Bishop Estate swings
for the fences

Some investments have been home
runs; others, disappointing strikeouts

By Rick Daysog

When Hawaiian Airlines flew into financial turbulence several years ago, it cost Kamehameha Schools/Bishop Estate about $700,000.

Bishop Estate had quietly owned about 1 percent of Hawaiian Air through a private investment fund, but the shares lost nearly all their value after the carrier filed for bankruptcy reorganization in 1993, said the fund's manager, George McCown.

"They weren't happy campers," said McCown, partner and founder of Menlo Park, Calif.-based McCown de Leeuw & Co., which teamed up with former major league baseball Commissioner Peter Ueberroth in the 1989 buyout of Hawaiian Air.

In many ways, the Hawaiian Air losses underscore Bishop Estate's swing-for-the-fences investment strategy that has produced its share of home runs as well as a few disappointing whiffs.

The 113-year-old charitable trust, the state's largest private landowner with assets estimated as much as $10 billion, is set up to educate native Hawaiian children. Its portfolio includes some 368,000 acres of land in Hawaii, the Royal Hawaiian Shopping Center in Waikiki, interests in a mainland China bank, timberland in Michigan and a majority interest in the parent of the People's Bank of California -- a thrift with $1.8 billion in assets.

The estate -- which until 20 years ago was land-rich, cash-poor and had to sell land to cover school expenses -- today is in its best-ever financial health, according to Henry Peters, one of Bishop Estate's five trustees.

For its fiscal year ending June 30, 1996, the estate generated revenues of $203.4 million and listed book-value assets of $2.03 billion. Results for the year ended June 30, 1997, are not yet available.

The 56-year-old Peters, who is in charge of the estate's investments, estimated that the trust's return on investment -- real estate, stocks and other holdings -- has grown at a compound rate "in excess of 15 percent" a year since 1979.

"We've done better than most entities in this town," Peters said.

Mainland investments grow

Peters, a former state House speaker named trustee in 1984, agreed to speak about the estate's investments, which some community leaders say are being mismanaged. State Attorney General Margery Bronster also has opened an investigation into the estate.

Critics such as Robert Midkiff, former president of American Financial Services and son of former Bishop Estate trustee Frank Midkiff, said it's difficult to independently verify Bishop Estate's investment track record.

It's hard to gauge the estate's return on investment based just on the federal tax returns that they file with the state Probate Court each year, he said.

But Midkiff believes that trustees have invested trust assets without a strategic reinvestment plan and have missed out on the greatest bull market in stock market history -- a charge that Peters denies.

"We don't do business with people who don't put money where their mouths are," said Peters, whose term expires in 2011. "If you have something to sell, we're not interested. But if they put money where their mouths are, we can talk. Everything else walks."

Peters cited mainland investments, which have enjoyed rapid growth recently. Since the 1980s, the estate, like many other large endowments such as those of Duke or Stanford universities, have turbo-charged their portfolios through more aggressive investments.

That's underscored by Bishop Estate's $513.7 million investment in Goldman Sachs Group L.P., which enjoyed its second-best year in 1996 with pretax profits of about $2.6 billion. The estate's share of the investment banker's 1996 earnings came to about $200 million, according to Peters.

Mergers are big hits

The estate also has become an active player in mergers and initial public offerings. Many of its recent big hits have come from those arenas:

Four years ago, Bishop Estate invested $30 million in Mid Ocean Reinsurance Co. with partners J.P. Morgan & Co., Marsh & McClennan Co. and Texas deal maker Richard Rainwater. The estate's 5.36 percent stake in the Bermuda-based reinsurance company, which went public in late 1993, today is worth about $106 million. Last year, the estate's Mid Ocean dividends amounted to about $2.5 million.

BankAmerica Corp.'s 1992 purchase of Honfed Bank for about $165 million netted a $40 million profit on the estate's $50 million investment in the local thrift, according to Peters.

Through its investments with McCown de Leeuw, Bishop Estate saw a fivefold increase in 1995 when Dallas-based Heritage Media Corp. acquired Dimac Corp., a Missouri-based direct marketing company, for about $180 million, McCown said.

