Sternlicht’s Starwood Firms to Buy LNR for $1.05 Billion

Starwood Property Trust Inc. the commercial-mortgage company founded by Barry Sternlicht, climbed to a record after agreeing to buy LNR Property LLC as part of a $1.05 billion deal with Starwood Capital Group LLC.

Starwood Property 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, 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 interest for $197 million.

The deal gives the Greenwich, Connecticut-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, is the biggest manager of distressed U.S. commercial real estate loans.

“It is a major-league transformative deal,” said Joshua Barber, an analyst with Stifel Nicolaus & Co. in Baltimore. The transaction will give Starwood Property “real size, real scale, unbelievable networks and real mortgage originators.”

Starwood Property gained 4.6 percent to $25.11, the highest closing price since the stock began trading in 2009. The real estate investment trust and competitors including Colony Financial Inc. and Apollo Commercial Real Estate Finance Inc. went public that year to try to capitalize on distressed property after the credit crisis.

‘Competitive Advantage’

“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.”

The company “leaped at the chance” to buy LNR, “because we knew LNR had an extraordinary seat at the table,” Sternlicht told analysts today on a conference call. “They had a view of the commercial-property markets, particularly the debt markets, that few if any people have in the United States.”

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, Florida-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.

Vornado, iStar

Vornado, based in New York, expects net proceeds of $241 million from the sale, the company said today in a statement. IStar, also based in New York, said it anticipates $220 million in proceeds. Its shares rose 2.1 percent to $8.90.

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.”

Property Broker

Beside the U.S. special servicing unit and its share of -- 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.

It “will be the biggest player structured as a REIT in the space by leaps and bounds,” Zachary Tanenbaum, vice president at New York-based investment bank MLV & Co., said in an interview. “It’s even hard to compare them to some of their peers, because this puts them into so many different businesses.”

‘Priceless’ Data

The company will benefit from having access to LNR’s $131 billion of loans where it is the named special servicer, said Andrew Sossen, chief operating officer and general counsel.

“The information is priceless,” he said in an interview. “As a special servicer, you have a view into what rents are in any given city on any given street in the U.S, to the extent you have a property there. With $131 billion worth of loans, that gives you a data point and a look into the commercial real estate markets throughout the U.S.”

The LNR purchase probably will add to earnings this year, before transaction costs, Starwood Property said in the statement. The deal creates an “unbelievably complicated story” for measuring financial performance, Stifel’s Barber said.

“The income is going to be screwy,” he said. “There’s a lot of different pieces to that income, you have non-recurring income from mortgage origination gains, from servicing fees, from workout fees. There’s a lot of goofy stuff.”

The deal is scheduled for completion in the second quarter. Citigroup Inc. and Credit Suisse Group AG advised Starwood Property, with Sidley Austin LLP providing legal counsel. Lazard Ltd. advised LNR.

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