Finance: REAL ESTATE
WHO SAYS THE '80s ARE OVER?
By all accounts, the Palm Springs conference at La Quinta last February was a spectacle. The 500 guests constituted a who's who of real estate. The gathering got rolling Thursday night with rock 'n' roll by the Gin Blossoms, followed the next evening by the Four Tops, and then, on Saturday, the Eagles. After playing their signature song, Hotel California, Eagles lead singer Glen Frey stepped up to the mike and wryly remarked: "You folks must have had a good year, because we don't come cheap."
He got that right. The host of the event, a phenomenally successful, 33-year-old dealmaker named Ethan Penner, has had a very, very good year. A boyish supersalesman, Penner has rapidly established himself as the biggest, most aggressive player in commercial real estate finance by lending hundreds of millions of dollars to developers and then packaging and selling the mortgage loans. He is by far the most profitable employee at Nomura Securities International Inc. (NSI), the U.S. subsidiary of the huge Tokyo-based brokerage. Nomura's U.S. unit, headed by co-chief executive Max Chapman, earned $140 million in the year ending in March, 1994, with $75 million of that attributed to Penner's commercial real estate unit, say sources close to the firm. Both Chapman's and Penner's bonuses are tied to Penner's profits, with Penner raking in about $10 million last year. For the year ending March, 1995, Penner's unit will likely post a profit of $150 million, largely offsetting $175 million in losses by the rest of Nomura Securities, say these sources. This could earn him a bonus of as much as $15 million. "Nomura is Ethan Penner," says one former employee.
Penner is a throwback, an '80s-style wheeler-dealer. He counts as one of his role models junk-bond kingpin Michael Milken, who staged similar investment extravaganzas. Penner has an active extracurricular life: He hobnobs with the likes of Elton John, lives in a trendy Manhattan apartment building, and enjoys the high life, including being a regular at Bouley, Zagat's pick for New York's best restaurant. "If Ethan weren't involved in the securities business, he would be the perfect Hollywood producer," says Stephen Williams, a former partner of Penner's who heads his own hedge fund. "He is a great showman."
Right now, Penner is selling a $665 million issue of commercial mortgage-backed securities, a complex project called MegaDeal III, a name Nomura has trademarked. The first two MegaDeals raised $1.1 billion in 1994. And their record is pristine. "To my knowledge, there are no delinquencies in the first two MegaDeals," says Ron Wechsler, an executive at Fitch Investors Service.
Yet envious competitors portray Penner's real estate dealings as something of a high-wire act. They regard him as a potential rogue wunderkind, such as trader Nicholas Leeson, whose exploits severely damaged Barings PLC. Penner's operations account for some $3 billion, or about 10%, of Nomura's $35 billion in liabilities. Rivals believe that while the highest-rated portions of the MegaDeals sell well, Penner has been forced to retain the riskiest portions, the so-called B-pieces, which rating agencies refuse to rate, and keep them on Nomura's balance sheet at generous prices. Competitors further claim that his short-term acquisition loans to developers are also very risky.
Nonsense, says Penner. He insists Nomura has no B-pieces on its balance sheet: "We don't have a big, stale inventory." And when Nomura does have some inventory, he says, "we carry them very conservatively." Penner says Nomura currently has $400 million in acquisition loans, but only one has ever gone sour--a Roanoke (Va.) shopping- center mortgage. "We take more risk than anybody else on Wall Street," says Penner. "We're in the business of taking prudent risk and managing that risk." Michael Berman, NSI's chief operating officer, says controls are strong, the firm's risk manager reports directly to him, and inventory is priced daily and conservatively. "I don't want Nick Leeson to happen here," he says.
RED FLAG? Penner's career was touched by controversy even before Nomura. The son of a rabbi, he grew up in Yonkers, N.Y. After New York University and several stints at small thrifts, he began his Wall Street career at Drexel Burnham Lambert Inc. in 1986 as a mortgage trader. In 1987, he jumped to Morgan Stanley & Co. in New York, later heading mortgage finance in the firm's San Francisco office. He ran into trouble with the first real estate customer he brought in, a joint venture between Executive Life and a former Drexel buddy, Richard Hollander, known as Signature Group. In 1990, Morgan made what was essentially a $50 million secured loan to Signature in the form of repurchase agreements using commercial mortgages.
