Wednesday, August 19, 2009

Tishman Speyer's Commercial Real Estate Debacles

The WSJ Property Report has an interesting piece on Tishman Speyer this morning. For those who haven't heard the name, Tishman is a venerable real estate property developer that holds an approximately $35 billion portfolio of properties from all over the world. Tishman, the cream of the cream of the commercial real estate crop, finds itself in the unfortunate position of being in default on debt tied to one of the largest office portfolios in the Washington area. Back during the Great Bubble Pandemic of 2006, Tishman Speyer paid $2.8 billion for what was known as the CarrAmerica portfolio, a collection of 28 buildings leased to law firms, lobbyists and other hoity toity tenants. Naturally, Tishman borrowed from the piles of easy money lying around at the time, levered up, and paid way too much for the properties based on unrealistic cash flow assumptions. Cash flows have since declined so much that they barely cover the debt service. The company is in violation of its covenants and must find a way to refinance the debt due in 2011. By the way, who were the lenders? Lehman was involved, of course, and also happened to put equity into the deal too. Because every good investor knows that the best hedge against a debt investment is a side-by-side equity investment. The seller of the CarrAmerica portfolio to Tishman was Blackstone, who proved to be the winner in the 2006 commercial real estate hot potato tournament by flipping the portfolio for an enormous profit months after buying it.

But fear not, Tishman Speyer itself isn't threatened by the problems with the CarrAmerica portfolio, according to the WSJ. No, Tishman is probably more threatened by other bigger, dumber deals like the monster $20 billion LBO of Archstone- Smith, which closed after the credit crisis was in full swing, and the brilliant $5.4 billion acquisition of Peter Cooper Village and Stuyvesant Town that paid a fabulous 2.5% cap rate. The Archstone deal was also done with debt and equity investments from Lehman, (seriously, did that firm even have a risk management department?) which recently received bankruptcy court approval to put $230 million more into Archstone, hoping the apartments will regain their value on the other end of the recession (you can take a few minutes to laugh, I did.) Tishman pointed out that it has been very profitable over the years and it has $2 billion in liquidity for new deals. Seems like it should focus on cleaning up the old deals first before they throw any money into new deals. After all, Bear Stearns had $17 billion in cash and Lehman was most definitely NOT HAVING ANY LIQUIDITY PROBLEMS days before they went bankrupt.

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