Lehman fights to attract buyers for real estate valued at $40bn

DURING THE recent Wall Street boom years, few firms embraced commercial real estate as aggressively as Lehman Brothers.

Last year, when the firm announced it was teaming up with Tishman Speyer to buy the real estate investment trust Archstone in a $22 billion (€14.98 billion) deal, with Lehman providing the riskiest part of the financing, some veterans of the property market wondered whether the bank really had strength commensurate with its ambitions.

Now Lehman's near-term fate depends in large part on whether it can attract buyers for the assets and securities in its commercial real estate portfolio, valued at $40 billion at the end of May.

Any sale would help Lehman, the fourth largest investment bank in the US, to add to its capital reserves, offset future credit-related losses and strengthen its argument against the bearish investors that have pushed its shares sharply lower.

However, some of the potential buyers Lehman has approached claim - admittedly at least partly out of self-interest - that Richard Fuld, Lehman's long-time chief executive officer, is still unwilling to mark down the value of the portfolio to where the market is.

"He is a tough fighter, but he is in a no-win situation," says one.

Lehman declined to comment yesterday but people close to the bank say it is hoping to announce a deal before it releases its third-quarter results in coming weeks.

Lehman's portfolio is very diverse. It consists of so-called whole loans, commercial mortgage-backed securities, risky financings such as equity bridges and individual projects.

While the commercial real estate market has not been devastated to the extent the residential market has, possible buyers say the due diligence process is more labour-intensive on commercial properties and securities than for residential. "So far, there hasn't been a significant demand issue" for commercial property, says a senior executive at one firm with real estate private equity operations that is considering purchasing at least some of the assets.

"It is a question more of the lack of credit and financing."

But this person adds that it is hard to come to a judgment on the right price and how much of a cushion is required to protect against any fall in values beyond what Lehman will guarantee.

Much of Lehman's real estate exposures, such as the Archstone deal, are tucked into Lehman's Level 3 accounting category for hard-to-value securities.

But by looking at comparable publicly-traded firms and indices, some analysts suggest that it is possible to come up with calculations that suggest Archstone could be worth 25 per cent less than at the time it was purchased, in which case the equity is worth zero.

An array of private equity firms such as Blackstone, asset managers such as BlackRock and Pimco, and specialised real estate investors such as Colony Capital and JE RobertCompanies, are poring over the books.

Joe Robert, the founder of the eponymous firm, is on Lehman's advisory board and has relied on Lehman to finance some of the firm's deals in Europe.

There are many other potential buyers who have escaped the carnage in the markets and have lots of cash, such as Citadel.

Many investment firms have raised money for distressed real estate purchases, but most of that money is still on the sidelines, waiting for prices to fall further.

Lehman's efforts to shed unwanted, and devalued, real estate assets underline a problem faced by many banks: how to raise fresh capital at a time when capital markets are in a state of flux and investors appear unwilling to back financial firms.

The almost obligatory solution - adopted by firms like Merrill Lynch and Citigroup - has been to raid their corporate cupboard looking for non-core holdings and portfolios that could be sold to investors. But that strategy has come at a price. Merrill had to finance the bulk of the sale of some $30 billion of toxic mortgage securities to Lone Star Funds - an arrangement that significantly increases its risks should the value of the assets continue to fall.

Even Lehman has offered to take on the first $5 billion of loss to be suffered by buyers of its commercial property assets, according to people familiar with the talks.

- (Financial Times service)