A Portfolio Play

Lennar takes a stake in distressed FDIC paper; buying a portfolio of real estate loans

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In another bold, strategic, financial move that stakeholders have come to expect from the nation's fourth largest builder, Lennar Corp. announced Feb. 10 that it is investing in a company that has partnered with the Federal Deposit Insurance Corp. to work out distressed real estate loans.

Lennar spent approximately $243 million, excluding working capital and transaction costs, to buy 40 percent of a joint-venture company created to hold two portfolios with 5,500 distressed residential and commercial real estate loans from 22 banks in receivership. The loans have an unpaid collective balance of $3.05 billion.

The FDIC retains the remaining 60 percent equity interest and will be providing $627 million of nonrecourse, no-interest financing for seven years.

Rialto Capital Advisors, the Lennar subsidiary created roughly two years ago to invest in distressed land, will manage and work out the portfolios. Jeff Krasnoff , former CEO of the builder's LNR Property Corp., heads Rialto operations.

“Acquiring and working out distressed real estate loans was a large and extremely profitable part of our business during the last major real estate down cycle in the early 1990s,” Lennar CEO Stuart Miller said in the announcement. “We are pleased to return to this business and honored to partner with the FDIC to manage, work through, and add value to these portfolios of real estate loans.”

A Paper Trail The $3 billion-plus portfolio of underwater real estate loans that Lennar and the FDIC took a joint-venture stake in reflects distress across the country. Here's a look at how the assets, 90 percent of which were nonperforming, were distributed by state. SOURCE: COMPANY DOCUMENTS

The arrangement promises what appears to be a low-risk investment—the new venture purchased the loan portfolio for roughly $0.40 on the dollar—that should bring in revenue at a time when Lennar's home building business has shrunk to 23 percent of market peak.

The new venture expects to profit from working out the individual loans by negotiating a repayment with the borrower or foreclosing on the loan, then reselling, holding, or developing the assets for more money. Lennar reported that every $0.10 of value over the $0.40 purchase price creates about $122 million in profit.

The assets are distributed across the country and include both commercial and residential assets. Of the residential properties, 25 percent is partially developed, 24 percent is dwellings, 10 percent is raw land, and 9 percent is finished home sites.

“LEN is using its expertise and capital to exploit distress and generate income,” wrote Citi analyst Josh Levin in a research note.

—Teresa Burney