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It's Wall Street vs. Main Street, and peaceful coexistence rules

Surprisingly, the battle lines between traditional real estate lenders and Wall Street investment houses have begun to blur of late, as both sides agree that crossover business will continue through the turn of the century.

Editor's Note: Recently NATIONAL REAL ESTATE INVESTOR gathered together eight leading players in the nation s real estate financing markets for our annual breakfast roundtable discussion at the Waldorf-Astoria in New York. Here are their comments.

Carl Kane (moderator): There's a toast that goes, `May we live in interesting times.' This has been one of the more frantic years in real estate capital. What have been your most important developments in 1995?

Michelle Felman: We're at about $18 billion in balance sheet commercial real estate loans and we have found both because we shouldn't grow any larger than $18 billion because that's a pretty good size and because we think there d be no benefit in that and we should begin accessing the capital markets going forward.

We've always been an on-balance-sheet lender or acquirer and we've really never thought much about using the capital markets because truthfully we really haven't had to unlike most people with capital constraints who,d rather not. I think we've made some minor headway this year and I think in '96 I see us making some major headway. So for us I think that's a real change in the way that we do business.

John Jardine: Well, TIAA-CREF is also about to take its shot. We currently have a portfolio of about $27 billion in various forms of real estate, and I would also include in that $27 billion commercial mortgage backed securities and also our REIT balance sheet as well. Since the beginning of the year we have been struggling with a regulatory requirement that created quite a bit of havoc, at least in January and February. We weren't sure if commercial mortgage backed securities were going to be treated as securities or as mortgages. We weren't sure what the risk-based capital surplus factors were going to be for the mortgages, and we understood early on that 15 percentage points were going to be charged to joint ventures and 10 percentage points to wholly-owned. So we went through a rather chaotic first quarter.

Once we either accepted what was being presented to us or cleared the air a little bit, we began really to invest. As that began, the interest rate market began to go down and we had a terrible time trying to find deals. My job is to try to go out and find deals, and I've been out buying a lot of mezzanine B-piece CMBS, rated and unrated. And have attempted to pick my spots but it's tough this year getting paid for risk.

Jay Sugarman: 1995 for Starwood, which is an opportunistic fund, was the year we stopped buying real estate. I think you're going to see going forward the opportunistic funds are out of the business of going out and buying real estate. They are quickly segueing into being hedge funds, finding arbitrages in the market, taking advantage of public market versus private market, doing unusual financings like mezzanine financing, subordinated financing, verbal financing. The era when people went out and bought into real estate because there was a lack of capital is over.

Last year we did three major things: For Westin we did an LBO; we took control of a publicly traded REIT in the hospitality industry that has a grandfathered tax structure that can't be replicated; and we started a mezzanine financing fund.

All three of those in our minds shift from a capital scarcity that simply allowed us to buy and sell to a new era where you have to be much more creative, much more flexible in how you wrap and in how you structure your transactions. A lot of value can be created by looking out at the world and anticipating those capital market moves and industry moves and making sure you're ahead of them.

I think you're going to see a lot of the large $600 million, $700 million and $800 million funds do a lot more corporate activity, a lot more international activity in trying to bring the international arbitrage back into line where yields abroad and yields at home have really started to move apart. You've got interest rates at historic lows. People are going to start doing things that have real estate flavor, but look a lot more like what people in the hedge funds do.

Ray Anthony: This year for us was probably a little bit on the boring side as we were perfecting what our bread and butter core business is and increasing the volume of it. We are essentially in the business of providing first mortgage debt financing and to a limited extent mezzanine financing on income-producing properties.

This was our third full year of operations, the volume each year being more than the year before. Probably if you had spoken to me last year at this time and looking forward and asked me, `Are you going to expect the volume that you had this year?' I would have thought not. Our volume of originating fixed-rate mortgages has been incredible. We've also benefitted this year from what we did in the prior two years in perfecting our MegaDeal concept, and also perfecting our small loan securitization which I really think has allowed us more so than some of our competitors to underwrite loans of virtually all sizes.

