Schroders Salomon Smith Barney

A merger in 2000 created what is now a dominant player in the corporate real estate advisory market, specialising in areas such as hotels and corporate property transfers

Schroders Salomon Smith Barney was formed in 2000 when US investment bank Salomon Smith Barney acquired Schroders’ European investment banking business. In Europe, the agglomeration forms the corporate and investment banking business of Citigroup, the umbrella financial services organisation, while the Salomon Smith Barney name survives in other trading operations in the US and Asia.

Before the merger, the banks’ European operations employed five real estate professionals between them. This has been expanded to a team of 25, who last year claimed a 27% market share in European property and hotel mergers & acquisitions. “We had aggressive targets and senior management was very supportive,” says John Herbert, managing director and group head for property and hotels in Europe. “We’ve been pleased with our ability to quickly create a market presence.”

The London-based European business has three areas of exposure to property: raising capital and offering strategic advice to hotel companies and hotel portfolio owners; raising capital and providing strategic advice to property companies; and offering corporations strategic advice on their property portfolios.

Unlike many of its competitors – such as JP Morgan’s Peabody Fund or Goldman Sachs’ Whitehall – SSSB does not operate or sponsor a real estate investment fund. Herbert says: “We prefer it that way as it makes us less biased.”

As an example of its work in advising and raising finance for hotel operators, Herbert cites its role in helping the UK’s Compass group dispose of its hotel portfolio in early 2001. Nomura acquired the Meridien chain from Compass for £1.9bn, while Bass bought Post House for £810m.

In the area of advising property companies, SSSB advised Land Securities on the acquisition of outsourcing services provider Trillium late last year, and in November managed the £825m securitisation of one of British Land’s prime assets, the Meadowhall shopping centre in Sheffield.

Meanwhile, in its third specialist area, corporate portfolio advice, SSSB advised BT on the £2.4bn transfer of its property portfolio to Land Securities Trillium. “We drove down the deal’s financing costs and created unprecedented flexibility in terms of property substitution and vacation rights,” says Herbert. SSSB also assisted in the outsourcing of facilities management.

One key business area identified by SSSB is structuring deals that allow corporations to separate property ownership from property occupancy. In the past four years, it has chalked up $25bn of property outsourcing deals in the US, Europe and Japan. “We devoted ourselves to this business a long time ago in the US,” says Herbert. “When Salomon Smith Barney merged with Schroders, both were starting to focus on this business in Europe and we’ve devoted a lot of effort to this.”

Capitalising on its telecoms sector experience, SSSB also advised consortium Caisse des Dépôts, in partnership with GE Capital and Goldman Sachs’ Whitehall fund, in its successful €3bn bid for France Telecom’s property portfolio in March of this year. The sale included 1,200 buildings, two thirds in the Paris region. France Telecom will use the money raised from the deal to cut its debts.

Meanwhile, SSSB is advising French engineering group Alstom on the proposed sale of almost €1bn of corporate real estate. Unlike the France Telecom or BT deals, this would be a pan-European transaction, since the company’s mainly industrial properties span several western European countries. Herbert believes the portfolio is likely to be sold to a single investor, despite the complications of dealing with multiple tax and legal regimes – but breaking the portfolio into smaller national or regional deals has not been ruled out.

Herbert anticipates further large-scale corporate property outsourcing deals. “Corporates’ and governments’ new-found interest in using property sales to generate cash for their core business and reduce debt has kept us quite busy,” he says. “We think the BT deal is much closer to the start of the trend than to the end of it. A number of groups have asked us to undertake feasibility studies on large portfolios to determine whether they are appropriate for similar transactions.”

Herbert believes the retail or banking sectors could produce the next swathe of deals, while vehicle manufacturing and other heavy industries are other sectors where deals could occur. “State-owned enterprises or ‘national champions’ usually have large property portfolios that have been part of their operations for years,” he says. “They see a golden opportunity to trade these assets for cash. For the first time, corporations in Europe are looking to add value to their operations in this way, because as barriers drop across the EU, they are being forced to become more efficient.”

