In less than two years, the commercial real estate finance group of Nomura Securities International Inc., New York, has shot out of Wall Street like a meteor. With a phenomenal swiftness, the group has gone from nonexistent to become one of the top sources of liquidity in commercial real estate. In recognition of their success and the scope of their business, the group has been separated from the fixed-income division and has been set up as a standalone real estate division of Nomura Securities International.
Nomura has closed $6 billion in commercial financing deals since April 1993, said Ethan Penner, executive managing director of Nomura's real estate division.
Beyond that, the firm has the risk capacity to often handle firm quotations on more than $1 billion worth of transactions per day, according to Boyd Fellows, director and co-head of commercial real estate trading. Fellows said that other Wall Street firms would be happy to see that kind of deal-making potential over the course of a year.
Nomura's lending takes many forms, and its borrowers represent the broadest range of commercial property sectors and differing financing needs. Fellows, who co-heads Nomura's real estate finance trading desk with Brian Pilcher, listed an array of products available from Nomura: loans in the $1 million to $10 million range represent one category, while those $10 million and up to hundreds of millions of dollars are another; loans with equity participations; direct equity investments; mezzanine subordinated debt; bridge loans; acquisition lines; first mortgage debt intended for commercial mortgage-backed securities (CMBS); and unsecured corporate debt on real estate investment trusts (REITs).
At the forefront of CMBS, Nomura has registered the term MegaDeals[R], referring to its pooling of large commercial mortgage loans into multitranche underwritings. The firm completed two MegaDeals in 1994. The first totaled more than $410 million and included four retail and two hotel loans involving 99 properties throughout the United States. The second totaled more than $729 million and contained multifamily, retail, discount retail, congregate care, office building and industrial loans for more than 200 properties across the country.
Kathleen F. Corton, vice president, said that a Nomura MegaDeal "works like a large conduit," and pleases both investors as well as the rating agencies by offering diversification in property type and geographical mix of loans. Nomura's goal is to create two to three MegaDeals per year, Corton said, each with $500 million to $800 million of loans.
Principal advantage quickens turnaround
No matter what product it is offering, Nomura benefits greatly from being a part of the world's largest investment bank, with $18.5 billion in equity capital and 52 international offices in every important financial center around the world.
This tremendous capital commitment to commercial real estate allows Nomura to serve as principal in all of its lending activity and gives it the invaluable advantage over lending agents making "best efforts" placements in being able to provide borrowers with a binding lending commitment -- locked in at current rates -- within days or even hours of a request.
"It is not uncommon for us to have a commitment letter on a client's desk binding both parties within 24 hours of meeting," Penner said. "Similarly, we usually close transactions and fund them within 30 days of introduction. In a couple of instances we have closed and funded within one week. Our commitment to client service is something we take very seriously," Penner added, mentioning that Nomura's rapid lending turnaround time differentiates the firm from most other lenders. And in a volatile market, time is money and speed often means savings.
"A borrower can go to two different places for a loan -- a principal or an agent -- and we have often found that borrowers are confused by the choice," Penner said. "They come to us and we agree to loan at 200 basis points over Treasuries, where an agent will undercut that rate and seduce the borrower. But with an agent, the borrower does not have certainty that the loan will be placed, and even the most well-intentioned agent cannot control the volatility of the market and the interest rate fluctuations that might occur until the loan is closed," he said.
"Borrowers may sometimes not close with us because of a five-to-10 basis point difference, when in the meantime they face a 190 basis point difference with an agent by the time the loan is closed," Penner added, explaining the fundamental advantage of acting as principal. "We can lock in on a principal basis as opposed to an agent promising the borrower savings based on factors they cannot control."
Once borrowers learn this difference and realize that best efforts placements are typically saving them no money, despite the slightly higher rate charged by a principal for assuming all the risks, they usually come back for more. Their satisfaction has served as Nomura's best advertising campaign, according to Penner, who said most of Nomura's new clients are coming through referrals from the 50 or more different companies who have completed transactions with the firm in the last two years.
"Ask any of our clients, and they would say that they enjoyed their experience with us and have never seen the same degree of service," said Penner. "The real estate community is a small community, and word-of-mouth is our greatest source of new business."
Word has spread considerably since the spring of 1993, when few real estate professionals in New York City had ever heard of Nomura and even fewer considered it the hot place to work on Wall Street. But it was still a time when liquidity was scarce, and Nomura saw it as an opportune time to enter the real estate financing business. Penner consequently decided to fold his own California-based commercial real estate financing firm into Nomura's operation.