Also this year, in addition to the increase in volume we've made some structural refinements that make our deals more efficient and our pricing more efficient. We're always reviewing our underwriting standards for various products. Probably in the hotel arena this year, despite a large increase in volume on hotel financing, the largest that we've seen in our three years, our underwriting criteria for hotels has actually gotten more onerous as time has gone on and not less.

Michael Reid: This year we saw a real estate industry that was in a consolidating phase whereas the previous two years you had fairly exponential growth, particularly in the issuance of equity on the IPO side as you had tremendous inflows of capital into the marketplace.

This year clearly the IPO frenzy was almost non-existent. There were very few deals that were done. As a consequence people thought that there was very little equity issuance. There was actually nearly $5 billion this year, so it was still a very heavy year if you look at the overall corporate calendar. You still saw considerable money flows coming into the real estate REIT business, but not companies going public as we had been seeing.

Lehman's role in all of that was to start delivering more full-service to our client base as it was no longer just "Get public, get public, get public," it was "Can we buy companies, can we do unsecured debt, can we do lines of credit, can we raise debt at the obvious levels that Ray's been seeing?" So, tremendous volumes on the debt side. The securitization business continues to be very competitive with insurance company lenders, even though insurance company lenders have come back very aggressively.

So it was essentially the role of Lehman and other investment banks to help in this consolidating phase where now existing companies were strengthening their balance sheets and reducing their costs of leverage. Going forward I think you'll start to see some more IPOs.

Thomas Pulley: This was a year when Bankers Trust was successful in taking a lot of the activities that we've done in the United States and exporting them abroad. We've bought three portfolios of non-performing and sub-performing loans in Canada this year which have worked out real well for us. We sold or are in the process of selling one of the largest portfolios of French mortgages. We did a securitization on a property in Hong Kong. Going forward into 1996, that will be a continued theme for us, continuing to take the technology that has been developed at this table and in the U.S. and spreading that abroad.

Barbara Rubin: This has been a tremendous year of transition for us. In the beginning we moved from being a division of a life insurance company to being a real estate investment adviser, with focus onbuilding third-party management.

The organization was created on Janq 1 with an emphasis on mortgage loan business for the life insurance company that started to establish with pension fund clients. We think of that as a tremendous opportunity going forward. We launched three unique funds and we started to raise capital again on the equity segment. We view `95 as a year of beginning and we see `96 as presenting tremendous opportunities.

Kane: We've heard competition for yields, both on the debt markets and on the equity markets. We've heard an international orientation, both in terms of seeking yield and new opportunity. Is it possible that the real estate capital markets are growing up and what are the implications of this on the next year or two?

Reid: I think clearly when real estate was taken into the public debt and equity markets it was taken out of the niche that it used to be in where real estate capital was priced very inefficiently. It was never as efficiently benchmarked against other types of securities. You used to see the days when highly speculative real estate loans were priced like AA corporate securities and you used to see real estate trading at levels that were through Treasury securities. It made no sense.

Going now through the combined efforts of people at this table into the public markets, all of a sudden real estate has to stand up and compare itself to all the other types of available capital, both domestic and international. You're beginning to see that adjustment on the debt side, so that debt securities are beginning to be priced in the continuum of total security issuance, and it's just beginning to happen on the equity side. It will be interesting to see going forward in 1996 and 1997 if you start seeing a re-evaluation of private real estate transactions based on the public capital markets. It hasn't really happened yet but it could clearly begin to happen in the next year or two.

Kane: Doesn't the falloff in REIT business in the last year and a half suggest what you're talking about also?

Reid: There wasn't necessarily a falloff with almost $5 billion raised and most industry sectors would be very happy to hear that $5 billion was raised, but clearly people have been turning more to the private sector looking for capital because they think there is a more efficient or cheaper source of capital in the private sector on the equity side. The question is will they really find any in volume and in size? The experience to date is they don't necessarily do that when you run auctions or competitive bid . Generally a lot of the competitive bids are off the REITs anyway. I'm not saying that on all property types and all asset classes but you still see the REITs being very competitive in bidding. Not always pension funds are clearly much more competitive generally in office buildings, but it's a little bit of a balance right now.

