The REIT Stuff

Hedge funds in the distressed investing space, much like private equity players, are turning towards a new source of capital – the real estate investment trust. 

Most recent to jump on the bandwagon is New York-based hedge fund Cerberus Capital Management. The firm is making its entry via LNR Property Holdings, a real estate financing company it took private earlier this year.

Cerberus is re-launching LNR as a $750 million, publicly traded REIT, according to a notice filed with the US Securities and Exchange Commission on Friday. The form provided no information about the number of shares or the shares’ price range.

LNR was acquired and taken private in February by Blackacre Institutional Capital Management, the property arm of distressed specialist Cerberus, for $3.8 billion in cash and debt. Before going public in 1997, LNR Property Corporation was the financing arm of Miami Beach, Florida-based homebuilder Lennar Homes.

According to the SEC filing, the REIT will continue to pursue its real estate finance business with the tax benefits afforded by the REIT structure. The vehicle plans to look for real estate-related investments including securities, loans and hard assets.

In addition to an “initial portfolio” of more than $2 billion in assets from LNR subsidiaries, the filings point to LNR’s reputation in the real estate sector, as well as its affiliations with Cerberus, as two possible founts of deal flow.

Late last month, shares of the publicly traded REIT Deerfield Triarc Capital were offered on the New York Stock Exchange at $16.00 each. The trust is a subsidiary of New York-based Triarc’s $9 billion alternative asset management firm Deerfield Capital Management and will focus on the usual range of real estate-related alternative investment strategies, including private equity, corporate mezzanine loans and distressed debt securities.

Increasingly, the private equity business is also looking towards the REIT as a tax-friendly way to diversify investment strategies. LBO firm Kohlberg, Kravis & Roberts (KKR) announced last month it was planning a $839 million REIT, followed less than a month later by a new REIT launched by McLean, Virginia-based real estate advisory and investment from JE Robert Companies.

Many feel the REIT ventures will be more successful than 2004 short-lived business development company (BDC) craze, which saw plenty of big plans, but few actual BDCs. REITs are a more established and road-tested investment vehicle and most players now raising REITS, including Cerberus, KKR and JER, have experience investing in real estate assets.
  
Not all of the funds are going after the public markets, however. GSC Partners, a New York-based investment advisory firm managing distressed debt, corporate credit and European mezzanine lending, announced Monday that it has closed a $200 million private REIT to invest in real estate-related securities, whole-loan mortgages, bank and corporate loans, as well as other asset-backed securities.

If the past is any indication, GSC’s private REIT could likely be the first step on the way to a public vehicle. Many firms, like KKR, have launched private REITs with the public markets in mind.