Lennar Looks to Unlikely Helper: Bad Loans By Dawn Wotapka and James R. Hagerty Wall Street Journal 02-12-2010

Lennar Looks to Unlikely Helper: Bad Loans By Dawn Wotapka and James R. Hagerty Wall Street Journal 02-12-2010

Lennar Looks to Unlikely Helper: Bad Loans
By Dawn Wotapka and James R. Hagerty
The Wall Street Journal
February 12, 2010

The recovery of the home-building market promises to be slow and rocky, but builder Lennar Corp. has found what it thinks will be a way to juice its earnings: buying distressed real estate loans.

The Miami builder's shares surged nearly 9% on Thursday after it announced late Wednesday winning an auction for a portfolio of about 5,500 residential and commercial real estate loans from 22 failed banks. Lennar agreed to pay $243 million for a 40% stake in the portfolio. The rest will be held by the Federal Deposit Insurance Corp.

"I think this is a home run" for Lennar, said Ivy Zelman, chief executive of Zelman & Associates, a research firm. She said the return on capital should be at least 20% and could be far higher. Lennar is likely to make more such investments, though not immediately, and may raise capital to increase its capacity for them, she said.

Lennar, the fourth-largest U.S. home builder in terms of sales last year, has long been known at least as much for its financial skills as its ability to put up drywall. After the real-estate slump of the early 1990s, it pounced on assets being sold by lenders at knockdown prices.

In today's bidding for such assets, Lennar is mostly up against private-equity firms and asset managers including Och-Ziff Capital Management Group. In October, for instance, a group of investors led by Starwood Capital Group bought $2.77 billion of construction loans, many of them to condominium developers, made by Corus Bank of Chicago before regulators shut it down.

Analysts at Citigroup Inc. said they expect the latest transaction to add as much as $15 million in earnings in the fiscal year ending Nov. 30, followed by $20 million to $30 million the next year.

The loans have an average balance of $555,000, and 90% of them are classified as nonperforming, Lennar said. One-third of the loans in Georgia, while 19% are in Nevada and 11% in Arizona. One-fourth of the loans cover partially developed land, while 24% are on residences. The package also includes retail, office and industrial loans.

Lennar said it did "extensive due diligence" over four months, including a review of loan documents and local real-estate conditions. The company said it might foreclose on some loans and then sell the property or develop and operate it. In other cases, Lennar said it might be able to get borrowers to pay off loans for more than it paid for them.

Lennar and the FDIC are supplying $1.22 billion of capital to purchase the portfolio, which has a face value of $3.05 billion. Lennar is putting up $243 million in cash and $22 million of working capital, the company said, and its maximum loss is limited to that equity and working capital. The FDIC is to contribute $365 million in equity and $627 million of debt financing at 0% interest.

"It sounds like a good deal, but the jury's out," said Josh Levin, a home-building analyst at Citigroup Inc. "We'll only know a few years from now how good of a deal of it was."

Lennar's bid shows that "the land rush is on again," said Tony Avila, a San Francisco financial adviser to home builders who manages the $100 million Encore Housing Opportunity Fund. Mr. Avila said his fund and a private-equity firm jointly bid "substantially less" than Lennar did for the loan package.


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