Last summer, Prudential Mortgage Capital Co. executives were assessing the strengths and weaknesses of their organization like an NFL front office before the annual draft. Discussing ways to enhance their team, they identified agency loans, high-yield loans and servicing as three prime opportunities for improvement. The Newark, N.J.-based company decided it could improve in those areas by acquiring WMF Group, a Vienna, Va.-based company that specializes in multifamily loan originations for Fannie Mae and Federal Housing Administration (FHA) programs, and has significant servicing and high-yield programs.
"WMF really stood out as a player that had significant relationships with Fannie Mae, but also a big FHA business, and terrific capabilities in both the servicing arena and in the high-yield sector," says David Twardock, president of Prudential Mortgage, which is the commercial mortgage lending arm of The Prudential Insurance Co. of America. "The combination of the two companies really gives us a multi-product lineup that we can take to borrowers."
Prudential Mortgage's $138 million acquisition of WMF, announced in May, closed in June. Under the agreement, WMF shareholders received $8.90 per share of WMF common stock, and Prudential Mortgage acquired all of WMF's operations, including its Fannie Mae, FHA, funds management and capital market programs. Prudential acquired a company that originated $2.3 billion in loans in 1999, compared to Prudential's $3.1 billion in originations.
A win-win situation Twardock's partner in the merger negotiations was Shekar Narasimhan, WMF's chairman and CEO. The two executives are looking forward to the opportunities the merger presents. Prudential is acquiring an expanded product line as well as a new client base. WMF, in turn, is increasing the value of its shareholders' stocks through the merger, says Narasimhan, who has been named managing director of agency and funds management for Prudential Mortgage. WMF's stock value never recovered following the bond market collapse in August 1998, when its stock price dropped from $33 per share to $5 per share. The company suffered a $30 million pre-tax loss that year when the value of loans it was holding for securitization dropped sharply.
"My responsibility is to create shareholder value. I was looking at the opportunity to do something with a strategic partner that shared our vision for the future," says Narasimhan. "It was very clear there were limitations on how much we were going to be able to penetrate the market without significant access to capital. And right now and perhaps for the foreseeable future, the public markets are not going to be kind to a company of our ilk."
Narasimhan also likes the prospect of having access to Prudential Mortgage's distribution channels to offer FHA and Fannie Mae loans to more clients. Those distribution channels include the PruEXPRESS service, which provides loans through Prudential's large general account portfolio and is sourced through the PruEXPRESS marketing adviser network. "The bottom line, from my perspective, is we have added a distribution system, more originators, larger capacity, more products, and we already have anbase that is hungry for this business," he says.
Prudential certainly is looking at the client base brought in by WMF with great interest.
"When we put our top 10 customers on a screen and Shekar put his top 10 up on a screen within the apartment sector, there wasn't that much overlap," says Twardock. "It's illustrative of the opportunity we have to deliver different products to clients that don't overlap that much."
A bigger multifamily player Twardock is particularly excited about the prospect of enhancing Prudential Mortgage's multifamily loan program. In WMF, Prudential Mortgage is acquiring a company that originated $1.2 billion in FHA and Fannie Mae multifamily loans in 1999. Prudential originated $956 million in multifamily loans last year.
"We added it up: In 1999, in the multifamily arena, these two companies originated more than $2.1 billion in mortgages," says Twardock. "I think that undoubtedly makes us the largest multifamily loan originator in the country."
The majority of Prudential Mortgage's multifamily loans have been originated through the company's general account. In 1999, the company originated $714 million through its general account, $155 million through itsaccount and $87 million through its interim account. Before the WMF acquisition, Prudential only dabbled in agency loans, he says.
"We really didn't have a capability in that arena," Twardock says. "That's why these two businesses are so complementary."
As an approved Delegated Underwriting and Servicing (DUS) provider of Fannie Mae loans, WMF gives Prudential that ability. WMF originated $828 million in Fannie Mae loans and $368 million in FHA loans last year.
Being a DUS lender will give Prudential Mortgage access to more capital since DUS lenders use Fannie Mae's balance sheet to make loans. "It delivers one of the highest quality multifamily products both in terms of price as well as flexibility," says Narasimhan. "And we are now in a position to serve major institutional clients in a variety of ways using Fannie Mae than might have been possible two or three years ago. And Prudential brings that client base."
Prudential also will be able to use WMF's expertise in originating FHA loans, which have the advantage of being 100% insured by the federal government. "We have a system set up that we have perfected over the years. We can deliver that product nationwide," says Narasimhan. "We know which markets it's easier to access; we know which markets it's not easy to get into; we know how long it takes to get it done, so we can advise clients with a degree of assurance that no other lender in the nation can on FHA loans."
Revenue opportunities Prudential Mortgage had been eyeing the high-yield loan market as an opportunity for additional revenues before its merger with WMF. These loans have redevelopment, rehabilitation, repositioning or other risks, and thus offer higher yields to the investor. Prudential will become much more active in this market because it is acquiring WMF's Los-Angeles-based Carbon Mesa high-yield division, which will be renamed Prudential Carbon Mesa. WMF has built a $400 million portfolio of mezzanine loans through this subsidiary.
"Prudential has strategically made a decision to be in the high-yield commercial mortgage business," says Narasimhan. "With Prudential, we will do more of that business, more tied to a distribution system that is very sophisticated." He adds that Prudential has the capability of originating far more FHA loans than the $368 million in loans WMF originated in 1999.
A new FHA program, called the Multifamily Accelerated Program (MAP) also will help Prudential Mortgage originate more FHA loans. To make the FHA loan system more efficient, the agency is delegating the processing and underwriting work it formerly handled to the private mortgage industry. That means Prudential Mortgage will be able to provide FHA loans in a more timely fashion, says Narasimhan.
Prudential Mortgage also plans to expand its loan servicing activity. The company services about $18 billion in loans owned by Prudential Insurance, and will be able to service more by acquiring WMF's $13 billion servicing portfolio.
The future looks bright With all the strengths the WMF acquisition brings to Prudential Mortgage, Twardock says he is confident that Prudential will enhance its standing in the commercial mortgage business. In particular, the company will become a bigger force in the multifamily loan arena with its ability to tap into the federal loan market. With all of its new resources, the company expects to build on its standing as the fourth largest commercial mortgage firm in the nation, says Twardock.
"This is a $1.4 trillion market. But it's still very fragmented," he says. "Our objective is to be one of the top three players in the sectors of the market we elect to participate in."
The following stats will be placed in boxes:
"We know which markets it's easier to access; we know which markets it's not easy to get into; we know how long it takes to get it done, so we can advise clients with a degree of assurance that no other lender in the nation can on FHA loans.Total 1999 loan originations:
Prudential: General Account: $2.1 billion CMBS: $643 million Interim: $314 million Total: $3.1 billion WMF Group: Fannie Mae: $828 million FHA: $368 million High Yield: $138 million Conduit: $207 million Third Party: $391 million Other (including equity): $368 million Total: $2.3 billion
Combined 1999 multifamily originations: WMF Fannie Mae $828 million WMF FHA $368 million Prudential's General Account: $714 million Prudential's CMBS: $155 million Prudential's Interim: $87 million