Real estate mogul Barry Sternlicht, in his latest deal, announced two of his companies, Starwood Property Trust, Inc. (NYSE:STWD) and investment firm Starwood Capital, will buy LNR Property LLC. The acquisition of the biggest manager of distressed commercial debt for $1.05 billion is carried to expand into the booming market for such loans.

Barry Sternlicht

“We are delighted to announce this transformative and highly strategic acquisition that diversifies Starwood Property Trust’s revenue sources, adds significant scale to our operating platform and dramatically expands our proprietary origination capabilities,” Mr. Sternlicht, the chief executive and chairman of Starwood Property Trust, Inc. (NYSE:STWD) said in a statement.

Globally, banks are restructuring their distressed commercial real estate loan portfolios, by offering them at discounted prices in an effort to make their balance sheet look attractive. According to consulting firm Ernst & Youn, about $1 trillion of U.S. commercial real estate loans are expected to mature in the next few years.

Under the terms of the deal, Starwood Capital Group will pay $197 million for LNR’s U.S. Commercial Property Group and for a 50 percent of LNR’s ownership in the real estate site

The other firm, Starwood Property Trust, Inc. (NYSE:STWD) will contribute $856 million for the remaining LNR’s assets, which includes its U.S. special servicing business and Hatfield Philips, the largest primary and special servicer in Europe. Starwood Property said that the deal is expected to boost the earnings and cash flow in 2013, before transaction expenses.

Home builder Lennar Corp spun off from LNR Property in 1997. The firm was publicly listed till 2005, after which, Cerberus Capital Management took it private. The company has 12 offices throughout the U.S. and Europe, and more than 550 employees. Currently, it is owned by affiliates of Aozora Bank Ltd (TYO:8304), iStar Financial Inc. (NYSE:SFI) and Vornado Realty Trust (NYSE:VNO).

During the financial crisis, a group on investors recapitalized LNR. The consortium of investors included hedge fund Oaktree Capital Management LLC (NYSE:OAK), commercial lender iStar Financial Inc. (NYSE:SFI), Vornado Realty Trust (NYSE:VNO) and Japan’s Aozora Bank Ltd.

Starwood Property Trust, Inc. (NYSE:STWD) is advised by Citigroup Inc. (NYSE:C) and Credit Suisse Group AG (NYSE:CS) while LNR Property LLC was advised by Lazard. The deal is expected to be completed by the second quarter.

On the conference call, management gave further reasons for why they like LNR:

One of the businesses that’s been very successful in a small a balanced conduit originator.

That fits nicely alongside the things that we have been doing.

We actually just do not have the capability of underwriting $20 million mortgages.
Frankly, those are the bulk of the business and Barry and his team has done an extraordinary job of the last couple of years building these very solid a business that is been fairly predictable with very high levels turn inventory.
There may originate — four times a year.
But that is something we like because the risk of the let toll of the data solo.
— rate reputation and it is a nice business at significant amount of profits for LNR and — going forward.
— archetype financial services which serves a small loans call small in TL pools cost of that actually — capital but does not approach because we do not have the body to do it. And it yet they been able to carve out a niche and a reproach to us over the last couple of years to partner with them to buy these pools we simply don’t have the body that as TG does that have the list up. For those of you who are familiar with our industry, these are the kinds of things that lone Star business is doing.

Connecticut-based Starwood Property shares closed at 24.01 on the New York Stock Exchange on Wednesday.