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Friday, October 18, 1996
VRS switches, sells RF&P
Sale, not a merger, surprises insiders
BY JEFF E. SCHAPIRO
Times-Dispatch Staff Writer
The Virginia Retirement System yesterday announced the sale of real estate subsidary RF&P Corp. for more than $550 million to a New York investment bank, jettisoning a holding that's generated more problems than profits for the pension fund for six years.
The tax-free cash sale to Lazard Freres & Co. was a surprise even to VRS insiders, who had been positioning the RF&P for a merger with the Charles E. Smith Cos., Washington's largest commercial property owner. But Lazard's LF Strategic Investors L.P., a $1 billion fund, sweetened its offer late last week.
''For the first time, the boards (of VRS and RF&P) felt we had an all-cash bid,'' said Edwin T. Burton III, the VRS trustee who has been screening offers for RF&P, a former railroad, since April 1995 and had been the key negotiator with Smith.
Because the VRS is tax-exempt, proceeds from the sale of all RF&P stock to Lazard could be put directly into the $22 billion pension fund. The closing date for the deal is Nov. 30.
A Lazard spokesman could not be reached for comment.
The purchase price satisfies a long-standing VRS demand: it approximates the book value of the RF&P, which was taken over by the VRS for about $380 million after the fund blocked a stock offer for it by transportation giant CSX Corp.
Lazard will acquire commercial properties from Fairfax to Richmond as well as the land beneath Crystal City, the huge, Smith-owned office-and-residential complex in Arlington. RF&P's holdings also include Potomac Yard in Alexandria, one of the last large tracts of undeveloped land inside the Capital Beltway and once touted as a site for a Washington Redskins football stadium.
Targeted for takeover by the VRS in 1990, RF&P has been a political and legal lightning rod for the retirement fund. The deal triggered federal and state criminal investigations, reforms at the VRS and a debate over whether a public pension system should run a private company.
RF&P, which accounts for about 3 percent of the VRS holdings, never turned over its profits to the VRS, in part, because of early tax complications. That annoyed VRS investment officers, who said putting RF&P profits off-limits prevented the pension fund from taking full advantage of the bullish stock market.
The 225,000 state and local employees who support the VRS and its 75,000 beneficiaries may be relieved by the sale, said Joan S. Dent of the Virginia Governmental Employees Association.
''We've heard all the different issues that developed in and around RF&P,'' said Dent. ''All things considered, probably severing ties with that particular company is something state employees and retirees would approve of.''
Besides Smith, Lazard beat SFRE Inc., a real estate investment firm backed by Cargill Inc., the grain firm. Lazard and SFRE had complained that they couldn't get a fair hearing before the VRS because the fund seemed bent on a Smith partnership.
Asked if he was surprised by the sale, Smith spokesman John M. Kurtz said, ''All kinds of things happen in a business arrangement.''
Nitin M. Chittal of SFRE, which offered $330 million for RF&P except Crystal City, said, ''If they got a cash offer, as I far as I'm concerned, they should take the money and run.''
Two defenders of the RF&P acquisition, former VRS chairwoman Jacqueline G. Epps and former Gov. L. Douglas Wilder, could not be reached for comment.
Until last Thursday, indications were that the RF&P and Smith would form a real estate investment trust with 21 properties from both firms -- including Crystal City, which is operated in a partnership between Smith and the RF&P. The trust would have gone public, allowing Smith and the RF&P to reduce mortgage debt.
Even though the RF&P and Smith this summer signed a letter of intent to merge their holdings, a marriage ''was an assumption by the media,'' said VRS trustee Donald L. Cahill.
Proceeds from the sale will likely be allocated in proportion to VRS' current holdings, said Burton. Equities make up 70 percent of the VRS portfolio; bonds, 21 percent; and real estate, 9 percent.
The Lazard deal means a smaller fee for VRS' adviser, Lehman Brothers. It will collect about $1.5 million, instead of about $15 million had the Smith-RF&P trust gone public.
ls expect Lazard to keep some senior personnel.
Only one of the nine VRS trustees opposed the Lazard deal, which was announced after a 3 1/2-hour closed session of the pension panel and the RF&P board of directors.
Bayliss, however, was quoted in June as saying the RF&P should be sold for about $650 million to $750 million.
VRS chairman James C. Wheat III did not attend yesterday's session.