In a sign that financial markets remain stagnant, the struggling investment subsidiary of real estate brokerage giant CB Richard Ellis Inc. said Tuesday that it would sever relations with its Los Angeles parent company and strike out on its own.
The separation, effective at the end of the year, will allow CB Richard Ellis to disassociate itself from troubled subsidiary CBRE Realty Finance Inc. and give the Hartford, Conn.-based finance company the chance to chart its own destiny. Both companies called the separation “mutually beneficial.”
The announcement came Tuesday with CBRE Realty Finance’s dismal third quarter results: a loss of $55 million, or $1.81 a share, compared with a loss of almost $50 million, or $1.64 a share, a year ago.
CBRE Realty Finance said it would change its name to Realty Finance Corp. in January, when CB Richard Ellis will terminate its management contract. The former parent company will retain its 5% ownership stake, however.
“We believe that becoming an internally managed company is the right decision,” said Kenneth J. Witkin, president of CB Realty Finance. The company announced earlier this year that it had hired Goldman Sachs to help it explore its financial options.
By separating from CB Richard Ellis, “CBRE Realty Finance will have flexibility to pursue its strategic options and manage its business,” said Larry Midler, general counsel of CB Richard Ellis.
“And we will avoid the brand confusion that has existed in the marketplace for some time,” Midler said.
Officials at CB Richard Ellis, which has faced its own recent losses in the stock market, have expressed concern in the past about how investors might get confused by the similar names of the two public companies traded on the New York Stock Exchange.
CB Richard Ellis raised funds in 2005 for a real estate investment trust, or REIT, that would originate and buy commercial real estate mortgages, including commercial mortgage-backed securities, and make real estate loans. Within six months the new entity, CBRE Realty Finance, went public and an affiliate of CB Richard Ellis became the manager of the REIT.
Around the middle of last year the credit market began to seize up and the REIT’s earnings fell. CB Richard Ellis will collect about $5.5 million in management fees this year.
The separation might be good for both companies, said real estate analyst Craig Silvers, president of Bricks & Mortar Capital. The parent company won’t have to worry about the distraction of managing the similarly named subsidiary, and investors might cut a little slack to the independent spinoff in its efforts to right the ship.
“Wall Street prefers companies that are internally managed,” Silvers said.
CB Richard Ellis’ third-quarter results will be released Thursday. Its shares closed down 34 cents Tuesday at $7.17. Shares of CBRE Realty Finance closed down 6 cents at 70 cents.