Rainwater's 'Single Worst Investment' Toxic Real Estate

Renowned investor Richard Rainwater saw 70% of the value drain out of his $100 million investment in Thornburg Mortgage

by Christopher Palmeri

Sometimes even billionaires make bone-headed moves. Richard Rainwater, the legendary Fort Worth investor, has seen a 70% decline in just two months on some $100 million he put into troubled home lender Thornburg Mortgage (TMA). Rainwater calls it the "the single worst investment of my career."

The 65-year-old-financier, with a fortune estimated at $3 billion by Forbes magazine, told BusinessWeek.com he was watching TV last year when he saw Thornburg's chief executive, Larry Goldstone, speaking about the mortgage crisis. "He seemed like a bright guy," Rainwater recalls. Rainwater says he then checked with some of his investment industry sources who said they considered Thornburg a "capable group."

Buying into the Jumbo MarketIn January Rainwater plunked down about $100 million to buy roughly 5 million shares of the Santa Fe (N.M.) company's preferred stock. Rainwater bought shares both in a public offering that Thornburg had arranged and on the open market. He says his average cost was 21.45 a share. The preferred stock trades today at 6.25 per share; Thornburg common shares closed Mar. 13 at 2.26, down from 28 in May.

Filings with the Securities & Exchange Commission show that Rainwater and his wife, Darla Moore, own preferred stock convertible into 9.3 million shares of Thornburg's common stock, about 6% of the company's shares outstanding. By the time Rainwater invested, Thornburg was already in trouble. That was reflected in the fact that Thornburg was offering a dividend on the preferred shares of 10%. The company declined to comment on the issue.

Founded in 1993 by the current chairman, Garrett Thornburg, the company specializes in making "jumbo" single-family home loans to what it calls "superprime" customers. Those are individuals with credit scores of 744 or higher. Some 97% of its investments are in loans rated AA or higher by ratings agencies. Thornburg says just 0.4% of its loans are delinquent, compared to an industry average of more than 4%.

Rainwater says it was the high-end nature of Thornburg's business that attracted him to the company. "Housing values are suffering everywhere," he says. "But at the high end things are holding up better." On its Web site Thornburg is offering mortgage rates as low as 7.9%.

Crumbling Credit Markets
Last summer Thornburg averted greater financial difficulties by selling $20 billion of its assets. In recent weeks, though, its problems have escalated as lenders began requiring the company to put up more capital to back its mortgage investments. The company says it is presently negotiating with creditors who want $600 million in additional financing.

The problem, says Keefe, Bruyette & Woods (KBW) analyst Bose George, is that Thornburg has been funding its business with short-term loans. That worked when capital was easy to find. "They have one of the best balance sheets on the asset side," George says. "The problem is in the market—it's hard to borrow money." George says he sees the market shifting away from independent lenders such as Countrywide Financial (CFC) and Thornburg. In the future, "mortgage lending is going to be done by banks," he says. "Nonbanks have turned out to be extremely vulnerable to this kind of downturn."

Win Some, Lose Some
Rainwater is famous for scooping up assets in troubled companies. As a chief adviser to Fort Worth's billionaire Bass brothers in the 1980s, he directed the family to invest in then-floundering Walt Disney (DIS). That company went on to great success under Chief Executive Michael Eisner. In the 1990s, Rainwater plunged into oil and gas companies then struggling with low commodities prices. He invested in the Hunt brothers' bankrupt Penrod Drilling, since merged into Ensco International (ESV), and T. Boone Pickens' Mesa Petroleum, now a part of Pioneer Natural Resources (PXD). "Oil I understand," Rainwater says. "Interest rates…?"

Last August Rainwater sold Crescent Real Estate Equities to Morgan Stanley (MS) for $6.5 billion. Crescent was a big owner of office buildings. Rainwater sold at what now looks to have been the peak of the recent commercial real estate cycle. "It just seemed like the right time to do it," he says, with the prices paid for office property working out to yield just 4% to 5% for buyers.

Rainwater says his portfolio is still up for the year thanks to his energy holdings, which include blue chip oil and gas companies such as Chevron (CVX) and ConocoPhillips (COP).

Nonetheless, he says, the losses so far on Thornburg "still don't feel good."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau

Morgan Stanley Real Estate - Corporate Real Estate Toxic Mortgages

January 2006: Fortune. Interview with Richard Rainwater. "This is the first scenario I've seen where I question the survivability of mankind." He's 112th on the Forbes 400, worth $2.3 billion: "Most people invest and then sit around worrying what the next blowup will be. I do the opposite. I wait for the blowup, then invest." He waited with a half-billion-dollar war chest.

One year later- look at the deal Morgan closed on May 22, 2007

Morgan Stanley Real Estate Acquires Crescent Real Estate Equities (CEI) for $22.80/Sh
Crescent Real Estate Equities Company (NYSE: CEI) entered into a definitive agreement pursuant to which funds managed by Morgan Stanley Real Estate will acquire Crescent in an all cash transaction for $22.80 per share and the assumption of liabilities for total consideration of approximately $6.5 billion. Shares of Crescent Real Estate Equities closed at $21.62 today.

