Doubletree and Red Lion. Simon and DeBartolo. Howard Hughes and
That's the kind of corporate roster any investment banking firm would be proud to call "clients." And it seems harder than ever these days to find a real estate deal - any estate deal - that Morgan Stanley Realty, based in New York, hasn't touched in some way, shape or form.
Long known as a leader in corporate mergers and acquisitions activity, Morgan Stanley Realty (MSR) is real estate's version of the answer-man. You want mezzanine financing to get a deal done? OK, MSR is there, too. And of cource, if you want to lead rather than follow the consolidation trend, MSR is the No. 1 player in that arena.
In fact, Morgan Stanley & Co. has been involved in the real estate industry longer than any other Wall Street-based investment banking firm, some 25 years. Today, the Morgan Stanley Realty team is part of a global company with offices in London, Hong Kong, Tokyo, New York, Los angles and San Francisco. but of course, its New York headquarters technically doesn't even sit on Wall Street (MSR calls 1585 Broadway, a shiny, fullblock tower near Times Square, home).
MSR is divided into three divisions of Real Estate Investment Banking (Scott Kelley and Christopher Niehaus are co-heads), Commercial Mortgage Finance & Trading (John Westerfield is head), and The Morgan Stanley Real Estate Funds (Owen Thomas is director of acquisitions and member of the investment committee). William Lewis is a managing director of Morgan Stanley & Co. and head of MSR. He also is president and COO of the Morgan Stanley Real Estate Funds.
Global is a word you hear a lot around the halls of Morgan Stanley, and it resonates from the top of the real estate department.
"Apart from real estate, one of the most important aspects of business as an investment banking firm is to be very clear in the marketplace the we believe globalization and a global reach is critical in providing the kind of service that we need to be able to provide to our clients worldwide," says Lewis. "Specifically as it relates to real estate, we feel that in order to be in a position to provide the best advice we do need to be able to speak to global trends, to global capital flows, to the way people are thinking about real estate throughout the world. So it's very much consistent with the way we run our investment banking franchise overall."
And while many of Wall Street's biggest players are global in nature, one true point of differentiation for MSR is its full-service bent.
"We are the only full-service, fully integrated real estate investment bank on Wall Street," says Lewis. "The world I would absolutely underline is integrated. We believe that we are the only firm where we all sit together on the same floor thinking about the business in an integrated fashion with our clients and investors as a focal point. We don't think in terms of separate departments or separate divisions or separate responsibilities. At the end of the day, we do think that having that integrated approach to deliver the best solution possible to our clients or to our investors really puts us in a unique position."
Years of experience in the real estate business have nurtured that perspective, according to Chris Niehaus, managing director of Real Estate Investment Banking.
"Morgan Stanley was the first investment bank, in 1970, to make real estate a strategic priority of the firm, and therefore has maintained the longest-running real estate presence of any investment bank. Over the years we have clearly developed the people and the strategies that result in our global reach and full-service capabilities. We've been around a long time and everybody in this room has spent their entire at Morgan Stanley. That also sets us apart from a lot of the more recent entrants into certain specialty niches of the real estate capital markets, says Niehaus.
Big M&A player
For the past couple of years, MSR's bread and butter has been the mergers and acquisitions arena, where it has dominated in servicing the continuing consolidation in nearly every segment of the real estate industry. Much of that success has to do with Morgan Stanley & Co.'s long-standing reputation in the corporate M&A business, which has led it to become somewhat of an adviser of choice in real estate M&A.
"Morgan Stanley is one of the dominant firms in the mergers and acquisitions business, generally speaking, apart from the real estate sector," says Scott Kelley, managing director in Real Estate Investment Banking. "And we've been able to import a lot of that expertise and that extensive knowledge base to real estate situations. This gives us a real leg up on other firms in providing the right advice to real estate clients."
But much of it still comes down to MSR's ability to grasp the tides sweeping through this business we know and love called real estate. Rather than just going from deal to deal, MSR's managers know that understanding the business is more important than doing one-offs.
