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Wednesday, 24 October 2012

Starwood Capital Seen Buying LNR Property

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Commercial Real Estate Direct Staff Report

Starwood Capital Group is said to have won a fierce bidding competition to acquire LNR Property, the CMBS industry's most active special servicer.

The buzz is that LNR's adviser, Lazard Ltd., conducted at least three rounds of bidding before Starwood was selected as the winner. It had been competing against Cantor Commercial Real Estate, which started building out a commercial mortgage lending operation only last year, and Rialto Capital Management, a Miami investment manager that is led by Jeffrey Krasnoff, who previously had founded LNR.

LNR, which is also based in Miami, long has been the most-active special servicer in the CMBS industry. As of the end of September, it was actively handling 1,055 loans with a balance of $21.3 billion. That's nearly 30 percent of all CMBS loans that are in special servicing.

Starwood, meanwhile, operates a series of investment funds, the latest of which raised $3 billion of equity commitments for Starwood Distressed Opportunity Fund IX.

Buying LNR gives it a unit that generates a steady stream of income. The company earns fees of 25 to 50 basis points on an annual basis for every loan it actively manages. And it can earn fees of up to 1 percent of the face value of any loan that is either made performing again or otherwise liquidated.

In addition, the company owns a substantial piece of the auction.com platform. That gives it a share of the fees generated from the sale of loans and properties. Those fees run up to 5 percent of the price of the assets that are sold.

LNR is owned by a group of investors that include Vornado Realty Trust, iStar Financial and affiliates of Cerberus Capital Management and Oaktree Capital Management, as a result of a 2010 recapitalization.

The company was acquired in 2005 by Cerberus, Vornado and iStar in a $3.8 billion leveraged acquisition. At the time, it was also a very active buyer of B-pieces, the most-junior pieces of CMBS transactions. But when the market collapsed, the value of its investments plummeted. It came close to filing for bankruptcy. Two years ago, it was recapitalized. It raised $417 million of fresh equity and slashed its debt to $425 million from $1.3 billion.

Soon after the recapitalization, Justin Kennedy and Toby Cobb, who were senior executives of Deutsche Bank's commercial real estate operation, were named co-chief executives. Because Starwood doesn't have a special servicing presence, it's likely the two will stay on.

As of the end of June, LNR was being carried on the books of its owners at a value of roughly $735 million. The unit generated an annualized $175 million of profit, according to a regulatory filing made by Vornado.

LNR's sale to Starwood would maintain the private-equity ownership of the CMBS industry's top special servicers.

CWCapital Asset Management, the second most-active special servicer, is owned by Fortress Investment Group, which bought it two years ago. And C-III Asset Management is owned by Island Capital Group.

Starwood Property Trust, a REIT affiliate of Starwood, had in 2010 competed to buy CW Financial Services, the parent of CWCapital. And it also invested $6 million in the recapitalization of what is now C-III.

At the time, Barry Sternlicht, who heads both Starwood Capital and Starwood Property, said it pursued the two units in order to be able to identify financing opportunities among the loans managed by the special servicers. But at the time, he noted that the strategy could be fraught with conflicts of interest.

Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.

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Additional Info

  • Syndicate to Realpoint: No
  • Subject: Mergers & Acquisitions (M&A)
  • Company: LNR Property Corp., Starwood Capital
  • Private: No
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