Koger, Owing $353 Million, Upbeat on a Restructuring

ATLANTA - A failing Florida real estate developer that owes banks $353 million expects to complete a financial restructuring plan next week, its chief accounting officer said.

James L. Wilke confirmed that Koger Properties has been working on "a comprehensive plan with all the creditors" of the Jacksonville-based developer, which has reported $21.3 million in losses for the past three quarters. Koger's second-quarter 10Q report warned that failure to agree with creditors could lead to bankruptcy.

Effect on Banks

While designed to restore Koger to health, the reorganization is expected to boost nonperforming-asset levels in the third quarter at J.P. Morgan & Co. and several southeastern banks. The impact on Barnett Banks Inc., Jacksonville, is likely to be the strongest.

Just last December, a Morgan official labeled the then nine-year-old joint venture "a modest success so far." Acting on behalf of several pension funds, Morgan put up $100 million for land acquisition and construction.

Today, Morgan Guaranty Trust Co., the company's banking subsidiary, still holds $98 million in Koger Properties debt. The loan is fully collateralized by 10 office parks, and its is nearly negligible for a sound bank with assets totaling $96.9 billion and enormous earning power.

Huge Loss Reserve

Morgan also has a loan-loss reserve of $1.5 billion, covering 236% of nonperforming loans.

Koger Properties' remaining $198 million in secured debt and $56 million in unsecured loans are held by several southeastern banks. Stock analyst said the list includes Barnett and First Union Corp., Charlotte, N.C.

In addition, Barnett, First Union, and NCNB Corp., Charlotte, have $100.4 million in fully collateralized loans to Koger Equity Inc., a publicly traded real estate investment trust, or REIT, that is an affiliate of Koger Properties.

Affiliate in Better Shape

All of the banks declined to comment on their relationships with the Koger companies, which had built a reputation as among the Southeast's most innovative and successful developers of commercial real estate.

The financial situation of Koger Equity, which is not restructuring its fully collateralized bank debt, is considered less grave than that of Koger Properties, although it was the ninth-worst-performing REIT in the country last year, According to the National Association of Real Estate Investment Trusts.

The Robinson-Humphrey Co. brokerage in Atlanta estimated that, in total, Morgan and the southeastern banks are exposed to about $500 million in Koger debt. Bank analysts at Robinson-Humphrey calculated that Barnett and First Union each hold about $100 million of the debt of which 80% is collateralized and the rest unsecured.

Robinson-Humphrey said Wachovia Corp., Winston-Salem, N.C., and Columbia-based South Carolina National Corp. hold smaller pieces of Koger debt, all fully collateralized.

Prepared for the Worst

First Union has told analysts privately that it is already fully reserved against its Koger exposure and expects no impact on third-quarter earnings. Bank spokesman R. Jeep Bryant declined to discuss customer relationships but added, "First Union is very conservative in identifying and reserving for problem credits, even before placing them on nonaccrual."

The situation at Barnett is less clear.

Barnett has told analysts it would add Koger-related credits to its nonperforming list but would move other credits off nonperforming status at the same time, leaving no major impact on third-quarter results. Most analysts still expect Barnett to report a slight decline in its loan-loss provision, from $85.6 million in the second quarter.

Barnett's Situation

Robinson-Humphrey, in a recent research report, is more guarded, speculating that Barnett's Koger-related losses and nonperforming-asset levels "should be manageable but could interrupt the first quarter's declining trend."

Barnett spokesman Russell Hoadley said that the bank would clarify if necessary "but that time is not now."

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