of the country, loan payments coming into Mortgage & Realty had slowed and the trust would not have as much liquidity, or ready cash at hand.

S&P;'s action had dire consequences, the trust claimed. The trust’s talks with its banks for a new credit line fell apart, and when Mortgage & Realty turned to sell more commercial paper, investors wanted no part of its now-downgraded paper, the trust said.

The result was a domino effect. Mortgage & Realty not only defaulted on the $13-million loan payment, but it couldn’t raise the cash to pay loans totaling another $92 million that were due in March.

The trust tried again to get a new credit line, this one totaling $425 million, but decided it could not live with its lenders’ terms. So instead, it filed for Chapter 11 protection. Its biggest creditors include divisions of such financial powerhouses as Prudential Insurance (owed $128 million), Merrill Lynch ($117 million) and First Chicago ($50 million).

Charles W. (C.W.) Strong Jr., the trust’s president, pointed the blame at S&P; during the creditors’ meeting last week. Strong, who runs the trust’s day-to-day affairs from Burbank, charged that the credit change “was reckless” and complained that S&P; did not advise the trust in advance that the downgrade was coming.

S&P;'s downgrade of the trust’s commercial paper, to A-3 from A-2, is “an indication that the credit quality has gotten weaker, but certainly A-3 is not a rating that’s signaling a disaster,” Franzetti said. (S&P;'s top grade for commercial paper is A-1+.)

“I believe the market and the banks overreacted to that and declined to fund the company,” he added. “We only assess credit quality. We can’t be responsible for the actions of the market in reaction to our assessments.”

Regardless, some of Mortgage & Realty’s creditors blame the company for going to bankruptcy court too quickly. The creditors are all unsecured, meaning that their loans are not backed by specific Mortgage & Realty assets. The trust, in fact, has no secured debt.

“The creditors are clearly frustrated because they don’t feel that they’ve had a satisfactory explanation as to why it was necessary that this company filed for Chapter 11,” said an executive of one major creditor, who spoke on the condition that he not be identified.

“The general feeling is that the company took this step without fully considering other options available to it,” such as negotiating for additional credit from its banks, he added.

During the creditors’ hearing, Strong said he was struggling to even utter the word “bankruptcy” because “we are not bankrupt. We are seeking reorganization of the debt.” He has declined to be interviewed since then.

Mortgage & Realty was formed by the 1979 merger of two other REITS, PNB Mortgage & Realty Investment Trust, an affiliate of Philadelphia National Bank; and Sutro Mortgage Investment Trust, an affiliate of Ralph C. Sutro Co., a Los Angeles mortgage banking firm that is now part of Metropolitan Life Insurance. Today, about half of Mortgage & Realty’s loan portfolio covers properties in California; the rest are mainly in the northeast United States.

The trust now must work with its creditors on a plan for repaying its debts, and even some of the creditors--citing the trust’s otherwise strong financial health--said they think they will be repaid in full. The trust’s lawyer, Thomas H. Coleman, told the bankruptcy analyst that the trust hopes to propose a reorganization plan within 120 days.

Strong indicated that the trust would sell some of its assets to raise additional cash for paying the creditors. But Strong, citing the glut of commercial real estate in many cities, had a warning for the creditors sitting in front of him:

“We are not going to have a plan that says, ‘Sell everything!’ at the worst time of the market,” he said.


Mortgage & Realty Trust is a real estate investment trust that is reorganizing under Chapter 11 of the federal bankruptcy laws. The trust is based in Pennsylvania and has executive offices in Burbank. The charts below show the trust’s recent financial performance, and its biggest creditors as listed in the trust’s bankruptcy filing. The trust listed total assets of $594.2 million and liabilities of $403.1 million

Net Income

For fiscal years ended Sept. 30;

In millions

* Three months ended Dec. 31, 1989

Net income:

1990* $ 5.0

1989 19.9

1988 20.6

1987 16.8

1986 17.2

Major Creditors

In millions

Amount Creditor owed Prudential Capital Corp. $128.0 Merrill Lynch 117.2 Bank of America 50.8 First Chicago 50.3 Capital Markets Bankers Trust Co. 35.4 Meritor Savings Bank 20.3