Andy Merin on Last Week's Poll Question

WILL LEHMAN’S $40 BN PORTFOLIO FIND A BUYER?

Close on the heels of Merrill Lynch’s July sale of $31 billion in CDOs, Lehman Brothers has put a $40 billion real estate and mortgage portfolio on the market where, according to a majority of this week’s poll respondents, it can expect to remain for some time. A huge majority of 68% were of the opinion that the portfolio will languish on the market, while only 32% say it will quickly find a buyer. Andy Merin, a broker in Cushman & Wakefield’s Capital Markets Group, is optimistic about Lehman’s chances of finding a buyer. Here is what he has to say:

“I think it’ll find a buyer relatively quickly. Most of the major players we’ve been talking to this year have turned their back on the equity markets because of the availability of buying the debt position. This puts them in a much lower position in terms of the capital stack and could net them a nice return because Lehman and others are selling them at discounts. All the major players are lining up and buying debt. As one of them explained to me, this is a phenomenon that happens once ever 10 or 12 years, when the major investment houses and the megabanks get caught in a cycle where they have to write off loans massively as they did in the early 90′s. It’s a great opportunity to buy things at cents on the dollar.

“With respect to Lehman Brothers, they’ve been an extremely active player in all sectors of real estate. A lot of their exposure is in mezzanine or quasi-equity positions. Let’s say something costs $100 million and conventional financing was $75 million. Lehman was cutting deals where they’d come in and put $10 million or $15 million in a mezzanine position and maybe even another five or 10 in a quasi-equity position, so the developer only had to come up with 5-10% of the cash and a lot of that was short-term paper, typically with a three-year instrument with two one-year renewals. A lot of that stuff was done two to three years ago, and even if they were done last year, in two years they’re coming back up again. So, the good news is, I think there’ll be a healthy appetite for the Lehman portfolio and I think Lehman is prepared to discount to get it off its books. The only negative I’d be concerned about is that their basis is pretty high.

“The regular buyers for this type of portfolio have been the large pooled funds like Angelo Gordon, Prudential and Carlyle. You may see some other players, developers or owners, getting into the game by forming their own little funds, sometimes co-investing with some of these larger institutions, but for the most part, it’s the institutional raised money that will look carefully at this deal.

“Not many companies will be selling off assets at this level. Lehman was one of the most active players. From what I’m hearing, everyone is on board to get their bad news off the books by the end of the year, so I think we may see some more sales, but with Merrill Lynch and Lehman we’re seeing two of the biggest. Wachovia may be doing some, and like I said, many of the larger banks will be getting rid of these assets as well. It’s both investment houses and larger banks that are looking to get this off their books.

“Like many investment sales brokers, I’m looking forward to a stabilized market when we can start trading again, and this issue of the old debt is hurting all of us, so I say let’s get all the bad news done this year.”