In late January 1985 I asked Dick Voell to be my guest at the annual dinner of political and corporate luminaries at the Alfalfa Club in Washington. Dick had been negotiating with Columbia to purchase the land under the Center for most of 1984 and thought he was close to a final deal. We were more than a bit disturbed to learn from a reliable source just before we left for the capital that General Electric was about to close a deal with Columbia for $400 million.
When we took our assigned seats at the Washington Hilton that evening, I was pleasantly surprised to find Jack Welch, the chairman and CEO of General Electric, sitting directly across from me. During dinner I leaned across the table and asked Jack point-blank if the rumor that GE was on the verge of buying the Columbia land was true. He said it was. I explained to him why we were anxious to buy it and asked if he would object if we talked to Columbia before GE completed the deal. Graciously, he said he had no objection.
The Alfalfa dinner was on Saturday night, January 26. Early Monday morning I called Michael I. Sovern, the president of Columbia. I told him of my conversation with Jack Welch and asked him if he would be willing to resume negotiations with RGI. I explained how vital it was for Rockefeller Center to own the land and pointed out how important our lease payments had been to Columbia over the years. I suggested that given our historic relationship they might even owe us a favor! To my delight he agreed to sell the land to us.
The following Sunday we closed the deal for $400 million, the same amount that GE had offered. At $32 million an acre, it was the highest peracre price ever paid for a parcel of urban real estate. But for the future of the Rockefeller family, I was convinced it was a price well worth paying.
With the Center buildings and the Columbia land finally united, Dick Voell and I were overjoyed that we had accomplished the objectives established only three years earlier. We had transformed RGI into a more aggressive company and dramatically enhanced its potential. It was now time to initiate the second part of our plan: the refinancing of the Center.
It was our thought to generate cash by mortgaging Rockefeller Center to the public through the sale of a Real Estate Investment Trust (REIT). The bulk of the proceeds from the public sale of the REIT, which we expected to produce $1.3 billion, would be used to finance other acquisitions to further enhance the value of RGI. Given enough time for our investments to mature, we would generate the additional income my family was demanding. The plan made great sense and only needed to be implemented.
DISASTER IN PARADISE
Standing in the way of carrying out our plan was the Trust Committee, the custodian of the vast majority of RGI’s shares.* It was a distinguished group chaired by R. Manning Brown, chairman of the executive committee of New York Life, and its other members were William G. Bowen, president of Princeton University; Hannah Gray, president of the University of Chicago; George Putnam of Putnam Funds; and John Whitehead, a former senior partner and co-chairman of Goldman Sachs.
The acquisition of Columbia’s land, the upgrading of the Center’s buildings, and our strategic diversification had enhanced RGI’s appraised value from $600 million to almost $740 million in three short years. RGI stock had come to represent more than half the net asset value of the 1934 Trusts. The difficulty was that its dividend yield was far lower than that of many of the other assets in the trusts. The RGI board, under pressure from the family and the Trust Committee, had instituted a small common stock dividend in 1981, which had been quickly increased to $17 a share in 1984, but apparently this was not enough. Several family members even insisted that it was time to sell Rockefeller Center.
To come to grips with these differences, Dick and I thought it prudent to brief the RGI board and the Trust Committee in detail about our plans for the REIT and how they would affect future income, stock appreciation, and dividends. We knew our ideas faced strong opposition, but we believed our plans were sound and that we could persuade the doubters of their merit. Accordingly, we scheduled a special RGI board meeting to which we invited the Trust Committee for the weekend of March 28–31, 1985, at Caneel Bay, my brother Laurance’s Rockresort on Saint John in the U.S. Virgin Islands.
We chartered the Chase corporate jet and flew the Trust Committee, the RGI board, several of RGI’s senior officers, and some guests, including Michel David-Weill, senior partner of Lazard Frères and RGI’s investment banker, to the Caribbean. On the way down, the plane stopped in Princeton to pick up Bill Bowen, the Trust Committee’s ranking member in the absence of Chairman Manning Brown, who was terminally ill with cancer.
