AMRESCO finds opportunity in 'risky business.'

While the real estate downturn spelled trouble for most of the industry, Amresco adapted and found its niche - and success in the process.

In the early days of the 1980s, no one thought there could be an end to the tremendous round of building that was occurring in just about every market. New skyscrapers were springing up in virtually all downtown areas as well as in most suburban markets. New malls and strip centers could be seen just about everywhere, and office/showroom/warehouse product, as well as big-box warehouses, abounded.

But there did come an end to those days. Failed projects and a doomed S&L system brought in a new era: One of distressed properties and RTC liquidations.

Even in this climate, there was opportunity.

Case in point: Dallas-based Amresco Inc., which in the mid-1980s was the special assets department of First Republic Bank, Dallas, has changed and adapted into a multifaceted, diversified financial services company with a most notable track record. Consider that it:

* acquired in excess of $5 billion in assets;

* has some 4,500 assets totaling $3.5 billion currently under management;

* resolved over $34 billion in assets located throughout the United States Canada and Europe;

* conducted due diligence on more than $8 billion in diverse and geographically widespread loans; and

* raised more than $300 million in capital over the past year, positioning itself to sustain its acquisition and investment program.

The firm specializes in loan acquisition and management mortgage banking, loan servicing, securitizations and investment advisory. Its historic core business involves buying, managing and resolving pools of distressed business and real estate loans for its own account and in conjunction with institutional lenders.

This core business underlines its evolution from a single-focus bank subsidiary to the multidisciplined entity of today.

"When First Republic failed in 1987," says Robert Adair, Amresco president and CEO, "it was acquired by what was then NCNB. The special assets department was incorporated as a subsidiary of NCNB-Texas, subsequently to become NationsBank-Texas."

Amresco was formally incorporated as a subsidiary of NationsBank-Texas in order to enter into an asset management contract with the FDIC, specifically to manage the assets of First Republic which NationsBank was not acquiring.

"That was really part of the deal that the FDIC required of Nationsbank to buy the failed banking institution," says Adair. "It was to manage the liquidation of these assets. That initially was a portfolio of about $6 billion in real estate mortgages and foreclosed properties."

"The FDIC contract grew to upwards of $12 billion over its six-year life. That was the largest single contract Amresco had," says Adair.

During the next five years, Amresco also became a major asset manager for the RTC, on about $3 billion in assets, according to Adair. It also managed distressed assets that Nationsbank had acquired and was the asset manager of the failed Rhode Island Credit Union distressed real estate assets.

"In the period from 1987 to the early-1990s Amresco was a very large thirdparty manager and liquidator of distressed assets," says Adair. "In late-1992, Nationsbank decided to spin off Amresco, and so it was acquired by an LBO fund from Atlanta, called CGW Southeast Partners."

"CGW, along with some of the management of Amresco, acquired Amresco from Nationsbank in December of 1992. A year later, Amresco, having been a private company for about a year, merged with BEI Holdings, a public company."

By virtue of the merger, Amresco became a public company.

"At the time of the merger," says Adair, "BEI had one major operating unit that had also become very active in the acquisition of these portfolios with a number of Wall Street partners. That gave Amresco the capability to act as a principal in these transactions as opposed to just being a third-party asset manager for the government."

The merger of Amresco and BEI took place on Dec. 31, 1993, and that according to Adair, created the Amresco of today. "In early-1994, we began the process of expanding and diversifying the activities of Amresco."

Adair says he knew that the distressed asset management business would not last forever. "The FDIC was cleaning up the banks; the RTC had already taken over most of the thrifts and, through bulk selling and other liquidation processes, was certainly reducing its inventory of distressed mortgages. And just in general, the market was turning around."

"What we foresaw," he continues, "was a lessening of demand for third-party management, and we also anticipated that over time the availability of the large portfolios for purchase would be exhausted as well."

"We wanted to start to get into activities that would capitalize on the improving nature of real estate markets, as opposed to just being totally focused on the distressed side of the business," Adair says.

That's when the firm began its expansion to diversify along four major business lines:

1. Asset management and finance, including Amresco Management Inc. and Amresco Funding Corp.

"This is the core competency of the firm, doing this for the last 10 years," says Adair. It involves acquisitions and management and resolutions of distressed real estate, either in the form of loans or as titled real estate or REOs.

Within this unit in the past year, we have begun a high-yield bridge and mezzanine financing activity," says Adair, "which is an extension of our core competency since so many of the people we have came out of the real estate lending arena. So, whereas in the past we have managed the liquidation of distressed assets, now we're back in the lending business where we focus on high-yield types of lending instruments," Adair says.

