Lehman Lives to Pay 18 Cents on Dollar With New Sales: Mortgages

Hawaiian-condo investors, homebuyers in Montana and travelers seeking a room at Miami Beach’s upscale Setai Hotel all can turn to one company to meet their needs: Lehman Brothers Holdings Inc.

Four years after filing the largest bankruptcy in U.S. history amid soured real estate bets, Lehman is still in the property business, wagering it can recover about $12.9 billion from mortgages and assets around the globe. Its $3 billion purchase this year of the remaining 53 percent of apartment owner Archstone Inc. made it the biggest buyer of U.S. commercial property by value in the last 12 months, according to research firm Real Capital Analytics Inc.

Lehman has invested $5 billion in real estate since its demise, acquiring loans and buying out joint venture partners. Instead of selling to vulture investors, it’s waiting for opportune times to unload properties as the commercial and residential markets recover. The company last week moved to take Archstone public to capitalize on soaring demand for rentals.

“The entire strategy was ‘don’t put yourself in a position of having to sell,’” said Jeffrey Fitts, Lehman’s New York- based head of real estate and a managing director at Alvarez & Marsal, the advisory firm managing the liquidation. “If you’re selling with a gun to your head and people know it, you’re dead and you will leave hundreds of millions of dollars on the table.”

Photographer: Rupert Hartley/Bloomberg

Property and artwork from the Lehman Brothers collection during the auction at Christie's International in London. Close

Property and artwork from the Lehman Brothers collection during the auction at... Read More

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Photographer: Rupert Hartley/Bloomberg

Property and artwork from the Lehman Brothers collection during the auction at Christie's International in London.

Lehman aims to raise $53 billion through 2016, to pay creditors an average of 18 cents on the dollar on about $300 billion of claims. The company made its first payment of $22.5 billion in April, about 53 percent more than it previously estimated was possible, after exiting court protection.

Higher Recoveries

It intends to retain some assets at least through 2015, according to a statement last month, in which the firm boosted its forecast for real estate recoveries by $1.6 billion compared with its outlook a year ago.

The bank filed for bankruptcy in September 2008, 158 years after its founding as a cotton brokerage in Alabama, and five months after David Einhorn, president of New York-based Greenlight Capital Inc., said he was betting against Lehman’s stock because he believed it overvalued some real estate assets.

Lehman failed because of too much debt and risky real estate investments, according to a bankruptcy examiner’s report. Chief Executive Officer Richard Fuld reported record earnings in 2005, 2006 and 2007 after riding the property boom. He bought originators such as Irvine, California-based BNC Mortgage, to obtain subprime home loans to package into bonds, turning the company into the largest U.S. underwriter of mortgage-backed securities.

Archstone Faltered

Even as housing prices began to fall in 2006, the bank continued making loans, including for commercial properties. In October 2007, it financed and invested in the $22 billion takeover of Archstone with Tishman Speyer Properties LP, eventually converting the loans to equity after Archstone faltered during the credit crisis.

Lehman listed total real estate assets of $23 billion the day before its Sept. 15, 2008, bankruptcy. They had a market value of about $14 billion nine months later, according to court papers.

As of March 31, the firm reported commercial real estate holdings of $9.6 billion, including more than $2 billion of commercial mortgages and mezzanine loans. The tally doesn’t include the final 26.5 percent stake in Archstone that Lehman acquired in the second quarter from Bank of America Corp. and Barclays Plc.

Justify Reinvestment

“If I were a creditor and I were not real estate savvy, I would almost look at Lehman as my real estate department,” said Lawrence Longua, director of the REIT Center at New York University’s Schack Institute of Real Estate. “They’re taking an asset and maximizing it. That should be beneficial to me as a creditor.”

Lehman’s efforts rely on values continuing to climb, to justify re-investing money that could have otherwise gone to investors, he said.

“You’re in an industry that’s cyclical so it can turn around and bite you,” Longua said. “There’s a risk to it, no doubt about it.”

Commercial real estate prices in the U.S. were up 28 percent in May from their January 2010 low, according to the Moody’s/Real Capital Analytics National All-Property Index. Housing is also showing signs of recovery after home prices, as measured by the S&P/Case-Shiller index, plunged 33 percent from a peak six years ago. Prices for single-family homes climbed in three-quarters of U.S. cities in the second quarter, and the national median jumped the most since 2006, the National Association of Realtors said in an August 9 report.

Rental Bet

Lehman’s largest bet since filing for bankruptcy is on rentals. The Archstone acquisition in May valued the business at $16.5 billion, according to Real Capital, making the bank a bigger buyer than Blackstone Group LP (BX), the world’s largest private-equity firm, and Simon Property Group Inc. (SPG), the No. 1 U.S. mall owner.

It also turned Lehman into the eighth-largest apartment manager in the country, overseeing 78,000 units, according to the National Multi Housing Council, an apartment industry group in Washington.

It announced plans to take Archstone public as rising national rents fuel investor demand to own apartment buildings.

