With $4 billion in new business, 1994 was a record year for GE Capital Commercial Real Estate Financing & Services. And it's on a pace to exceed that volume this year, with $3 billion in business closed through July of this year.
But the fact that the Stamford, Conn.-based firm, which has an asset base of $18 billion, appears poised to set another record in volume by year-end shares the spotlight with how the firm is positioning itself for the new millennium, its executives say.
"We had great business results, but we're getting ready for the next game and accelerating what we're doing on new fronts," says senior vice president and general manager Michael Fraizer. The firm has doubled its resources and grown the staff of its new products group from four people to 20 over the last three years. In addition, it has 30 people in a separate division devoted to risk exposure analysis.
Without the new products and services GE Capital has developed in the last two years, Fraizer says the firm's volume could be half of what it is today. And much of that portfolio could be at risk.
With product life cycles shorter and niche plays faster, the emphasis is as much on executing the new products as it is on identifying them.
"We are execution oriented," Fraizer adds. "The worst thing is to have a great strategy, but no execution -- and the world is rife with examples of that."
This year, the new fronts for GE Capital include more international business, new loan products like its growing affordable housing and senior living segments, a small equity program with investments between $1 million and $10 million, tapping the capital markets to create more flow for its lending business, and an array of new services for its customers like Power Buyer service and GE Capital-ResCom.
When you talk with executives at GE Capital, several themes underscore every description of the new products and services it creates to produce its volume. Among them are service, real estate solutions, technology and execution.
"Solutions, I think, has become a cliche in the industry today," Fraizer says. "But, because we have the tools and the execution, solutions are a reality here."
GE Capital has added the tools to help grow its asset base by more than 50% since 1992. And, in constantly asking and intelligently answering how can it remain a credible player over time, it continues to solidify and create its own niches. Sitting still is anathema to the company's culture, which is evident in its internal dialogue called Vision 2000.
As traditional players joined alternative sources of debt and equity, there's no shortage of capital and competitors in today's marketplace.
To examine the trends and identify the opportunities, GE Capital relies on a broad-based risk and exposure management effort, led by senior vice president of exposure management and ventures Ed Santoro, who previously led the firm's Product Development and Capital Markets Group, and chief credit officer Jayne Daye.
"The ability to maintain our presence in the market depends on good risk-exposure management," Santoro says. Among some of the major issues his group is considering are technology's impact on property markets and how GE Capital can use technology to re-engineer the front end of its business to make it more responsive. For instance, it expects to have a trading floor operating in its Stamford headquarters next year that will further speed its underwriting process, which it aims to decrease from its current 30 days to only 10.
"We do things differently than in the past," he adds. "We've been providing solutions for customers for 25 years because we can anticipate change."
For instance, it has added the capital markets and private placement markets to its tool kit, which allows it to originate and place loans as well as originate and hold.
"For us to continue to provide what our asset base needs, from highly flexible to lower loan-to-value product, we'll use the capital markets or private placements," Fraizer says. "We'll still do the volume; we'll just have more flow through. The mindset is not to have loans sitting on your balance sheet for years on end."
He'd like to see the firm operate at its present $18 billion asset mark but also maintain $3 billion to $5 billion in new volume each year. "If you keep the portfolio fresh while keeping an eye on how technology impacts the business and what the exposure is, then you're a long-term player."
Of this year's $3 billion in volume, $2 billion was lending and $1 billion was committed to deals where GE Capital was a principal. The mix reflected its existing portfolio, with about 40% apartments, 30% office, 17% retail and the remainder a mix of specialized product like senior housing and affordable housing.
"The strength of our originations is that we send our people to the property to understand indepth exactly how the building is performing and its future," says vice president Dave Henry, who heads the Americas Origination Group. This group involves a broad regional network and a new market/product group which was recently realigned into two separate entities -- specialized markets and housing programs. "There's no substitute for this."
Among the fast growing debt product in its specialized industries group, which is newly headed by Mike Henry, is senior housing. The sector has grown to a $250 million portfolio in one year, and the firm is considering takeouts on to-be-built senior projects, including skilled nursing facilities.