Then, Executive Life went bankrupt, which caused the repos to be frozen in bankruptcy court. That forced Morgan Stanley into a protracted legal battle with Signature to recover the $50 million. Morgan Stanley blamed Penner for bringing in Signature, being sloppy in arranging the transaction, and not protecting Morgan Stanley's interests. Penner left the firm acrimoniously. Morgan Stanley, which will be made whole in a recent settlement with Signature, declines comment. Penner says other Morgan Stanley departments share responsibility for the soured deal, as well as "senior people who tried to make me a scapegoat to preserve their jobs."
Penner next started his own small firm in San Francisco. In 1993, Berman wooed Penner to Nomura, impressed by his vision of a real estate finance powerhouse. Penner's timing was perfect: The real estate market had hit bottom, and lenders were few. Penner began cultivating a group of high-powered clients just as the market rebounded.
Penner soon made Nomura Wall Street's leader in commercial real estate lending, with $7 billion in loans. "We finance more commercial real estate properties than anyone in the country and have for the past two years," he boasts. He has also greatly expanded the market for securitized commercial real estate. Traditionally, Wall Street firms would not finance commercial real estate projects until the loans were securitized and salable, a process that takes months. Penner changed the game: He lent Nomura's money to developers up front, then took the risks of holding the loans until they could be securitized and resold. This naturally has made Penner popular with the commercial real estate borrowers who flock to his parties, because it has reduced the time it takes to get their loan from months to weeks. "Nomura are risk-takers," says James F. Titus, a director of Standard & Poor's Corp. "They've been very aggressive in using their balance sheet to provide large sums to lots of players."
"COMMITTEE OF ONE." Penner's profitability gives him huge clout within Nomura. He has essentially built a firm within a firm, insulating himself from the company's controls, say sources close to Nomura. Despite rules against nepotism, Penner's brother Joseph works in Nomura's Los Angeles office. "There is one set of rules for the firm and one set of rules for Ethan, which is no rules," says one source. Responds Berman: "Ethan doesn't have a separate set of rules he can operate under."
Still, Penner has an unusual degree of autonomy. Consider Scott A. Wolstein, CEO of Developers Diversified Investments, a real estate investment trust. In 1993, he had his first conversation with Penner about a loan. That same day, Penner took a plane to Wolstein's Moreland Hills (Ohio) office and made him a $150 million secured loan to make acquisitions. Of that, $12 million was advanced the next week in an unsecured loan to help Wolstein negotiate better terms on a separate bank financing. "Ethan and I made a deal in five minutes," he says. "It shows you the advantage of Ethan being a committee of one and being able to act."
Last December, Penner's unit spent $24.5 million to buy a controlling interest in Winthrop, a Boston real estate partnership without even telling his Japanese bosses. And he did it even though Apollo Partners, a buyout firm, was seeking financing from Nomura to buy Winthrop.
Penner did face a hitch: Winthrop was being sued by its limited partners. But Penner believed the litigation would be settled cheaply. He miscalculated. The plaintiffs won at least $39 million. "They were in big, big-time shock," says Charlie Parker, the plaintiffs' attorney. Nomura lawyers were able to whittle the award down to $17 million. But when executives in Nomura's Tokyo headquarters learned of the purchase, they were quite uncomfortable and encouraged him to unload it, say sources close to the firm. Nomura is now trying to sell Winthrop. A possible buyer: Apollo. Berman's comment: "I am convinced, worst case, Winthrop won't cost us any money."
Penner got his way in another situation. Nomura underwrote MegaDeal I in March, 1994. But in a rush to book profits before the Mar. 31 yearend, Penner's group gave preliminary prospectuses to clients early. That violated Securities & Exchange Commission rules and allowed buyers to sue to obligate the firm to buy the securities back at the purchase price. To create reserves to pay any clients who exercised that right, Nomura asked Penner to set aside part of his $10 million bonus. But when Penner intimated legal action, Nomura paid up. Penner doesn't deny the incident but says he didn't play hardball.
Despite the dispute, Penner says he has enough money. What he is motivated by, he says, is "building a legacy I can be proud of." But what that legacy will be remains an open question.
EDUCATION: New York University
PAST JOBS: Mortgage trader at Drexel
Burnham Lambert, mortgage salesman
at Morgan Stanley
CURRENT JOB: Head of Nomura Securities' real estate finance unit
About $10 million
Created expanded market for securitized commercial real estate
HERO: Michael Milken
DATA: BUSINESS WEEK
RED TAPE AND OVERSIGHT
ROBIN THOMASBy Leah Nathans Spiro in New York