RBC Hits Real Estate With Capital Markets Division
With the hiring of Dan Smith, RBC Capital Markets is targeting real estate as an area where it wants to make a move.
Interview by Randall Shearin and Jerrold France

Shopping Center Business recently interviewed Dan Smith, who was appointed head of real estate for RBC Capital Markets in 2006. With the hiring of Smith, RBC (Royal Bank of Canada) has entered the real estate lending market and wants to make a big push in lending on commercial real estate properties.

SCB: Why is the timing right for RBC to enter the real estate lending arena?

Dan Smith

Smith: It is one of the best times for the capital markets. It is probably at one of the deepest and most global right now. Investor acceptance is high right now across the world. The experience and track record of CMBS and investor acceptance is now worldwide. It is a well established market. I can remember 20 years ago when people were questioning how deep the market was and how long would the CMBS market survive. Now, it is a given. It gives RBC a chance to expand its client base into the U.S.

SCB: Tell us a little bit about RBC as a financial institution.

Smith: RBC, which is the Royal Bank of Canada, is an AA institution that is the largest bank in Canada. We have a tremendous marketshare there in terms of real estate. We have a conduit in Canada. Management there sees the U.S. as a great growth opportunity. RBC Capital Markets is not the first entry into the U.S. RBC owns a bank in the Carolinas called RBC Centura. We also own a traditional mortgage banking firm called Capital Advisors. RBC also owns Dain Rauscher, which is a bond trader and personal financial advisor nationwide. The capital markets group is very active right now. The combination of the debt of the capital markets now and the investor acceptance allow RBC to grow in the U.S., which will significantly expand the client base.

SCB: What kind of work are you doing as RBC establishes itself as a real estate lender?

Smith: We are doing a lot of merger and acquisition work for larger clients. These are clients like REITs who are doing recapitalizations or large developers who are looking to significantly expand. These activities are allowing RBC to offer products nationwide to smaller, regional owners of shopping centers, apartments, office buildings, hotels, self-storage and industrial properties. It is creating a large product base in the U.S.

SCB: RBC has entered the consumer banking sector in the U.S. with RBC Centura. How is the capital markets division borrowing from that experience?

Smith: RBC Centura is a very customer focused organization. The idea for us is really to provide a mix of products for clients who want to grow. We want to allow our clients to form a partnership with a large institutional lender.

SCB: You have assembled a team of people to help serve real estate.

Smith: We have about 20 people in Dallas and New York. We are going to be opening offices in Newport Beach [California], Phoenix and Chicago. We are looking at potential expansions in Atlanta, Florida, Washington, D.C., and Northern California. We have a combination of originators, underwriters, closers and a securitization team. The capital markets team is also working closely with the Dain Rauscher team. They will be helping us to sell the bonds in our CMBS deals.

SCB: Who are the clients that RBC would like to have?

Smith: Developers, opportunity funds and REITs are some of our borrowers. We will work also with the mortgage bankers and mortgage brokers. But ultimately, our success will be defined by the investors of the securities backed by the loans.  We want them to be very satisfied with the quality of collateral we originate.

SCB: What size loans will you underwrite?

Smith: The minimum size we will do is $3 million to $5 million. We also have a national program with Buchanan Storage Capital for self-storage properties. The majority of our loans will be in the $8 million to $12 million range. We will go up to a $1 billion pool if we want to.

SCB: What kind of programs is RBC putting together for lenders?

Smith: We will do both fixed and floating rate loans. Fixed-rate will be the permanent loans with 5- to 10-year terms. The floating rate loans tend to be at the lower end of the leverage level — 65 to 75 percent. The fixed-rate loans will be more in the 80 to 85 percent leveraged level. Traditional construction loans will be done through the RBC Centura network, and a subsidiary that they own called Builders Finance. Our CMBS program will probably not expand into construction loans because we have that in place through Builders Finance. We will primarily be offering longer term financing.

SCB: How are you setting up your network so that you can close loans quickly and have some of the benefits that the larger conduits offer?

Smith: The primary benefit we have and the way to close loans quickly is through a philosophy of delegation. Along with our risk manager, Todd Rhodes, I have signing authority for the loans. We look at them quickly. We have developed a technology that gets packages into my hands and Todd’s hands so that we can make a decision very quickly. We have transactions where the turnaround time from submission to commitment has been as quickly as 24 to 48 hours. I will allow the originators in the field to get the commitments out and have signing authority at some point. To provide a quick and dependable service, you have to have a philosophy of delegation. That is how we are building this organization. There is a lot of ability here because I have hired a team of people who are experienced in CMBS lending. I have been doing CMBS for over 20 years. Our risk manager has been doing CMBS for over 10 years. Our originators in the regions have been doing this for 15 to 20 years. We are blending experience with the delegation.

SCB: What attracted you to RBC?

Smith: I found that the RBC philosophy and my philosophy of lending fit pretty well. I spent considerable time discussing our lending philosophies with the New York team and the Toronto team at RBC. It was a major requirement for me that the bank be financially strong. That was one of the cornerstones. We talked a lot about the commitment to real estate. I became very comfortable with their commitment to real estate lending in Canada and what they had done to date in the U.S. One of the other things that impressed me was that they trusted me to put together a business plan for an organization that will originate product that will be successful for investors. RBC’s philosophy is not necessarily to be at the top of the deal charts, but to be a provider that has a lot of respect and provides a customer-centric product to borrowers. We have a product that we can be proud of, and we have a multitude of products that borrowers can look at and say ‘there is some value added here.’

SCB: Over the years that you’ve been in the business, you have developed relationships. Are you carrying some of those with you to RBC?

Smith: There are people who I’ve known in the industry for a long time. They see the value of having a dependable product that’s committed to the market.

SCB: What are RBC’s competitive strengths?

Smith: We are able to provide a broad product to cover what the borrower’s needs are. We are more competitive for a borrower who is looking to grow and see some value added in a variety of products. Someone who is just looking for the last basis point and the last dollar for a one-off transaction, we are not going to be that competitive for that deal. We are interested in providing the most competitive product for borrowers and mortgage brokers who bring us good repeat clients. Our competitiveness will be driven by the customers’ needs.

SCB: What do you think your volume will be in 2007?

Smith: I think it is realistic for us to do $1.5 billion over the next 12 months. That includes what we are doing in the M&A group and the capital markets group.

SCB: How did you choose the team for RBC’s Capital Markets group?

Smith: I was looking for a combination of people who have experience in CMBS and who are dedicated to providing good customer service. If you are going to give a borrower a quick response and make that response dependable, the people in the field have to know what they are doing. They have to know the right questions to ask and they have to know how to do get the information quickly and deliver it to those who have the signing authority in an organized manner. I was looking for people who I trusted. Many of the people who agreed to join the team are well respected and well known in the industry. I have worked with Todd Rhodes for almost a decade. The law firm we are using to complete our transactions I have worked with throughout my career and they are dedicated to customer service. They helped put together many of the rating policies that I use today.


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