Trust Leaves Chapter 11 With Plan to Pay in Full : Reorganization: Mortgage & Realty emerges from bankruptcy protection ready to use its holdings to square with creditors before investing in new loans.
Mortgage & Realty Trust is now out of bankruptcy court and again calling its own shots. But before the trust can grow again, it first has to slim down.
MRT is a real estate investment trust (REIT) that recently emerged from Chapter 11 proceedings after 10 months under U. S. Bankruptcy Court protection, which it sought after defaulting on $105 million in debts. The trust, which has executive offices in Burbank and Elkins Park, Pa., made real estate loans mainly for industrial buildings, offices and other commercial structures.
MRT also invested in properties and, as a REIT, its earnings are not taxed at the corporate level because MRT distributes nearly all the profits to its stockholders.
The reorganization plan hammered out by MRT and its creditors is somewhat unusual on two counts: First, it was accomplished relatively quickly and, second, it calls for MRT’s creditors to be repaid in full. In many bankruptcy cases, creditors often get less than a dollar for each dollar they’re owed. But in other ways, it was a typical Chapter 11 proceeding, generating a stack of legal papers more than six feet high.
MRT’s plan calls for the trust to pay back the entire $403 million it owed the creditors--with interest--within 4 1/2 years. MRT made its first payment, $46.4 million, on March 1 to pare the principal amount of its debt to $389.4 million.
But the plan also means that MRT, for perhaps a year or two at least, will be largely a caretaker of its existing portfolio--taking payments from its borrowers and selling its own properties to raise cash for creditors.
The result: MRT’s asset size--now totaling $600 million--could shrink by as much as half before the trust makes any new investments, said Hayward L. Elliott, 74, a trustee of MRT and a former president of the trust.
(Elliott and MRT President Charles W. Strong Jr. head up MRT’s Burbank operations, and Chairman Victor H. Schlesinger oversees the Elkins Park office. MRT was formed in 1979 by the merger of PNB Mortgage & Realty Investors in Pennsylvania and Sutro Mortgage Investment Trust in Los Angeles.)
Elliott cautioned that “we’re not liquidating the company” with a fire sale of its assets, most of which are in California and Pennsylvania. Because MRT has more than four years to repay the debt, it can be choosy about which properties to sell and which prices to accept, he said.
“We’re not groveling for every penny,” Elliott said. “We don’t have to get this done next week.”
Meanwhile, he said, MRT’s borrowers are in better shape today to repay their loans because interest rates have fallen and credit is more available since the trust filed for Chapter 11. (Under Chapter 11, a company continues to operate but is shielded from creditors’ lawsuits while it works out a plan to pay its debts.) The drop in rates is also helping to reignite real estate sales, he said.
Strong, 61, said: “We are about to demonstrate that there is nothing wrong with our business or our portfolio, even though it’s less delightful than it once was because the market has changed.”
And the effects of the real estate market’s softness definitely are lingering. In its fiscal year that ended Sept. 30, MRT had to set aside $23.8 million for problem loans, resulting in a $10.4-million net loss. Elliott predicted that MRT would show another loss for the current year.
No dividends have been paid lately, and the trust’s stock price was hammered by the real estate slump even before MRT filed for bankruptcy. The stock, which rose to nearly $19 a share in 1989, closed Monday at $4.125 on the New York Stock Exchange.
With the real estate market improving, however, MRT should be able to pay back its debts on time, said Kenneth Campbell, director of research at Audit Investments in Montvale, N. J.
“Remember, their reorganization schedule was put together at the darkest hour of the credit crunch” that slowed real estate sales and borrowing late last year, Campbell said. Today, with credit more ample, “people are getting deals done and the best properties are starting to move.”
Still, the real estate market is notoriously cyclical, and any improvement today could evaporate within a year. So there’s slack built into MRT’s plan to accommodate future slumps in the market, whereby MRT can be short a payment by a few million dollars and defer that amount to a later date.
MRT filed for Chapter 11 at a time when it appeared that nothing was gravely wrong with the trust, and the move shocked the trust’s creditors and Wall Street. At the time, the company was solvent and profitable. It’s true that the value of MRT’s assets was eroding because of the national slump in real estate prices. But bankruptcy?
The trust blamed its decision largely on Standard & Poor’s Corp., the credit-rating agency, and still does today. In March, 1990, S&P; downgraded its rating of MRT’s commercial paper, a type of short-term unsecured debt that is sold to investors and makes up about half of the trust’s total debt.
The trust claimed that S&P;’s action prompted investors to shun its now-downgraded commercial paper, leaving MRT without its normal quick source of cash. MRT asserted that S&P; took its action even though it knew that MRT was also negotiating for a new line of credit at the time. In any case, MRT defaulted on $105 million in loan payments that shortly came due. S&P; denies any blame, saying it can’t be held accountable for how the markets react to its rating changes.
MRT had one last chance to avoid bankruptcy. A group of lenders offered a $425-million loan package, provided that the trust--which up to then had zero secured debt--pledged all of its assets as collateral for the loan and agreed to repay it in 24 months.
“We said, ‘We can’t do that,’ ” Elliott said. “The probability of success is very limited, its failure high, and now all of the assets have been pledged and if they’re gone”--by MRT defaulting and having its assets seized by the lenders--”so is the company,” he said. So the trust opted for Chapter 11.
Some of MRT’s major creditors, although supportive of the trust’s reorganization plan, still grumble that MRT fled to bankruptcy court.
“They should have never gotten themselves in that position,” said Robert Coats, a credit officer for First Chicago Corp., a bank holding company that also was a dealer for MRT’s commercial paper. MRT owed $50.3 million to First Chicago and other investors represented by First Chicago when the trust filed for Chapter 11.
Coats said MRT should have ensured early on that it had the cash to pay its debts. “In that sense, I’ll never be satisfied that they did the right thing,” he said. “But once they filed last April, we had to accept that.”
MRT thinks otherwise. “All things considered, we did the right thing,” Elliott said. “If we had been able to negotiate extended payment terms” on the $425-million loan, “obviously that would have been the best way to go. But it was our conclusion that we could not do it.”
When MRT filed, Strong was visibly embarrassed when he met with his creditors for the first time. Today, he said he’s more determined than ever to get MRT back on its feet, but still complained that S&P; cut its rating even though “they knew we were in the process” of arranging a new credit line.
“I don’t want you to think we were sitting there fat, dumb and happy and didn’t know what was going on,” Strong said. “We did. Management is always responsible. But I don’t think we were irresponsible.”
