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Rialto Mining Gold from Nonperforming Assets

Bringing Another Portfolio to the CMBS Market
March 20, 2013
Rialto Capital Management, the investment management spin-off from homebuilder Lennar Corp. that made headlines last year after successfully securitizing a collection of non-performing commercial real estate loans and assets, is back in the market with its second offering.

This time the firm has packaged 1,472 small-balance non-performing loans, real-estate-owned (REO) properties, and performing loans related to 761 unique borrowers for securitization.

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Rialto acquired the assets from eight financial institutions for $345.9 million. The loans have an aggregate unpaid principal balance (UPB) of $843.6 million. Rialto paid 41% of UPB for the assets.

The transaction is structured as a liquidation vehicle that monetizes recoveries from the assets to pay the rated notes.

Rialto seems to have a winning formula based on its first performance. The firm paid $224.1 million for the assets in its first securitization (or 42.6% of UPB). As of Jan. 15, 2013, Rialto had liquidated assets with an UPB of about $150 million for a cool $128.4 million, or about 85% of UPB -- more than double their acquisition value.

Based on its track record, Rialto was assigned an “above average” ranking this year by Standard & Poor's Ratings Services as a commercial loan special servicer.

Rialto is a wholly owned subsidiary of public homebuilder Lennar Corp., one of the nation's largest homebuilders. As of June 30, 2012, the company actively managed a special servicing portfolio of 4,929 loans totaling $2.1 billion and 1,529 REO assets totaling $2 billion.

The underlying collateral in its second CMBS is comprised of commercial and multifamily real estate properties (65.3% of acquisition basis), land (20.6%), residential assets that primarily consist of homebuilder inventory (12.5%), and other collateral (1.7%).

The collateral is predominantly located in the Southeastern and South United States. The top-three state exposures include Florida (17.5%), Georgia (17.1%), and South Carolina (9.2%).

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