Although Bill had been a member of the Trust Committee for a number of years, I did not know him very well. He was an economist by training and as president had done a superb job of rebuilding Princeton’s endowment and strengthening its faculty and curriculum. Bowen had been close to my brothers John, who had left the university a substantial bequest, and Laurance, who had also been very generous to his alma mater. The flight lasted a couple of hours, during which Bowen and I chatted amiably. Although the Trust Committee already knew about the REIT proposal, Bowen gave me no indication that he had any concerns or even strong opinions about the plan.
The meeting in Caneel was a disaster.
Dick and I knew we did not have the support of at least two of the other five members of the RGI Board. George O’Neill, husband of my niece Abby, and William Pounds, the executive head of the Family Office, thought the plan “too risky.” They were concerned about the continued illiquidity of RGI’s stock and also believed the REIT would further delay the payment of larger dividends to the family.
Their dissent was no surprise. What we had not anticipated was that the Trust Committee would be unanimous and categorical in its opposition. Bowen, Hannah Gray, John Whitehead, and George Putnam (who also sat on the RGI Board) listened to our presentation. Then Bowen dropped the bomb. He said the business plan was “too aggressive” and did not meet the needs of the shareholders. While the committee authorized us to proceed with the REIT, they directed Dick Voell and me to disburse the $1.3 billion we expected to generate in a totally different way:
$400 million would be used to pay off the debt incurred by purchasing the land from Columbia.
$250 million would be invested in an escrow account to support dividend and interest payments to the REIT shareholders.
$250 million would be applied to the purchase of RGI’s shares from the 1934 Trusts, thereby enabling the Trust Committee to achieve its objective of reducing RGI’s total value in the trusts. These funds were passed directly to the income beneficiaries in the Rockefeller family, including me.
An additional $100 million would be reserved for dividend payments to the family shareholders through the trusts over the following five years.
$200 million was reserved to complete capital improvements in and the modernization of Rockefeller Center.
RGI would be allowed to retain only $100 million, less than 8 percent of the total proceeds, for the aggressive acquisitions program we had contemplated, essentially eliminating this as a viable strategy.
The decision took me completely by surprise. I was outraged by what I considered an imprudent policy, and I said so with some vehemence. By ordering the withdrawal of capital to buy back shares and to pay dividends in excess of income, the Trust Committee had decreed the partial liquidation of RGI. In effect they were mandating that RGI remain a real estate company, and one that would be even more dependent on Rockefeller Center as its key asset than it had been before. They had vetoed the aggressive program of diversification that Dick Voell and I had begun to implement in the early 1980s. Michel David-Weill, one of the world’s most astute financial strategists, agreed. He likened RGI to a goose that could lay golden eggs and believed the Trust Committee’s action “would be slitting the goose’s throat.”
In order to ensure that their policies were implemented, they commissioned Samuel Butler, a senior partner at Cravath, Swaine and Moore, to convey their wishes directly to management, effectiv
ely bypassing the RGI board altogether. Frustrated and angry, I retained Judge Simon Rivkind, a respected senior member of the New York State Bar, to advise me on the legality of the Trust Committee’s actions. Judge Rivkind concluded, much to my regret, that the powers given to the trustees under the original trust indenture were so extensive that, short of illegal actions, they could dictate whatever course they felt was best for the beneficiaries—including the dismantling of RGI if they so wished.
For the next four years Bowen, who became chairman of the Trust Committee after the death of Manning Brown in late 1985, regularly interceded with both management and board prerogatives—an unprecedented role for the Trust Committee and one that I doubt Father had in mind when he created it.
THE REIT
The REIT, formally named Rockefeller Center Properties, Inc. (RCPI), was duly created and went public in September 1985. I served as chairman, and the other board members included my old friend Pete Peterson of the Blackstone Group; Benjamin Holloway, the head of Equitable Life’s real estate unit; Paul Reichmann, one of the principals in Olympia & York; and Dick Voell. Goldman Sachs and Shearson Lehman underwrote what would prove to be the largest REIT offering in history, issuing 37.5 million shares of stock at $20 a share that raised $750 million in the United States and marketing $335 million of bonds in Europe and $215 million of notes in Japan.