The housing program under JoAnn Carpenter is growing its affordable housing portfolio, with one-stop shopping for developers needing Section 42 housing.
In April, GE Capital also started a low loan-to-value program to expand is product line. The 75% LTV and lower loans with more attractive pricing pits it against insurance companies and regional banks. "Bottom line is we'll be more flexible at looking at deals than groups like insurance companies -- for example, leaseholds and more flexible amortization terms," Henry says. "Couple that with our service programs like Power Buyer and we provide customers with yet another solution package. We're prepared to reduce pricing, but we'll still be 50 to 100 basis points over life loans."
The firm made two large portfolio buys. It won a bid for a portfolio of mostly nonperforming apartment loans from HUD. The deal totaled $600 million. GE Capital has already sold some of the loans and plans on foreclosing and creating value on others. The other purchase was a $400 million portfolio of performing apartment loans from ITT, which exited the financial services industry.
It also added a small equity program for deals in the $5 million to $10 million range, which it used to buy a 100% leased shopping center in Denver.
Domestic network expands
Despite growing competition, the firm's core domestic lending produced about $150 million a month in the first half of 1995. It remains strong in part because GE Capital has added six new offices to its office network and 20% to 25% more loan origination staff in the last 16 months. There are more than 20 regional offices around the country.
"The closer you get to the customer, the greater the business," Henry says. "We probably have one of the most extensive field networks."
Adds Fraizer, "We didn't take our network apart like some of our competitors. Even though everyone is back in the market, we've seen little compression in our pricing because of our new products and services, our flexibility and our responsiveness."
The firm expects to grow its international business in both mature and emerging markets in a similar fashion -- by being there.
"There's tremendous growth opportunity outside of the United States where population is growing and there's significant creation of a middle class," says Santoro. "We've got to keep our eyes on those parts of the world."
The firm recently opened an office in Singapore to do just that. A three-person team consists of Asian and U.S. staff.
"Real estate capital is flowing more globally," Fraizer explains. "Clients are asking us to help them overseas. When they can go to a firm with local knowledge in each market, it's much easier."
Its existing offices in Canada, England and Mexico continue to generate business. The Canadian market, which is attracting opportunistic portfolio buyers, is particularly active on both the debt and equity side. GE Capital closed on a small portfolio buy with New York-based Goldman Sachs.
The 18-month-old office in Mexico was not hurt by the Peso crisis because all of its loans there are dollar-based. The firm has built a $150 million portfolio of primarily industrial properties net leased to U.S. or multinational tenants.
"The flow of deals is good," says Henry. "We're the only U.S.-based institutional capital source down there, and we're in for the long haul."
Service is integral
Providing real estate services -- not just capital -- remains an integral part of GE Capital's strategy, with the scope and execution of solutions being a major differentiator from its competitors.
"We don't want to compete on price because our return expectations are a little higher," Henry says. "We compete on value-added services, responsiveness, creativity and specialization."
Everything is linked to being a good service provider, Fraizer says. One of its newer services is the GE Capital-ResCom, an integrated communications system that provides phone, cable and security services to apartment properties, at no cost to property owners. The phone service has all the features of the regional phone companies and offers discount rates obtained from buying millions of dollars of long distance each month.
"What was never a revenue generator (for owners) now is," Fraizer adds. "It's a great value package and a huge growth business. And there's enormous value created for tenants too through service and lower cost. We're looking to have several hundred thousand subscribers by yearend."
Another major service is Dallas-based GE Capital Realty Group, a unit which provides asset management, corporate outsourcing services and loan servicing. From mid-1994 to mid-1995 the group grew its asset management base by 74%. By year-end, Realty Group executive president Pam Schutz says assets under management should total $7.5 billion.
The three-year-old organization manages property for GE Capital, which has acquired $4 billion in assets since 1992, and opportunistic buyers. It also added pension funds and other institutional investors like Kodak Retirement Income Plan, Mitsui Leasing and Development and American General Life Insurance to its client list.
