Cooperative ventures are new to the hot conduit market, but Donaldson Lufkin & Jenrette and Column Financial are banking on name branding for the future.
At a recent mortgage bankers party, Steve Kantor had some sage advice for the exuberant bunch "This is the time to build relationships." Times are good for lenders today, but who knows what tomorrow brings, and with it, who you know and trust will be more important than today's loan spreads.
Kantor should know. His firm, New York-based Donaldson Lufkin & Jenrette, has developed some of the strongest relationships with its clients ever seen on Wall Street. And the real estate group, led by Kantor, has just completed one of its best transactions to date it acquired the remaining 50% of Atlanta-based Column Financial it didn't already own from Equitable Real Estate Investment Management.
That move signals DLJ's full-time entry into the burgeoning conduit business, which last year accounted for more than 50% of the total $30.5 billion commercial mortgage-backed securities (CMBS) market.
Since 1993, when DLJ did its first conduit deal, the firm has racked up an impressively consistent track record. In 1996, DLJ did about $1.1 billion in two conduit deals. This year it expects to do about $1.5 billion in three deals. About half of the origination production is being produced by Column and the other half by DLJ.
DLJ's conduit business has been run from two sides by Kieran Quinn at Column Financial in Atlanta and by Robert Brennan and Don MacKinnon at DLJ in New York. MacKinnon runs DLJ's CMBS originations and securitization process, while Brennan runs the capital markets trading operation.
"We really like the conduit business," says Kantor. "We believe going forward that you're either going to be a major player in the conduit business or you won't be in the conduit business."
That's particularly true today, as the size of the average conduit deal has risen from $200 million or $300 million to First Union/Lehman Brothers' recent deal that hit the Street at about $1.5 billion, and more are on the way.
DLJ felt the strength of the Column relationship would ideally position it for the future. "When the opportunity to buy the other 50% came up, we looked at it as a great opportunity to basically do what we wanted to do for 12 months, which is to have a high-quality organization that can originate loans, and structure loans and securitize them," says Kantor. "If we can do that, we'll be one of the major players going forward. In our mind by putting those two together and going out as one, we felt we could immediately increase that origination by having a coordinated approach to the business," says Kantor. "There were a lot of times when we'd both be looking at the same piece of business. Going forward that's not the case."
Last year, the DLJ/Column partnership ranked No. 2 in conduit issuance, right behind Nomura, and DLJ was No. 4 in total CMBS issuance. This year, DLJ will do $3.5 billion to $4 billion in CMBS business apart from Column, which includes the securitization it already did on its headquarters 277 Park Avenue office building for $425 million. In the first quarter of 1997 (prior to the Equity Office and Boston Properties REIT IPOs), DLJ lead all comers with $1 billion in lead-managed REIT underwriting. To date, DLJ has done some 800 conduit loans.
"It's very important to us that we originate a lot of loans, we are in the origination business, but as important to us is the quality of loans we originate," says Kantor. "To us, being No. 1 in the amount of loans you originate is not the whole story. At some point, whether it's this cycle or the next cycle, it's going to be the quality of the business you do. So we've turned down a lot of business that we just don't believe is good business."
The concept of DLJ/Column as a name brand has not truly taken hold in the markets, but over time, that is the goal for bond buyers and investors to recognize and appreciate the name during the next down cycle.
"Column in the marketplace stands for quality. To us, owning that name was very important, because that's the reputation we wanted," says Kantor.
"It's our feeling that whether it's a year from now, or five years from now, if you really want to be in the business and you don't want to treat this as a trade it's not a transaction to us, it's a business then they will look at Column Financial like you might look at an IBM."
Time and again, the firm's quality commitment has been proven out. "One of the things that we did learn in doing a re-securitization of below-investment grade pieces for Criimi Mae is that we saw B pieces from DLJ/Column deals, we saw B pieces from a lot of other dealers' deals, and there is a distinct difference in the performance of the underlying collateral in CMBS," says Don MacKinnon. "At some point in time, clearly when a recession hits, it's going to have a big impact and more aggressive underwriting or weaker loans will have delinquencies and defaults and will cause stress. With investors, obviously, somebody's going to get burned. And secondly, the rating agencies will respond to that because there will be a track record."
"If you start with the premise that yes, there is a difference between originators, whether their aggressiveness or the quality of loans they are doing, then you look at the rating levels today, you certainly don't see that borne out. It has not been branded yet," says Mac-Kinnon.
Four-year-old Column Financial has seven regional offices in Atlanta, New York, Washington, D.C., Chicago, Dallas, Los Angeles and San Francicso.
"We thought about doing everything out of one central location, but this is a local business where local market presence and local market knowledge is king," says Kieran Quinn, president of Column. "It also helps on the customer service where you're in their backyard and you can meet them that afternoon or that morning to see a property. We've built everything around that local regional office. We probably know 400+ mortgage bankers. We closed loans with almost 70 mortgage bankers last year. You'll find that each of the regions have four or five really key mortgage bankers where we do 80% to 90% of their conduit business."
>From the beginning, Column was created as an independent operating company capable of originating real estate loans and then partnering with DLJ to securitize them into conduit pools. With the changing nature of the conduit business, Quinn thinks 1997 will be a watershed year for conduits, and 1998 will see a shakeout as branding takes over and investors may shy away from many of the more one-off alliances/partnerships.
Quinn acknowledges that the value of the DLJ/Column partnership has been the key to much of Column's success.
"We're making loans in order to sell securities, and so much of everything we do is driven by DLJ's client base. It's their fixed-income investment-grade buyers, below-investment grade buyers and the rating agencies. And all the information they glean from this client base is then funneled down through Column out to the mortgage bankers and borrowers so that we can be a very efficient operation with a delivery system and the knowledge," says Quinn.
It's Robert Brennan's job to oversee the distribution channel for those CMBS bonds. "We almost double the participants from one deal to the next, with maybe half of the new participants being first-time CMBS buyers. We really are growing the participation in these deals exponentially," says Brennan.
"It makes it easy to get people involved in the business when a fellow at XYZ Insurance Co. calls the person at Prudential and says, 'We've never really bought conduits, who would you recommend?' The name (Column) really does sell. We've got people who tell us they won't participate in conduit lending except with Column," says Brennan.
"Column employees get a piece of the first-loss as part of their long-term compensation. The thing that's unique about us is that we also ask the question, 'Is it a good real estate loan?' Forget about the smoke and mirrors of securitization, is that a good loan?," says Brennan.
"Would you own it" is a question often asked around the DLJ/Column management table. "Let me tell you when they make a loan, you don't want defaults. They can't just do the loan and walk away. They have to live with what they've done. That's what gives the buyers the comfort level that we're doing our job," says Kantor.
"We want to be the Nordstrom of the business, not the Wal-Mart. We want to be known for quality and good customer service. If we can do that, in the long run we're going to win. It's very hard, because sometimes you're giving up short-term profitability for a long-term goal. It takes a lot of patience to say, 'We're not going to do that,'" says Kantor.
DLJ affirmed that statement late last year by hiring James Titus, formerly of Standard & Poor's, to run its CMBS research operation.
"At the end of the day, it's not only basis points, it's not only proceeds, but it's trying to come up with solutions for clients' problems. If we can do that and we can add value in any way, we're going to get our fair share of the business," says Kantor.
"You don't work at DLJ unless you understand that our reputation is worth a lot more than any transaction you can do. That comes right from the top."