February 19, 1995
Speaking of possible ties between the president and the Rouse Co., he doesn't have to communicate on a daily basis. He understands that the most desirable thing to do is that which paints a picture that is conducive to real-estate sales.
In that respect, he has a problem for the public is learning the truth. The $90 million debt is no problem to him but the public is learning that under the covenants the property owner must eventually pay this debt. Drive around town and see the number of properties for sale, many of them for a year or more. Property in Columbia has depreciated about 10 percent the past two years and there is nothing on the horizon to indicate the problem will turn around.
Is CA financially healthy? Oh, very healthy now. Mr. Kennedy is misleading in discussing the financial picture. To him the $90 million debt is no problem because he will soon have the asset figure inflated enough to match the debt figure. The book value of CA is about one-third of the asset value. If CA continues to roll over the principal amount of debt service each year, it will just continue to grow.
He advertises that debt service is only 25 percent of revenue. He doesn't include the principal amount in that figure. He never mentions the fact that debt service, both principal and interest, is paid from lien revenue. The money goes directly to the trustee and CA never sees it. The total, interest and principal, is around $13 million out of total revenue from the lien of $17 million. That is about 76 percent and leaves $4 million to operate CA.
CA does some weird bookkeeping to make things look healthy. Note the fact that the principal amount of debt service goes directly to the trustee. CA takes the same figure and enters it into the operating budget as a cash receipt. Also they enter millions of maintenance and repair cost in the capital budget instead of the operating budget.
The results? It creates a profit in the operating budget and inflates the value of assets at the end of the year.
The one thing that has reflected on the credibility of Mr. Kennedy and CA more than any other took place back in 1987. CA was borrowing large amounts and the trustee requested CA agree to a change in the trustee agreement, restricting CA from the right of recall of any bonds prematurely for the purpose of refinancing.
In the summer of 1993, interest rates dropped and if CA had not agreed to the recall restriction, it could have refinanced its debt, reducing the interest cost from an annual cost of close to $9 million to close to $6 million. This would have amounted to a savings of $3 million.
CA was planning to build a golf course that would take two years and cost more than $5 million. If they were permitted to refinance, they could have built the golf course cash on the barrel head. Mr. Kennedy was correct in stating that proponents of change should offer something to the people in the way of improving on what they presently have.
Charles W. Ahalt
Columbia