"Within six weeks we were doing meaningful business," Penner said. "In our first nine months, we closed approximately $2.5 billion in financings," thanks largely to existing relationships between Penner and four or five clients, he said.
Penner assembled a professional staff "with great diversity and with more roots in real estate than Wall Street." He said his hiring philosophy focused on personality as much as technical skills. "I wanted to hire people that you like to spend your time with," he said, knowing that harmony is essential for a group who frequently spends 12 hours a day together in tight quarters on a trading floor.
Penner had close ties with his traders and research head, all three of whom were former colleagues, and he maintains a hands-on involvement, working closely with the trading desk in pricing and trading. The trading desk in turn interfaces with the group's six financing teams -- the real estate people who put deals together -- and oversees the product management team, headed by Keith Hall and Fred Fellows, which functions as the group's marketing arm, working with Nomura's institutional sales force and customers to sell product and manage output. Combined, the group includes 72 professional staff members and a structure that is "as close as you will find to a meritocracy," Penner said, noting that the group has a California flavor -- and has recently opened an office in Los Angeles, headed by Rick Magnuson, to introduce the firm's lending capabilities to the West Coast.
With a cast assembled and ready to act as thought-provoking market contrarians with an appetite for challenging transactions, Nomura became a major force in hotel lending as well a forerunner in originating and securitizing loans to other less well-established property sectors, such as senior housing, selfstorage facilities, discount retail properties and mobile home parks, among others, all of which traditionally have not been the recipients of much liquidity, said Raymond M. Anthony, director.
Hotels proved opportunistically beneficial
In the hotel sector, "Nomura had good timing," said Daniel S. Abrams, vice president, who has been involved in many of the firm's hotel transactions. "Hotels were the worst sector in terms of the recession, because they were overleveraged, there was too much supply and because of a lack of travel in 1991 due to the Gulf War. It was a disaster for owners, and lenders ended up taking back many hotels," he said.
"In 1993, there was very little capital, and we were the first major player to jump back in," he said, referring to the firm's six hotel transactions that year. "We came in at the bottom of the cycle, which is consistent with our style and distinguishes us from other lenders. Nomura is not averse to taking a resonable risk, moving quickly into opportunistic areas and making loans which we then hold on our balance sheet until the time is right to roll them out into securitizations. We are a trading house, and consequently are always looking for an exit strategy.
"Borrowers are thankful that we are taking a risk that no one else is willing to take. Borrowers acknowledge that it isn't cheap, but they are happy that it is available," Abrams said.
One example of satisfied borrowers are the owners of the Boca Raton Resort and Club in Boca Raton, Fla. Nomura, in partnership with Starwood Capital Group of Greenwich, Conn., originated a $75 million first mortgage loan, enabling the overleveraged owners of the world-famous resort to reduce their debt and retain their position with the property, Abrams said.
He also mentioned that Nomura's ability to close quickly on a loan was eminently important to the Chalet Susse hotel chain, for which Nomura originated $66.5 million in permanent financing in February 1994. The chain was in a crunch, facing 26 overleveraged hotel properties, with three of the properties' debt being held in receivership by a bank. "Chalet Susse had looked everywhere for money and needed to close. We committed quickly and closed three properties in three weeks and saved $4 million in existing debt, with no need to first go to a rating agency," Abrams said.
Another hotel transaction that is expected to close in the first quarter of 1995 involves the sale of the Westin Hotel Co., which is currently owned by Aoki Corp., a Japanese construction company. Nomura will provide acquisition financing to a partnership comprised of Starwood Capital and Whitehall Street Real Estate Limited Partnership, the real estate acquisition fund of Goldman Sachs, and in turn will receive a share in the equity. The partners' goal is to realize value in the properties, with the intent to grow the chain internationally and develop strategic alliances with others in the industry who have a stronger presence in areas such as Europe, to create a worldwide luxury hotel chain, Abrams said.
Division dominates senior housing
Nomura sees the senior housing industry as another hot area for lending and securitization in the 1990s and has clearly dominated its competitors in lending to this sector, according to Anthony, who specializes in this and other less traditional property lending areas.
Nomura has completed $650 million in financings for senior housing in addition to $100 million in acquisition lines, Anthony reported. The senior housing market includes skilled nursing, congregate care and assisted living facilities. Borrowers are typically refinancing existing debt or acquiring facilities, he said.