Anthony: When I think about what factors going forward into 1996 will affect our business on the debt side, clearly from Wall Street's perspective in pricing loans, it is rational pricing. We can argue whether rating agencies are over-conservative or under-conservative, but there is a certain rationality there where we on Wall Street when we're making loans say one, we have to mark to market fairly, and two, ultimately we have to get those loans off of our balance sheets, and our exit strategy for that in one way, shape or form is putting those loans in the hands of institutional investors.

When we're pricing a loan we're pricing that risk that the market and the rating agencies are telling us is the risk for that loan. From time to time, you'll see insurance companies come in and price loans a lot differently than we price loans. We on Wall Street would argue that oftentimes we see irrational pricing. In the latter half of this year, the reason Wall Street's volume is as large as it is is to a certain extent that insurance companies haven't been in the market. They filled up their allocations the first of the year.

What will be interesting is to see the insurance companies, appetite for mortgage loan debt origination and also how those loans are priced because the insurance company doesn't have a discipline of marking those loans to market.

Jardine: I don't really disagree with what's been said. We find it's often the case that the security side of the business will compete with the investment mortgage side of the business. When it comes down to it, we all get in a room and say, "Oh by the way, why take $140 million in risk when I can take $40 million of risk in the subordinating classes and basically get paid for it?" and then let someone else lever up on the $100 million that's left over and not take that kind of exposure.

As it relates to the underwriting and the discipline in marking to market, you and the institutions and the insurance companies on that side of the spectrum are more disciplined than they've been. That doesn't mean they don't have a long way to go. There is a lot more marking to market and you're seeing still pretty tight underwriting criteria. We've been surprised at one or two institutions that have broken with form and been a lot more aggressive, and they're mostly midwestern institutions trying to shock the market.

Felman: One of the things that we tried not to do was change yields. I think everybody knows that about GE. That's been difficult for a lot of reasons this year because in fact some of the insurance companies may have the disciplined underwriting approach but they don't have the same disciplined pricing approach to underwriting. So I don't know how you really put those two together. I would agree that major insurance companies have filled up their allocations and there's been more room for everybody else in the market. It's tough for some of our regional people to rationalize chasing the yield curve that way because I don't think it's worth it.

When you talk about efficient pricing I'm not sure that it's really all that efficient. The lower tranches of the debt securitization market are still fairly inefficient. It's such a thin market that it's hard to call that an efficient market.

Kane: Is that something you like, lay?

Sugarman: Long live inefficiency.

Felman: We both try to find markets that are inefficient. I personally believe that the lower tranches of the debt capital markets are still fairly inefficient.

Rubin: I come from a slightly different perspective on the whole loan side. When you compare what is achievable today on a whole loan versus what's available on a single- or double-A or even a triple-B corporate, it still is a substantial margin. To the extent that you want to spread your investing over the year it's still very attractive relative to what's available on a mortgage loan right now.

And I think there is a discipline on the life company side on behalf of all of our clients pricing mortgage loans relative to other asset classes. We have developed a unique model that takes into consideration credit risk and then adds on the other costs associated with mortgage loan investing. So when we evaluate mortgage loans today we're doing it in conjunction with evaluating the whole spectrum of investments that are available to us. I suspect that is the wave of the future.

Kane: What's the institutional investor outlook on capital markets for real estate?

Felman: We welcome the growth of the capital markets. We welcome the growth of securitization. For a variety of reasons, it won't eliminate whole loan in vesting, but we think this will be another alternative to help us diversify and augment. And frankly, there has been a lot of CMBS product in the market that satisfies our needs but is not at the quality level we are seeking. on the other hand there have been some very good opportunities in the whole loan market in the second half of the year. CMBS and securitization is here to stay. The spreads are very wide relative to whole loans.

Kane: Bankers Trust has been at the forefront of the capital markets for several years. What does this mean to Bankes Trust and the strategy you want to pursue?

Pulley: What we're seeing is echoing a lot of the comments here at the table. Both securitization and whole loans have a different place in the marketplace. When we look at a transaction we look at all possible executions, be it a securitization, be it a whole loan, be it a bank syndicate. It depends on the transaction where the most efficient pricing in the market will be for that deal.

Kane: Sounds like the outlook is for peaceful co-existence. What implications does this have on your strategies. Certainly if you go back to the portfolio side GE and Teachers are undergoing a little bit of schizophrenia being a capital markets player and a portfolio player.