It also added a loan servicing operation, which was moved from another part of GE Capital to the Realty Group. The Houston-based group is one of the largest master servicers in the country with more than 13,000 mostly third-party loans totaling $7 billion under management.
In May, GE Lincoln Corporate Services, a 50-50 joint venture with Lincoln Property Co., Dallas, was formed to provide facilities management to Fortune 500 companies and government agencies.
GE Lincoln Corporate Services will likely grow to 100 million sq. ft. under management within four years. The Realty Group brought a sizable GE Capital portfolio to the venture while Lincoln Property added NationsBank.
Schutz sees most of the Realty Group's growth over the next year in Canada, which is several years behind the United States in terms of its cycle and the object of interest among opportunity buyers. It manages a Canadian portfolio that was purchased by New York-based Bankers Trust.
About 65% of the Realty Group's $15.2 billion asset management and loan servicing portfolio is for third-parties, with the remainder captive work for GE Capital. "Our target is third-party management and fee for service," Schutz says.
"We're resourcing and putting a number of things in place that will keep us on the leading edge," Fraizer concludes. "We're not just talking about it."
With an $18 billion portfolio, GE Capital Commercial Real Estate Financing Services has quite a bit of buying power. And since March it has offered the benefits of this purchasing punch to all of its customers via the Power Buyer Service.
"We realized that with our large equity and loan portfolio, we could gain savings in accessing third-party vendors and in getting some GE products to customers easier," explains managing director of commercial real estate services Dan Miranda, who oversees the program from the firm's Chicago office. "This isn't an effort to sell things to customers; it's an effort to enhance our client's bottom line or their customer's bottom line."
Real estate owners that have any financial relationship with GE Capital -- as a mortgagee or an asset management client -- can sign up for the no-cost service, which can deliver a modest but growing range of products and services at discount prices and special rebates and warranties.
Appliances, lighting and roofing products are offered by GE divisions. Other products and services like carpeting, HVAC, title insurance, property insurance, and water and energy management are supplied by vendors with which GE Capital has negotiated national account pricing and service contracts.
"The focus is on making a big financial impact, and where we can make this kind of impact is with bigger ticket items and things that result in recurring savings (like energy efficiency)," Miranda says, adding that the goal is to include highyield components that could increase a customer's bottom line by as much as $100,000. The higher a project's or customer's net operating income, the greater its collateral value and the stronger the real estate customer.
The concept is not unique, but the execution of the Power Buyer Service makes it work. GE Capital coordinates and monitors the program, which has only one access point via a toll-free number and service center in Indianapolis. Requests are received and distributed to GE companies and the participating vendors. The vendors include American Water Savers, Trane Air Conditioning, Lee's Carpeting, Dimension Carpeting, Near North Title Insurance Corp. (an agent for First American Title Insurance) and the property insurance firm of Alexander & Alexander.
GE Capital executives say the Power Buyer Service is one of the latest examples of how the firm provides value to differentiate its lending business. And it's faithful to GE chairman Jack Welch's charge of boundary-less behavior.
"Last year Power Buyer Service was still a dream; now it's blowing and going," says Michael D. Fraizer, GE Capital senior vice president and general manager. "It's another way we focus on providing services and other ways to give our customers value instead of just money."
Of the 1,800 or so properties that GE Capital finances, owns and manages, about 600 have registered for the Power Buyer Service, which is available at no cost. Among the clients that have used the program is the owner of a new 400-unit apartment property in Dallas that bought GE appliances, pocketing $9,200 from a 2% rebate on top of the competitive prices.
In addition, the owner of a Hempstead, N.Y., office building bought lighting products through the service that is expected to cut its energy bill by $70,000 a year. A water management audit and retrofit will reduce a Dallas-based apartment owner's water bill by almost $100,000, creating $1 million in value (assuming a 10% cap rate).
One or two more high yield programs or services may be added by year-end, the firm says.
"The effort is to make our clients more profitable and, because of that, enhance our relationship with them," Miranda says. "These are business strengthening components.
"The ultimate customer service is helping our customers perform better," he concludes.