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Retail Traffic

In The Thick Of Things

When it comes to sales, few companies do retail better than Goldman, Sachs & Co. The Wall Street investment bank doesn't actually get behind a counter and push merchandise, but if someone wants to sell the whole mall or even a shopping cart full of malls, then one of the first places to turn would be Goldman, Sachs.

Since the mid-1990s, the company has been advising buyers and sellers on large retail transactions. In 1995, Goldman, Sachs scored a major success when it helped Sears sell its $2.3 billion real estate portfolio - by selling the shopping malls to General Growth Properties Inc., the community centers to Developers Diversified Realty Corp. and the offices to Gerald Hines and Morgan Stanley.

Other large deals with Goldman, Sachs fingerprints include the 1996 Centermark transaction of $1 billion and the 1997 sale of a group of malls for Prime Property Fund totaling $480 million.

However, as busy as 1995, 1996 or 1997 might have been, this year is turning into the equivalent of an all-year Memorial Day sale. Goldman, Sachs has had a hand in the three of the biggest retail deals of the year:

It represented Equitable on behalf of IBM on the $975 million sale of its mall portfolio to Simon DeBartolo Group, represented United Kingdom-based MEPC on the $871 million sale of its malls to General Growth, and put The Rouse Co. and Westfield America Inc. together as the team that has agreed to buy TrizecHahn's mall portfolio in a $2.55 billion deal.

On both sides of the buy-sell process An important portion of Goldman, Sachs' real estate business has always included the sales of shopping centers, says Mark Ettenger, a managing director. "We create a competitive environment among a limited group of buyers in a fair process," he says, "and we have credibility on both the buy and sell side with decision-makers."

Goldman, Sachs boasts close relationships with the chief executives of retail, real estate and investment companies, and, as Ettenger notes, "each of these major deals is a decision largely made at the CEO level."

Buying and selling malls is only one component of Goldman, Sachs' real estate practice. Its real estate department, a part of the firm's Investment Banking Division, is charged with four principle activities:

* Real estate corporate finance.

* Hospitality and gaming corporate finance.

* Asset sales, mergers and strategic advisory assignments.

* Commercial mortgage securitization.

All these businesses are growing like gangbusters, reports Mark Tercek, managing director and head of Goldman, Sachs' real estate department. "We had a record year in 1997 in every respect, and 1998 will be even better," he says.

As an example, Tercek cites his company's explosive REIT activity. "We've had a tremendous run here in three areas: raising public equity, unsecured debt, and mergers and acquisitions. We've built our team, and it continues to grow very rapidly," he says.

Last year, Goldman, Sachs managed more than $5.5 billion of equity and debt offerings for the leading REITs and real estate companies. The company was the lead manager for more than $3 billion of real estate company equity and lead manager for another $2.5 billion of investment grade debt.

Among its many recent deals were the $902 million initial public offering of Boston Properties; the $276 million initial public offering of Entertainment Properties Trust; and a $288 million convertible preferred offering for Vornado Realty.

Originations, CMBS activity increasing REITs are just part of the transformation of real estate from a privately owned asset to a publicly owned asset. Equally important has been transformation of the debt side of real estate into commercial mortgage-backed securities. Goldman, Sachs has been integrally involved with REITs as well as CMBSs.

"Increasingly, the sources of capital being sought by large owners of real estate are in some form of securities," says Ettenger. "Goldman, Sachs is an active player and facilitator in the shift of real estate ownership from private to public companies. Whether we do that by acting as an agent for a seller or a buyer or helping companies raise capital to fund acquisitions or operations, we want to be an active participant."

Which is one reason that Goldman, Sachs intends on boosting its CMBS activity. According to Commercial Mortgage Alert, Goldman, Sachs' conduit activity in 1997 was a mere $238 million, ranking it 22nd. However, its conduit/large loan program totaled $1.2 billion, which made the company the eighth largest in that category. Good numbers, but small compared to the company's plans for 1998.

Last year, Goldman Sachs completed two securitizations with joint-venture partners Central Park Capital and Amresco Capital Corp., explains Mark Kogan, a managing director and co-head of the company's debt securitization group. In December, Goldman, Sachs formed Archon Financial, a wholly owned subsidiary in charge of making loans in the $1 million to $75 million range.

"Our originations are currently running at an annual rate of $3 billion to $4 billion, and we are targeting $5 billion in originations for next year," says Kogan.

In the first quarter, reports Commercial Mortgage Alert, Goldman, Sachs completed just one CMBS transaction for $200 million.

But the calendar for the second quarter shows a $1.3 billion conduit transaction that includes loans from Amresco, Central Park Capital, Citibank and Goldman Sachs; a $1.4 billion large loan transaction under Goldman's Grande Loan program; and a $600 million floating rate securitization.

While the market's total volume of CMBS issuance will increase dramatically, originations, which may be the true test of the firm's activities, remain consistently high. In 1997, originations totaled approximately $4 billion; this year, that number will probably jump into the $7 billion to $10 billion range.

"Origination, not distribution ability, determines market power," says Sheridan Schechner, the company's debt securitization group's other co-head.

Although quickly expanding, the CMBS market could be affected by the recent spate of mega-mergers, as many of the acquisitive-minded financial institutions are key players in the industry. For example, Bank of America and NationsBank were active as separate companies; as one firm, it could become a much stronger player.

Schechner isn't so sure. "We have a significant amount on our balance sheet allocated to this, and so do others. The question is, will these mergers give more capital to the industry? The answer is yes, but it is hard to imagine how even more capital could make this market more liquid than it already is. Whether you are swimming in 10 feet or 20 feet of water, you still can't touch the bottom. The CMBS market is in the same situation."

Pioneer with retail property securitizations Goldman, Sachs manages its real estate debt finance business as a joint venture between two departments: The real estate department's responsibilities include loan sourcing and origination and securities structuring, while the mortgage securities department is responsible for capital commitment, pricing and distribution.

The company's loan origination activities encompass not only traditional asset classes such as offices, retail and hotels, but specialty finance areas such as auto dealerships, nursing homes and golf courses.

Of its conduit business, about 20 to 25 percent of its originations are on retail properties. Says Kogan, "Our volume should increase in this area, as certain classes of retail properties were out of favor with the rating agencies and bond investors in 1995 and 1996."

In its upcoming $1.4 billion Grande Loan transaction, the company will include loans on three retail properties:

* a $160 million loan on Green Acres Mall, which is owned by an affiliate of Vornado Realty Trust;

* a $117 million loan on Pier 39, a festival shopping center in San Francisco's Fisherman's Wharf District; and

* a $79.5 million loan on the Showcase, an entertainment-retail complex in Las Vegas, which is owned by an affiliate of Forest City Enterprises and a local developer.

Pointing to his firm's long history of financing retail properties, Kogan says, "Many of the first properties we securitized were regional malls because of the stability of their cash flow and the barriers to entry in developing new properties. Goldman, Sachs was a pioneer with retail property securitizations for companies such as The Rouse Co. and Macerich. We think we know how to finance this asset class very well."

Goldman, Sachs' focus is client-oriented, Tercek adds. "Everybody in our department focuses every day on servicing our existing clients and developing new relationships," he says. "We maintain a strategic dialogue with our clients, and when there is a need for a transaction, more often then not, Goldman is the banker that arranges it."

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