Felman: We originate about $4 billion to $5 billion in mortgage loans a year. As I mentioned earlier, we realize there is a time and a place for not using our balance sheet or for using it for a short period of time and moving it off balance sheet. What we're going to do is look at what we want to hold and what we want to sell. We're really going to try to stratify that.

You talk about a peaceful co existence. There are some things that were going to originate that have a yield that we want to keep. There are other things we want to do just for a flow-through business. It's going to require a very different type of product if we are going to go to a flow business than it has in the past. That's really the challenge that we have is to take a look at what's out there and figure out a way to take the 100 or so people we have in lots of cities around the country and utilize them to offer new products.

Kane: What are the strategic implications to Teachers?

Jardine: Probably a third of what we invest will be in the mortgage and real estate arena, which would include CMBS and REIT issues. And since the insurance companies have been having a difficult time holding real estate assets, we will be continuing to short that particular asset. And we'll be redeploying those proceeds into the fixed-income arena. We as others will engineer some of our restructured loans for sale to the security capital markets, and CMBS, as will many of our brethren. We've set up a separate account for our real estate which will provide our participants with the opportunity to decide whether they want to be in real estate.

Kane: Jay, you've got a couple of major funds under your belt. Where are you going to take them in 1996?

Sugarman: One thing I want to point out to lenders is it's not necessarily a price game going forward.

A lot of the ways right now that life companies are able to outdo Wall Street is the flexibility. Unfortunately the rating agencies really do look in the rear view mirror and they're not going to blaze trails with new structures and new opportunities, but to do some higher level loan-to-value financing. The life companies have been much more interested in valuation much more interested in the management much more interested in some of the nuts and bolts of real estate that maybe don't give us quite the level of credit or willingness to bend the rules a little bit.

In a bread and-butter scenario like on Wall Street where you're laying the pitch right down the middle, it's become extremely competitive and it's probably you're first call. They're quick, they've done it a thousand times, they have the capital ready to go, they want to make the loans. We're seeing a bifurcation a little bit. More unusual financings need to go to someone who's willing to listen to a story. The rating agencies aren't really in that business. They don't want to hear your story.

I think Wall Street has done a phenomenal job of accessing capital. For us, that gives us a chance to work with just about everybody. We do see some deals where it's quick, it's simple, it's straight forward, and we'll go to our Wall Street relationships. In other situations where we think it's a great long-term story but someone's got to sit down and work with us, oftentimes that a life company who's willing to say, `I want to money out for a long time, I'm willing to sit with you and do some work, and I want a little higher spread for that.'

So it's not necessarily going to be a pricing competition in the end, where 25 basis points make all the difference. It's going to be who's the right lender for this particular opportunity and I think there's a place for everybody.

Jardine: We've had a difficult time getting enough product in the ranges we like. So we're going to have to do more speculative work on our own to offset or add to what the investment banks. We can't spend a month doing the work on a deal and end up with a $50 million loan. After a while you get a little weary. We did 48 deals this year. A couple of years ago we did 23 with the same number of people.

Pulley: One thing we haven't talked about that much. There's Wall Street, there's the insurance companies, but we're also seeing a big increase in activity in the syndicated bank loans market, especially in the second half of this year. We see the banks really coming alive in real estate and the opportunity to do syndicated bank facilities for certain kinds of securitized real estate, in $100 million and $200 million size levels. Obviously that kind of execution also offers a floating rate advantage and easier prepayment terms. That's another segment of the market that we're seeing coming increasingly alive.

Anthony: Can I comment on some things Jay just said, because I kind of agree with his assessment, but I want to give a Wall Street perspective, particularly about the thought that `If it fits in our box we'll do it and if it doesn't we don't want to hear a story.'

What's meant by a story is this isn't what's happened in the past but this is what's going to happen in the future and why. When it comes to just plain straight debt financing, he's absolutely right that we don't want to hear a story and the rating agencies don't want to hear a story.

