Hertz Properties reports financial trouble on 11 buildings

CoStar News

September 3, 2024 | 3:21 P.M.

Hertz Properties Group, an arm of one of the largest owners of office properties in central business districts across the United States, said it has “significant doubts regarding the continued existence of the company.”

The concerns are tied to ongoing deterioration in U.S. office leasing, high operating costs due to inflation and high interest rates, the company said in a regulatory filing. The disclosure comes as some office properties in major cities across the United States have been selling for far less than what the owners had paid years earlier as some companies hold off on taking more space and others allow remote work.

Hertz Properties had financed 11 U.S. office properties with about $200 million in bonds issued on the Tel Aviv Stock Exchange in Israel and bondholders are scheduled to meet over the next two weeks to discuss the redemption of the bonds, which are only partially repaid. The firm disclosed its “going concern” doubts in its half-year financial report filed this past weekend in Tel Aviv that also details financial reporting irregularities it discovered for the first time.

In a separate filing, Hertz Properties said it hired a chief restructuring officer to oversee the financial reorganization of the entity, part of the larger Los Angeles-based Hertz Investment Group that CoStar data shows is the 25th largest owner of downtown U.S. office properties. Hertz Properties controls nine U.S. office properties totaling 4.03 million square feet, of which 33% is vacant. Last year, Hertz Investment struggled to hold on to properties — reported on by CoStar News — after a string of failed sales and unsuccessful financing deals.

Hertz Properties, in its weekend filing, said a receiver was appointed on a 10th property, the 430,373-square-foot 10 S. Broadway office building in St. Louis. In addition, the firm lost an 11th property, the 822,636-square-foot Energy Centre in New Orleans, through foreclosure by the mezzanine lender. The 11 properties taken together were once part of Hertz Investment Group’s larger portfolio of 57 office properties totaling 16.7 million square feet.

The parent company’s total office portfolio shows a current 19.1% vacancy rate and a market capitalization rate, or rate of return, of 11.1%, according to CoStar data. Twelve of its office properties are delinquent on $281 million in commercial mortgage-backed securities loans, in maturity default, or in the foreclosure process.

William “Zev” Hertz, chairman, CEO and president of both Hertz Properties and Hertz Investment, did not respond to CoStar News' emailed request for additional information.

Downgraded Bonds

Last year, Hertz Properties decided not to pay the principal and interest payments on bonds for the 11 properties “for the time being.” That prompted a downgrade, which is still grounds for placing its Israeli bonds up for immediate repayment, the filing said.

The bonds were downgraded due to the deficit in the company's working capital, loans that are contractually due and lapsed, as well as the ongoing deterioration in U.S. office markets in which the company operates, accounting firm Deloitte reported as part of Hertz Properties’ half-year financial update.

Office space in central business districts has suffered since the COVID pandemic struck in 2020, and the effects are still lingering today among a majority of the nation's markets, according to CoStar analysis.

From 2020 through the first half of 2024, U.S. office tenants returned nearly 200 million square feet to the market. Central business districts collectively accounted for 120 million square feet of that, according to CoStar data. The fallout has trickled down to other in-market commercial real estate sectors, including retail and hospitality.

Hertz Properties has been trying to counter its falling property revenue and near-term loan maturities through property dispositions. The company reported last week that effort has run into trouble.

In March, Hertz Properties said it secured a buyer for its three-building Brookhollow Central office park in Houston after putting it on the market a year earlier. The 807,000-square-foot campus went under contract for $69.2 million, all of which was to go to Israeli bondholders.

Then last week, Hertz Properties said that after several extensions of the due diligence period, the buyer in the transaction announced the termination of the sales agreement.

In its second-half earnings report a few days later, Hertz Properties disclosed the Brookhollow property was among its holdings on which it discovered irregularities in its previous reports.

“During the preparation of the financial statements for June 30, 2024, the company came to the conclusion that an error had been made in light of the failure to disclose several transactions with related parties, as well as with the way of presenting the balances of liabilities,” Hertz Properties said.

New Executive

The discovery of the unreported disclosures and its growing financial distress led to Hertz Properties hiring a chief restructuring officer.

The company appointed Amir Giryes, founder of Dallas-based Giryes Capital Group and managing partner of Pando Cos., to the reorganization role for an initial period of two months with options to extend for additional time.

A chief restructuring officer is a senior executive brought in to oversee a company's financial restructuring process, often in the face of severe financial distress. Their primary responsibilities include working out payment plans, debt restructuring, or even debt forgiveness, as well as negotiating with creditors and communicating with stakeholders.

Giryes’ employment agreement includes incentives for securing full payments to Hertz Properties’ Israeli bondholders or final payments that exceed certain levels of payments to bondholders, according to the filing. That could indicate that a potential liquidation of Hertz Properties' remaining office buildings is up for consideration.

As part of his employment agreement with Hertz Properties, Giryes had to resign from the management of Pando, according to the filing. Pando is a commercial real estate debt brokerage firm in Texas.

Last month, Giryes helped arrange $115 million in bonds through Israel's Tel Aviv Stock Exchange for three properties in Texas.