Amresco is also exploring construction loans in this division.

"We're in the process of signing up a commitment on our first one, an office property in Dallas' Las Colinas area. Not many of the banks have returned to construction lending, and we feel that now is a very appropriate time in certain submarkets to do this type of lending," Adair says.

"For example, in a number of submarkets in the country where they are at a 95% to 97% occupancy and rents are escalating rapidly, the first new projects to come out of the ground are all going to soak up the pent-up demand," says Adair.

Apartments, he says, are also another good example and, in the right markets, "we feel they are a very safe kind of construction financing. There are some good opportunities."

"In our asset management and finance line of business, we are looking for very high returns in response to taking calculated high risks, either through the acquisition of new portfolios or the creation of new financing."

2. Commercial mortgage banking, including Amresco Capital Corp. and Holliday Fenoglio Inc.

In this area, Amresco originates mortgages, including whole loans for life companies, as well as for securitization through its wholly owned subsidiary, Holliday Fenoglio Inc.

"Holliday Fenoglio is about the thirdlargest originator in the country and will originate probably something in the $3 billion range of commercial real estate mortgages this year."

"We also have a subsidiary called Amresco Capital Corp., our in-house mortgage bank, a conduit lender. They did about $400 million last year and will probably do $600 million this year in originating and underwriting loans to securitization with Goldman Sachs. Add the two together," says Adair, "and we will do something in the $3.5 billion range in terms of originating commercial mortgages."

"On the commercial mortgage banking side," Adair says, "we are the servicer for roughly $14 billion in commercial mortgages and are somewhere in the top three in the country in loan servicing. Much of that volume we acquired from Equitable Real Estate when we acquired EQ Services last year. So, we are an approved master servicer for the conduits and, of course, we do the special servicing in our own asset management unit."

3. Residential mortgage banking, including Amresco Residential Credit Corp.

"We're a bit more of a niche player in this arena," says Adair. The firm chooses to focus primarily on the `B' and `C' mortgages, which average $80,000 to $100,000 and are first lien mortgages to borrowers with sub-par credit. Typically, these are characterized by higher rates of interest, generally in the 10% range. Because of problems the borrower has had, these tend also to be lower loan-to-value than the A-market.

Amresco is a wholesale acquirer of these mortgages, buying them in bulk portfolios from originators, warehousing the loans on its balance sheets for a month or two, then securitizing them. It keeps a residual interest in the portfolios, which represents its profit.

Adair says that Amresco started this a little over a year ago, hiring a number of people from Household Finance. "We have bought and securitized roughly $1.5 billion of this residential mortgage paper over the last 12 months."

A particular bright spot for Amresco is a letter of intent signed to acquire Irvine, Calif.-based Quality Mortgage USA, which has some 50 origination offices in 34 states and originates about $800 million a year in nonconforming paper. "When we consummate the acquisition, we will have a very significant origination capability to feed our capital markets or securitization capabilities," Adair says.

"We've begun a vertical integration of our residential mortgage banking activities. We do not service these, but rather outsource them. Most often when we acquire a portfolio, we will acquire the loans with servicing retained by the originator."

The residential mortgage banking business, says Adair, is the most rapidly growing part of Amresco and, "it's proven to be a very nice profit contributor to the company. So we are aggressively moving on the origination side."

4. Institutional investment advisers, including Amresco Advisors Inc.

Amresco acquired a pension advisory business late last year, Acacia Realty Advisors, from Prentiss Properties, which is located in Boston and has roughly $4 billion in real estate assets under management.

With an eye to the future, Adair says: "We are looking to achieve balance in what we do. We were a company that was focused in distressed assets, and 100% of the revenues were derived from those management and liquidation activities.

Going forward, the company is looking for more balance, where its residential mortgage banking activities will represent somewhere in the 45% to 50% range for revenues and profits in the next year or two. "And we will look to our asset management or high-yield lending and our commercial mortgage banking activities and the adviser to represent the other half," says Adair.

Operationally, "we place a high premium on the entrepreneurial nature of the leadership in our company - the ability to exploit new niches and opportunities. We are a company that looks for businesses that have a higher level of risk and hence a higher level of return."

"We like high-return, high-profit margin businesses because we feel comfortable with taking more risk than, say, a more traditional financial institution," Adair says. "Mainly that's because we spent the last 10 years or so dealing with distressed situations. So, we feel very confident with what we can do should one of our higher risk investments run into difficulty."

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