So when we're putting something into a securitization we're pretty much underwriting it on true historicals, obviously satisfying ourselves that there's no reason for a material or adverse change on an ongoing basis. If we're looking at something that prospectively is going to get better then we would say, 'That's an equity holder's risk. We're not going to bring it to the rating agency because they don't want to hear the story and we're not going to put it in the securitization.' And then from time to time, we and some of the other Wall Street securities firms will look at those type of `stories' and if we decide to do them we'll hold them on our own balance sheet until that story is proven, taking an equity risk and demanding whatever we think the appropriate return is for doing that and once that story has proven itself then see about restructuring it to a first mortgage loan based on historicals and putting it in a securitization.

Reid: At Lehman we've actually had a major business in taking the mezzanine piece of the capital structure. There's the rating agency, the BB piece and up, and then there's an equity slug, call it 10% or 15% that's at the bottom of the capital structure. In between those pieces is the place where Lehman's played.

Lehman is actually very willing to listen to those stories. Obviously they are looking for a situation that has significant upside in it. The building might not be fully based, the market's recovering, smart money like Starwood has put money in underneath them. Lehman will use their balance sheet as Ray said in those kinds of situations. So it's not an all or nothing. We will take that debt slug underneath, and certainly other investment banks have been willing to go and take the lowest piece of all which is the equity piece.

Felman: People like GE Capital who take those situations on balance sheet are a little more patient than you all who have to move things off your balance sheet, and that patience may both better to certain types of investors because what happens is there are probably some onerous terms that trigger at that point because of the need to move things very quickly off balance sheet. If you're an onbalance sheet player, you don't really have that same requirement when you have a little bit more patience, and you probably can add a lot more flexibility and creativity because you don't necessarily have to worry about the exit.

That's really how our pricing differentiates as well. For the future if we're going to be utilizing the capital markets we will have to structure for the capital markets. But when you hold on book and you have a lot of these extras and sort of creatively looking at things and valuing more on the cons of some of this stuff, you get paid for that, and you have probably a little more patience than Wall Street just given the fact that you're utilizing your balance sheet.

Kane: Just to share one factual observation based upon our E&Y Kenneth Leventhal CMBS survey this year, one of the surprises that we've seen is that in the CMBS market the largest component was made up of portfolio resellers going into the market. It was 28% of the CMBS market through the third quarter, which is really a dramatic change. Two years ago portfolio resellers were nonexistent in the CMBS market, which kind of bears out the fact that this market is being used to recycle the product that is being taken down to the balance sheets, cleaned out and then pumped out in the most efficient manner.

Reid: What Lehman, Nomura and others are running into is recovering situations or portfolio buyers that are buying distressed real estate. They actually don't want our money for 10 years because after a certain point when it's recovered our money has become expensive. So whether it's Westinghouse or other portfolios when you've leased it up all of a sudden the mezzanine financing is no longer the most efficient form of financing and you want to go out and get the cookie-cutter, conventional, rated financing. We're certainly seeing that.

Kane: That's kind of another way to look at peaceful coexistence. It depends where you are in the cycle. One of the areas we haven't talked about is the implication of information reporting, the implications on confidentiality, internal asset management-type issues. We're talking about some substantial, high-risk portfolios. How do you go about managing those portfolios? Has that changed and what is the significance?

Rubin: It's become more and more critical that we maintain a larger and larger market database of whole loans than we have, whether they are whole loans or securitized loans. Certainly it's been true of the life companies over the last three to four years and will continue to as we look forward.

The problem continues to be getting borrowers in line with the information required. But I believe as more and more lenders impose this the norm will become accepted. To a certain degree there is information overflow that some segments are requiring. There's only so much data that you can use in an efficient manner, particularly on a performing loan, so when we hear about collecting information on a monthly basis on rent rolls and operating statements, sometimes I wonder what they do with it. I truly don't believe it's used for much of anything.

Jardine: I would agree that I think if anything the commercial mortgage backed securities market has provided a greater flow of information and I would agree that it comes in now as overkill. From where I sit, we have a very difficult time. I run a public desk and a private desk. And I sometimes spin around in my chair trying to figure out whether I'm breaking the law or not. I have to call compliance four or five times a day on issues regarding the information we have in-house. So the more information I get it's great, however it may be a bit much.

Kane: We have an expression, 'the more conflicts of interest we have the more independent we have to be.'

