The Miami-based home building enterprise, Lennar Corp. recently announced its purchase of $243 million for a 40 percent stake in real estate loans meted out by 22 failed banks. This appears to be one way of assuring profit.
Lennar was not the only one vying to buy troubled real estate loans. The auction pitted Lennar against several private equity firms including Och-Ziff Capital Management Group. Ultimately, Lennar managed to grab the win. As a result, Lennar’s shares rose almost 9 percent on Thursday.
Analysts think the move should prove extremely lucrative. According to Ivy Zelman of Zelmand & Associates, the return on capital for Lennar should be 20 percent or more. The purchase is expected to earn an extra $15 million.
Lennar is the nation’s fourth largest building companies. It plans to foreclose on some of the loans and the sell the property or develop it. The properties include a mix or retail, offices and residences. Most of the loans originated in Georgia. Others are located in Arizona and Nevada. Day-to-day management of the portfolio will be carried out be Rialto Capital Advisors, a subsidiary of Lennar.
This is not the first time Lennar has bought distressed loans. During the real estate bust in the early 1990’s, Lennar did the same and profited handsomely. This helped allay investor fears over the long-term risks of the venture.
The Federal Deposit Insurance Corp. bought out the remaining 60 percent stake, with a contribution of $365 million in equity and $627 million of debt financing at zero percent interest for seven years. The partnership should prove successful, however it remains to be seen how good of a deal Lennar actually made.
Written by Lani Shadduck
HULIQ.com
Source: The Wall Street Journal, Dawn Wotapka and James R. Hagerty (02/12/2010)
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