The latest headlines regarding Bank of America Corporation’s (BAC) purchase of Merrill Lynch & Co. overlook the huge profits that the combined banks have made in real-estate investment banking.
The addition of Merrill Lynch, which has led the industry in revenue from 2006-2008, propelled Bank o f America to over $207 million dollars in revenue from real-estate investment trusts (REITs). That was nearly double what the second place bank, J.P. Morgan Chase & Co. (JPM) earned.
According to a Wall St. Journal article, the bank gained a competitive advantage by leveraging its relationships with real-estate borrowers to generate a flood of investment banking work.
Merrill Lynch helped to jump-start the REIT industry by taking debt-burdened private landlords public in the early 1990s, and much of its team joined Bank of America after the merger. Jeffrey Horowitz, who now heads real-estate investment banking in the Americas for Bank of America, led the Merrill real-estate investment-banking team at the time of the merger. Ron Sturzenegger, Bank of America’s global head for real estate, gaming and lodging, said the number of employees at the combined Bank of America and Merrill Lynch real-estate team was cut by about 50% in the wake of the merger.
Mr. Sturzenegger said the merger with Merrill Lynch helped lubricate the slew of stock offerings and debt restructurings undertaken by REITs last year.
“As our corporate bankers worked on restructuring the debt side, our investment bankers were able to give much more confidence about the ability to raise equity simultaneously,” Mr. Sturzenegger said.
Bank of America hopes to repeat its success by dominating what is expected to be one of the biggest businesses in real estate this year: helping troubled private companies tap the public markets. Many expect a rash of initial public offerings by private companies comparable to the one that followed the commercial real-estate collapse of the early 1990s, with large payoffs for underwriters.
“We have lists of companies that we think are good candidates for the public market, and we’re proactively reaching out to them,” said Horowitz. In IPOs of real-estate companies, Bank of America’s capacity to issue debt commitments will matter as well, Mr. Horowitz said, because company executives will look for underwriters who also can provide a credit line that will allow the company to expand.
“I have always taken the position that unless firms provide us with debt capital, we don’t give them any business,” said Debra Cafaro, chief executive of Ventas Inc., a health-care-related REIT that raised $312 million of equity in April with Bank of America as lead bookrunner. As debt became hard to come by for real-estate companies last year, Ms. Cafaro said, that position “became an imperative” for executives across the REIT industry.
The success of investment-banking teams like the one at Bank of America cuts to the heart of the bonus debate rattling Wall Street. Former Merrill Lynch investment bankers such as Mr. Horowitz have contributed mightily to Bank of America’s profits since the merger. In the first three quarters of last year, Merrill Lynch turned profits of $2.2 billion, or about one-third of Bank of America’s overall earnings of $6.5 billion. Bank of America investment bankers are likely to get bonuses that are close to 2007 levels as the bank tries to stem defections in the wake of the takeover, according to people familiar with the situation. A Bank of America spokesman declined to comment on bonuses.
J.P. Morgan, another big lender to REITs, also saw more business in 2009. The bank earned $119 million for arranging REIT equity offerings in 2009, or 13% of all the fees earned by investment banks for arranging those deals, according to Dealogic. That is nearly double the bank’s market share in 2008. J.P. Morgan was a lead lender on $35 billion in credit lines to REITs.