Sales of apartment properties totaled $16.2 billion in the three months ended June 30, the second highest quarterly total since 2007, according to Real Capital. Apartment developers are also hastening their acquisition of land sites, buying $2 billion worth in the first half of the year -- almost double the total for all of 2011.

Limited Competition

The Bloomberg REIT Apartment Index of 16 publicly traded landlords fell 0.6 percent in New York today as of 4 p.m., paring this year’s advance to 5.3 percent. It has more than tripled from a low in March 2009.

“The timing makes sense,” Rod Petrik, an analyst with Stifel Nicolaus & Co. in Baltimore, said in a telephone interview. “You have at least a two-year window where fundamentals are going to be strong and you are not going to have the competition of new supply. So the matter of getting it out and public gets Lehman a step closer to liquefying their position.”

Petrik estimates Archstone may raise more than $1 billion in the initial public offering, and that the stock would be sold in several stages “over the next few years.” He expects Lehman to sell assets as a way of paying down Archstone’s debt.

Hawaii Condos

Lehman’s also in the hospitality and homebuilding business. In January it acquired Mooonlight Basin, a ski-and golf resort community in Montana, and plans to begin marketing land to homebuyers while operating a resort there, Fitts said. It’s also planning to sell 73 unsold condo units at the Ritz-Carlton Kapalua in Hawaii that it took over through foreclosure in December after the borrower defaulted on a $260 million mortgage.

Lehman could realize more money for creditors by marketing the Hawaii condos and Montana development parcels itself, rather than sell the assets to an investor who would ultimately do the same, Fitts said.

“The mantra that we live with is: If it’s liquid and stable then it’s time to think about selling it,” he said. “So answering those two questions on every property is really what we’re doing all day long.”

In Miami, where hotel revenue per available room climbed 11 percent in the year through June, Lehman isn’t planning to sell the Setai, its luxury hotel on South Beach, Fitts said. Lehman replaced the hotel management in March, bringing in Trevi Luxury Hospitality Group Inc.

Manhattan Hotel

Lehman also is keeping the On the Avenue Hotel on Manhattan’s Upper West Side, which it gained control of through a deed in lieu of foreclosure in June 2011, said Fitts. While revenues per available hotel room in Manhattan climbed 5.7 percent in the year through June, Lehman is mulling whether to renovate the 282-room property.

“On the Avenue would obviously generate a lot of interest if we offer it for sale, but there are also some improvements that can be made that could translate into meaningfully better recoveries for Lehman creditors,” Fitts said.

Lehman is holding onto a 21-story Manhattan office building at 237 Park Ave., after buying a $255 million junior note from an investor in 2010 as a way of protecting its claim to the property. The company financed the acquisition in 2007 with about $1.23 billion in loans, according to a July 2011 filing.

Smaller Assets

Of the U.S. real estate assets still held by the Lehman estate -- including joint ventures and loans -- 43 percent are located in major metropolitan areas, where values are recovering amid strong investor demand, according to Ben Carlos Thypin, director of market analysis at Real Capital Analytics. The majority are in smaller markets, such as Greensboro, North Carolina and Norcross, Georgia, where institutional investors aren’t interested in buying, keeping values low, Thypin said.

“That means that no matter how quickly and profitably they can liquidate the major market assets, the estate is still going to be sorting through a lot of smaller assets in small markets for years to come,” Thypin said.

Harder-to-sell assets, Thypin said, include 72 acres of land for development in Tolleson, Arizona; a Super 8 Motel near the Las Vegas airport and a 154-acre (62-hectare) development site in Delray Beach, Florida, in a metropolitan area where home foreclosures climbed 24 percent in the first half from a year earlier, according to RealtyTrac Inc.

Lehman Foreclosed

Lehman sold the Delray site in November for $23 million, a 54 percent discount to the approximately $50 million it was owed on the property, including mortgage, interest and default penalties, according to court records filed with the Palm Beach County Clerk.

In Norcross, Lehman foreclosed on a 180-unit garden apartment complex in June, according to Real Capital. It took possession of a 100,000-square-foot (9,300-square-meter) warehouse in Greensboro last year.

“In major markets, it’s a much easier sell to invest capital, because they can recover that capital sooner,” Thypin said. “In these smaller markets that recovery is much less certain and on a much longer time horizon, so creditors would prefer them to either take a loss now or hold onto it and wait.”

Lehman has $8.2 billion of cash available for creditor payments after raising $4.7 billion in the second quarter from real estate sales, derivatives and settlement of a lawsuit, according to a July regulatory filing.

The firm plans semi-annual distributions, including a second payment to creditors in September and is “focused” on maximizing cash for that purpose, according to the filing.

“I can’t tell you how many lunches and dinners and meetings I’ve had with opportunistic guys, all of them very smart and very good,” Fitts said of vulture real estate investors seeking to buy some of Lehman’s assets.

“And I say to them: ‘If I sell to you I haven’t really done my job.’ ”

To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rob Urban at robprag@bloomberg.net.

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