A big OUCH - Lehman looks to dump dirt

Reports are that LBHI is looking to dump its $40 billion portfolio of real estate and securities. Given that some friends of mine are "swamped" with work, I guess I am not shocked but I am nonetheless surprised.

The fact that Lehman is willing to absorb the first $5 billion in losses from its portfolio (yes, 1/8 of the price) is telling. Call me naive or ignorant, but to me that smacks of desperation if it is true.

Of course, the PE types stand to do well here IF they get the assets at a fire sale price or can do flips like EOP. But lending is tight right now which makes those kinds of flips difficult. I think you might see some single asset sales of no brainer properties to funds that are flush in cash but not larger Macklowe-style deals. (We all know where THAT went.)

I've never been a huge fan of mega portfolio deals from the legal side. There's a lot of risk that something could go wrong. And I'm one of those darned risk-adverse lawyers. But there's definitely upside to be seen on the deal on the business side, and to paraphrase an old mentor, "Sometimes, if the price is right, you've just gotta close ugly." When the cash rolls in, suddenly the ugly duckling looks like a swan.

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They weren't kidding about buying

A couple of months ago we noted that Shorenstein Properties was now a buyer. And they meant it. Yesterday the WSJ reported that Shorenstein is buying two of the properties DB took back from Harry Macklowe, and at a 20-30% discount from Macklowe's price. The story also reports that Paramount is buying a third building, presumably at the same discount.

Does this mean other buildings are going to tank similarly? Probably not. Most analysts were saying that Macklowe overpaid for his chunk of the old Zell/EOP empire, and the credit market agreed by not bailing Macklowe out when his loans came a-callin'. We need more empirical evidence -- meaning more deals -- before the real correction can be ascertained. The smart money has been on 15%, and I'm not inclined to disagree.

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Sam sure doesn't pull punches

Sam Zell calls the estimated difference between the $6 billion Harry Macklowe paid for the EOP Manhattan properties and the $7 billion he paid for them "Macklowe stupidity.'' Ow. You must have a thick skin to play at that level.

While people do not want to overpay:

The pace of commercial real estate deals may pick up as U.S. pension funds such as the California Public Employees' Retirement System move money into real estate, Zell said. "I don't think they can afford to sit on the sidelines and get 2 percent from Treasuries when they need 7 percent'' of returns to pay retirement benefits, he said of the funds. That could lead to an "opening'' in credit markets.

Makes sense to me, but we have to see what the rest of the dirt world says and does.

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