"We've got as a department and as a firm a view on what's going on in our clients' businesses. We are involved in all aspects of the real estate business and, because we are investing for our own account, we're in the middle of the flow on both the buy and sell side. So from probably the most fundamental perspective, we can provide clients superior ideas and superior real estate strategic advice based upon our understanding of the industry," says Kelley.
"We take a serious and long-term view of our client relationships. Sometimes the best advice is not to do a deal and we do not hesitate to provide that advice if we think it right," says Kelley.
The combination of long-term view and market knowledge helps MSR to position other services for its clients, including individual asset and portfolio sales.
"We've been on the sell side of major portfolios, and major real estate companies more than any other investment bank. We are in the middle of these flows and our level of activity helps us in providing the right advice for our clients," says Kelley.
Perhaps the hottest phenomenon brought to the real estate markets in recent years is the securitization of commercial real estate, including the issue of pooled commercial mortgage-backed securities (CMBS). Even here, MSR finished last year as the No. 2 underwriter of CMBS issues. So where is it headed as 1996 comes to a close?
"We'll be in the top five," says John Westerfield, managing director of Commercial Mortgage Finance & Trading. "The market is red-hot. 1996 will be a record year in terms of new volume in the marketplace and it will be a record year for us in terms of the number of transactions we've done, the amount of capital we've committed and the amount of total debt we've placed."
As with everything popular, "competitive" is an understatement when describing the scramble for CMBS work, but MSR has managed to carve out a significant piece of the business. "People come to us because we've been able to achieve very aggressive execution levels in terms of pricing for clients in the marketplace," s Westerfield. "We've been aggressive with our capital and we have a very integrated team that has a smooth approach between fixed-income and real estate finance."
Big "Opp" funds
Another popular rage has been the opportunity funds which have poured billions of dollars into real estate in the last five years. And again, MSR was there early in the game with one of the first Wall Street opportunity funds, which it created in 1991.
So why was it an early entrant? "At the time we believed that there were tremendous opportunities to make principal investments in real estate," says Owen Thomas. "And we created that fund to focus on the market at that point in the real estate cycle."
The timing was good. MSR has acquired nearly $4 billion in assets through 23 investments, and its MSREF II, with nearly $1.5 billion of committed equity capital, is one of the largest funds of its kind. Major MSREF investments include Red Roof Inns, the purchase of loans and properties from BankAmerica Corp., and the acquisition of a 15-building office portfolio from Sears in partnership with Hines Interests.
Some might argue that in a truly recovering real estate cycle such as the United States is experiencing that the role of the opportunity funds may diminish. But Thomas says they will continue to be active going forward. "We think they will be. We continue to see opportunities in the marketplace. Our charge is to continue to evolve and continue to diversify our activities each year and I think if you look at our history over the last few years we've certainly been able to do that, whether it be by property type or by region, and yet specifically today we are quite focused on international opportunities and leveraging the global franchise," says Thomas.
Morgan Stanley = career track
There's no substitute for experience in the real estate business, and likewise, Morgan Stanley has a reputation for hiring talented people out of college and keeping them for lifetime careers. The MSR group brings a diversity of experience in all property types to the table.
"Once again, we are an integrated investment bank. We try to create as part of our investment banking franchise a group of very experienced investment bankers and all of the people in this room have basically spent their entire careers at Morgan Stanley," says Lewis. "It's not atypical for Morgan Stanley to keep those people highly motivated and well-paid over the course of a career. Our culture is sort of a one-firm firm. We don't think in terms of opportunities that are unique to our department or to our particular expertise. When you're part of a global integrated firm you can attract good people who can do a lot of things for a lot of different clients. And we've demonstrated that over and over again at our firm."
"Consistent with a career at Morgan Stanley, we try to create a group of professionals who over the course of their career can really be valuable advisers, investors, you name it across a lot of different areas, wherever the opportunities might arise. Wherever our clients' problems might be if you will. And therefore, we have in this room as in our real estate department overall as in our firm overall, a group of well-rounded, broad-based professionals that have expertise across a lot of different areas," says Lewis.