Eighteen months ago, the SSSB real estate team started using a computer model which allows corporations to analyse the costs and benefits of owning real estate, as opposed to leasing it. Salomon Smith Barney has used similar software in the US for four to five years. “In many cases – given the capital structure of a variety of European corporations, their expected returns on equity and the costs of debt – the argument for selling and leasing back property is quite compelling.”

SSSB’s model also examines the break-even rate on real estate’s appreciation in value. “UK and continental real estate returns have grown at between 0% and 2% annually in the past 20 to 25 years,” says Herbert. “The figures are similar all across Europe. If real estate returns barely keep up with inflation, corporations have to ask: ‘Why do we own this property?’”

Herbert also predicts more securitisation deals – an area where SSSB was number one in Europe last year. “Securitisation deals are currently UK-dominated but there are increasing opportunities on the Continent, where the EU is putting economic and regulatory pressure on banks to be prudent in their real estate lending.”

Herbert sees such a situation as conducive to raising finance through the public markets, and spots similarities to the US market in the early 1990s. “The banks stopped lending to real estate borrowers, leading to the growth of commercial mortgage-backed securities,” he says. “This played into the hands of investment banks with strong securitisation capabilities.”

As part of its growth strategy, SSSB last year lured well-regarded property analysts Alan Carter and Mike Prew from CSFB. Herbert, who ranks them as first and second in European property research, says: “They’re known for their good calls on market direction and for writing incisive reports. They will be of huge benefit to our property business and have given us an immense amount of credibility with institutional investors.”

SSSB’s analysts have to date focused on the UK and on larger companies. But Herbert adds that the plan is “to cover a number of larger Continental companies in the next twelve months”.

As well as being number one in the European real estate financing and securitisation market, SSSB has a 50% market share in financing global hotel mergers and acquisitions. “Before their merger, Schroders advised the buyer on the Bass/Inter-Continental deal and Salomon Smith Barney advised the vendor. So both were strong in the hotel arena, and we’ve been able to play off that.”

Herbert predicts that the hotel sector will remain calm for the next six months. “But after this period of lower economic growth the economy will become more buoyant, and we’ll see more activity and consolidation in the sector,” he adds.

His prediction is based on the fact that while 75% of the US hotel sector is operated by major brands – such as Marriott, Starwood or Hilton – in Europe, the figure is roughly 25%. Herbert believes European players, expansion-minded US corporations and tour companies will drive consolidation. “Europe’s market is very fragmented in comparison to the US. We expect more consolidation and growth in big brands and we aim to play a key role in that process.”

Selected European real estate transactions 2001-2002
Alstom could be Europe’s first pan-European corporate disposal
Company	Closing date	Comments
Alstom	Pending	Leading adviser on review of pan-European portfolio, mainly industrial
Canary Wharf	2000-2002	Arranger and joint bookrunner for £2.6bn multi-tranche securitisations
British Land	Dec 2000	Structuring adviser/joint bookrunner on £875m retail property securitisation
British Telecom	Nov 2001	Sole adviser on restructuring and sale of BT’s £2.4bn UK property portfolio
France Telecom	Oct 2001	Adviser to buyer in France Telecom’s €3bn real estate transaction
Compass Group	May 2001	Adviser on sale of Compass’s c.£3bn European lodging assets
		Adviser to Compass on the £17.5bn merger with Granada
Source Schroders Salomon Smith Barney

Selected European real estate transactions 1999-2001
Telecom Italia began the wave of corporate disposals in Italy
Company	Closing date	Comments
BPT	March 2001	Adviser to BPT on its £477m public-to-private transaction
Telecom Italia	Dec 2000	Adviser to Telecom Italia on its €2.9bn real estate portfolio joint venture
Land Securities	Nov 2000	Adviser on the acquisition of Trillium for £33m
Punch	Oct 2000	Sole bookrunner and arranger for Punch’s £250m private securitisation
	June 2000	Sole arranger for Punch on a £1.5bn multi-tranche securitisation
Canary Wharf	March 1999	Co-lead manager on the $1bn initial public offering of Canary Wharf
Source: Schroders Salomon Smith Barney