Dubai Group Transfers Control of U.S. Real Estate - WSJ.com

Dubai Investment Group is closing its New York office and transferring control of its $1.1 billion U.S. real-estate portfolio to a private-equity firm co-founded by Mark Walsh, the former head of Lehman Brothers Holdings Inc.'s real-estate operation.

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Jumeirah Essex House is part of the Dubai Investment Group portfolio.

The move marks the most notable step in the comeback of Mr. Walsh, who is best known for masterminding Lehman's real-estate strategy during the boom years. His deals, like the privatization of Archstone-Smith Trust in 2007, played a big role in Lehman's demise. His new firm has been steadily increasing its assets under management.

At the same time, the deal is the latest sign of Dubai's retreat from its global property-buying spree during the previous decade that accelerated near the market's peak.

Mr. Walsh's firm, Silverpeak Real Estate Partners, will try to improve the value of the portfolio's 30 properties with an eye toward selling assets over a period of time, according to people familiar with the matter. The portfolio includes Manhattan's famous Essex House hotel—rebranded as the Jumeirah Essex House several years ago—on the south end of Central Park and two properties in Germany.

Dubai Investment Group is the real-estate and asset-management arm of Dubai Group, which itself is part of Dubai Holding, the investment-holding company owned by Sheikh Mohammed bin Rashid Al Maktoum, Dubai's ruler. Dubai Holding is currently restructuring an estimated $6.2 billion in debt taken on to fund acquisitions that immediately preceded the financial crisis and a regional real-estate downturn.

In a written statement, Fadel Al Ali, acting chief executive of Dubai Group, described the hiring of Silverpeak as an "outsource" strategy. "Given the current market environment this…strategy offers us extensive on-the-ground resources and market leading real-estate management experience," the statement said.

Dubai's state-owned entities have been forced to undergo major restructuring as the global financial downturn has made it difficult for their companies to raise new debt and repay existing loans.

The various companies still own marquee U.S. real estate, including large stakes in the Mandarin Oriental hotel in Manhattan and the massive mixed-used development CityCenter in Las Vegas.

Craig Plumb, head of research at Jones Lang LaSalle in Dubai, said depressed real-estate market conditions at home makes it more attractive for Dubai government-run companies to sell assets overseas. That would allow Dubai to inject more cash into its domestic market.

Some of Dubai Group's U.S. properties have yielded profits already. In 2010, Dubai Investment Group and its partner Chartres Lodging Group sold the Sir Francis Drake hotel in San Francisco for $90 million, according to people familiar with the matter. In August, Dubai and its partner West Core sold the San Francisco office building One Montgomery Street.

"It's been a profitable portfolio for Dubai," says Mark Edelstein, an attorney who represented Dubai Investment Group on the Silverpeak transaction.

The deal is the largest transaction yet for Silverpeak, which has been managing assets that were controlled by Lehman Brothers.

Silverpeak is expected to help Dubai Investment Group refinance projects and renegotiate agreements with operating partners to increase the value of the properties. As part of the agreement, three Dubai Investment Group employees will now work for Silverpeak.

Brett Bossung, another former Lehman executive and Silverpeak co-founder, said "the intention of Dubai is to sell assets over the medium term." Real-estate investors say that typically means two to four years.

Silverpeak was founded last year. It began running private-equity funds with about $18 billion in assets after buying the unit that managed them.

Mr. Walsh helped take apartment-building owner Archstone-Smith Trust private in 2007 in a heavily leveraged buyout that left Lehman's balance sheet with $5.4 billion in hard-to-sell exposure, according to a report last year by the bankruptcy examiner hired to investigate the company's demise.

Mr. Walsh declined to comment. His defenders have said that the overwhelming majority of the $400 billion of the deals his team at Lehman did over one decade were profitable.

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