By AP
WASHINGTON: Lehman Brothers' do-or-die decision Wednesday to spin off up to $30 billion in commercial real estate loans and buildings highlights how jittery worldwide investors are about all things real estate.
The last-ditch plan was part of sweeping measures the investment bank is taking to survive.
Lehman, which reported a $4 billion third-quarter loss, also will sell a majority stake in its investment management business, and said a sale of the entire company was possible.
Lehman has been a major player in financial deals for office buildings, hotels and retail centers.
It invests in real estate properties and loans in the United States, Europe and Asia.
Lehman, for example, was a key player in Tishman Speyer Properties' $22.2 billion acquisition last year of Archstone-Smith Trust, an apartment building operator.
But over the past year, the credit crunch has spread to commercial real estate financing, stalling or killing plans for some major developments in cities around the world.
That deterioration forced Lehman's plan, announced Wednesday, to spin off $25 billion to $30 billion of commercial real estate investments into a separate publicly traded company.
The new company, called Real Estate Investments Global, is expected to be launched in the first quarter of 2009.
"These are difficult times, there's no way to sugarcoat that,'' said Dan Fasulo, managing director of research firm Real Capital Analytics, which estimates that total U.S. commercial property sales were down 70 percent in July from last year's levels.
Fasulo, however, noted that the American commercial real estate market is in far better shape than the battered housing market, which has seen a tremendous surge in defaults and foreclosures.
Building developers were more cautious this decade than in earlier real estate cycles, and U.S. cities for the most part are not replete with vacant office buildings.
The main problems are with properties financed at the top of the commercial real estate market last year, Fasulo said.
With weak demand and prices falling in major cities around the world, "the only sellers out there today are sellers that have to sell,'' said Lawrence Longua, a commercial real estate finance expert at New York University Schack Institute of Real Estate.
"Values in commercial real estate are clearly not going up.''
Still, while loan defaults for hotels, retail, office buildings and the like are rising, but they are nowhere near the levels for residential properties.
Total delinquencies on commercial mortgage-backed securities rose to 0.53 percent at the end of June, up from an all-time low of 0.31 percent at the same time a year earlier, according to the Mortgage Bankers Association.
Nevertheless, the total amount of new securities backed by commercial real estate loans plummeted to $12 billion in the first half of the year from $137 billion a year earlier, the trade group said.
"There continues to be a fundamental disconnect,'' between the performance of those investments and investors' willingness to buy them, said Jan Sternin, senior vice president of commercial and multifamily at the mortgage bankers' group.
Lehman also said it has reduced its residential mortgage exposure by 31 percent to $17.2 billion, and expects the sale of $4 billion of its U.K. residential mortgage portfolio to BlackRock Financial Management Inc. to be completed within the next few weeks.
Lehman also reduced its commercial real estate exposure by 18 percent in the third quarter to $32.6 billion from $39.8 billion. While financial regulators had forced Lehman to regularly recalculate the value of commercial real estate assets on its books, those same restrictions will not affect the new company.
Lehman executives say the new structure will allow executives to focus on the long-term.
Troubles appear to be worse overseas. CB Richard Ellis said in a report this month that Britain has been most affected so far by a decline in commercial property prices, but the credit crunch is also having a greater impact in Spain, Ireland, Sweden and France.
In Britain, overall purchase prices for commercial property are down 20 percent from mid-2007 and could fall an additional 15 percent in the coming year, according to Capital Economics.
"The market won't pick up before 2011,'' said Kelvin Davidson, an economist at the London consulting firm.
A high-profile casualty was a 47-story building planned for London's central financial district.
Developer British Land revealed last month that it is delaying the $500 million (286 million pound) project, which had been due for completion by 2011.
Pieter van der Meijden, a Brussels-based analyst for private banking group Petercam, said that sales activity across Europe has disappeared at the moment, making it difficult for surveyors to value real estate.
"Deals are nonexistent,'' he said. - AP
Lehman tries to soothe Wall Street with asset sale
NEW YORK: Lehman Brothers put itself on the block Wednesday as part of a last-ditch effort to rescue the investment bank from bad bets on real estate-related holdings that have already laid low other storied Wall Street firms.
The 158-year-old company's chief executive Dick Fuld, known as "the gorilla'' for his bloody-minded approach to investment banking, outlined a plan to sell off Lehman's well-respected investment management unit and spin off its commercial real estate assets after it reported an almost $4 billion third-quarter loss.
Fuld, the longest serving CEO on Wall Street, also said the firm would examine all other options - including a sale of the company he joined right out of college.
Finding a buyer might pre-empt any hostile takeovers now that Lehman's stock has plunged from $67.73 a year ago to $7.25 Wednesday, giving it a shrunken market capitalization of $7.6 billion.
"If anybody came with an attractive proposition that was compelling for shareholder value, it would be brought to the board, discussed with the board, and evaluated,'' Fuld said on a conference call.
"We remain committed to examining all strategic alternatives to maximize shareholder value.''
For investors, the strategy Fuld presented seemed long on hope, short on details and raised questions about timing and execution, analysts said.
