Corus sale may be model for distressed sale

Starwood Capital Group LLC and TPG's agreement to buy $4.5 billion of Corus Bankshares Inc.'s real estate assets shows investors are ready to bet on distressed property -- as long as the U.S. helps finance the deals.

The private-equity firms led a group that won the auction for loans and properties of the failed Chicago lender, offering $554 million, the Federal Deposit Insurance Corp. said Oct. 6. They will take a 40 percent stake and manage the portfolio, while the FDIC keeps 60 percent and lends the buyers as much as $2.39 billion to complete the sale.

The investors, who are paying about 60 cents on the dollar, beat out seven other bidders. The losers, including Colony Capital LLC and Related Cos., will have more chances to acquire distressed mortgages. As many as 1,000 U.S. banks may fail by 2011, according to John Duffy, chief executive officer of KBW Inc., a New York-based firm that advises financial institutions.

"There are going to be hundreds of banks that are going to be seized and we're just getting started," said James Corl, managing director of Siguler Guff & Co., a New York-based firm that manages about $9 billion. "Auctions of nonperforming bank loans are going to comprise the next wave of opportunities for distress-oriented real estate investors."

The FDIC will provide the Starwood-TPG group with $1.39 billion of zero-coupon debt to help pay for the purchase and as much as $1 billion in working capital. Similar financing was included by the agency in deals involving IndyMac Federal Bank and BankUnited Financial Corp.

Financing a Necessity

The government will have to continue offering such low- cost debt to persuade investors to absorb troubled bank loans and real estate, according to John Grayken, founder of Lone Star Funds, a Dallas-based firm that buys distressed assets including mortgages.

"Unless the seller is willing to finance, you have to do these deals with all equity," Grayken said in a fundraising presentation to the Oregon Investment Council on Sept. 30.

The FDIC probably will make similar arrangements in future sales, Chairman Sheila Bair said yesterday in an interview.

"I think we will use this structure again, absolutely," Bair said. "We're pleased with the results."

Corus Bank, taken over by regulators on Sept. 11, was a 51- year-old Chicago lender crippled by construction loans for condominiums after the housing market slumped and the credit crisis worsened. It was one of 98 banks seized this year as lenders fail at the fastest pace in almost two decades. Corus's $7 billion in deposits and 11 branches were sold to Chicago- based MB Financial Inc.

Starwood, based in Greenwich, Connecticut, is run by Barry Sternlicht, who was chairman of Starwood Hotels from 1997 to 2005. Fort Worth, Texas-based TPG's investments include casino owner Harrah's Entertainment Inc. and Neiman Marcus Group Inc., a luxury retailer.

Fundraising

Their partners in the deal are Perry Capital, a New York- based hedge-fund firm with about $7 billion in assets, and WLR LeFrak, a joint venture of the real estate firm LeFrak Organization of New York and WL Ross & Co., a unit of Atlanta- based Invesco Ltd. that is run by billionaire Wilbur Ross.

Investment managers are raising between $118 billion and $138 billion to buy properties and real estate securities, according to surveys by Institutional Real Estate Inc. of San Ramon, California, and Real Estate Alert, an industry newsletter in Hoboken, New Jersey. Lone Star is seeking $20 billion for two new funds.

Distressed assets including residential and commercial mortgages and bonds backed by such loans will be sold over the next several years as banks go into receivership or seek to strengthen their balance sheets. Commercial and investment banks together hold about 80 percent of the devalued assets that will change hands, according to the Lone Star presentation.

Asset Pipeline

About $524 billion of commercial mortgages held by U.S. banks and thrifts are scheduled to come due before 2012, half of which probably won't qualify for refinancing because they exceed 90 percent of the property's value, according to Lone Star. At least $410 billion, or two-thirds, of commercial mortgages bundled and sold as bonds coming due by 2018 will have difficulty refinancing, according to data from Frankfurt-based Deutsche Bank AG.

The Washington-based FDIC used partnerships with private investment firms two decades ago to sell the assets of savings and loans that failed amid plunging oil prices and real estate speculation. The government formed the Resolution Trust Corp. in 1989 to merge or liquidate insolvent thrifts, and by 1995 the RTC had handled 747 thrifts, eventually recovering about $395 billion of assets with a book value of about $452 billion, and limiting losses to taxpayers, according to the FDIC.

Financing Trend

The FDIC is again turning to private investors to recover the most it can from distressed loans and property. Its deposit- insurance fund has been depleted by about 120 bank failures during the past two years. The agency has proposed asking banks to prepay three years of premiums to raise $45 billion. A deficit in the insurance fund could require emergency loans from the Treasury.

The government is offering financing to private firms through its Public Private Investment Program. The Treasury Department is matching equity pledges and providing debt financing to private funds to enable them to buy assets including real estate loans and mortgage-backed securities from banks. Treasury Secretary Timothy Geithner has committed as much as $30 billion in funding for the program. The Treasury once envisioned the partnerships buying as much as $1 trillion of such assets.

In addition, many owners are reluctant to sell as they wait for a recovery in property values. Prices in the $3.4 trillion market for U.S. commercial real estate have fallen an estimated 39 percent from their 2007 peak, according to the Moody's/REAL Index.

Slow Start

Some real estate funds could see their investment period expire without doing any deals, said Geoffrey Dohrmann, chief executive officer of Institutional Real Estate.

"A lot of funds that were raising money in 2007 and 2008 have not called any capital," Dohrmann said. "There hasn't been any distress selling but that's changing. Look at the number of distressed bulk sale ads. A year ago, there weren't any. Portfolios are being marketed that weren't being marketed before."

Blackstone Group LP in September teamed with the CEO of Sunwest Management, an Oregon-based operator of senior living centers, to buy 148 properties from the company as part of its Chapter 11 reorganization. Also last month, New York-based Blackstone acquired a 50 percent stake in the Broadgate office complex in London from British Land Co., the U.K.'s biggest commercial landlord. The Broadgate purchase was the largest such property sale in London since the market slump began.

"You're starting to see more transactions," said Joe Harvey, chief investment officer at real estate investment firm Cohen & Steers Inc. in New York. "We're not quite at the point where there's a lot of forced selling, although we're getting closer to that point as time passes and owners default. By and large, it will really start next year."