Lennar Corp. announced plans Thursday to raise $350 million by selling convertible senior notes, cash it says it might use to invest in distressed debt through its Rialto joint venture.
Bloomberg reported Wednesday that three sources said the home builder is seeking to raise $800 million from private investors to increase its investment in Rialto, its distressed asset real estate unit.
The news outlet said the first tranche of the capital raise was being marketed to U.S. and Canadian investors and is expected to close by the end of November.
The Thursday note sale announcement said the company plans to use the proceeds "for general corporate purposes, which may include the repayment or repurchase of its existing senior notes or other indebtedness, purchase of, or investments in portfolios of distressed mortgage or other debt instruments, and acquisitions of land suitable for residential development."
Company officials did not immediately return messages inquiring whether the proceeds would be invested in Rialto.
Lennar CEO Stuart Miller has made no secret of how pleased he is with Rialto, which Lennar incubated several years ago and brought into the limelight last February. That was when it spent approximately $243 million to buy 40% of a company created to hold two portfolios totaling 5,000 distressed residential and commercial real estate loans with $3.05 billion in unpaid balances from 22 banks in receivership that had been taken over by the FDIC.
In September, Miller said he was excited about Rialto's progress with the FDIC portfolio and its potential future. Lennar reported that Rialto brought it $7.7 million in earnings on $38 million in revenue for its quarter that ended Aug 31.Lennar also pulled 1,500 home sites, nearly half all the home sites it acquired in the quarter, out of the Rialto entity.
"They (the lots) weren't on the market, they weren't available to the public, and they really present a unique opportunity for us to invest," Miller said during a Sept. conference call with investors pulled from a Seeking Alpha transcript of the call. "And this will be an increasing component of our margins and performance going forward. So we feel pretty good about that." So good that he made it clear the company planned to up its ante in the entity.
"It affords us the opportunity to be a machine for the capital." Miller said, referring to Rialto's organization as well as Lennar's experience at working through distressed real estate assets that goes back to the 1990s downturn when Lennar created LNR for the same purpose.
"We will raise capital in the public market," he said. "We will raise capital through private avenues as well. Capital wants to invest where there are outsized returns. There are outsized returns in the distressed investment vehicles."
But Rialto won't be focused only on distressed opportunities, he said.
"There will be a variety of things that stem from this distressed opportunity that we will use this as a stepping stone to get into and expand this part of our business," Miller said in the Seeking Alpha transcript. "And it will always be in perfect complement to the home building business and the two opportunities will play off of each other. We saw that all the way through the early '90s and into the late '90s as we spun off LNR."
The expected terms of the new notes are that they can be convertible to cash and/or Lennar Class A common stock at Lennar's election. Holders will have the right to redeem the notes for their principal plus unpaid interest any time on Dec. 20, 2015. Any notes that aren't redeemed, repurchased or converted into stock will mature on Dec. 15, 2020. Interest on the notes is expected to be paid semi-annually.
Lennar will sell the $350 in new convertible senior notes it announced Thursday to qualified institutional investors it said.