Lehman Brothers

While the Real Estate Partners fund has made the headline grabbing acquisitions, the bank is also well established in the property lending, securitisation and advisory areas Opportunity fund Lehman Brothers Real Estate Partners is probably the most high-profile property arm of the US investment bank in Europe. The $1.63bn fund made its mark on the Continent by swallowing large telecoms deals – such as portfolio acquisitions from Swisscom and Telecom Italia – as the corporate sale-and-leaseback trend took off in 2000. But this view of the bank’s work is somewhat misleading, as principal investment via this fund was one of the last options to be added to the investment bank’s property capabilities. The bank already had a real estate investment banking group and a global real estate finance group. Between the three divisions, the bank offers a broad spectrum of advice, plus the provision of debt and equity. “We try to broaden what we do so we can be more effective in the market,” says Wilson Lee, managing director, head of European real estate finance. It was Lee’s division which was the bank’s first main investor in Europe. It concentrated on buying non-performing loans, which it often securitised, as well as providing mezzanine funding. On the equity side, it was involved with repositioning bids for assets and backing property-related companies. It also arranged securitisations for third parties, capitalising on its strong commercial mortgage-backed securities experience in the US. The global real estate finance group has now expanded to provide senior debt in the form of loans of $20m and above, which can be securitised as part of its large loan programme. Recent debt financing provided by the group includes around $210m for Goldman Sachs’ Whitehall fund and DB Real Estate’s acquisition of a Deutsche Telekom portfolio, and a $185m loan for the purchase of an Italian portfolio by the Carlyle Group. “We anticipate carrying out three securitisations of our own this year, including a pan-European euro-denominated issue,” says Lee. The pan-European securitisation will be the group’s first deal of this kind, and it will be backed by loans in Italy, Germany and France. Lee says the banking environment has changed to make conduit-style lending more viable. “German banks have become more conservative and ratings agencies are now more effective [in analysing the market], so we feel we can compete in this area.” Lee’s department also continues to work on third-party securitisations. In February 2002, it was lead manager and joint bookrunner on the €2.3bn SCIP securitisation, which was backed by the proceeds of sales of Italian government property. It has also handled two securitisations for Canary Wharf and will manage the $728m securitisation of the Swisscom portfolio acquired by the fund and PSP Swiss Property in 2001. While Lee’s team continues its equity investment work, all potential deals over $10m are offered to the bank’s Real Estate Partners fund first. An example of a recent equity deal is the £160m acquisition of the Allders department store group in the UK by UK property group Minerva. Lehman was primarily a debt provider but also provided some equity. The bank also participated in the high-profile acquisition, renovation and reletting of the 51,100m2 Shell Mex House on London’s Strand, with the Witkoff Group. Lehman provided a full debt and equity underwriting commitment. The Real Estate Partners fund has mainly focused on the larger deals in Europe. In the same vein as its peers, it has participated in high profile public-to-private transactions and corporate sale and leasebacks. On the public-to-private side, the fund was part of a consortium that took Anglo-Dutch company Haslemere private in a €2.3bn deal, and in the €1.8bn acquisition of Dutch property company Uni Invest. In 2001, before the fund was closed, Lehman’s took UKproperty company Burford private in a £920m deal. Part of the transaction has now been transferred to the fund. Mark Newman, managing director of Lehman Real Estate Partners Fund, says the acquisitions allow the fund to enjoy the best of both worlds. “There are two aspects; the opportunity to realise break-up value in buying the property, and the platform represented by the existing management team.” Haslemere has now streamlined its business, selling off core assets, and will seek new opportunities, an approach which could be adopted by other companies that the fund invests in. “There is a benefit in using existing management to do new business; we will look for exit routes for the assets over time,” says Newman. Newman acknowledges that market conditions will have to be quite particular for public-to-private deals to happen, but is confident that the trend will continue. “Public companies are trading at discounts everywhere from Holland to Spain. There are still select opportunities to acquire companies which are unappreciated by the public markets.” The fund will also be selective in the role it plays in corporate property disposals, which it remains assured will pick up, despite the sector seeing uncompleted deals in Spain and Germany. “We have to be thoughtful about which deals we commit resources to,” says Newman. “However, with the current