Wall Street Journal
written by Anton Troianovski And Lingling Wei
Wednesday April 14, 2010
Morgan Stanley has told investors in its $8.8 billion real-estate fund that it may lose nearly two-thirds of its money from bum property investments, according to fund documents reviewed by The Wall Street Journal.
That would likely make it the biggest dollar loss—$5.4 billion—in the history of private-equity real-estate investing. Over the past 20 years, Morgan Stanley's real-estate unit was one of the biggest buyers of property around the world, doing some $174 billion in deals since 1991, mostly with money raised from pension funds, college endowments and foreign investors. The losses come from investments in properties such as the European Central Bank's Frankfurt headquarters, a big development project in Tokyo and InterContinental hotels across Europe, among others.
The loss also represents a huge challenge for the firm as it tries to resuscitate its Morgan Stanley Real Estate Funds business, known as Msref.
The firm has reinstated Owen Thomas, the executive who helped create Msref, as head of the real-estate business and brought in an outsider, real-estate-debt veteran John Klopp, to lead its property business in the Americas.
The soured investments made by the $8.8 billion fund, Msref VI International, continue to be a distraction for Morgan Stanley as it tries to extricate the fund from complex deals around the world. In many cases, the company can't walk away from foundering investments because the fund made billions of dollars in guarantees.
Morgan Stanley now is negotiating with lenders to reduce the fund's obligations on the money it borrowed, its interest payments, renovation costs and other expenses.
Adding to the difficulties, the economic downturn and big real-estate losses have rattled some of Msref's core investors, leading to a challenging fund-raising environment. Morgan Stanley has sought to raise a new, $10 billion fund, Msref VII Global.
While numerous other real-estate funds may lose more than half their values, the dollar value of the $5.4 billion loss at Msref VI International is likely to dwarf the losses at many competitors because of the fund's large size. According to data firm Preqin, only two other real-estate funds—managed by Blackstone Group LP and Lone Star Funds—had even raised more than $5.4 billion from investors.
As of Sept. 30, Blackstone's $10.9 billion fund had an unrealized, marked-to-market loss of about 60% and less than half of investors' money had been spent, according to a report by the Oregon public-employee pension fund. Lone Star's $7.5 billion fund was up about 15%, according to the report.
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