Anthony pointed to several factors that make this sector attractive: first, most of the United States has an inadequate supply of senior housing coupled with a lack of new construction financing. Secondly, well-managed senior residences boast an extremely high occupancy rate. Thirdly, demographics point to the aging of the American population. Anthony also points out that skilled nursing facilities are similar to public utilities in that the federal government guarantees operators can make a profit and issue periodic rate increases.
Despite senior housing's favorable characteristics, the sector is not yet well established with the rating agencies. "The historical data is not there yet for senior housing, but we are doing deals with proven managers and using stricter underwriting requirements than we would for multifamilies, which are the benchmark of CMBS," Anthony said, mentioning that senior housing loans typically require a minimum debt service coverage ratio (DSCR) of 1.40x as opposed to a lower 1.20 to 1.25 DSCR range for multifamilies.
"Even though the rating agencies see senior housing as more esoteric, I think the AA-rated senior housing securities are a safer investment than similarly rated securities backed by multifamily properties," Anthony said.
Some of Nomura's recent senior housing transactions include:
* A $167 million fixed-rate loan on 33 congregate care facilities located throughout the United States on behalf of Holiday Retirement Corp.
* A $100 million acquisition line to the Forum Group to purchase senior housing properties.
* A LIBOR-based adjustable-rate loan of more than $90 million for the Forum Group, financing properties that included all three types of senior housing. The loan was part of Nomura's 1994 MegaDeal II.
* A recent Nomura transaction totaling more than $162 million contained approximately 25% of senior housing loans.
Regardless of the sometimes overwhelming dollar amount of Nomura's MegaDeals and conduits, the firm knows that to be truly fullservice it must also address small borrowers' needs.
Corton heads up a finance team, part of which includes Nomura's small loan program, which has expanded into Nomura Direct, Nomura's new 800-number direct lending program that is being introduced this quarter and uses consumer techniques to further facilitate broker-free borrowing for the masses. Corton said Nomura has already generated approximately $200 million on an individual loan basis through the small loans program, which in turn has generated another $200 million in minipools.
Despite increased overall competition from insurance companies and banks who have re-entered the lending market in the last year, Corton said she is witnessing less competition for small loans now that spreads have tightened.
"Fewer people can afford to stay in the business, and Wall Street is typically in and out of a product if they don't like it anymore or if it is less profitable. We view small loans as one of the parts of being full-service. It is a steady source of business and profitable," she said, admitting, though, that smaller loans require a greater focus on criteria and processing. Corton said there are too often too many layers in the process of making smaller loans, mentioning that brokers, correspondents and originators traditionally have all been involved. But this cumbersome structure is dissolving, she said. "Borrowers are calling directly, and they know they do not have to go through four people. We have worked hard in the last two years to ensure that the personnel and technology is there" without extra parties and unnecessary complications.
A comprehensive research capability complements Nomura's diverse and voluminous deal making. The firm has set the standard for information and analysis of the CMBS market, where well-established structures and benchmark issues have not been readily available.
Research fosters strong investments
David P. Jacob, managing director and head of commercial real estate research, said he blends real estate and bond research to provide a building block for educating investors and borrowers about this emerging market. "Better education yields better ratings and better risk assessment," he said.
Nomura research highlights value opportunities both within the CMBS market and against other types of fixed-in-come investments, and analyses of both public and private real estate markets for both debt and equity investments.
The belief that liquidity is created through information is the guiding philosophy behind Nomura's research efforts. It publishes a quarterly analysis of commercial real estate and topical monthly research reports focusing on industry sectors, innovative securitization techniques as well as price movements and transaction updates in the CMBS market and features on outstanding bonds. In order to enhance the firm's real estate research efforts, Jacob hired Randall C. Zisler, managing director.
While investors and rating agencies benefit from the flow of information from Nomura's research department, its borrowers take relief in knowing Nomura can also speak their language.
"This is the first time that real estate people have seen a Wall Street lender viewing things the same way they do. It's a good combination," Corton said.
Penner makes the same point. "Real estate and Wall Street come from two different worlds. Many Wall Street types are Ivy League-educated and started life with certain advantages," he said. "Many real estate people, on the other hand, are self-made entrepreneurs. At Nomura we have created an environment where a real estate person can feel at home. We see ourselves as a real estate lender. No other Wall Street firm would say that. We're a collection of regular Joes with blue-collar work ethics and, therefore, people in real estate are comfortable working with us."
