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Bear Stearns builds its name in real estate lending

In just a few years, this Wall Street firm has made a name for itself in commercial mortgage and investment banking.

Building a reputation as one of the nation's top providers of commercial mortgage and investment banking services is not an easy task to accomplish. But when your name is Bear Stearns and you have 74 consecutive profitable years under your belt, the task doesn't seem quite as difficult.

And because of the reputation that New York-based Bear Stearns Commercial Mortgage Inc. has built for itself, the company has experienced strong growth throughout its few years as a full-fledged commercial mortgage lender and investment banker. For example, as an underwriter of public and private equity, Bear Stearns has raised over $6 billion since 1992, and it has grown at a compounded annual rate of approximately 30%, raising its total capital to $11.7 billion as of June 30, 1997. This has helped rank Bear Stearns as one of the top six investment banks in the country and as Institutional Investor's No. 1 Wall Street mortgage trading firm.

"It's been one of the three top mortgage players in each of the past eight years, and the other two players keep changing," says James G. Reichek, senior managing director of the Commercial Mortgage Group. "We'll originate close to $1 billion in mortgages during our fiscal year, which started July 1. This is more than a 300% increase over the previous year."

Part of this growth is based upon Bear Stearns' down-to-earth, realistic approach to business, which means not jumping into something new without considering the long-term effects.

"We design our growth against opportunity, and what I mean by that is that it's not our style to say, 'OK, this is going to be a great market for the next two years so let's hire 50 people,'" says Thomas Flexner, senior managing director of the Real Estate Investment Banking Group. "So ours will be strong growth, but it will be measured growth."

Bear Stearns began to focus on investment banking and commercial mortgage lending in 1993, when it started its first conduit that provided only multifamily lending. Flexner joined the company in 1993 to head up the department. However, as the markets changed, Bear Stearns started up a new conduit that focused on all property types. This is the conduit running today.

Volume growth in the commercial mortgage group accelerated after the adoption in 1996 of "The Mortgage Banker's Source" theme, created by Gregory J. Spevok, who runs the unit's marketing side and oversees its mortgage banker relationships nationally. "Our commitment to our mortgage banker sources is absolute -- we actually refer business out to them that comes in to us directly," says Spevok. "We decided early on to embrace the professional intermediary community and not circumvent them. Like our sources, we are in this business for the long term."

As the group grew alongside the growing CMBS market, the need for more senior management arose. So in 1996, Reichek came into the company to head up the commercial mortgage business, while Flexner focused on investment banking.

"Bear Stearns' senior management understands what it takes to be a survivor in this business and be a long-term player," says Reichek. "We are very much focused on that as a strategy. We understand that at times you are going to have to take some lumps in order to survive in this business."

Because all of the departments were built up at the same time, the relationship between them is a strong one. Often times, the investment banking and the commercial mortgage groups will work together to complete a deal.

"We work closely together," Flexner says. "We are constantly referring business to one another. We pitch business together. When we have an investment banking engagement that requires mortgage execution, the commercial mortgage finance department provides both the processing professionals to complement our bankers as well as the execution and the distribution. So we're intimately tied together."

This camaraderie between the groups has helped the company provide better service to its clients, particularly when there is a need for speedy turnaround.

"We strive to get a loan quoted within 48 hours of receiving a request," says J. Christopher Hoeffel, associate director at the Commercial Mortgage Conduit. "Once we can issue applications, immediately thereafter, we have closed loans as quickly as three weeks from the time we've seen it. The traditional turnaround is probably six to seven weeks."

This is possible in part because Reichek physically sits in the area where conduit loans are underwritten and marketed. "My accessibility has significantly increased our ability to react to the borrowers' needs and to the marketplace in ways that many firms can't compete with," says Reichek. "We can frequently respond to a request literally in 15 minutes."

"[Reichek] is also a co-head of our trading desk, so there is very seamless communication between me, who runs underwriting and the credit analysis side of the equation, and Jim, who runs the pricing and capital markets side of the equation," says Hoeffel. "That brings a lot of strength to Bear Stearns."

Bear Stearns' credit structure is similar to that of a bank or other traditional institutional financial lender in that they have a credit committee, but this one is made up of people in the mortgage conduit, the real estate investment banking area and the mortgage trading side of the business.

Speedy follow-through, however, is only one of Bear Stearns finer assets. Within the last year, Bear Stearns has begun offering its clients flexible rate-lock options on the commercial mortgage side of the business to closer resemble the traditional life company lenders.

"One of the things that a life company used to offer is a very flexible early rate lock," Hoeffel says. "We were holding the rate lock just before closing, but we are locking rates earlier at commitment, and we are even getting to the point where we are locking rates at application and, if interest rates fall, we give the borrower the benefit."

Bear Stearns also has an incredible amount of distribution strength that is derived from its "origination platform that combines the high-service level associated with a life company correspondent system with the capital market expertise of Bear Stearns' leadership in mortgage securities business," says Reichek, adding that the firm has what he calls a relationship manager system, which provides a mortgage banker with a point person who handles the deal from beginning to end.

"There is not a true hand-off from originator to closer," says Reichek. "The relationship manager stays involved."

"Firms that have to originate mortgages, and there's somebody else who is approving them, and there's somebody else who is doing due diligence, and they aggregate it all and then sell it or give it to a firm that is then going to do the trading -- there's too many steps there, they just can't react quickly enough, and they can't price effectively enough," says Hoeffel, adding that the company is opening its own regional offices -- not to compete with the mortgage intermediaries, but to be more accessible to its mortgage banker clientele. One office has already opened in Los Angeles.

On the investment banking side, Bear Stearns has managed or lead-managed several IPOs and follow-on offerings for companies like Patriot American, Starwood Lodging and Glenborough Realty Trust, to name a few.

"I think when a company is picking a banker, they are looking for two things at the end of the day: One is certainty of execution and one is optimizing the execution," Flexner says. "And optimizing doesn't always mean maximizing proceeds; sometimes it means leaving a little on the table to provide the company with momentum so that their secondary offering is successful."

Other services provided by the investment bank include M&A for REITs, asset disposition and debt underwriting. "Interestingly enough, we've been extremely active and are a market leader in the lodging sector, particularly with respect to lodging REITs," Flexner says. "Most recently, we've integrated the real estate investment banking group with lodging and gaming to take advantage of the significant kind of overlap in those three industries."

Of course, its flexible and varying line of services has added to Bear Stearns' growth over the past few years along with its industry commitment.

"What we offer is a unique blend of intellectual capital and creativity that is fully supported by first-class distribution strength in both equity and debt product," Flexner says, "which is why the business is growing at basically triple-digit annual percentage rates."

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