According to McCown, the trust earned a similar return on its investment in Signal Hill, Calif.-based Eastman Office Products Corp. when it was bought by Florida-based Office Depot Inc. in 1993 for more than $200 million.

Peters noted that Wall Street rating companies such as Standard & Poor's Corp. and Moody's Investors Service give the estate their highest grades each year.

Citing its low debt, deep resources and strong cash flows, Moody's has issued a Prime-1 rating for some $200 million in short-term corporate paper issued by the estate, while Standard & Poor's has rated that debt with a similar A-1+ rating.

(The high ratings allow the estate to raise money from the credit markets to finance investments or capital expenditures while paying a low, 5 percent interest rate.)

Aggressive tack questioned

The estate's aggressive investment approach has raised some eyebrows.

In a report last spring, Moody's said the Bishop Estate's mainland diversification strategy may expose it to "additional risks." Moody's noted that the trust may not be able to control its mainland investments as readily as it controls its Hawaii assets.

Moody's concern is grounded in past experience.

The estate recorded an $85 million loss in 1989 when Houston-based methane gas operator McKenzie Methane Inc. filed for bankruptcy protection. The estate said much of its investment was misappropriated by a McKenzie executive.

What's more, estate staffers and trustees -- which then included Matsuo Takabuki, former Chief Justice William Richardson, Myron "Pinky" Thompson, Richard Lyman and Peters -- invested some $2 million of their personal money in the venture.

Those personal investments recently were taken to task by five prominent members of the local Hawaiian and legal community -- senior U.S. District Judge Samuel King, Monsignor Charles Kekumano, retired state Appellate Judge Walter Heen, University of Hawaii law Professor Randall Roth and Gladys Brandt, former principal of Kamehameha Schools for Girls -- who said trustees breached their fiduciary duties.

Peters said that trustees and staffers are now prohibited from making personal investments in estate investments, under guidelines issued several years ago.

And he said the estate has recouped nearly all of its investment in McKenzie after taking over the company's assets about two years ago. The estate restructured its leases with the Southern Ute Indian tribe, which owns the land beneath wells in Colorado and New Mexico as well as the transmission lines. The restructuring has made McKenzie's operations profitable, Peters said.

"We're very satisfied on how that's performing to date, and I expect that to be a home run."

A value-investing approach

Lisa Sarajian, real-estate analyst at Standard & Poor's, said Bishop Estate's recent investment record to some extent has been affected by mainland real-estate ventures like McKenzie.

But she said the mainland investment losses -- on investments made in the 1980s -- were offset by growing rental revenues from the estate's local holdings, which at the time benefited from booming Hawaii real-estate prices.

And while the new emphasis on bigger and more aggressive investments such as Goldman Sachs may raise concerns, those new investments have been very successful, she added.

"They have acknowledged that they have some investments that have turned out poorly, but I think they have stopped the bleeding," said Sarajian. "They're committed to getting these behind them and moving forward."

Peters said most of the mainland investments are conducted with professional money managers and strategic partners such as Goldman Sachs and former U.S. Treasury Secretary William Simon, who invested with the estate in Honfed and People's Bank, then called Southern California Savings and Loan Association.

Peters said the estate usually is attracted by investments that are backed by hard assets and generate a strong cash flow. The estate likes to put money in private companies that have a good chance of going public.

The estate's value-investing approach means that it turns down many deals each year.

For instance, when Gannett Co. put the Honolulu Star-Bulletin up for sale in 1992 after purchasing the Honolulu Advertiser for about $250 million, Bishop Estate made inquiries about acquiring the Star-Bulletin.

But Peters and adviser Goldman Sachs found that the sale didn't include assets such as printing presses and other equipment and that the newspaper was largely "an annuity play" in which the owner in the Star-Bulletin received yearly income for operating the afternoon daily.

The newspaper is now owned by Liberty Newspapers Limited Partnership.

"It wasn't attractive enough," he said. "Based on the projections, it was clear that we could get a better return from our existing portfolio."

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