Crescent Real Estate Equities Co. (NYSE: CEI) has finally found a buyer, and one that seems to like its mixed-use approach. Morgan Stanley Real Estate has agreed to acquire the Fort Worth, Texas-based REIT for a deal that totals $6.5 billion, including the assumption of debt.

Crescent, a mixed-use REIT owned by Texas billionaire Richard Rainwater, was in the midst of morphing itself into a pure-play office REIT. After evaluating its strategic options, the company came to the conclusion that it could "take advantage of the void left by rabid industry consolidation" as a remade office REIT. More likely, it was positioning itself better for an outright sale.

The Crescent deal just underscores the notion that the private equity boom is still in full swing. According to a New York Times article citing data from Thomson Financial, there have been $281 billion worth of private equity deals in the U.S. so far this year -- that's triple the amount compared to the same period last year, which ended up breaking all sorts of records.

There seems to be plenty of momentum left for REIT take-private deals, too. Year to date, 12 REITs have gone private for a total of $16.2 billion. But, there's still a ways to go to catch up to the lofty levels of 2006, when 23 deals totaling $64.3 billion, including the mammoth EOP buyout, took place, according to SNL Financial data listed in an article by The Wall Street Journal.

Greenhill & Co. LLC served as Crescent's financial advisor and Pillsbury Winthrop Shaw Pittman LLP provided legal

Goldman Sachs and Morgan Stanley decided—while fearing for their own existence—to transform themselves into bank holding companies in September (bringing with it the ability to access the Federal Reserve's discount window), they essentially brought to an end the era of the standalone investment bank.

Bank of America said it couldn't even close its Merrill Lynch acquisition without substantial extra government help, and is likely to get billions of dollars in federal guarantees.

Morgan Stanley private incarnation

Another PUBLIC goes PRIVATE SCAM....PONZI SCHEME

Morgan Stanley hasn't said yet if Crescent's top executives will stay with its new, private incarnation.

"...despite four shareholder lawsuits in Tarrant County, Texas, contesting it. "


This spring, Crescent said it intended to sell off its non-office holdings. A deal to sell the whole company to Morgan Stanley came up in May.

Financial adviser Richard Rainwater of Fort Worth, who formerly worked with Texas' wealthy Bass brothers, co-founded Crescent in 1994 with CEO John Goff.
Wednesday, August 1, 2007
REIT with extensive Colo. holdings to be soldDenver Business Journal


Shareholders in Crescent Real Estate Equities Co. of Fort Worth, Texas, OK'd the company's sale on Wednesday to Morgan Stanley for roughly $6 billion.

As of mid-July, Crescent owned 2.5 million square feet of office properties in Colorado and several residential developments in downtown Denver and mountain ski towns.

Nearly 74 percent of holders of Crescent's outstanding shares favored the sale.

The transaction includes a $22.80 per-share offering, valued at $2.3 billion, plus the assumption of $3.1 billion in Crescent debt.

The sale is expected to close Aug. 3, despite four shareholder lawsuits in Tarrant County, Texas, contesting it. Publicly traded Crescent (NYSE: CEI) will merge into an affiliate of New York-based Morgan Stanley's (NYSE: MS) real estate group. The existing Crescent company will cease to operate.

Crescent, a real estate investment trust (REIT), currently has 23 million square feet of office space nationwide, as well as residential and resort holdings.

The Texas company sold its 613-room Marriott City Center hotel in downtown Denver -- one of the metro area's largest hotels -- in a package deal in March. Walton TCC Hotel Investors V LLC bought the Marriott and Crescent's 190-room Park Hyatt Beaver Creek Resort for $550 million.

Crescent's current Denver-area office holdings include:

Johns Manville Plaza -- 675,400 square feet at 717 17th St., Denver, one of downtown Denver's largest office buildings;
707 17th Street (also called MCI Tower) -- 550,805 square feet in downtown Denver;
Regency Plaza One -- 309,862 square feet at 4643 S. Ulster St. in the Denver Tech Center;
Peakview Tower -- 264,149 square feet at 6465 S. Greenwood Plaza Blvd. in Centennial;
44 Cook -- 124,174 square feet at 44 Cook St. in Denver;
55 Madison -- 137,176 square feet at 55 Madison St. in Denver;
The Citadel -- 130,652 square feet at 3200 Cherry Creek South Drive in Denver.
Crescent's Denver residential developments that have not yet sold out include One Riverfront and The Park at One Riverfront. The company has another 310 acres in metro Denver for future housing development, including nearly seven acres downtown.

The Fort Worth company's mountain residential holdings range from Eagle Ranch in Eagle to Three Peaks in Silverthorne and Riverfront Village in Beaver Creek. Crescent has 170 acres for future projects.

This spring, Crescent said it intended to sell off its non-office holdings. A deal to sell the whole company to Morgan Stanley came up in May.

Financial adviser Richard Rainwater of Fort Worth, who formerly worked with Texas' wealthy Bass brothers, co-founded Crescent in 1994 with CEO John Goff.

Rainwater currently sits on company boards, and owns or controls more than 4 percent of the company's shares, according to GlobeSt.com. He also has more than 5 million partnership units. Goff and company president Dennis Alberts recently forfeited their $10.3 million worth of partnership units as part of the Morgan Stanley deal.

Morgan Stanley hasn't said yet if Crescent's top executives will stay with its new, private incarnation.