Barry Sternlicht’s Starwood Property Trust Inc. and Starwood Capital Group LLC agreed to buy LNR Property LLC, the biggest manager of distressed U.S. commercial real estate loans, for $1.05 billion.
Starwood Property, the largest commercial-mortgage real estate investment trust, will pay $856 million for most of LNR’s businesses, including its U.S. special servicing unit and 50 percent of LNR’s stake in Auction.com, the companies said today in a statement. Starwood Capital, Sternlicht’s closely held investment firm, will buy LNR’s U.S. property-development unit and the other half of the Auction.com interest for $197 million.
The deal gives the Greenwich, Conn.-based companies a window into some of the more than $1 trillion of commercial real estate debt scheduled to mature in the next five years in the U.S. and Europe, as well as access to pricing of troubled properties and income from fees. LNR’s special servicer business, which represents bondholders in debt restructurings and foreclosures, oversees more than 1,100 delinquent securitized mortgages, according to data compiled by Bloomberg.
“Our goal from the beginning was to build a sustainable competitive advantage in the financial markets,” Sternlicht, the founder, chairman and chief executive officer of both Starwood companies, said in a telephone interview. “We’re always looking at tilting the landscape in our favor.”
LNR’s co-CEOs, Tobin Cobb and Justin Kennedy, will remain in their jobs, managing LNR as a separate business under Starwood Property ownership. The Miami Beach, Fla.-based company is currently owned by a group that includes funds managed by Cerberus Capital Management LP, Oaktree Capital Group LLC, iStar Financial Inc. and Vornado Realty Trust.
The LNR deal follows nine months of pursuit by Starwood and a U.S. property recovery driven by the Federal Reserve’s low interest rates and growing institutional appetite for real estate assets. Commercial property prices were up 38 percent from their 2010 trough as of November, according to a value-weighted index compiled by CoStar Group Inc.
“Values are increasing but they’re not running away,” Sternlicht said in the interview. “Clearly there’s a move out of fixed income to real property, and capital—particularly international capital—is beginning to spill into secondary cities.”
Beside the U.S. special servicing unit and its share of Auction.com—a property and loan broker that sells primarily online—Starwood Property’s acquisition includes LNR’s U.S. investment portfolio, which has 203 securities in 97 CMBS trusts, plus another five collateralized debt obligation bonds, the companies said. It will also gain the European loan servicer Hatfield Philips and a European debt-investment fund.
“Europe is just beginning to untangle an enormous backlog of assets,” Sternlicht said. “We should have a pretty good seat at the table” as banks there contend with distressed commercial property assets, he said.
Starwood Property primarily originates and invests in commercial real estate loans and buys mortgage-backed securities. It had $3.6 billion of investments at the end of the third quarter, according to a November investor presentation on the company’s website.