Starwood Capital, along with affiliate Starwood Property Trust, has secured bank financing for its $1.05 billion strategic acquisition of LNR Property.
As previous reported, Starwood is buying the special servicer to expand the private equity firm’s origination and distressed asset sales capabilities and give it a strongbox of off-the-market data about properties and borrowers. (See related story:
Starwood Buying LNR for $105 Billion.
Starwood emerged as the winning bidder for LNR when the consortium of five firms that owned it put the special servicer up for sale last fall, beating off competition from underbidders Rialto Capital Management and BGC Partners, a Cantor Fitzgerald affiliate.
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The acquisition comprises two major separate component parts by Starwood Property Trust and Starwood Capital Group.
The first part is Starwood Property Trust’s $856 million acquisition of six separate business lines, which includes LNR’s US special servicing platform, which has more than $131 billion in loans under management; its portfolio of legacy whole loans, CMBS and CDO investments, Archetype Mortgage Capital, Archetype Financial Institution Services, a 50% stake in Auction.com and LNR Europe, manager of the LNR European Investment Fund and Hatfield Philips, Europe’s largest primary and special servicer.
Starwood Capital Group’s part of the acquisition, on behalf of Starwood Distressed Opportunity Fund IX, is for $197 million and comprises LNR’s U.S. Commercial Property Group and the remaining 50% stake of LNR's ownership interest in Auction.com.
Barry Sternlicht, Starwood Property Trust's founder, chairman and CEO, said the acquisition will provide new sources of revenue for Starwood Property Trust while greatly expanding its operating platform and proprietary origination capabilities.
“We expect the combination of LNR's capabilities, Starwood Property Trust's superior access to capital, and both firms' underwriting expertise to result in a long-term and sustainable competitive advantage," Sternlicht said.
Knowledge Is Power
Importantly, the deal also enhances Starwood’s credit market surveillance capabilities and provides a natural pipeline for origination business, the company said.
LNR adds significant capabilities, infrastructure and new potential capital deployment opportunities to Starwood’s existing business. According to the company, the strategic benefits include:
· Competitive advantage to pursue opportunities before competitors via more than 15,000 touch points with borrowers;
· Broadens Starwood’s existing origination platform capabilities to include small balance CRE loans;
· Interest in Auction.com provides potential for incremental deal flow;
· Expanded ability to pursue European origination and distressed asset sales; and
· Opportunity to refinance loans and REO assets in special servicing portfolio.
“We leapt at the chance,” Sternlicht said because we knew that LNR had “a view of the commercial property markets, particularly the debt markets that few, if any, people have in the United States, being the largest servicer of distressed debt and that they had other businesses that we could easily fit into the REIT like the CMBS trading business, which they have made a career out of, knowing which and having this information of which assets might default at what point. They had a unique competitive advantage in actually acquiring debt, for what people thought might be pennies on the dollar.”
“What we're getting here is an opportunity to see a lot of information that… should help transform our ability to write loans at attractive coupons, to work with borrowers to fix their problems again off-market, allowing us to get excess return,” Sternlicht added in a conference call announcing the acquisition.
Lining Up Financing
While the two-part purchase is a cash-only acquisition, Starwood has secured a $300 million bridge loan from Citigroup and Credit Suisse to finance the short-term operational running of the LNR Property business lines. Citigroup and Credit Suisse are also joint financial advisors to Starwood Property Trust on the acquisition.
For the rest of the financing, Sternlicht said, “I think you'll see us do a combination of financings, including selling off some lower hanging fruit, some of our paper that we bought over time, where our mortgages have appreciated to the point where the ROE [return on equity] on the remaining at market for our remaining equity is like 4%.”
“We'll actually have to be in the equity market at some point,” Sternlicht added. “We'll look at other securities whether it's the bond market and/or the convert market or the preferred markets, to manage as capital structure that will put - be most accretive to our current shareholders and best for the company over the long run.
James Wallace, CoStar’s London finance reporter, and Tim Trainor, CoStar U.S. editor-in-chief contributed to this story.
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