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Starwood firms reach $1B deal with distressed property company

In a landmark deal, two Greenwich investment companies led by billionaire Barry S. Sternlicht will acquire a Miami-based real estate investment and special servicing firm for more than $1 billion.

Starwood Property Trust Inc. and Starwood Capital Group are buying LNR Property L.L.C., a diversified real estate investment, finance, management and development firm with 12 offices in the U.S. and Europe, for $1.05 billion in cash under the Jan. 24 agreement.

Under the terms of the agreement that is subject to various conditions and approvals, Starwood Property Trust, which is publicly traded on the New York Stock Exchange, will acquire five LNR Property business segments and a 50 percent stake in LNR’s Auction.com unit for a total of $856 million.

The remaining 50 percent stake in Auction.com and LNR’s U.S. Commercial Property Group will be bought by Starwood Capital Group, a privately owned investment firm, for $197 million.

The transaction is expected to close in the second quarter of this year. LNR Property has more than 550 employees worldwide.

The deal represents Starwood Property Trust’s entry into commercial mortgage backed securities (CMBS) and special servicing, which involves the management of borrowers in or near default.

Sternlicht, who serves as chairman and chief executive of both Starwood firms, called the deal a “transformative and highly strategic acquisition that diversifies Starwood Property Trust’s revenue sources, adds significant scale to our operating platform and dramatically expands our proprietary origination capabilities.”

In a statement, Starwood said the deal also bolsters its risk management capabilities by adding “a premier global platform of real estate underwriters and workout specialists with access to an unmatched proprietary database on the performance of over $400 billion of commercial real estate loans and underlying assets.”

Included among the business units to be integrated by Starwood Property Trust is LNR’s European unit, which consists of Hatfield Philips, the largest independent primary and special servicer in Europe, and LNR European Investment Fund, a European commercial real estate debt fund.

When asked whether that aspect of the deal presented any concerns due to economic volatility in Europe, a source with knowledge of the proceedings said Starwood views the CMBS and special servicing businesses as a hedge against certain economic scenarios.

“Having LNR Europe in the fold will offer an extraordinary window on what is happening in the European debt market,” the source said.

LNR Property is currently owned by affiliates of Aozora Bank Ltd., which is a subsidiary of investment funds managed by Cerberus Capital Management L.P.; by iStar Financial, which is a subsidiary of funds managed by Oaktree Capital Management L.P.; and by Vornado Realty Trust.

LNR co-CEOs Toby Cobb and Justin Kennedy said in a statement that “having partnered on several large transactions, we knew that Starwood Property Trust’s unique capital and investment capabilities would be a perfect complement for LNR’s operating platform and diligence capabilities.”

Citigroup and Credit Suisse are serving as financial advisers to Starwood Property Trust with Sidley Austin L.L.P. acting as legal counsel. Lazard is serving as financial adviser to the sellers of LNR Property.

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