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Crescent Down, San Francisco EOP Assets To Go

November 20, 2009

In the news today is Morgan Stanley’s handing back of the keys on the Crescent Real Estate nightmare they acquired two years ago. The nightmare wasn’t that they were bad assets, the nightmare was the price paid for the portfolio and the subsequent fall in the market.

We were out in front of the Crescent deal. But the fun isn’t over for Morgan Stanley. Let’s not forget about the San Francisco portfolio which they acquired from Equity Office/Blackstone at the peak in 2007. That deal consisted of 9 San Francisco CBD properties in a transaction valued at $2.6B ($600+ psf). It was the largest deal in the city by far, and in one fell swoop a huge chunk of the financial district changed hands. The assets were dumped into various funds, with a significant portion going into Glenborough, the REIT Morgan took private in 2006. That deal came in at $1.9B, which included about $800M in debt. Contemporaneous with the closing, MS offloaded about $600M of Glenborough property to Normandy.

AREA (Apollo) Partners is rumored to own the mezzanine debt on the portfolio (with GE being more senior). We anticipate that within the next two months, that will be the next write off Morgan Stanley makes as it hands off the baton to AREA. Properties in that portfolio include 60 Spear Street for instance, which is sitting at 75%+ vacancy, but also, Foundry Square I which is 100% leased (excluding retail). We would be surprised if MS can make sense out of this deal at such a high basis with rents falling and vacancy and the cost of attracting tenants increasing. It likely makes sense to just hand the keys off again.

Once that happens, the focus then turns onto AREA and what to do with the assets. If their mezzanine piece is small, they might also just be a temporary operator of the assets if the market doesn’t recover. If it’s large, then they might be able to hang onto something, which I suppose is better than nothing. My guess is it’s all cross-collateralized so stripping out the good stuff is a no-no. Regardless, we won’t try to¬†dissect¬†these large deals too much as there are just too many moving parts and too many securitizations involved, but what we’re pretty skeptical on Morgan’s ability to hang on much longer. The plus is that this will be one step closer to cleaning things up for Morgan, and the sooner that happens the better it will be for all.

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