Finance Legend Bets
On Bank-Branch REIT

In a modest fifth-floor office in suburban Uniondale, N.Y., onetime Wall Street highflier Lewis S. Ranieri is being anything but modest about his newest venture -- snapping up lowly bank branches.

"Will I be a bull in a china shop?" he asks rhetorically. "Yeah, absolutely, without a doubt. Will I shake up things? Absolutely. I don't care for people telling me what I can't do."

It is vintage "Lewie," the man who defied expectations by transforming Salomon Brothers' sleepy mortgage-trading division into one of the securities firm's biggest profit centers in the 1980s and who is credited with helping develop the huge market for mortgage-backed securities.

Now, Mr. Ranieri again is going against the grain in real estate and finance. While most big real-estate investors have been competing to buy high-quality office buildings and retail centers, Mr. Ranieri's latest undertaking aims to buy bank and office buildings from financial institutions that are consolidating operations, and to transform them into sexy, income-producing real-estate assets. The idea is to rent the space to other banks or lease it as retail space.

Despite Mr. Ranieri's reputation for spotting opportunities before others do, some are raising questions about his timing and his business model.

Mike Kirby, a principal with real-estate research firm Green Street Advisors Inc., says Mr. Ranieri will have to prove that buying bank property is a legitimate business that has enough depth to make it more than a novelty. Lawrence D. Raiman, analyst at Credit Suisse First Boston, says one of his main questions is who will be renting these bank branches and offices, if many big banks are busy merging and shrinking in size.

For Mr. Ranieri, who has lost little of his bravado, the idea is a no-brainer. The 55-year-old deal maker, interviewed last fall in Uniondale on Long Island, where his investment firm, Hyperion Partners, is based, retorted to skeptics, "I always seem to be in the position of everybody telling me why I can't do a thing, and frequently I don't believe them. If every time everybody told me it couldn't be done I didn't do it, most of my life would be different."

To buy bank properties, Mr. Ranieri formed a private real-estate investment trust, called American Financial Realty Trust, with American Financial Resources Group Inc., a five-year-old real-estate investment firm led by Nicholas S. Schorsch. Messrs. Ranieri and Schorsch met in early 2002 at the urging of executives at Wachovia Corp., with which both men had separate business relationships.

They launched the Jenkintown, Pa., firm in September in a private offering that raised $400 million. In October, the company agreed to buy about 200 bank branches from Wachovia, which was closing them as part of its merger with First Union Corp. American Financial, which now owns properties in 40 states, declines to say how many of the bank branches it has leased so far.

Mr. Ranieri, who holds the chairman title at the REIT, sees vaults of opportunity. "Bank and thrift-related real estate is a subsector of the real-estate market that seemed to be overlooked," he says. In November, Mr. Schorsch, the chief executive, said the company aims to post double-digit annual returns. More recently, he declined to make any projections.

They plan to expand the firm by tapping public markets for additional capital. The prospectus for the September private offering said American Financial was required to file a registration statement to go public either through an initial public offering of shares or the resale of shares by investors within six to nine months of the completion of the private offering. Mr. Schorsch says the firm's seven-member board hasn't yet decided on a date for an IPO.

American Financial could be a tough sell, though. IPOs have been few and far between, as a result of the choppy stock market. Moreover, after a strong performance the past couple of years, real-estate stocks have slowed since mid-2002 as the economic downturn has persisted. The outlook for the real-estate industry in 2003 isn't very bright. What's more, specialty REITs such as American Financial that focus on niche markets have had mixed success at best.

Then there's the matter that many banks are scaling back, which raises the question of who will rent the branches that American Financial is buying.

"True, some banks are consolidating," says Mr. Schorsch, "but some community banks and regional banks are expanding and opening up more and more branches." He cites statistics from the Federal Deposit Insurance Corp. that show the number of bank branches and offices increasing even as the number of banking institutions declines. In 2001, the latest figures available, the number of institutions declined 2.8% to 8,080 from a year earlier, but the number of branches and offices rose 2% to 139,208.

Mr. Schorsch says the company would "reposition" branches and lease them to retailers in the event a suitable bank tenant isn't found. In those cases, American Financial eventually would sell the assets because retail tenants wouldn't be considered part of the company's core operations, he says.

For Mr. Ranieri, the challenge of doing something new -- and proving the skeptics wrong -- is part of the fun.

When he speaks of his go-go years at Salomon, his eyes light up, and he talks of the firm as if it were an amusement park he loved as a kid. He has given up cigar smoking because of a lung condition, but the Brooklyn native, who flavors his sentences with "you know," hasn't stopped wheeling and dealing. "Pressure is like oxygen to me," he says.

Things haven't always been rosy for Mr. Ranieri since he left Salomon in the mid-1980s. His investment firm, Hyperion Partners, made a fortune buying a troubled Houston thrift from the government in 1988 that was revamped and taken public as Houston's Bank United. (The thrift was sold to Seattle-based Washington Mutual Inc. in 2001, and Mr. Ranieri's stake was valued at about $50 million, based on his reported holdings.)

But a former arm of Hyperion Partners, Hyperion Capital Management, stumbled in the 1990s, when it sold investors so-called term trusts -- closed-end funds that specialized in mortgage securities that turned out to be, in some years, the worst performers of their class. In 1993, an investor group, claiming to have suffered losses of 30% when the value of the funds plunged, sued Hyperion Capital, alleging it didn't make adequate disclosure of the risks; a federal judge dismissed the suits in 1995.

"He did not have a good record with the original funds," says Robert Dall, who selected Mr. Ranieri as a trader in Salomon's mortgage-securities division and is now a private investor. "But like most people in the limelight, to have mixed results is not unusual."

That Mr. Ranieri is behind the American Financial venture doesn't surprise former colleagues. "He's always been interested in real estate and finance, and putting them together in a way in which he and his associates may have a chance to make a buck," says John Gutfreund, who was once Mr. Ranieri's boss at Salomon Brothers and who is now a senior managing director at C.E. Unterberg, Towbin, an investment-banking boutique in New York.

Mr. Ranieri agrees his years in banking and real estate are reasons why American Financial makes sense for him. "I think this is really going to be a good company over time that will be larger than people are anticipating," he says. "If I'm wrong or right, we'll see."

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