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Making Money From a Meltdown
Bargain-Hunting May Prove Tougher Than in S& L Crisis

By Thomas Heath
Washington Post Staff Writer
Saturday, October 4, 2008

The J.E. Robert Cos. began in 1981 as a sleepy private real estate investment firm in Alexandria with a seemingly boring business aimed at helping federal agencies like the Federal Home Loan Bank sell off troubled real estate assets.

Then the savings-and-loan crisis hit in the late-1980s. Plunging real estate values forced 747 savings institutions into insolvency. J.E. Robert moved quickly to capitalize on the meltdown, deploying a staff conversant in real estate and expert in the intricacies of unwinding troubled mortgage loans.

From 1991 through 1996, J.E. Robert and its partners acquired $10 billion in distressed real estate assets and mortgages from banks, insurance companies and the Resolution Trust Corp., which the U.S. government formed to help it liquidate the portfolios of failed savings-and-loan associations. The company earned billions for its founder, Joseph E. Robert Jr., and for its investors, be they wealthy individuals, endowments or foreign governments.

Congress's approval yesterday of a $700 billion rescue package proposal creates opportunities for a new generation of firms to help the government deal with troubled real estate around the country, and Robert's company will be one them. Like other firms, it is ramping up its global staff, hiring all manner of specialists in mortgage finance ready to hunt for the next bargains.

But this time around, the work is likely to be much more difficult, Robert said. "Comparing this new entity to the RTC is like comparing an elephant to an alligator," Robert said. "They are completely different."

For starters, the RTC process was simpler because the trust took possession of the assets from failed savings and loans and there was no need to negotiate price. "The government did not have to decide what value they had until they sold them" at auction, Robert said.

Under the current rescue, setting a price is a two-step process. The government first plans to buy assets from lenders and then sell them off later. "The U.S. government is going to be determining the value of those assets on the front end," Robert said, "and the market will determine the value upon exit."

In the RTC days, those assets included mortgages on office buildings, hotels, resorts, homes and apartment buildings. Potential buyers such as J.E. Robert were allowed to examine those loans in "war rooms" filled with paperwork on loans for individual projects. J.E. Robert's staff then could inspect the properties and study the surrounding real estate market to determine whether money could be made and how much to bid for the loans in an auction.

In 1990s, for example, J.E. Robert successfully bid for a $270 million portfolio of distressed properties from Savers Texas, which was secured by more than 50 apartment complexes and other assets. All the loans were in default. Robert paid a little more than $85 million to buy the mortgages and assets, foreclosed on the loans, fixed the apartments and sold them off.

The current real estate market is much more complicated. Individual properties are likely to be packaged into securities. Think of 300 neighbors pooling their money and loaning it to a local developer to build a shopping mall. That loan is one security. These days, that one security would then be pooled with hundreds of other similar securities into a larger one with thousands of neighbors expecting regular dividend payments from their individual securities. Those giant securities are categorized into seven or more classes, varying from least risky to most risky, and sold all over the world.

There are databases that allow companies like J.E. Robert to peer into the layers of these giant securities -- known as collateralized-debt obligations or CDOs -- but actually finding the underlying real estate won't be easy.

"It's like those Russian dolls," Robert said. "You keep opening them up and there's another one inside."

Sorting it all out could be highly lucrative. J.E. Robert earned $3 billion from its RTC involvement.

There were two ways to make money from the S&L crisis. One was to manage the real estate for the RTC until the properties were auctioned. The other was to buy the real estate outright at the auction.

The first tended to be a safer bet, but it was not as lucrative. Companies seeking to manage assets for the government bid for the right. If they won, they typically would be assigned a portfolio and receive a fee for managing the properties until they were sold at auction.

"They weren't an extraordinarily large profit center," said Keith W. Belcher, executive vice president J.E. Robert Cos. "You made margins on fees depending on your costs."

The other opportunity to make money came in the bulk sale transactions of hundreds of real estate loans at auction. In other words, taking ownership of the loans and the properties that went with them. Each bidder had to understand the underlying property, whether it was an empty lot or a sprawling resort.

J.E. Robert employees would physically inspect the property, deciding whether it needed a coat of paint or major capital improvements. They learned whether it was fully leased or half empty. They even compiled a database of bankruptcy judges to decide which way they leaned in hearings, which helped them price their risk. They examined court records to make sure there were no problem tenants or liens on the properties. The company studied the local marketplace to decide demand for office space or homes, calculating how long they would hold the property before reselling.

"We had people who understood real estate," Belcher said.

Under the government's rescue plan, the task for J.E. Robert and others will involve getting out into the field to directly value the hundreds of real estate assets underlying the pool of mortgages, establishing a price for the complex beneficial interests, managing non-performing loans and assets in the pool, burrowing into the excruciating details of documents that control the economic interests and finally finding a buyer for such interests.

"The fundamentals are the same, but it is massively complex and it's much more risky," said Daniel T. Ward, J.E. Robert's general counsel. "Instead of looking at 100 assets, you may be looking at 1,000 assets. All those layers of complexity make it a much more risky proposition."

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