RealEstateFlux

As late as September 10, CalPERS announced it was expanding it real estate allocation with $700 million in fresh commitments. The funds in questions went to a JER Partners fund focused on Latin American Investment, and a buyout fund lead by GI Partners. Given the historic federal intervention in markets since September 10, it is an open question how institutional real estate investors such as CalPERS will be impacted. In particular, with real estate being a high profile trigger of the Lehman Brothers blow up, will the sector be tarnished? Real Estate is historically a debt driven vehicle, with a huge amount of capital necessary to make deals. With new financing increasingly scarce since the credit crisis began, it is uncertain how the massive federal bailout will impact the industry. Hopefully the removal of the damaging mortgage portfolios choking balance sheets will allow lenders to turn the page on the credit crisis.

The New York Times | Jenny Anderson & Charles Duhigg | September 20, 2008

Earlier this year, when Lehman’s chief financial officer, Erin Callan, met with some investors at the company’s headquarters in Midtown Manhattan, she exuded confidence. During the meeting an investor challenged Ms. Callan, according to two participants who requested anonymity because they did not want to jeopardize their relationships with senior executives. With firms like Citigroup and Merrill raising capital, the investor asked, why wasn’t Lehman following suit?

Ms. Callan was brusque, the two participants recalled. Glaring at her questioner, she said that Lehman didn’t need more money at the time - after all, it had yet to post a loss during the credit crisis. The company had industry veterans in the executive suite who had perfected the science of risk management, she said.

According to both investors, she said Lehman’s real estate investments were top-notch. “This company’s leadership has been here so long that they know the strengths and weaknesses,” participants recalled her saying. “We know when we need to be worried, and when we don’t.”

One of the more surprising results of the credit crisis to date has been the lack of distressed sales activities. The fundamentals of commercial markets have generally remained in tact, and sellers have been stubborn about getting their price - per their appraisals of 6 months or a year ago.

There is good reason to believe that with the end of Lehman will also come a narrowing of bid ask spreads. Lehman’s commercial debt, securities, and property portfolio was marked to market at $40 billion as of May. Now with the liquidation of this portfolio, price pressure is turning downwards.

The Wall Street Journal | Lingling Wei and Michael Corkery | September 17, 2008

“As a result of Lehman’s bankruptcy, other financial institutions will feel more pressure to sell assets at deeper discounts sought by investors,” said Spencer Garfield, a managing director of Hudson Realty Capital, a New York-based real-estate fund manager.

Goldman Sachs Group Inc. on Tuesday said it had reduced its portfolio of commercial mortgages and securities by about $2 billion to $14.7 billion as of the end of its third quarter, which ended Aug. 29, taking a $325 million loss.

The weekend was unkind to Lehman Brothers as the leaders of Wall Street met to consider their fate and a possible buy out of the investment bank and influential commercial real estate player. Yet after Bank of America and Barclays examined Lehman’s books, they balked. There were no other takers. Apparently no bids for Lehman’s distressed assets were viable, or in and of themselves would have forced Lehman into bankruptcy. Therefore, the cleaner solution became a Chapter 11 filing at the holding company level.

Bloomberg | Peter Robison & Yalman Onaran | September 15, 2008

Fuld waited too long to write off bad debt, then didn’t act quickly enough to sell a stake to raise capital, said Richard Bove, an analyst with Ladenburg Thalmann & Co. In the third quarter, Lehman said it reduced its exposure to residential mortgages 31 percent to $17.2 billion and commercial real estate 18 percent to $32.6 billion. New York- based Merrill Lynch & Co. moved faster under new CEO John Thain, agreeing July 29 to liquidate more than half of its mortgage-linked securities at a fifth of their price and raising $8.55 billion in capital.

Seeking Alpha | J.D. Steinhilber | September 15, 2008

Going into the weekend, the outcome Wall Street was expecting was a buyout of Lehman Brothers. Instead, it got a Lehman bankruptcy, a buyout of Merrill and increased pressure on AIG. These developments have intensified fears of a financial panic.

The New York Times | Joe Nocera | September 15, 2008

Ever since the crisis took hold last summer, most of the big firms have been a day late and dollar short in admitting that their once triple-A rated mortgage-backed securities just weren’t worth very much. And, one by one, it is killing them.

After months of uncertainty, a resolution is at hand for Lehman Brothers. Once a preeminent force in commercial real estate lending, the overextended investment bank is in forced sales talks, hosted by U.S. financial regulators. In spite of CEO Richard Fuld’s announcement earlier this week that the struggling bank had settled upon a restructuring plan, the equities markets voted down the planned measures with massive sales pressure. Lehman’s public shares are down over 90% since last February.

