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The REIT way

Distressed players with real estate experience are looking to REITS as a new way to raise capital.

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 (€611 million), publicly traded REIT, according to a notice filed with the US Securities and Exchange Commission. LNRwas 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 documents, the new 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 estaterelated 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 sources of deal flow.

It's been a busy summer for LNR. The firm recently closed on the purchase of the El Toro military base in Orange County, California for $650 million. Announced in February, LNR worked alongside Blackacre, Rockpoint Group and MSD Capital, the family office of computer maker Michael S. Dell, on the deal. The former base will be redeveloped into a mix of residential and commercial real estate, as well as a college campus, a golf course and a 1,375-acre park.

Increasingly, the private equity business is also looking towards the REIT as a tax-friendly way to diversify investment strategies. KKR Financial, a REIT sponsored by LBO firm Kohlberg, Kravis & Roberts, raised $800 million in June via its initial public offering, followed less than a month later by a new REIT launched by McLean, Virginia-based real estate advisory and investment firm JER Partners.

Also in June, REIT Deerfield Triarc Capital began offering shares on the New York Stock Exchange; the subsidiary of New York-based Triarc will focus on real estate-related alternative investments, including private equity and distressed debt securities.

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 in July that it had closed a $200 million private REIT to invest in real estate-related securities, whole-loan mortgages, bank and corporate loans, as well as other assetbacked securities. In many cases, private REITs are a prelude to a public listing, as was the case with KKR's real estate vehicle.