The Resolution Trust Corp. drew frequent fire from Capitol Hill for a host of bureaucratic foul-ups. As it raked through the wreckage of the thrift industry, it was a source of embarrassment to at least two presidents. But from where Thomas J. Barrack sits, the agency looks like a smashing success.
"In hindsight, they've done an incredible job," he said.
With hindsight it is clear just bow incredible an opportunity the RTC created for Mr. Barrack and a handful of other entrepreneurs who had the financial rout and foresight to buy the "bad" real estate assets the agency began to put on the market in 1991.
Mr. Barrack is president and chief executive officer of Colony Capital Inc., which was formed in 1990 to get in on the action resulting from the Financial Institutions Reform Recovery and Enforcement Act of 1989, the legislation that created the RTC.
The group entered the business with a big splash, buying $1.1 billion of assets for $510 million in a joint venture with GE Capital, and benefiting from what has proved to be a booming business restructuring real estate debt.
Today, the management firm employs 70 people in Los Angeles, New York, and Fort Worth and controls nearly $3.5 billion in assets. It acquired about half of its portfolio from the RTC and the rest from commercial banks and life insurance companies that quickly followed the RTC to market with portfolio sales of their own.
Mr. Barrack doesn't disclose how profitable the activity has been for Colony. But he points out that the group paid about 71% of derived investment value -- a term coined by the RTC to describe what was then a new method of evaluating real estate loans -- for its first big portfolio. Today, he said, "you'll find portfolios Wading at well over 100% of DIV."
This indicates not only that the new valuation method has become accepted, but also how hot competition for the assets has become in the few short years since Mr. Barrack struck his first RTC deal.
"Prices have increased significantly since the original sales in 1991," said Mike Van Konynenburg, a principal in Secured Capital Corp, a Los Angeles firm that has advised the RTC in portfolio sales and securitization. Interest rates have come down, and the fear of real estate that permeated the markets a few years ago has lifted somewhat, he said. "The people who bought first had the best returns," he said, mentioning Colony, Maxxam Inc., Goldman Sachs & Co. and Solus Property, a unit of Broad Inc. of Los Angeles, as the four most prominent early buyers.
"The thing they had in common was that at the time, the guys who bid against them and lost said 'those guys have paid too much,' "Mr. Van Konynenburg said.
The executives attributed the success of the agency to a decision to enlist the private sector in the asset sales, which totaled $367.1 billion by May 31, including residential real estate assets and securities as well as the more than $50 billion of soured commercial real estate. The RTC also sold 733 institutions to a long list of banks and surviving thrifts, but the real estate was expected to be the hard part of RTC's mission.
The RTC's success in selling the real estate, they said, stands in stark contrast to the performance of the Federal Asset Disposition Association, or FADA, which was created by the Federal Savings and Loan Insurance Corp. in the early stages of the thrift crisis, and ultimately failed to dispose of much of anything.
They also noted that the key provision to enlist the private sector in the process was not in the bill as originally proposed: it was put in as a result of lobbying by an organization of real estate asset managers, the Real Estate Capital Recovery Association.
"The private sector amendment created enormous opportunities for the real estate industry to get back on its feet," said Joe Robert, a charter member of RECRA and president of J.E. Robert Cos., an Alexandria, Va.-based firm that has advised and participated in about $6 billion of portfolio purchases.
Mr. Barrack, who had served as Deputy Under Secretary of the Interior in the Reagan administration, was the managing director of RMB Realty, Inc., the real estate investment and management company owned by Fort Worth, Tx.-based investor Robert M. Bass, when the idea of Colony Capital was first conceived.
Mr. Barrack also was on the board of New West Federal Savings Bank, comprised of the bad assets of American Savings Bank, a failed thrift Mr. Bass acquired from the FSLIC in 1988.
The unexpected success of that enterprise "gave us the idea that this was a better business than anybody thought," he said. At this point in time, everybody thought we were crazy. The idea of investing in financial instruments that were troubled and were growing more troubling was not really in vogue.
"Continued pressure on the S&L and banking industry by the regulatory regime" made matters even worse, he said. Colony's plan was "a calculated bet and a gamble."
Today, Mr. Barrack said, resolution plans are in place on about 70% of the loans and assets in the original portfolio, which were secured by apartment complexes (77%), offices (14%), retail (4%) and industrial (2%) properties.
About 35% of the plans involved discounted payouts, in which the borrower paid the loan at a discount to the original face value, but a premium to the amount Colony paid for the loan. Another 30% involved restructurings and modifications to the original loan, he said, and 15% involved foreclosure.
Meanwhile, the marketplace has changed. "When I was looking for capital, people I'd known for 10 years wanted me committed. Now the same people are clamoring to get me to speak at industry groups and trying to find a way that they can participate in this market."
While acquisition loans were nowhere to be found when Colony lined up backing from GE Capital, now Shawmut National Corp., BankAmerica Corp, Wells Fargo & Co. and Bankers Trust New York Corp. all are making loans to acquire portfolios of real estate for restructuring.
Mr. Barrack said the real estate restructuring business is just getting underway. Most of the savings and loan industry's bad loans are resolved, he said, but banks are only about 70% of the way through portfolios. Now, he said, companies like Colony will focus on some $250 to $300 billion of commercial mortgages made in the 1980s by insurance companies which are coming due at a time when capital regulations effectively forbid the insurance companies from holding the debt.
All told, he said, "You have right now $500 billion of real estate that still needs to be repriced."