Affiliate's Woes Put Golf REIT In Fiscal Crisis

Staff Reporter

Los Angeles golf-course magnate David Price made a fortune riding the boom in golf's popularity. Now, he finds himself in the rough.

The publicly held company Price founded eight years ago is grappling with a stock-price meltdown, whose resolution is being complicated by related-party transactions, conflicts of interest, and belated "sell" signals from Wall Street.

National Golf Properties Inc., based in Santa Monica, is the only nationwide real estate investment trust focusing solely on golf courses. Since mid-August, National Golf's stock has sunk to $9 from around $25, shaving $208 million, or 64 percent, off the company's market value. The decline follows a series of disclosures about the weakening financial health of National Golf's primary tenant, golf course operator American Golf Corp., a privately held company that shares significant ownership and management ties with National Golf. American Golf is having trouble paying its rent and is in negotiations with its sister-company landlord on a restructured lease deal. However, the ties between the companies have lowered the confidence of investors and analysts that a favorable outcome will be reached. The companies haven't said much about the situation, and without information, analysts have downgraded National Golf's stock.

"It appears that some sort of restructuring will have to take place, but what that will entail we don't know," said Steve Sakwa, a Merrill Lynch director who recently lowered his rating to "reduce" on National Golf stock.

In-bred ownership

At the center of the drama is the chairman of both companies, Price, one of L.A.'s wealthiest businessmen. Price, who is president of the Museum of Flying and co-founder with his wife Dallas of Oaks Christian School in Westlake Village, started American Golf in 1973 and owns 87 percent of the closely held company. He also owns 19 percent of National Golf, the publicly held company he created in 1993 as a vehicle to acquire distressed golf course properties that American Golf would run.

Although no one has suggested any improprieties, the in-bred ownership ties put the interests of Price at odds with those of unrelated National Golf shareholders.

"There is still quite a lot of cash flow coming from those courses. The question is, how do you divide those cash flows?" said Dan Boyle, vice president at Schwerin Boyle Capital Management in Springfield, Mass., the largest institutional owner of National Golf stock with 6.5 percent of its shares.

Until the economy went sour, everything was going as planned. National Golf's shareholders enjoyed a solid annual dividend yield of 7 to 8 percent, based on the rents paid by American Golf, and a revenue growth rate of around 9 percent annually.

Operating the courses, American Golf generated positive cash flows ranging from 15 to 26 percent above rents, according to Merrill Lynch calculations.

Through the end of 2000, National Golf had acquired 116 golf courses for a total of $711 million, and American Golf now runs all but four of National Golf's 146 owned courses.

This year, though, same-course revenues on National Golf's properties have declined 5.6 percent, leading to cash-flow problems at American Golf that are endangering both companies.

In the second quarter, American Golf fell short of fixed-charge coverage ratios (cash-flow measurements) that were requirements of two American Golf credit facilities and also National Golf's $300 million line. Then in November, National Golf disclosed that the two companies were in negotiations on the timing and payment of rents over the winter off-season. American Golf's ratio of operating cash flow to rent had fallen to 0.93, meaning it was bringing in less cash than it needed to pay rent. National Golf is also in discussions with its lenders about various non-compliance issues and cross-defaults.

Little information available

Since then, there has been very little information. National Golf directs all questions about the matter to a telephone recording, which in turn points to the company's filings with the Securities and Exchange Commission. Calls placed to Price through American Golf were not returned.

Lacking anything further, analysts have downgraded National Golf's stock and attempted to draw out best- and worst-case scenarios of a restructuring. Two brokerage firms, Merrill Lynch and Robertson Stephens, have placed versions of "sell" ratings on National Golf's stock.

"I think the stock price has fallen into a vacuum because there hasn't been a whole lot of information out there about the options or solutions," Boyle said.

A lot will depend on National Golf's four independent directors. In cases where there is interlocking ownership or interlocking boards with a public and private company, the directors who don't have conflicts of interest are charged with negotiating on behalf of the public company, said Eric Landau, national co-chair of the securities litigation group at McDermott Will & Emery in Irvine and a specialist in corporate governance.

At National Golf, the four independent directors include several prominent locally based executives. John Cushman III, one of the region's major real estate executives, is chairman of Cushman & Wakefield Inc. Bruce Karatz is chairman and chief executive of residential homebuilder KB Home. Charles Paul is chairman of IFILM Corp. and a co-founder of Sega Gameworks LLC, and Richard Archer is an independent consultant and former chairman of Jardine Insurance Brokers Inc.

As the lease renegotiations proceed, these independent directors of National Golf will likely square off across from Price, who typically would be free to negotiate on behalf of the privately held company, Landau said.

Karatz, Cushman and Paul declined to comment. Archer could not be reached.

In the past, Boyle said that National Golf officials have done a reasonably good job of managing the conflicts. For instance, though it now looks as if National Golf overbought golf courses, the expansion actually proceeded at a slower pace than many on Wall Street wanted at the time, he said.

On the other hand, the independent directors did allow American Golf to be released last year from maintaining a $13.6 million letter of credit against potential rent defaults on some of its properties. "If you take away the letter of credit, National Golf should have got something for it," he said. "That was my point at the time."

Boyle said he expects the independent directors to "step up and do their jobs." Of particular interest is whether Price will be forced to reinvest some of the profits he pocketed from American Golf during the good years.

"I think if we have a capital injection into American Golf, a rent reduction of some reasonable magnitude, and the sale of certain courses that provides some capital at National Golf that can be used to pay down debt, if we have that combination, then we probably won't have a $9 stock price."

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