MBA (9/11/2008 ) Murray, Michael
With shares tumbling more than 40 percent on Tuesday, Lehman Brothers, New York, attempted to ease investor worries and announce reduced exposure of its residential and commercial real estate assets.
Shares fell Tuesday after talks with state-owned Korea Development Bank to buy a 25 percent stake in Lehman fell through. Lehman shares dropped more than 7.5 percent by the end of the day, and Dow Jones reports some investors saying pricing the commercial real estate assets could be a problem. Lehman stocks have fallen more than 80 percent in the past year.
As part of its plan to shore up the balance sheet, Lehman Brothers said yesterday it plans to reduce its commercial real estate exposure by 18 percent during the third quarter, from $39.8 billion to $32.6 billion, and it intends to spinoff a publicly-traded company for its commercial real estate portfolio.
The new spin-off company—Real Estate Investments Global—would begin during the first quarter of 2009 and include $25 billion to $30 billion of the investment bank’s commercial real estate portfolio, said Lehman Brothers Chairman and CEO Richard Fuld.
Lehman Brothers said it also reduced its residential mortgage exposure by 31 percent to $17.2 billion for the third quarter and expects to reduce its residential mortgage exposure overall by 47 percent to $13.2 billion after it completes a sale of nearly $4 billion of its United Kingdom residential mortgage portfolio to BlackRock Financial Management Inc.
“This is an extraordinary time for our industry, and one of the toughest periods in the firm’s history. The strategic initiatives we have announced today reflect our determination to fundamentally reposition Lehman Brothers by dramatically reducing balance sheet risk, reinforcing our focus on our client-facing businesses and returning the firm to profitability,” Fuld said.
Fuld has been under fire in recent weeks with some Lehman investors asking for his resignation.
Despite the firms's announcement of overall losses of $3.9 billion for the third quarter, Lehman's shares were up slightly during Wednesday's trading until falling more than 6.9 percent by the end of the day.
The investment bank said it plans to remove the majority of commercial real estate exposure from its balance sheet with REI Global and “realize a true sale of its commercial real estate assets while maximizing their value.” Transfer of common equity and provision of debt financing would fund REI Global, and Lehman Brothers said it could syndicate costs as markets normalize.
Lehman Brothers said it plans for REI Global to manage the CRE assets without the pressure of mark-to-market volatility, and that the new spin-off firm would not be forced to sell assets below "what it believed to be their intrinsic value."
However, Dow Jones reported some investors saying pricing the commercial real estate assets for the spinoff company could be a problem because some of those assets are commercial mortgage-backed securities.
The new firm would not make investments in new assets and any excess cash flow would return to shareholders, Lehman Brothers noted. REI Global's primary focus would include maximizing shareholder returns by selling assets or holding them to maturity, “whichever would provide the greatest return,” Fuld said.
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