GLOBAL - Investment banking giant Lehman Bros is separating its commercial real estate business as a new listed entity and selling a majority stake in its investment management division after yet more writedowns generated a third-quarter net loss of $3.9bn (€2.76bn).
In a preliminary results briefing to shareholders on Wednesday (10 Sept), chairman and chief executive Dick Fuld confirmed the recent media speculation and announced it was "aggressively reducing our exposure to commercial real estate" by spinning-off $25-30bn of its commercial real estate division as a separate listed company called REI Global.
Moreover, Fuld claimed the firm would still maintain its independent status even though its intention is in the "final stages of raising capital" by effectively selling Neuberger Berman when it sells a 55% stake in its investment management division
The business contains the asset management, wealth and private equity businesses, and will be substantially reduced once sold to an as yet unnamed buyer - although Lehman will still earn income from the remaining investment - but Lehman will continue to "have a strategic connection" and hold onto the institutional middle market business and commercial partnership agreements.
"We are on the right track to putting these last two quarters behind us," said Fuld.
Actual figures of the third quarter preliminary results showed a gross mark-to-market downward adjustment on its assets of $7.8bn in the third quarter, of which $5.3bn was "residential mortgage-related positions" while $1.7bn was on commercial real estate positions.
The investment management arm also saw its asset management revenue drop from $468m in the third quarter of 2007 to $360m in 2008, while assets under management have fallen slightly from $273bn to $277bn at the end of Q2.
Fuld said the decision to "quickly exit" the real estate sector, as executives previously stated they would, has significantly added to the losses the firm faced over the three month to 31 August, 2008.
Its residential mortgage exposure was reduced by 47% to $13.2bn between Q2 and Q3, and part of the arrangement will be to sell £3bn worth of UK mortgages, generated via Kensington Mortgages, to BlackRock.
Much of the real estate division is understood to have been made up of asset-backed securities (ABS) and collateral debt obligations (CDOs) until now, though Lehman Bros does also have a sizeable direct holding in companies and properties and has, most recently, been promoting investment in its Lehman Bros Real Estate Partners III commingled fund, to encourage investment of $4-5bn.
However, several US pension funds have invested with Lehman Brothers over recent years, as most recently have been committing assets to the Lehman Bros Real Estate Partners III commingled fund and the Lehman Bros Real Estate Partners Mezzanine II. (See earlier IPE Real Estate stories: New Jersey commits to high return fund, NYSTRS buys $250m in fresh real estate and Pennsylvania Public School to invest $641.5m into real estate)
Fuld also said the firm had "reshaped its human capital" over recent months, and reduced its staff numbers by 1300 people.