The REIT lent RGI the $1.3 billion it had raised, receiving a mortgage on the buildings and land of the original Rockefeller Center in return.* The proceeds were disbursed as the Trust Committee had directed. RGI would make regular payments to the REIT from Rockefeller Center rents, and the REIT, in turn, would pay dividends to its shareholders of 95 percent of its annual taxable income as required by REIT regulations.
Under the terms of the REIT, as specified in its prospectus, dividends would increase from $1.75 in 1986 to $6.63 in 2000 when the shareholders would have the option of either converting the mortgage into a 71.5 percent ownership of Rockefeller Center or awaiting the return of their principal in 2007. The REIT prospectus clearly stated that for the first nine years of operation rental income would be insufficient to service the mortgage but that RGI would cover the estimated $250 million shortfall by drawing down on its own reserves.
We were satisfied that our projections for the REIT were realistic and achievable since 40 percent of the Center’s leases, more than 2.3 million square feet of space, would roll over in 1994. We believed, and most experts concurred, that New York City’s real estate market would continue its strong recovery from the recession of the early 1980s. We estimated, therefore, that by 1994 we would be able to raise rents to an average of $75 a square foot, a 100 percent increase. We also believed that the remaining leases coming up for renewal between 1995 and 2000 would command between $80 and $100 a square foot. Thus, early losses would be replaced by handsome profits, and if the REIT shareholders exercised their ownership option in 2000, we would hand over to them, as promised, a successful property.
Our forecasts proved to be right on target for the first five years. The REIT began to repurchase its bonds and notes (almost $480 million of the $550 million outstanding), paid dividends on time and in the amount promised, and even began to return capital to its shareholders, a total of $1.58 a share by the end of 1988. The strong stock market of those years bolstered the escrow fund and limited the contributions RGI had to make out of its own cash flow. In addition, new leases appreciated in line with our expectations. The REIT was in excellent shape.
The same was true of RGI. At the Trust Committee’s insistence we had sold Outlet Communications, the centerpiece of our earlier diversification strategy for a tidy $236 million pre-tax profit. Likewise, RGI’s other holdings—especially Cushman & Wakefield and the totally revamped Radio City Music Hall, the nation’s leading concert venue with annual profits approaching $9 million a year—were showing positive growth. Thus, despite the cash withdrawal of $250 million by the trust for the benefit of my family, RGI’s balance sheet remained strong. In fact, by year-end 1988, its net worth had surged an additional $350 million, to $1.1 billion, a double-digit growth rate in only three years.
Ironically, this healthy appreciation in value proved to be a double-edged sword. Once again the value of RGI had grown to more than 50 percent of the total value of the 1934 Trusts, thereby causing consternation among the members of the Trust Committee.
SELLING A LANDMARK
Toward the end of 1988, Dick Voell and I began meeting regularly with the Trust Committee to discuss the future of RGI. Bowen told us that he and his fellow trustees considered it “unsound” for RGI to represent such a large portion of the trusts’ assets. They were particularly concerned about RGI’s vulnerability to a decline in New York City real estate values. Paul Volcker, who joined the Trust Committee in 1987 after he retired as chairman of the Federal Reserve, agreed with Bowen, as he was particularly wary of real estate in New York City. Dick Voell reported that Paul Volcker told him that he felt “real estate was not a suitable trust investment; he was not comfortable with the debt necessitated by real estate investment, and, even more important, he had little faith in New York City politicians.”
The Trust Committee concluded that to protect the interests of the beneficiaries, the value of RGI stock as a percentage of the value of the trusts would have to be reduced from 50 percent to something closer to 15 percent. In order to accomplish that goal they wanted to reduce the trusts’ ownership of RGI stock from 86 percent to about 25 percent as quickly as possible. Once RGI management had accomplished that goal, Bowen assured us, the Trust Committee would no longer intervene in the policies and operations of RGI but would treat the company as just another substantial investment.