Felman: As most of you probably know, we have a subsidiary in Dallas, the GE Capital Realty Group, which we actually formed several years ago but it has moved rnore and more to be a third-party provider of asset management services. What we're trying to do is capitalize on the information technology need, and I know they are in the process of developing some pretty technologically advanced reporting types of systems because people do require more information. Investors require more information. They want information that is user-friendly rather than just whatever comes in is what goes out the door.

Sugarman: Two observations for you Carl. One is as both a lender and a borrower, we imbed in every document an overkill of information. We do get monthly information and we track the guts of the operating statement very closely. However, we also get backup reams and you're right we don't look at them. Until the guy defaults. Then go try to get his past three years of statements and see what's changed. You'll never get them. So part of it is just as a defensive measure that you may never use, you put it in the back room. So I think we have to live with this pile of past data.

The other thing is that I'd like to complement GE. They have come out with some really fabulous software on CDROM with visuals and backup spreadsheets, with income data, audio and video. If you want to spend the time, if you want to spend the money, if you want to spend the effort, you can deliver information very coherently, very cogently, to investors. I think information technology is also going to help us move towards giving people as much information as they want, let them pick and choose what they want to use. Don't just hand them a book of a thousand pages and say, `Figure out what it is we're selling you.,

Kana: John said the same thing in another way. He talked about the efficiency of your people and getting through the morass of information that you have to process to get a deal done.

Jardine: I wish I could say the same thing about TIAA as GE. We're getting there but we're not there yet. The information we receive from the banks in particular is very very helpful and useful. We really don't have as much time for some of these more complicated transactions, so it is helpful.

Kane: We've talked a lot about some of the changes that have taken place in 1995, and a short term outlook for 1996. Where is this all going to take us through the end of this century?

Rubin: At least on the debt side, we're looking at an appetite something on the order of $200 million a year. The life company industry at least is facing a very strange dichotomy. You've got some companies totally exiting the market either on an intermediate basis or permanently as we said with Starwood. Others are getting back into the market either on a relatively nominal basis or going into different areas and doing small loans or whatever.

Wherever the life company industry ends up I think we're looking at $15 billion to $20 billion a year. The pension fund industry is likely to move more heavily into mortgage lending. In my opinion I see the primary objective is predictability - predictability of income - and mortgage lending can offer a real premium relative to other asset classes, and I do think we will see a very large movement of pension funds into the mortgage lending side in the next five years. And the rest of it will probably be taken up by the banks either on behalf of themselves or their conduit operations for securitization. They've been heavy players over the past year moving very much into traditional areas directly competing with life insurance companies on longer term nonrecourse product. We see it time and time again, particularly for loans under $15 million.

Pulley: We look for a steady but gradual recovery in the basic income statements. We don't think there's going to be a dramatic increase in profits per se, but we do expect a gradual and steady improvement. If you compare the next five years to the previous five years basically the last five years were really putting capital to work in markets that had no liquidity associated with them whatsoever. I think as we look over the next five years basically it's going to be part of that liquidity that we see coming back into the marketplace. It will be that liquidity driving out whatever arbitrage there is between CMBS and asset-backed corporates, developing a more liquid market for the very large loans of $100 million plus. I think the property markets still have a lot of inefficiency associated with it. That would all be done in our minds against a fairly stable dynamic fundamental market which would see steady increases in the operating statements.

Reid: The contrary of that can also be very interesting in the next five years, which is that the capital markets have really been built, both on the debt and the equity side, on a resurgent, recovering economy and real estate industry. And so you could blend in almost any situation and generally be safe. You could buy most things and generally be safe. What we're all seeing already occurring is that money is getting plentiful, money is getting very aggressive. It's harder and harder to find the high-quality opportunity without some commensurate level of risk. People that were looking for 20% to 30% returns are now down into the teens.

What will be the interesting challenge in the next five years is hamessing capital flows. How will the capital markets react if institutions stumble, if there are bad investments? That will in a sense be the next phase of the capital markets. We all predict the $5 billion to $10 billion of equity issuance a year. We continue to see $20 billion or so of capital markets debt issuance a year.

Kane: So you think we're going to screw it up again?

