LAST YEAR WHEN PNC FINANCIAL SERVICES Group Inc., Pittsburgh, decided to realign its real estate finance operation, the big banking and investment company didn't have to look very hard to find a person to lead the strengthened unit. The talent was already in the company--so to speak. [??] Hugh Frater took a step across the corporate aisle, moving to PNC Real Estate Finance from his position as head of the real estate group at BlackRock Inc., a New York--based investment management firm of which PNC owns 70 percent. [??] While the shift was simple to accomplish, it was a major adjustment for Frater. He was going to the corporate banking world from BlackRock, a company he helped found back in 1988. The fast-moving, entrepreneurial BlackRock went public in 1999. It was through BlackRock's efforts that Frater also helped create--and serve as president of--Anthracite Capital Inc., New York, a mortgage real estate investment trust (REIT), and Carbon Capital Inc., New York, an institutional mezzanine debt fund. Prior to founding BlackRock, Frater served as vice president of investment banking at Lehman Brothers Holdings Inc., New York. [??] As head of PNC Real Estate Finance, Frater intends to lend his expertise in the world of commercial real estate to a banking unit that has undergone some important changes. The parent company also merged into PNC Real Estate Finance another independent operating unit, Midland Loan Services Inc., Overland Park, Kansas, a provider of loan servicing and technology solutions to the commercial real estate industry. [??] Today Frater oversees a business unit that seems to grow more important to PNC Financial Services Group every day. [??] As it stands now, PNC Real Estate Finance reports to PNC's wholesale banking business, and it includes responsibility for Midland, PNC Multifamily Capital (affordable housing), PNC Securitized Finance (conduit and agency lending) and all real estate balance-sheet lending involving acquisition, development and permanent financing.
Last year, PNC Financial Services Group reported consolidated earnings of $1.197 billion, of which $443 million came from wholesale banking--second only to regional community banking, which reported $504 million in earnings. However, the increase on a percentage basis was higher at 13 percent on a year-to-year basis for wholesale banking ($391 million in 2003 to $443 million) than for regional banking at 6 percent ($477 million to $504 million).
Real estate finance makes up 25 percent of the wholesale banking business and contributes 10 percent to bank earnings, says Frater. Among the key reasons why the wholesale banking group did so well last year was an increase of 18 percent in Midland Loan Services' portfolio, plus conduit lending (securitization) was up 54 percent over 2003.
In third-quarter 2004, earnings for the wholesale banking group totaled $100 million, PNC reported. The jump to $108 million in the next quarter was partially attributed to increased net gains from the sale of commercial mortgage loans.
Of all the major financial institutions now thickly involved in commercial real estate, PNC has been one of the most pioneering. In 1998 it acquired Midland, which at the time originated, securitized and serviced conduit loans; in 2000 it merged with Univest Financial Group LLC, Little Rock, Arkansas; and in 2001 it bought TRI Capital Corporation, San Francisco, a Freddie Mac and Federal Housing Administration (FHA) lender active in multifamily and seniors' housing.
It's mostly been in the last two years that the rest of the commercial banks have followed suit, buying up Fannie Mae, Freddie Mac and FHA lenders to bolster their real estate finance efforts. PNC was years ahead of the rest.
Oddly enough, soon after PNC acquired Midland, it separated origination and servicing. Conduit lending (securitizing loans into commercial mortgage-backed securities [MBS]) was somewhat alien to balance-sheet loan officers, who worked the traditional bank lending markets. That continues to be the model in the commercial banking industry, says Frater, except now for PNC. "Most of our commercial bank competitors that have had capital markets lending and securitized lending report differently than the...