economic malaise, we believe more companies will find themselves under pressure to re-align their balance sheets by completing corporate sale-and-leaseback transactions.” The fund will also be seeking portfolio deals, single-asset purchases and deals involving repositioning assets. It is now also considering development. “Development is a subset of what we do,” adds Newman. “Investors are now, on a relative basis, willing to pay more to buy income. Perhaps there are opportunities in looking for improvements in capital values over time for assets with less certainty of immediate income.” The fund has teamed up with US developer Tishman Speyer in France to develop Tour CBX, a 44,000m2 office building in La D,fense, which will be completed in 2005, and also has a joint venture to develop condominiums in Milan and Rome. While the fund is still keen to buy individual properties with a good income stream, it sees its strength as lying more at the big-deal end of the market. “Where we are competitive buying [assets offering a secure] income is with the larger transactions that require large amounts of capital quickly, and significant financial structuring,” says Newman. The fund is happy to invest in office, residential, retail, industrial and hotels. Country wise, Europe’s major developed economies attract its attention, as it can also benefit from Lehman Brothers’ wider presence in these countries. The fund has invested around $800m of its $1.63bn equity globally. Its investment phase will last around two more years, during which time it will continue to concentrate on Europe and the US. “We have no specific allocation to either Europe or the US but it will probably be more or less 50/50 – we can see excellent opportunities in both,” says Newman. The bank’s other property division, its advisory business, run by Paul Shang, head of European real estate investment banking, expects to be kept busy with clients looking at options to restructure the property held on their balance sheets. Shang says there is still a good flow of deals, although he acknowledges that “gestation periods are now longer” for such transactions. Advisory work is also generated through the work of the bank’s other departments involving corporate clients. “Property issues are often embedded in broader financial issues,” says Shang. “Our business is not always about dealing with distressed assets – it is also about good housekeeping.” Main property transactions, July-Dec 2002 The bank managed and advised on several large-scale transactions in the Italian property market towards the end of last year Date Country Client Transaction Amount m Role Dec 02 Italy Initium Initium’s acquisition of 38 properties from Assistalia €373 Sole financial adviser to Initium Oct 02 Italy Im.Ser 60 Strategic property portfolio securitisation €1,200 Joint lead manager/bookrunner Oct 02 Italy Telegono Telegono’s acquisition of 28 properties from Mirtu € 400 Sole Financial adviser to Telegono Oct 02 Italy Beni Stabili/Telecom Italia Beni Stabili and Telecom Italia have agreed to demerge Im-Ser into Im.Ser 60 and EMSA € 2,050 Exclusive financial adviser to Beni Stabili/Telecom Italia Oct 02 UK Canary Wharf Group Securitisation £510 Class A6 sole bookrunner/manager Oct 02 Netherlands Lehman Brothers Real Estate Partners/Merwede Group Acquisition by Lehman Brothers Real Estate Partners/Merwede Group of entire share capital of UniInvest, in a public cash offer € 1,800 Financial adviser to Lehman Brothers July 02 Italy Beni Stabili/Telecom Italia Sale of Telemaco by Beni Stabili and Telecom Italia to Mirtus €1,000 Exclusive financial adviser to Beni Stabili/Telecom Italia Source:Lehman Brothers Main property transactions, Dec 2000-May 2002 Lehman made its mark in Europe with portfolio acquisitions from telecoms companies Imser/Telecom Italia and Swisscom Date Country Client Transaction Amount m Role May 02 Italy ICCRI-Banca Federale Europea Spa Merger of ICCRI and Investimenti Immobiliari Lombardi €1,600 Exclusive financial adviser to ICCRI May 02 Netherlands Lehman Brothers Real Estate Acquisition of entire share capital of Haslemere by Lehman Brothers Real Estate/Brack Capital Real Estate €2,355 Financial adviser to Lehman Bothers/ Partners, Brack Capital Real Estate Feb 02 Italy Societa Cartolrizzazione Immobili Pubblici Securitisation €2,300 Joint lead manager/bookrunner Dec 01 UK Windermere CMBS Securitisation £467 Sole lead manager/bookrunner July 01 UK Le Meridien Principal Hotels Group’s purchase of Le Meridien Hotel chain £2,330 Finance provider Apr 01 UK Thayer Properties Thayer’s purchase of Burford’s share capital, with management £920 Sole financial adviser to Thayer Mar 01 Switzerland PSP Swiss Property/Lehman Brothers Acquisition of 160 buildings (900,000m2) by PSP Swiss Property and Lehman Brothers from Swisscom SFr1,300 Sole financial adviser to PSP Swiss Property and Lehman Brothers Dec 00 Italy Beni Stabili and Lehman Brothers Acquisition of a controlling interest in Im.Ser from Telecom Itali by Beni Stabili and Lehman Brothers € 2,900 Sole financial adviser/equity provider Italia to Beni Stabili and Lehman Brothers Source: Lehman Brothers TEXT: Lehman Brothers One Broadgate London EC2M 7HA Tel 44 20 7601 0011 Fax 44 20 7260 2641 www.lehman.com