At the root of Lehman’s demise has been an aggressive contrarian bet; a year ago when commercial real estate markets began to slow, Lehman continued pumping out debt and equity investments while many of its peers were reigning in. For the last several months Lehman has been desperately trying to sell these investments, to no avail. Unfortunately, Lehman’s exit strategy for its commercial real estate investments had vanished. Just 12 - 18 months ago, Lehman was regularly feeding its securitization program vast chunks of CRE mortgage debt which were regularly sold off to bond investors, but now these markets are frozen.

The forced sale of Lehman Brothers is a welcome conclusion to the gory saga of Lehman’s implosion. Of course, any strategy which would have sustained Lehman would have been preferable. Yet the months of uncertainty regarding Lehman’s future have weighed heavily on the financial markets. Lehman has been a high profile train wreck, strewing wreckage in slow motion.

Assuming that Bank of America, Nomura, or HSBC is able to acquire and stabilize their platform, our financial system will more quickly get over it and move on. An important question is what level of guarantees the federal government will need to extend to Lehman’s buyers?

Centro’s plans to raise capital were dealt another blow this week as its agreement to sell a portfolio of U.S. retail properties was terminated.

FT.com | Peter Smith | September 15, 2008

Centro, which has a large portfolio of shopping malls in the US, Australia and New Zealand, said in July it had agreed to sell 29 of the 31 properties in the Centro America Fund to a private real estate investment advisor for A$735m (US$592m), at a 10 per cent discount to book value.

After six extensions in the last year, Centro Properties Group has approached its Lenders with a new plan in the hopes of getting more time. Centro is floating the idea of offering a hybrid security to its Lenders allowing them to swap debt for equity in the company. The problem is that this would further dilute the value of existing shareholders, who have already lost 96% of the value of their stock since December 2007.

The initial thrust of Centro’s turnaround strategy was to offload assets, and it has already sold 29 US properties for $714 million according to the Wall Street Journal. Yet Centro is now saying that they will need to obtain new equity commitments in the firm to stay afloat, and Blackstone and others have considered options including breaking off what is left of their US portfolio. Yet looking into the bottom of Q3 2008, Centro believes it is unlikely that new equity can be closed in time to comply with its Lender’s late September and Mid December deadlines.

IHT | August 25, 2008

“While banks have provisioned for their exposure to date, it would be of some concern to lenders that neither asset sales or an equity injection is a near-term possibility,” said a hedge fund manager who asked not to be named because he was not authorized to speak to the news media. Centro said it had begun preliminary talks with its bankers on converting a portion of its debt into some form of hybrid security.”

The Wall Street Journal | Andrew Harrison | August 26, 2008

“Centro will look to obtain debt extensions from its lender group, and has started talks with lenders on terms, the company said. Centro’s Australian lenders include Australia & New Zealand Banking Group, Commonwealth Bank, National Australia Bank and St. George Bank Ltd. Foreign lenders include J.P. Morgan Chase & Co. and Bank of America Corp.”

In a move designed to protect its turf, Walgreens has launched a competing bid for Longs. Given the prior shareholder dissent and now a competing bidder for Longs, CVS’ original deal is in jeopardy.

Los Angeles Business Journal | September 15, 2008

If the deal goes through, Walgreens would acquire Walnut Creek-based Longs’ retail drugstores in California, Nevada, Arizona and Hawaii. The acquisition would include Longs’ prescription benefits management subsidiary, RxAmerica, LLC.

Longs’ shareholders are reportedly looking to scuttle the merger with CVS due to what they believe is an undervaluation of the firm and it real estate.

The Wall Street Journal | Heidi N. Moore | September 5, 2008

“Longs’ largest stakeholder, the investment firm Advisory Research, has renewed calls for the Walnut Creek, Calif., drugstore chain to release details about its real-estate holdings. Longs owns as much as 20% of its 500 stores, and where it doesn’t own, it holds long-term leases struck long before real-estate prices boomed…Investors say that means Longs should be fetching more than the $71.50 offered by Woonsocket, R.I.-based CVS.”

Retailers nationwide are facing the strain of shrinking consumer spending, especially now that  tax rebate checks have already been spent. Therefore, the news of a significant consolidation amongst retail drugstore operators invites questions about possible redundant locations and possible store closures. Reports indicate that CVS is not considering any closures in the near term.

CPN | Michael Fickes | August 13, 2008

“In one of the year’s notable retail acquisition announcements, Longs Drug Stores Corp. has agreed to be acquired by Woonsocket, R.I.-based CVS Caremark for $2.9 billion or $71.50 per share. The purchase price includes the assumption of Longs’ outstanding debt. “

Globe St. | Brian K. Miller | August 13, 2008

“As part of the integration of the Longs chain into CVS, Ryan said CVS will look to relocate 10% to 15% of the Longs stores in Northern California that aren’t already well-located to freestanding locations “if we can find them, but there’s no rush,” he said. In addition, he said CVS would look to learn a little something from Longs about its general merchandise business, which accounts for more of the stores’ overall sales than CVS stores, and use that to improve operations at its existing CVS stores in California. “