As head of Credit Suisse First Boston's real estate department, high-flying transactions have become Andy Stone's trademark.
Rob Maguire, one of Southern California's most high-profile real estate developers, needed a financial backer to pull off his purchase of MGM Studios. It was a big deal, but conventional money wanted nothing to do with it. Enter Andy Stone, head of Credit Suisse First Boston's real estate department. He lent Maguire 100% of the purchase price because he felt the purchase option was undervalued, then the loan was split in three pieces -- a senior mortgage was securitizable and put into the firm's latest conduit pool, there was a mezzanine piece and there was preferred equity behind that. Get this -- the entire deal was done in a week.
That typifies the high-flying sorts of transactions that have become the trademark for Stone and his crew at Credit Suisse First Boston. They are trapeze artists that take the risks and the chances when others won't, but when the deals go right then they reap the applause -- and the rewards -- of their labors.
It all began for Andy Stone 16 years ago in 1981 when he was a trader at Salomon Brothers under Lewis Ranieri in single-family mortgage-backed securities. He then became a trading desk manager responsible for all new and creative products including the first single-family CMO and the first asset-backed deals. "Everything that didn't fit in a little bucket, I was responsible for," says Stone. Even then, he enjoyed "the stuff" that had no established markets.
"It's always judging and assessing value, conjuring up your own impressions of that, and being willing to bet your capital that you're right and if you are right, getting paid significant sums for it. That's how I grew up in the industry. There weren't 20 other screens I could look at or even other deals that I could use to judge value," says Stone. "As the markets got more efficient I tended to hand them off to other people so I could work on the next frontier."
In 1987, Ranieri left and so did Stone and a number of other people. Soon he landed at Prudential Securities, but left after three years. He took some time off in 1990, and decided to do something a little more entrepreneurial. He saw the Resolution Trust Corp. (RTC) was ready to sell huge amount of assets, but there were no buyers for commercial real estate.
"My feeling was, why couldn't one take commercial real estate and buy a bunch of them on the debt side and package it up like single-family? It wasn't rocket-science. This wasn't being done in large pools like in single-family. There had been one-off deals, but never any large-pool deals. So I decided to raise a fund and go out and buy debt to do that."
One of the firms he approached was Daiwa. "After a few meetings, they said they liked the idea sufficiently to be my sole investor. So they launched a division to be like a fund. So we were buying debt from the RTC and providing debt to buyers of equity from the RTC. Again, it was uncharted water, it was the market I like, and we went out and hired 25 guys and started repackaging it and it became the first CMBS done in large pools."
It was a big success, but other firms soon joined the fray. Then in 1994, Stone left Daiwa after it announced massive losses in Japan, and cut most of its U.S. business operations. After a brief sabbatical, Stone joined First Boston in late 1995 to set up a real estate group. At the time, Credit Suisse was a majority holder in First Boston, and finally completed its purchase of the firm in 1996.
Stone began building the team he has today, which numbers about 100 people. "We really aren't like a lot of the rest of the Street. I can't tell anymore who my clients and my competitors are. We've all kind of merged together. When you think about it, I'll compete against a deal with GE or Apollo, or I'll finance someone else who's competing with them, or I'll partner with them."
If you hadn't guessed by now, what differentiates Stone and his team from the rest of the Wall Street crowd is they're different.
"Our focus is on originating interesting deals. Our focus is not to turnover and sell, though. That's a big difference. Most of Wall Street wants to originate and sell. I have a large balance sheet. I want to originate and hold. When my balance sheet is full, I sell down a certain portion, until I have room to originate more. But I want to be fully invested. Right now I have $10 billion in assets on my books. I could probably securitize that tomorrow, but then what am I going to do with my cash? So I'm going to sell out this $2.5 billion and now I'll have some powder in my keg and I'll be able to originate more.
"By the nature of our business we try to be a debt provider and sometimes an equity investor where there are shortages of capital, situations that are out of favor, misunderstood, unique, complex that other institutions don't want to be involved in."
"Internally they would describe us as a real estate merchant bank rather than a real estate investment bank. There is a true distinction there. The difference is that we are not driven to originate internally and we are not driven by market share and we're not driven to satisfy key clients that we're servicing them. We're driven by getting involved in interesting assets with smart borrowers and entrepreneurs where we can get paid to take risks. We'll go further out on the risk/reward spectrum than almost any other lending entity and hopefully be rewarded for it. And you as Mr. Owner of real estate might say, 'Gee, if I'm taking a 70% loan then I really want my rate low.' You probably would also say, 'If I'm taking a 92% loan, 25 basis points is irrelevant to me because my leverage numbers are either going to be wonderful or lousy and that's irrelevant.'"
In recent months, Stone has forged interesting relationships with both Continental Wingate and Belgravia Capital Corp. "Those are two that we are very fond of, close to and have respect for. We've given them both basically access to our capital to originate the kind of mortgages we want. So they're almost like my bankers."
Stone feels comfortable with the team he has assembled, too. "I am a firm believer in what I would call semi-chaos, which drives most of the people who work for me crazy. We laugh about it, but that's with intent. I believe that a lose-structured environment will foster more creativity. I don't want someone to have to fit in the box. Our job is to try to translate interesting ideas into a structure where we can make good money. If I get a bunch of drones, I won't get that creativity. The good news is that we are very free flowing and very lose."
One of his more interesting ventures which may pay off big-time is his European operation. Right now the group based in London principally does equity deals, and has put out over $1 billion in Europe. And though it's only been around for 10 months, Stone expects the European operation to contribute up to half of his profits by the year 2000.
Already, Stone has been in the forefront of being "early, active and right" investing in Downtown Manhattan's older buildings and converting them. Stone bought 55 Wall Street from a Japanese firm that spent $90 million in renvoations. He brought in Cipriani and created a catering hall and ballroom downstairs, and then sold the property but retained an equity interest. "Everyone looked at us like we were Martians. Now the owners of the assets look like heroes and we were paid handsomely for our risk."