COVER STORY, OCTOBER 2007

FORMING A FINANCIAL GIANT
The heads of Collateral and Laureate discuss the merger.
Chris Thorn

In one of the bigger financial moves of the year, Winston-Salem, North Carolina-based BB&T is acquiring Collateral Real Estate Mortgage. BB&T would combine Collateral with Laureate Capital, its existing commercial mortgage banking firm.

The acquisition will create one of the largest full-service commercial and multifamily mortgage banking firms in the nation with a combined servicing portfolio of more than $20 billion.

“This puts us in a different league,” says Thomas Dennard, president and CEO of Charlotte, North Carolina-based Laureate Capital. “When you are capable of placing upwards of $10 billion in debt or structured equity, you are among the top originators in the country.”

The transaction is subject to investor consents and regulatory approval. The combined company’s new name and brand is expected to be announced in early November. The combined company not only grows in size and scale, but it also neatly interlocks components that were missing from either company’s current platform.

“The Collateral side will be bringing our Fannie Mae DUS® license to the new company,” says David Roberts, president and CEO of Birmingham, Alabama-based Collateral. “Multifamily transactions are critical to the long-term success of the new company. With the acquisition we will be adding 17 Laureate offices to our Fannie Mae production platform.”

Dennard says, “Laureate’s only missing piece was a Fannie Mae DUS flag.”

However, the deal is not one sided. The Collateral production offices will gain access to BB&T’s balance sheet. This will enable them, like Laureate,  to provide direct lending for bridge, construction and other interim loan products.

“That will be a big plus for our people to offer those products internally to service our clients,” Roberts says. “This should propel the new company to do more business.”

As a combined entity, the company will offer an enhanced set of commercial real estate financing loan products, including life insurance companies, pension funds, CMBS lenders and proprietary lending products. Other major components include the Fannie Mae DUS program, their combined Freddie Mac business and other multifamily products insured by the FHA. To accommodate this volume of business, the company will need to call on every one of its 80-plus loan originators, which are supported one-to-one with loan analysts.

“Of the 330-plus people at the company, approximately 180 will be involved with the origination effort, “Dennard says. “We have no immediate plans to eliminate any jobs. We plan to grow into any excess capacity we may have following the consolidation.”           

Although the company will be consolidating and streamlining operations, this will have little effect on individual offices because Laureate and Collateral operate in mostly different markets.

“From a geographic standpoint, our offices complement each other extremely well,” Roberts says. Laureate has offices throughout the southeast and mid-Atlantic and Collateral has a heavy presence in both the southeast and midwest. Currently, the two companies only overlap offices in four cities: Birmingham, Atlanta, Jacksonville and Indianapolis. These offices will be integrated to give the company more size and scale in those markets.

The loan servicing centers will continue to operate in Birmingham and Charlotte. Dennard, who will be CEO of the new company, is based at the corporate headquarters in Charlotte. Roberts, future president and COO, is based in Birmingham, along with the underwriting for Freddie Mac, Fannie Mae, FHA and proprietary loan operations.

The two production heads will be John Davis, based in Minneapolis and Tom Gracey, based in Naples, Fla., They will be responsible for the day-to-day production activities. The company also plans to hire a senior credit officer.

Although the numbers seemed to add up between Laureate and Collateral, both companies were very concerned with ensuring that a new strategic partner would  mesh with the individual corporate climates.

“One of the key factors in our decision to consolidate with Laureate Capital is that we felt that our corporate cultures matched up extremely well,” Roberts says. “The senior people at both companies have known each other, and known the way we they do business, for years.” From Collateral’s perspective, they had identified the need for a strategic partner that could strengthen their balance sheet and offer a proprietary lending business while maintaining the momentum the company had built over the years.

Laureate was using a similar philosophy as it looked to expand its business. Collateral appeared to be a nice fit.

“I saw that Collateral seemed to have similar expansion goals as Laureate,” Dennard says. Both companies had recently acquired other entities to expand their businesses, such as Laureate’s purchases of Atlanta-based Horizon Mortgage, and Wilson & Nolan Southeast and Tampa-based R.J. Twitty & Company; and Collateral’s acquisition of CareyKramer in Fort Lauderdale, Florida. “After the due diligence process it was evident that the right move was an acquisition and consolidation into one company,” he added.

But the move comes at an interesting time in the commercial finance markets. Some areas are seeing a disruption for the first time in years and clients and lenders are becoming more hesitant when buying or selling capital. For some new companies hoping to make a splash in the market, this might be an unsettling turn of events. Dennard, on the other hand, is pleased.

“This slight disruption in capital markets funding, while unfortunate, was predictable,” Dennard says. “It had gotten a bit overheated. The pause will give us the chance to close this deal and be in the position next year to catch the rebound of pent-up demand of the delayed financing in the queue because of this funding aberration in the CMBS arena.”

Furthermore, he believes that the life insurance companies have had a very active first half of 2007 and that a majority of them have met their allocations for 2007. He thinks that most of these lenders will not be aggressive again until next year.

The combined company will have approximately 180 loan production professionals that will be poised to have a banner year in 2008.

“With additional CMBS and life company lenders as well as broadened Freddie Mac and Fannie Mae execution capabilities, we’re going to be even better prepared to facilitate financing for our commercial and multifamily customers,” says Dennard. “We are very optimistic that we will arrange transactions in excess of $10 billion in 2008”

Roberts echoes that confidence. “One of the strengths of our organization will be that we can do business with every type of investor in the marketplace,” he says. “This transaction creates a large sustainable company going forward with long-term value that has the opportunity to be one of the premiere firms in the country.”

When the company settles on a name, it will be prepared to offer the right loan to any project. “We can customize a financing product, just like a tailor,” Dennard says.

Roberts concurred, “As a new company, and a leader in the industry, we’re ready to write the next chapter in our success story. We have a clear vision and are prepared to focus on our borrowers’ needs, delivering exactly what each needs in terms of financing.”

Roberts concurred, “As a new company, and a leader in the industry, we’re ready to write the next chapter in our success story. We have a clear vision and are prepared to focus on our borrowers’ needs, delivering exactly what each needs in terms of financing.”


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