In the late 1980s, and early 1990s, the CRE spin off concept was used quite extensively, says Hugh Finnegan, an attorney in the real estate group at Sullivan & Worcester LLP. He tells GlobeSt.com that in those days, it was not always successful. "I am skeptical of its chances for success now, because it is a timing issue," he says. "It is too late to do any good."
Finnegan explains that the name of the game today, is capital adequacy. "Will this help Lehman address that issue?" he wonders. The other "name of the game," he says, is market perception. Finnegan questions whether confidence in Lehman in the marketplace is shaken--for whatever reason--how will creating this spin-off help them restore that?"
Confidence in Lehman came into serious question around the time when the firm posted a Q2 net loss of $2.8 billion, primarily due to write-downs on commercial and residential mortgages as well as its commercial assets. At the time, the firm said that it reduced exposure to residential mortgages, commercial mortgages and real estate investments by approximately 20% in each asset class. Now, with Lehman shares falling 12% to $3.70, and with reports that the firm is searching for a buyer, insiders are questioning how it will all pan out. Some say Washington Mutual Inc. could the next one in trouble, as its stock was slammed by a 34% drop this week. And an anonymous source tells GlobeSt.com that Wachovia is also hurting and could be up next as well.
According to numerous reports, Ladenburg Thalmann analyst Richard Bove says in a research note that Bank of America Corp. will win the auction for Lehman Brothers, arguing there is a "natural fit" between the two firms. The potential list of buyers also reportedly includes France's BNP Paribas; Deutsche Bank AG; and Britain's Barclay's Plc. According to reports, the bank's assets include between $25 billion and $30 billion in commercial real estate investments--58% of which is comprised of debt and 26% of which is equity. The debt includes financing of SL Green's 1166 Sixth Ave. and 1515 Broadway, as well as Broadway Partners' acquisitions of 340 Madison Ave., 450 W. 33rd St. and 280 Park Ave. The sale could reportedly also move the firm's headquarters at 745 Seventh Ave., which has been estimated to be worth more than $1 billion.
Many insiders, including Paul Fried, a principal of AFC Realty Capital, have faith that Lehman Brothers, "which is a quality group," could still pull through. Reacting to the CRE spin-off, Fried tells GlobeSt.com that the market generally reacts favorably to a CRE spin-off move "if the firm can pull it off," adding that he believes "with the top flight team they have, it can be done.
"They need to raise capital and insulate the institution from the perception that they are sitting on a troubled portfolio," he says. "That itself is not a new concept." He explains that the CRE spin-off gives people comfort. It is comforting to know that the firm has taken steps to separate itself from the issues that might exist within its portfolio. If they can execute that, then the market will act favorably."
He continues that in any given market, there are organizations that are just caught in a credit market move, like everybody. "Whether it works out or not comes down to perception of how much capital they need, but clearly there is an internal dialog about how much capital is required and what is the cost of that capital."
Fried compared the Lehman CRE spin off announcement to the Fannie Mae, Freddie Mac/Treasury Department takeover announcement nearly a week ago. With Fannie Mae and Freddie Mac, he says, "the market had been speculating for months and no one knew what the final deal would be…the fact that the mystery has been resolved or taken away is enough to dispel concerns." He continues to note that the speculation surrounding Lehman the past few months is very similar. "If Lehman can execute some sort of plan, that's one less worry we have in the market."
Fried says that in the beginning of the year, "every announcement built up questions in the market as more financial institutions were added to the watch list. So every time a firm is taken off that watch list, no matter the terms, it will help the financial institution move forward."
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
