September 12, 2008

Lehman's Commercial Real Estate

I hope that I will see the planned spin off of Lehman's commercial real estate because I think it will be dirt cheap, everyone will dump it because it is the "bad bank", leaving a very attractive opportunity to buy at low valuation. So let me examine some of the potential holdings. Lehman till now did not specify what will be in the spin off.

REI Global, the Lehman spin off, most likely have a portfolio that is mixed and includes the company’s equity position in the Archstone-Smith Trust apartment portfolio, which it purchased in partnership with Tishman Speyer Properties last year. Tishman Speyer and Lehman Brothers completed a $22 billion leveraged buyout of Archstone Smith a year ago last August.

Off course they overpaid for their buyout at the height of real estate valuation in 2007. At the time, Englewood, CO-based Archstone was one of the largest multifamily REITs with about 86,000 units worldwide. Barron's called the deal a "gigantic gamble" because Lehman and Tishman would be paying more than $1 billion in interest -- more than Archstone's $800 million projected NOI for 2007 -- on the $17 billion borrowed for the deal. based on these figures, they did this transaction at a blended cap rate of about 3.6%, a very high valuation.

One of their mortgage investment is in SunCal Cos. SunCal is a California land developer with 250,000 residential lots and 10 million square feet of commercial properties, the company has a huge development pipeline in California.  Obviously this holding is troubling given the current environment for home builders. Serious questions must be attached to the ability to SunCal to refinance and sell its pipeline. Already SunCal debt has been downgraded to non performing by Moody's in march 2008 and there are several non payment on loans to lenders.

Here is the breakdown of their portfolio by dollar value:

Geographical break down:

  • 57% of the holdings are in the Americas,
  • 26% in Europe, and
  • 17% in Asia.
Assets class breakdown:
  • 58% are debt positions,
  • 26% are equity positions,
  • 16% are securities.
Property type breakdown, largest values:
  • multifamily properties represent 22%, and
  • office properties represent 18%.


Anonymous said...


Opinion on the BAC and MER deal?

Ryan B

Anonymous said...

Hi Sami,

Fan of your blog and have been reading for sometime. I know you think that commercial real estate is being severely undervalued but so far I have been unable to understand the rationale behind it. I guess I am unable to understand how you are coming up with the valuation you are using in your decision to buy?


Sami said...


I have post re the acquisition.

I do not like big acquisitions in general, there are a lot of risks involved. Lewis want to create another Citi sans insurance, I am not sure the supermarket model works.

But at the backdrop of dissapearing competition they can make something out of it, I hope. Another point is BofA should be trying to shore their core businesses and then looking for acquisitions when the dust settles.

Sami said...


I have written many posts about commercial real estate. I have said there is slow down. but far from the people's expectation that it will mirror residential real estate. for the simple fact that developers did not overbuild and created glut of supply.

What is happening now is a crises of leverage and financing. look at every commercial real estate company or investment that failed, Lehman, Centro, Macquire, Maclkowe, and you will see that excessive leverage is the culprit not the performance of the assets. Actually rent growth has been pretty good. recently vacancies are up ticking as a result of unemployment, a natural occurrence in the current economic cycle.

All I am saying is CRE will go down but not at some of the prices that people are paying for.

Commercial Real Estate said...

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Hope this helps.