Commercial mortgage REIT Starwood Property Trust (STWD) has just announced an acquisition that takes the company to another level among commercial property lenders. On January 24 the company announced it is acquiring LNR Property LLC for a cash purchase price of $1.05 billion.
LNR Property is involved in several commercial property related businesses. The company is the largest special servicer of distressed commercial property debt, currently working a $130 billion portfolio of loans. LNR holds a large number of legacy CMBS and CDO investments. Another business line is the origination of commercial mortgage loans and repacking those loans into CMBS. The company has an established commercial mortgage servicing business in Europe. And finally, LNR owns a 50% interest in Auction.com, the leading real estate exchange selling residential and commercial real estate via auction.
For additional background read: Take A Look At Starwood Property Trust For An 8% Yield And Growth Potential.
Conference Call Notes
I listened in on the conference call discussing the purchase announcement to pick up some color on the acquisition. Here are some of the important points I took away:
- Starwood Property Trust has been working on this acquisition for 6 months, going through every part in detail of the complicated LNR businesses and holdings.
- The special servicer business and the mortgage origination business each account for about 1/3 of the value of LNR. These are complimentary businesses in the commercial real estate business cycle. If one is going through a slow period the other will naturally be doing very well.
- LNR owns a tremendous database on the U.S. commercial property market. That data will be invaluable for both the current Starwood Property Trust and the LNR origination business to continue growing.
- There is no debt being assumed. The deal will be financed through the sale of some Starwood portfolio assets and some form of equity financing. Deal closing is expected late in the first quarter or early second quarter.
- The acquisition will be almost immediately accretive to Starwood Property Trust for cash flow and the ability to pay dividends.
- LNR Property will most likely stay in business as a wholly owned subsidiary of Starwood Property Trust.
Starwood Property Trust was already head-and-shoulders above the rest of the commercial mortgage REIT pack. Commercial property lending is a trillion-dollar market with few willing participants. Starwood has become a major player in the $50 million and up commercial mortgage game. The LNR purchase allows Starwood to expand its offerings into the smaller loan sizes and the data and knowledge LNR brings to the table provides additional opportunities to build a market dominant company. I think that Starwood Property Trust will become the top company by originations and profitability in commercial real estate lending.
The current 44 cent quarterly dividend provides a near 8% yield. The dividend has been level for 7 quarters and a bonus 10 cents was paid in December. Once this deal goes through, expect dividends to start to increase, possibly by the end of 2013. I also expect the market to realize the value in Starwood Property Trust and continue to push up the share price. As the company starts to be viewed as the premium player in the commercial financing space, I expect the yield on this REIT be well below the 8% to 10% typical of commercial mortgage REITs. A $40 share price on Starwood Property Trust would still provide a 6% plus yield and, in my opinion, be a better reflection of the value and potential for this stock.