Starwood CEO looking at other bank portfolios

NEW YORK (Reuters) - Barry Sternlicht, chairman and chief executive of private equity firm Starwood Capital Group, recently bought himself and his partners $4.7 billion worth of real estate when the firm saddled up with the federal government and purchased failed Chicago bank Corus.

He is eyeing yet another Midwest bank portfolio, with problems similar to Corus, a conservative Midwest bank that expanded beyond its traditional geographic area and financed billions of dollars of mostly construction loans, many of which soured when the lending market tightened.

"There's at least one other really attractive bank," Sternlicht told Reuters in an interview last week. "They had national branches. But I wouldn't give the Midwest a distinction on that. I think there are plenty of calamities across the country."

Last week, Starwood Capital and its partners put up $554 million of a $2.7 billion deal along with the federal government for the Corus loan portfolio.

The Federal Deposit Insurance Corp took a 60 percent equity stake for about $831 million. The federal government also is providing $1.38 billion in guaranteed loans at 0 percent interest.

"If you had to go out and finance this through a third party, you couldn't have done it," Sternlicht said. "You couldn't have borrowed $1.3 billion and if you could have, it would have cost you probably 10 to 15 percent."

The commercial real estate sector has been on the decline for more than a year and represents the next great threat to the financial markets, according to recent government reports. Although large investment banks have more commercial real estate loans by dollar amount, regional banks are vastly more exposed as a proportion to their overall assets.

During the commercial real estate heyday of 2004 though the first half of 2007, some banks issued loans that covered even more than the property was worth. Corus was not a reckless lender, Sternlicht said. It issued most of its loans at 60 to 70 percent of cost or value. But the housing crisis prompted many condominium buyers to renege on their contracts, leaving many of developers with Corus loans struggling.

"There were projects in this portfolio that were nearly 100 percent sold out, but they finished a year ago and 90 percent of the people walked on their contracts," he said.

Corus tried to stay its demise by extending the loans. "If they took the losses that everybody knew they had, that would have wiped the bank out earlier," he said. "So they just hoped and went and went and went until the FDIC said you can't do this anymore."

Many regional banks are playing the same game, and the properties are not as valuable, he said.

Yet as banks have been extending loans for weak borrowers, they have been less willing to give stronger borrower latitude, Sternlicht said.

Corus was not always a victim of timing, and seems to have worn blinders when it made loans to Miami projects, he said.

"If you looked at the historical absorption and looked at what would have to be absorbed to meet these projections, you would have known this couldn't happen in any market. Forget about the crash. It was going to overbuild in any market," he said.

Yet Corus' portfolio appealed to Starwood for several reasons, he said.

"What made Corus so attractive was a geographic footprint across the country," he said. "It's not reliant on any one market getting soft."

The portfolio has several office properties, many of which are located in Washington D.C., the strongest U.S. office market. It also has properties in Los Angeles and New York.

It also has three beachfront properties in or near Miami.

"The other key component about this that people don't understand about this portfolio is a significant portion of this nearly $1 billion are loans we expect to perform and stay performing," he said. "It's not all going to wind up in foreclosure."

Of the $3.5 trillion of commercial real estate loans outstanding, regional banks hold $1.1 trillion, according to accounting firm Ernst & Young. Through the end of 2013, about $1.42 trillion of commercial mortgage-backed securities and bank loans are set to mature, excluding $600 million in construction loans.

Yet so far there have been few distressed loans or properties to buy. In addition to loan extensions, Libor, which is used as a base for floating-rate loans, has been kept very, very low. Experts worry that these loans will finally give out all at once.

"The best thing that could happen... is let the market clear," he said. "Take the losses and put capital to work in more productive uses. And let the market be a free market. It will work. It may not be all U.S. players."

(Reporting by Ilaina Jonas, editing by Matthew Lewis)