10/14/2009

Morgan Stanley Walks Away From Crescent

Morgan Stanley is preparing to turn the keys to Crescent Real Estate Equities over to a Barclays syndicate and walk away from its disastrously timed $6.5 billion takeover of the REIT.

Morgan Stanley owes the syndicate $2.5 billion, including $2 billion to Barclays itself. In August, Barclays granted a three-month extension on its portion of the debt, giving Morgan Stanley a last-ditch opportunity to address the overleveraged investment.

But with the extension's Nov. 2 deadline looming, Morgan Stanley has decided to throw in the towel. It is working with Barclays on an orderly transfer of the portfolio in what will be one of the largest defaults so far in the market crash, according to people familiar with the matter. Morgan Stanley declined comment.

Barclays isn't expected to quickly liquidate Crescent's holdings, a mix of office buildings, resort developments and residential land. The bank evidently plans to manage all or most of the portfolio for now, in the hope that property values will rebound. But as a bank, Barclays is unlikely to hold the properties long term. A spokesperson did not return calls seeking comment.

Barclays is currently assessing the value of the properties. The most-challenging holdings are the residential parcels and resort developments - two asset classes that have been hammered in the current recession.

Morgan Stanley's property arm, Morgan Stanley Real Estate, acquired Crescent in August 2007, near the peak of the real estate market. The REIT, based in Fort Worth, Texas, owned full or partial stakes in 54 office buildings comprising 23 million square feet, as well as resort developments in Scottsdale, Ariz., Vail Valley, Colo., and Lake Tahoe, Calif.

Morgan Stanley planned to fold the portfolio into one of its commingled funds, but was unable to do so when the market abruptly went south, driving down the value of the properties. Morgan Stanley ended up having to consolidate the portfolio on its balance sheet, turning it into the company's biggest real estate headache.

The bank started selling assets piecemeal and managed to unload full or partial stakes in at least 16 of Crescent's properties and other assets, fetching $1.4 billion in total. That enabled Morgan Stanley to pay back a portion of Barclays' original $3.3 billion loan. But the effort flagged late last year as the property-sales market dried up.

Among the larger properties remaining in Crescent's portfolio are three in Houston: the mixed-use Greenway Plaza, which encompasses 4.3 million sf, the 2.3 million-sf Houston Center (24% stake) and the 1.3 million-sf Post Oak Central office complex (24% stake).

Morgan Stanley hasn't specified its losses on Crescent. As of midyear, the bank valued Crescent "and other consolidated interests" at $3.7 billion, or 80% of the company's $4.6 billion of total equity investments in real estate. It's believed that Crescent accounted for the bulk of the $3.7 billion.

On a July 22 conference call about Morgan Stanley's second-quarter earnings, one analyst questioned whether the bank had adequately written down its Crescent investment. Colm Kelleher, Morgan Stanley's chief financial officer, replied that the bank doesn't discuss its valuations on individual investments.

In the first half of the year, Morgan Stanley reported $1.7 billion of losses on its equity real estate investments. Some $600 million of that was attributed to "Crescent and other consolidated interests."

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