Morgan Stanley takes $150 million hit on Crescent REIT

NEW YORK (Reuters) - Morgan Stanley (MS.N) suffered a $150 million second-quarter writedown on its Crescent Real Estate investment, as the Wall Street firm took over commercial and residential properties that fell in value before they were transferred to an investment fund.

Last August Morgan Stanley's real estate investment arm acquired the publicly traded Crescent for $6.5 billion. A portfolio of 54 office buildings and residential developments was to be transferred to a new firm-managed investment pool, the $10 billion Morgan Stanley Real Estate Fund VII Global.

But the downturn in real estate markets eroded the value of this company, prompting Morgan Stanley to consolidate the investment on its own books instead.

"Due to factors including change to market conditions, timing, valuation and size of the investment, we will not include Crescent to the investor fund," Morgan Stanley Chief Financial Officer Colm Kelleher told analysts Wednesday. "As a result $4.6 million of assets have been consolidated onto our balance sheet."

Kelleher added Morgan will evaluate these assets and position them for possible sale.

Typically, as firms like Morgan Stanley raise cash from outside investors, they may also acquire properties that will eventually be sold to the fund. In the interim, these assets are financed by a bridge credit line extended by the bank.

In the case of Crescent, Morgan Stanley decided to retain the investment, rather than complete the transfer to the fund, which includes client money. The global fund, which according to marketing documents would pursue distressed assets, completed fund-raising last month.

The Crescent losses contributed to a 10 percent decline in merchant banking revenue, an area that also includes private equity and infrastructure. Total write-downs in the merchant bank, part of Morgan Stanley's asset management division, were $212 million for the quarter ended May 31.

(Editing by Brian Moss and Richard Chang)