After years of fixing past mistakes, 1994 saw Joseph A. DeLuca shift his focus to Chemical Banking Corp.'s future in the real estate business.
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Mr. DeLuca insists that the bank has remained active in real estate finance for corporate customers throughout the downturn. But sources at the bank said internal meetings with the executive vice president of real estate finance became more upbeat as the year progressed.
And in a recent interview -- one of the first since he took the helm of the real estate group in 1990 -- Mr. DeLuca emphasized that his group is firmly in an "eyes looking forward" stance after a "phenomenal year" in 1994.
Mr. DeLuca believes it is not only desirable from a revenue standpoint for a bank to provide real estate finance, but essential to serving its major clients' needs.
"A large bank like Chemical needs to be in the real estate business. Our customers need us to be in the real estate business," he said. "There isn't anybody's business that doesn't touch real estate."
But in contrast to the days when banks made construction loans to developers and held them on the books, Mr. DeLuca's strategy is not predicated on new demand for real estate construction.
Instead, his new approach emphasizes the bank's capability not only to originate loans but to package them and sell them on the secondary market. He said that Chemical, acting as an investment bank, also is well positioned to structure deals for clients that use real estate and for the investors that began to buy real estate in earnest this year.
"The opportunity is the refinancing; the issue is the equity," he said.
Whatever the strategy, the emphasis on new deals rather than old problems represents a major turning point.
Although certainly not the hardest hit, Chemical suffered its share of trouble in the real estate bust. The bank's nonperforming real estate assets climbed to a peak of more than $3.08 billion in September 1992, before Mr. Deluca began to whittle down the total.
Within his group, nonperformers fell from a peak of $2.18 billion in the third quarter of 1992 to about $670 million now. The totals do not include foreign real estate loans or real estate loans by Chemical's Texas subsidiary, but the decline is similar companywide.
In some recent high profile deals, the bank sold Hotel Macklowe in New York for nearly $100 million and International Crossroads Center, Mahwah, N.J., for $30 million, in a deal expected to close today.
Mr. DeLuca said the bank's strategy of holding assets and waiting for real estate prices to rebound has saved it more than $1 billion, compared to what it might have lost had it pursued the fire sale strategy of many of its peers.
And Mr. DeLuca characterized as mop-up work the recently announced plans to dispose of about $950 million in real estate assets over the next 18 to 24 months.
That includes $100 million of residential real estate, and about $90 million of real estate loans from the unit in New Jersey, where Chemical is selling about half of its branches and associated assets.
The remainder of the $950 million consists of what Mr. DeLuca called "the bulk of" the nonperforming loans and real estate still held by Chemical's flagship bank and about $150 million of loans that are performing but considered "somewhat vulnerable."
Although the bank disclosed the sale with some fanfare in a recent restructuring announcement -- noting $150 million would be drawn from reserves to pay for it -- Mr. DeLuca said it actually represents a continuation of the bank's existing program.
He said he expects to dispose of about 60% of the assets in the first year.
At the same time, he said, Chemical has emerged from the downturn with a five-pronged strategy in place.
In addition to providing toptier clients with real estate banking services, the group is prepared to syndicate large scale project loans and to lend selectively to public real estate corporations.
It recently announced the creation of a commercial mortgage conduit, which is expected to securitize up to $1 billion a year of loans originated by Chemical's various banking units.
A fourth area of emphasis -- "focused investment banking service" -- is illustrated by a transaction completed about a year ago for Time Warner Inc.
The financing enabled Time Warner to arbitrage the difference between its corporate debt and mortgage debt rates, and reduce the occupancy costs in its New York headquarters.
Finally, he said, Chemical hopes to exploit "niche highyield opportunities" and "market dislocations" through co-investments in portfolios that can resold at a profit, or through short-term acquisition loans.
New York real estate experts hold Mr. DeLuca in high regard, but, predictably, talk of a bank's expanding its participation was greeted with some skepticism.
Plans to sell loans on the secondary market or to confine lending to corporate borrowers do not lessen the need to carefully evaluate the cash flows on the underlying assets, said Lioyd Lynford, president of REIS Reports, a real estate data analyst.
Mr. DeLuca acknowledged the importance of careful analysis of market conditions, noting that Chemical saw the 1980s downturn coming sooner than most -- thus avoiding several syndicated office construction loans that proved disastrous for its peers.
Since then, he added, the bank has beefed up its market research and property valuation capability.
"You have to have a clear idea of what your risk and reward parameters are, and then be disciplined" in pursuing them, he said.
As for the possibility that some of the same borrowers who gave banks trouble may be back at the table again, he added that the key to success would lie in being "intense ... but not personal."
"You have to be passionate about goals and objectives," he said, "and dispassionate about whom you're dealing with."
Real Estate Strategy For the Future
* Delivery of full-service real estate banking to top-tier clients.
* Focused large-scale lending
* Be player in permanent mortgage market and securitization
* Focused investment banking
* Pursue niche high-yield opportunities.
