Lehman Watch: Firm To Spin Off Commercial Real Estate Holdings

As investment bank giant (and major New York employer) Lehman Brothers teeters on the brink of joining Bear Stearns in that great trading floor in the sky, the announcement comes that the bank will spin off its commercial real estate holdings into a public company.

From a new Lehman Brothers’ release:

The Firm intends to spin off to its shareholders $25 billion to $30 billion of its commercial real estate portfolio into a separate publicly-traded company, Real Estate Investments Global (“REI Global”), in the first quarter of 2009. The spin-off of REI Global will strengthen Lehman Brothers’ balance sheet while preserving the value of the commercial real estate (“CRE”) portfolio for shareholders.

The concentration of positions in commercial real estate-related assets has become a significant concern for investors and creditors. Therefore, Lehman Brothers believes that it is in the best interests of all its constituents to separate these assets from the rest of the Firm. Transferring the vast majority of the commercial real estate portfolio to REI Global will achieve the following objectives:

  • REI Global will be appropriately capitalized to hold the CRE assets through the current economic cycle;
  • REI Global will be able to account for its assets on a hold-to-maturity basis;
  • REI Global is expected to hold its assets to maximize their value for shareholders;
  • REI Global will be able to manage the assets without the pressure of mark-to-market volatility; and
  • REI Global will not be forced to sell assets below what REI Global believes to be their intrinsic value.

At the time of formation, REI Global will be appropriately capitalized through the transfer of common equity and provision of debt financing, which the Firm may syndicate as markets normalize. REI Global will own a high quality portfolio of assets, which is diversified by geography, property and lien type. REI Global’s primary focus will be to maximize shareholder returns by selling assets or holding them to maturity, whichever provides the greatest return. REI Global will not make investments in new assets and any excess cash flow will be returned to shareholders.

Through the creation of REI Global, Lehman Brothers achieves an enterprise solution that removes the vast majority of commercial real estate exposure from the Firm’s balance sheet and realizes a true sale of its commercial real estate assets while maximizing their value. Further, it enables shareholders to benefit from the anticipated financial upside of the portfolio of assets.