In essence, then, it was the Trust Committee rather than the Rockefeller family or the board of RGI who ultimately decided that owning Rockefeller Center was no longer “in the Rockefeller family’s best interest.”
To comply with the Trust Committee’s diktat, Voell and I recommended selling a controlling interest in RGI. The Trust Committee gave us the green light to proceed with a sale in September 1989. However, they imposed two conditions that made our job more difficult: an impossibly high minimum price of $1,000 a share and completion of the sale by the end of the year—or they would consider other options.
Dick Voell and his team identified twenty companies in the United States, Europe, and Japan who might be interested in RGI. The Mitsubishi Estate Corporation, flush with cash from the boom in the Japanese real estate market, offered a staggering $1,350 a share, a preemptive bid that essentially ended the auction. In late October 1989 the RGI board accepted their proffer.*
The 1934 Trusts sold Mitsubishi 80 percent of the outstanding shares of RGI over a period of fifteen months in 1990 and 1991 at a total price of $1.373 billion. The trusts paid almost $533 million in taxes on this total and another $40 million in expenses, leaving about $800 million to be divided proportionally among the fifteen 1934 Trusts. The trust of which I am an income beneficiary netted $171.3 million from the Mitsubishi sale, not a bad return considering that I bought my original 20 percent interest in Rockefeller Center from Father in 1948 for $442,000! Despite the enormous taxes that had to be paid, the deal was clearly a good one for the family financially, and the Mitsubishi Estate Corporation was a wholly appropriate buyer.
The sale of Rockefeller Center to the Japanese, however, ignited a firestorm of criticism in the United States—hysteria, I would call it. “Japan, Inc.” was described as a monolithic giant taking advantage of naive Americans in the subtle warfare of trade and then buying up America’s patrimony. What more telling symbol was there than New York’s greatest landmark, Rockefeller Center? Some said the verdict of World War II had been reversed. In the overwrought mood of the moment, a crucial point was overlooked: The Rockefellers through the 1934 Trusts would still own a 20 percent stake in RGI and Rockefeller Center.
AN “UNTHINKABLE” BANKRUPTCY
Dick Voell and I were o
ptimistic about RGI’s partnership with the Japanese, particularly since they showed confidence in our management by asking me to remain as chairman and Dick Voell to continue as president and CEO. Mitsubishi Estates was a well-run company with more than $26 billion in assets and extensive interests around the world. We even had reason to hope that Mitsubishi’s management might pursue some of our ideas regarding the expansion of RGI as a holding company, which the Trust Committee had firmly rejected.
Alas, in the end the purchase of RGI proved to be a nightmare for the Japanese. They had bought control toward the end of the 1980s real estate boom. No one at RGI or Mitsubishi could have predicted the depth or duration of the worldwide real estate recession that began less than a year later or its particular severity in New York City.
The recession’s impact on RGI was almost immediate. Instead of rolling over leases at $75 a square foot, by mid-1990 demand had flattened and it was difficult to retain tenants at $35. The Center’s rental income soon fell even further below its interest obligations to the REIT; its appraised value declined from $1.4 billion to $1.1 billion in 1993; and annual operating deficits climbed from $40 million in 1990 to $61 million in 1993. Mitsubishi and the 1934 Trusts were obliged to step in to cover the shortfall. Mitsubishi’s investment swiftly became a financial drain with the potential of turning into a financial disaster unless remedial action was taken promptly.
To make matters worse the REIT itself was rapidly running out of reserves. It had borrowed almost $400 million in the short-term commercial paper market to finance the repurchase of bonds and notes to lessen costs down the road when interest rates on both classes of debt would increase automatically. By mid-1992 the REIT faced a credit crisis and turned to RGI for emergency financing.
Memoirs Page 61