Real estate mogul Barry Sternlicht's Starwood Property Trust (STWD.N) and investment firm Starwood Capital will buy LNR Property LLC, the biggest manager of distressed commercial debt, for $1.05 billion to expand into the booming market for such loans.
Starwood Property's shares rose 6 percent to a life high of $25.50 in early trade on the New York Stock Exchange on Thursday.
Banks across the world are working through their distressed commercial real estate loan portfolios, selling them at discounts to clean up their balance sheets. Consulting firm Ernst & Young expects nearly $1 trillion of U.S. commercial real estate loans to mature in the next few years.
Starwood Capital Group will pay $197 million for LNR's U.S. Commercial Property Group and 50 percent of LNR's ownership in real estate site Auction.com.
Starwood Property will pay $856 million for the rest of LNR's assets, including its U.S. special servicing business and Hatfield Philips, the largest primary and special servicer in Europe.
Starwood Property said it would likely finance the deal with a combination of equity, debt and asset sales.
The deal will add to the trust's earnings and cash flow in 2013, before transaction expenses.
LNR Property was spun off by home builder Lennar Corp (LEN.N) in 1997 and was publicly listed until 2005, when it was taken private by Cerberus Capital Management.
The company was recapitalized during the financial crisis by a consortium of investors, including hedge fund Oaktree Capital Management, commercial lender iStar Financial Inc SFI.N, Vornado Realty Trust (VNO.N) and Japan's Aozora Bank Ltd (8304.T).
Vornado, which bought a 26 percent stake in LNR in the recapitalization, said it will receive $241 million from the sale.
IStar Financial said it will receive $220 million for its 24 percent stake, sending its stock up 6 percent to $9.20, its highest in more than four years.
Citigroup and Credit Suisse advised Starwood Property Trust on the transaction, while Lazard advised LNR Property LLC.
The deal is slated to close in the second quarter.
(Reporting by Jochelle Mendonca in Bangalore; Editing by Saumyadeb Chakrabarty, Roshni Menon)