Reid: There seems to be more discipline this time around. But there is a precedent for the real estate industry not doing it right. I think the public market discipline has been chasten for a lot of companies. So far they're learning that missteps are penalized pretty severely. I'm not sure it will be as bad as in the past, but I'm also not sure it's going to be as rosy as it's been in the last five years.

Anthony: If you look back over the last three years the developments have been absolutely dramatic on the debt side. What's probably different than 10 years ago is a rationalization of pricing where GECC is doing higher leveraged transactions but evaluating that risk and pricing it accordingly. On the first mortgage debt side you see Wall Street underwriting based on cashflow. On the insurance side they're underwriting based on cashflow. Even though we've been in a real estate recovery over the past few years, I don't think that if there's a real estate recession the results will be anywhere near as dramatic as last time because I do think people are underwriting loans a lot better than they used to.

It's hard to predict what's going to happen five years from now. It's hard to predict what's going to happen six months from now. What I'd like to see over the next five years is continued development in the information processing so it becomes more efficient and easier to handle. I would like to see Wall Street and insurance companies getting a little closer together on how you price that first mortgage piece. You will see continued efficiencies and continued rationalization of pricing along the continuum and greater liquidity over the next five years.

Sugarman: We try to look at real estate and every other asset class we're competing with to make sure we're doing the right thing at the right time. Right now real estate is still extremely attractive. Real estate looks attractive at the CMBS level, it looks attractive on a cash-on-cash buy and on a cash-on-cash multiple. What will change over the next five years is that relative valuation. You're going to see real estate perhaps less attractive going forward as some other benchmarks move around. There are still lots of opportunities, lots of inefficiencies. We will keep trying to be on the frontier. The real bellwether is what the opportunity funds do, because they look at everything else they can do with that money. The day they stop doing real estate is a pretty good signal that it's peaked, it's plateauing.

What we're worried about in the next five years is not real estate, but what's going to go on in these other markets.

Kane: That's a theme we've heard a lot today, that real estate is now part of the broader capital markets and it's no longer an insular system.

Jardine: I would say with respect to the issue of repeating some of our past mistakes, is we're going to do that. It's going to happen, but you're not going to have a lot of really catastrophic things happen, at least in the foreseeable future. As long as you keep trying to push this kind of volume around you may see some overdevelopment, particularly in the multi-family area. But I don't think the insurance industry is going to be equity players on single-property equity transactions or in REIT stocks because of regulatory constraints. I know the pension funds will probably be a source of capital for perhaps real estate equities. Certainly I look for them to hold real estate equity stocks because most of the people who run the pension funds are stock and bond guys who feel a lot more comfortable with that than they do wholly owned properties.

Real estate will not be as cheap going forward, but there will be more liquidity. I do believe we've come out of probably one of the most horrendous capital constrictions we've seen since the Depression.

Felman: I think internationally is where we're going to see some type of shift. People are going to start looking beyond our borders. We were one of the first people in Canada. We've done a lot of business with Bankers Trust. We are also very active in Europe. We're active in Asia. We're active in Eastern Europe. In Mexico we went down there when the crisis hit and we took a second look. Everybody pulled out but we're still there. Actually we are doing great business in Mexico. We have a dollar-denominated business. We really have had zero hiccups and in fact are trying to finish the year with additional business down there.

What we're trying to do is round out our portfolio, not only on a leveraged scale, not only on an asset class scale, but also rounding it out on a global scale because we think that there are some markets that will provide some of the opportunities and inefficiencies that we saw here over the years. Canada was there a few years ago, but is sort of getting full now in our minds however there are still opportunities. The same thing with certain countries in Europe right now. In Southeast Asia there are different types of opportunities, but they're there. You just have to be more careful when you go where you're not as familiar with it.

By 1998 international holdings will probably count for at least 25% of our business, and probably will grow moving forward.

Raymond M. Anthony Managing Director Nomura Securities

Michelle Felman Vice President GE Capital

John Jardine Managing Director Teachers Insurance & Annuity

Carl Kane Managing Director E&Y Kenneth Leventhal

Thomas Pulley Managing Director Bankers Trust

Michael Reid Sr. Vice President Lehman Brothers

Barbara Rubin President Phoenix Realty Securities

Jay Sugarman President Starwood Mezzanine Investors

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