The bank-property real estate investment trust American Financial Realty Trust has made a name for itself in recent years by gobbling up branches, operations centers, and office buildings, usually in big bulk deals.
The problem: It has been left with a balance sheet bloated by a slew of properties it believes it would be better off not owning.
But Harold W. "Hal" Pote, named American Financial's chief executive in August to lead a turnaround, said in an interview that month with American Banker that instead of changing its acquisition strategy, it is simply focusing on executing better on what comes next.
Even while speeding up the disposition of $1.5 billion to $2 billion of properties over the next year and a half or so, the $4.3 billion-asset American Financial will continue to buy properties that it does not want for the long term, and to do so as regularly as in the past, Mr. Pote said.
He said the only real difference is the company will jettison those unwanted properties faster. As in the past, he stressed, it will not sell properties that the financial institution it buys them from does not want it to sell.
"We have had a noncore disposition process, but we need our people to be really focused on it, and to move more aggressively," Mr. Pote said. He added later, "Properties that we" and the bank "have agreed are really not core: We should out be in the marketplace pre-marketing those before we ever close on the acquisition."
He said that doing such dispositions faster will let the Jenkintown, Pa., company "recycle our capital back into supporting our core relationships" faster. It will also use some capital raised from sales of current holdings to buy back shares and pay down debt, as promised in the turnaround plan.
The REIT's original vision - one it says it has decided to stick to - is for it to be the place banks turn to when they need to unload properties that they either do not want burdening their balance sheets or that they no longer intend to occupy. Sometimes the banks remain tenants, with American Financial as the landlord, and sometimes American Financial is free to sell the properties.
Most of the American Financial-owned properties to be sold are large, high-profile office buildings not associated with ongoing customer relationships, though it also plans to sell some small office buildings that have little or no bank occupancy. Thanks to a hot market, Mr. Pote said, it should realize gains on sales of larger buildings.
In some cases where a bank that has sold it a property intends to remain a minority tenant, the bank does not care whether American Financial remains the owner, meaning those properties could be sold, Mr. Pote said.
Another strategic shift for the company, which went public in 2003, is a plan to increase its buying power by bringing capital from other investors into its deals more regularly - chiefly through joint ventures but also through other structures.
It has already lined up many investors interested in participating in the bank-real estate niche through American Financial, Mr. Pote said. Early on, "we were not on their radar screen, and now we are."
Indeed, despite the dispositions, a spokesman said the company expects to remain an "active acquirer" and "to own significantly more properties two years from today, especially branches." On June 30 it owned 1,142 properties, including 669 branches.
With the joint ventures, American Financial plans to be the lead partner and manage the buildings, Mr. Pote said.
He said this would give banks what they want - dealing with a single landlord that "they know," that "really understands this stuff," and that has "a track record of doing what they said they would." And with American Financial remaining "front and center," he said, banks should not worry that the other investors' interests will lead the REIT to manage the properties in ways that hurt them as tenants.
Mr. Pote said that relying more on joint ventures would not slow down transactions, since American Financial will have investors for certain types of deals lined up before conversations with banks get started, and thus will be able to identify "natural" fits readily. "We're now well down the road in understanding who the right partners are for the right kinds of properties," he said.
As evidence that deals involving equity partners can go smoothly he pointed to his company's winning a competitive deal in July to buy 236 branches from Royal Bank of Scotland's Citizens Financial Group Inc. through a joint venture with Dillon Read Capital Management LLC.
American Financial is not backing away from any building types, even office buildings, and it sees more opportunities to work with middle-market banks, Mr. Pote said. (Most of its deals have been with large ones, such as Bank of America Corp. and Wachovia Corp.) It recently struck a marketing alliance with Sandler O'Neill & Partners LP that it expects to help it secure more deals with smaller banks.
Another comment Mr. Pote made suggests a different type of opportunity for bankers. He said his company has not used the best financing on many properties. In particular, it now finds itself with too many loans with heavy amortization schedules earlier in their lives in an era where interest-only periods are popular. Changing that is also part of the plan, he said.
Speculation was heavy earlier this year that American Financial would sell itself. Instead, Mr. Pote last month replaced Nicholas S. Schorsch, who co-founded the company with its current chairman, Lewis Ranieri, in 2002. (Some analysts expect Mr. Schorsch to try to buy the company.)
Mr. Pote said his long relationships with Mr. Ranieri, the mortgage bond pioneer, and Mr. Schorsch (who like Mr. Pote lives in Philadelphia), led him to learn of and admire American Financial and to join its board this spring.
Mr. Pote last was the vice chairman of retail financial services at JPMorgan Chase & Co., where he oversaw 550 branches and related operations centers. His other titles have included founding partner of Beacon Group, a private investment firm acquired in 2000 by a JPMorgan predecessor, and CEO of First Fidelity Bancorp.
Mr. Pote said he agrees with banking insiders and observers who "believe that in certain markets, we have had a branch mania." But today, he said, "I think the mania is probably starting to come to an end. I'm beginning to see more about banks saying, 'It's taking me longer to break even.' "
But he said that even in the most crowded urban markets, "smart" banks are seeing opportunities to add branches in neighborhoods where the population is growing.
He said he does not expect offshoring to cause a meaningful drop in the amount of U.S.-based operation locations. Part of that has to do with the need for "proximity" on retail banking back-office work, he said.
Selling off less-desirable properties more quickly will allow his employees to refocus on leasing up and controlling expenses at the ones it wants to own, he said.
It is managing the process carefully, he said, to make sure "the customer-focused side of the business does not get distracted."