"Particularly in real estate you will find that people have picked up areas of expertise that we might say is a subspecialty. We have significant retail expertise, Chris Niehaus speaks to that. We have significant lodging and leisure expertise. We have significant principal/investing expertise. But I don't think anybody would sort of paint themselves into a corner and say that they're limited in the kinds of opportunities that they can address on behalf of our clients and on behalf of the firm," says Lewis.
That sort of broad-minded thinking within a real estate market framework has led to substantial volume.
"If you look at the breadth of our activities we probably have purchased a little in excess of $4 billion worth of assets," says Lewis. "Those assets span all categories, and we've been very successful in first and foremost looking for good value opportunities, often in conjunction with operating partners and broad-based experienced investment professionals."
REITs are right
Its public market bent has made MSR a major player in the real estate investment trust (REIT) business, lead-managing initial public offerings and facilitating other equity capital raising efforts. But the role of REITs is changing as the public markets mature.
"I think public companies and REITs will continue to be a major client constituency for us," says Kelley. "We've raised a lot of capital for our public clients, both debt and equity. We've got a significant commitment to that business. On a macro level, we think that we're in the early stages of a fundamental shift in the ownership of real estate assets and that a major beneficiary of that shift is going to be the public companies. Successful public companies will be asset accumulators and the agents of consolidation. They're going to need a lot of capital to do that. Our strategy is to position ourselves to help those companies both on the business side to accumulate the assets, and on the capital raising side to raise the capital to do so."
Niehaus says MSR now tracks 34 REITs with $1 billion aggregate value or greater, and the consolidation trend is being driven by investors seeking better liquidity.
"If you look at the combined float of the Simon Debartolo merger which we helped put together, that's one of the most fundamental benefits of consolidation because you're really going to start to have more of a mid-cap market size company attracting a broader group of investors including real estate pension fund investors which should give you better trading characteristics. We still think we're in the early stages of this and it's still somewhat of an immature market that will continue to be enhanced as more investors enter the market, companies get larger and certainly as trading characteristics, particularly liquidity, improve," says Niehaus.
All of which puts Morgan Stanley Realty in a position to use its full-service capabilities for whatever changing markets may lie ahead. What does Lewis see as the single biggest opportunity for MSR?
"In the80s, there was a lot of talk among investment bankers about what they really wanted to pursue, what product area did they want to pursue. You had some people pursuing M&A, some people pursuing merchant banking, some people pursuing junk bonds, each attempting to take advantage of their core competencies. That was true in the real estate industry to a certain extent as well. If you look at our firm and our real estate activities going forward, we want to be the firm of choice when sophisticated real estate clients have needs. If you look at 1996, it just so happens that we have been in a position to address the vast majority of those needs, whether it was having us invest with them in principal opportunities, serving them as an M&A adviser, raising equity or debt capital, or being asked to act as principal or as agent on the CMBS side. We don't want to put ourselves in a position where we are only a CMBS house, or we're only a REIT equity house, or where we're just a mezzanine financing house, or where we're limited solely to the U.S.," says Lewis.
"We just think that we've got a unique franchise in an environment where complexity is going to be the name of the day and we really do feel that having done this for 25 years we think that the best approach is to be as general as possible and focusing where we have to on very specific opportunities. But we do think those opportunities will ebb ad flow over time. We think we're well positioned to benefit from that ebbing and flowing."
[The Doubletree/Red Lion merger] is the most recent example of what we call one-stop shopping. A lot of people are talking about it, but as best we can tell, we're the only firm - and this transcends real estate - that has truly put in place a one-stop shopping transaction. We're certainly the only firm where both sides of the deal have asked for Morgan Stanley's assistance," says Lewis.
MSR was representing Kohlberg Kravis Roberts (KKR) in its effort to sell Red Lion Hotels. "Our recommendation was that Doubletree was the best company to do this deal. KKR then asked us to assist Doubletree in the financing. We provided the M&A advice to Doubletree, we provided the senior financing to Doubletree, we provided a bridge loan to Doubletree, we provided a backup high-yield financing to Doubletree and we're in the process of doing the equity offering for Doubletree," says Lewis.
Creative solutions. That's MSR's stock and trade.