Investors had hoped to see a solid plan in place to offset nearly $6.5 billion of losses during the past two quarters.
"This is agonizing for shareholders,'' said Mark Williams, a professor of finance at Boston University School of Management.
"Fuld was supposed to have a war room started in March, when Bear Stearns nearly collapsed, to solve these problems, and at this point he has failed miserably.''
The nation's fourth-largest investment bank plans to sell a 55 percent stake in its investment management division, which includes its prized Neuberger Berman asset management unit.
Lehman said it is in advanced talks with several bidders, but refused to give a timeline about when a deal would take place.
Investors were discouraged that no buyer had been named.
Lehman began pitching a deal to private-equity firms two months ago.
Analysts believe the sale could fetch about $3 billion.
Further, the firm is also taking a big bet that a spin off of its commercial real estate assets will get a strong market reception in early 2009.
The new entity will be called Real Estate Investments Global, and will be run by an independent management.
Williams believes that Fuld now has a limited amount of time, perhaps until Monday, to unveil a bona fide deal or run the risk of shares tumbling even further.
And, he said, that could lead to a worst case scenario where rumors about the company cause anxious trading partners to pull business - a scenario that felled Bear Stearns six months ago.
Wall Street remains skittish about financial stocks since a run on Bear Stearns caused the U.S. government to orchestrate its sale to JPMorgan Chase & Co. in March.
Lehman, the biggest U.S. underwriter of mortgage-backed securities, was automatically scrutinized.
Global banks have lost more than $300 billion from write-downs since the housing slump evolved into a full-blown credit crunch.
Many on Wall Street believe another major bank failure is probable.
Compounding anxiety is that Lehman, unlike smaller rival Bear Stearns, might not be able to count on a lifeline from the government.
Any Fed intervention on behalf of Lehman would heighten concerns about the central bank's role in encouraging so-called "moral hazard,'' where financial firms would be inclined to take extra risks because they believe the government will bail them out of their messes.
Unlike Bear Stearns, though, Lehman Brothers has access to funds from the Federal Reserve through the central bank's discount window.
The government has permitted investment banks to borrow money to cover short-term needs, an ability that only commercial banks had in the past.
The borrowing could buy Lehman some time while it works out its restructuring.
Fuld also is one of the most respected and popular bankers on Wall Street.
He led his firm back from major capital shortages during the financial crisis in 1998.
Analysts said he inspires confidence that he can reinvent the bank despite one of the worst economic climates since the Depression.
"Every other major Wall Street bank was trying to duplicate the Lehman model that Fuld created,'' said Brad Hintz, an analyst with Sanford C. Bernstein and a former Lehman chief financial officer.
"He is extremely well liked and respected inside and outside the firm.''
Lehman shares, which shed 54 cents to $7.25 Wednesday, tumbled another 6.9 percent in after hours trading.
The contagion spread to other financial companies. Washington Mutual Inc. plunged 74 cents, or 22.4 percent, to $2.56 after setting a multiyear low of $2.30 earlier.
WaMu, among the banks hit hardest by the housing mess, has seen the value of its shares plunge 76 percent this year, as it battles rising mortgage delinquencies and defaults.
Shares of Citigroup Inc., JPMorgan, Bank of America Corp., and Wachovia Corp. also fell.
Lehman Brothers' current crisis came to a head on Tuesday when its shares plunged almost 45 percent after reports that the head of South Korea's financial regulator said talks about a possible investment had ended.
Fuld had been in negotiations with state-owned Korea Development Bank for several weeks about a capital infusion.
Analysts have speculated that Fuld was overvaluing the firm.
On the conference call, Fuld blamed rumors and speculation for hurting the stock price.
He also confidently predicted employees will hang in there: "We've been through adversity before,'' he said.
There are some who think Fuld will live up to his nickname and muscle through the firm's rescue, although Lehman could be a much smaller firm than it is now.
A smaller Lehman could be vulnerable to a takeover, most likely from an overseas bank that hasn't been traumatized by the market dislocation, Hintz said.
Among the names considered to be potential suitors are Deutsche Bank, which has approached Lehman a number of times in the past decade.
Others include France's BNP Paribas and Britain's Barclays. - AP
Fannie Mae sells record $7B in two-year debt
WASHINGTON: Mortgage finance company Fannie Mae sold $7 billion in two-year notes Wednesday at prices that showed investors' fears about the company have subsided since the government took over the company last weekend.
Fannie Mae said it was the largest-ever sale of such debt, indicating strong interest from investors now that the company is firmly in government hands.
The sale may put further downward pressure on mortgage rates, which have fallen to about 5.8 percent on average for a 30-year, fixed-rate loan from last week's 6.25 percent, according to Bankrate.com.
Fannie Mae's two-year debt was auctioned Wednesday at a yield of nearly 2.9 percent, or almost 0.7 of a percentage point above comparable Treasury notes.
When companies issue debt, prices are often compared with those of similar-length Treasury bonds.
Treasury yields are a benchmark because they are considered the safest investments since they are backed by the government.
The wider the spread between corporate debt and treasury yields, the riskier investors deem the corporate debt.
