D.E. Shaw Struggles With New Mexico Bet - WSJ.com http://online.wsj.com/article/SB10001424052748704164004575548521...

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COMMERCIAL REAL ESTATE OCTOBER 12, 2010

By LINGLING WEI

For more than 300 years, a huge swath of land in what is now New Mexico endured the rise and fall of empires,
the arrival of settlers and development of the surrounding area into the city of Albuquerque.

But the Atrisco Land Grant, handed down by Spain's king and
queen in 1703, has never seen anything like the real-estate
disaster now gripping hedge-fund firm D.E. Shaw & Co.

Known for its obsession with computer-driven investing, the

New York company surprised many real-estate deal makers in
late 2006 by teaming up with developer SunCal Cos. to buy the
55,000-acre property—twice the size of Boston—for $250
million.
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The two companies planned to create a new town with
LOSING LANDSCAPE? D.E. Shaw and SunCal bet
residential, commercial and industrial areas. But the
big on this undeveloped tract near Albuquerque, N.M.
Now it's in foreclosure. nationwide real-estate slump left the project stuck on the
drawing board. Last month, lenders led by U.K. bank Barclays
PLC foreclosed on the property. D.E. Shaw and SunCal have only a few weeks to come up with the money needed
to pay off the lenders, or else the hedge-fund firm could see its roughly $100 million investment wiped out.

The deal is the largest potential loss facing D.E. Shaw in its wider, ill-fated move into real estate. The firm had
invested about $2 billion in real estate near or at the height of the market, according to people familiar with the
matter. It also realized profits from selling a number of properties such as 340 Madison Ave. in New York. Its
remaining $1 billion real-estate book is marked at around $700 million today, the people said.

The real-estate performance contributed to the firm's recent decision to reassess its businesses, which also
include distressed and event-driven investing. One of the largest hedge-fund firms, D.E. Shaw is cutting 150 jobs,
or 10% of its work force, after seeing its assets under management decline to about $20 billion from nearly $40
billion two years ago, people familiar with the figures say.

"While our existing team remains focused on optimizing and supporting the firm's real-estate portfolio, we are
not currently investing in new deals out of our absolute-return strategies," said George Rizk, head of real estate at
D.E. Shaw

The pain shows how little the quantitative trading strategies used by D.E. Shaw to move quickly in and out of
many investments helped the hedge-fund firm as it made big bets on illiquid real-estate development.

D.E. Shaw is known primarily for its expertise in a form of trading that uses mathematical models to predict

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markets. Real estate traditionally represents less than 5% of the firm's business.

Founded in 1988 by David Shaw, a former Columbia University computer-science faculty member, the firm uses
complicated programs to buy and sell assets, often stocks and bonds, trying to predict their rise or fall based on
historical patterns.

In contrast, real estate is a slow-moving, capital-intensive investment that requires extensive fundamental
analysis of property values, cash flow and other factors. The Atrisco investment was structured to pay off over a
20-year period—an eternity in the quant world.

When capital markets seized up and the project bogged down, D.E. Shaw couldn't escape.

Adversity is nothing new for the dry and rocky Atrisco tract. The area was settled in the late 1500s by a band of
families led by Juan de Onate, one of the last of the Spanish conquistadors. Apache attacks were so frequent that
women commonly walked behind men with guns as they plowed their fields, according to Peter Sanchez, chief
executive of the Atrisco Heritage Foundation.

As a reward for their perseverance, the 12 principal families were given an 80,000-acre grant by Spain. The
families and their heirs held on even as the control was passed from Spain to Mexico to the U.S.

Development and land sales whittled down the size of the area to 55,000 acres. In the 1960s, the owners created
a land-owning corporation to manage development and preservation. In 2006, they voted to sell Westland
Development Co. to D.E. Shaw and closely held SunCal.

The development plan called for selling 39,328 market-rate residential lots in 20 years and the remaining
36,000 acres in bulk. The two companies also planned to sell 3,391 acres of commercial land. But the
projections depended on Albuquerque maintaining its strong growth rate. Growth slowed sharply after the
recession hit.

The venture also was hurt by a decision to make a long-term investment using short-term debt. To help finance
the land purchase, D.E. Shaw and SunCal borrowed $212.3 million, planning to refinance in a few years. The
short-term debt was originated by a Barclays unit, which sold pieces to private-equity firm Five Mile Capital
Partners LLC and iStar Financial Inc.

The debt came due in June 2008 as financial markets were going into a tailspin. That set off a series of debt
extensions and negotiations that culminated in April when the Atrisco venture sought bankruptcy protection.

The project's lenders contend that the filing was a "bad-faith" move by the partnership to avoid its obligations. A
bankruptcy-court judge dismissed the case, and the land has been taken back by Barclays, Five Mile and iStar.

The D.E Shaw partnership has 30 days to come up with about $150 million to pay off the creditors and get the
property back. SunCal also ran into trouble in 2008 when its biggest lender, Lehman Brothers Holdings Inc.,
filed for bankruptcy, forcing SunCal to suspend work on 20 large residential property developments.

Mr. Sanchez says he hopes that D.E. Shaw and SunCal find a way to stay involved in the Atrisco project.

"They spent three years investing in engineering and infrastructure," he says. "They bought and paid for a lot of
good intellectual property. They're in the greatest position to take advantage of it."

—Gregory Zuckerman contributed to this article.

Write to Lingling Wei at lingling.wei@wsj.com

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