April 7, 2009 / 9:29 AM / 11 years ago

UPDATE 2-Lone Star shops in Japan, grabs failed REIT

* Lone Star to inject $123 mln to revive New City REIT

* Fund in 2nd round of distressed asset shopping in Japan?

* Deal eyed for valuation guidance in depressed property mkt

* Lone Star plans to repay all the debt

(Adds further details in paras 14 and 15)

By Junko Fujita

TOKYO, April 7 (Reuters) - U.S. investment fund Lone Star Funds [LS.UL] won the right to buy failed Japanese real estate investment trust New City Residence Investment Corp on Tuesday, as it shops for distressed assets amid Japan’s worst recession in half a century.

Lone Star turned around a string of assets laid low after Japan’s bubble economy burst in the early 1990s and the purchase of the failed upmarket Tokyo apartment investor suggests it may try a similar approach in the current global financial crisis.

New City said in a statement Lone Star would invest up to 12.4 billion yen ($123 million) to buy the failed firm, subject to approval from debt and current New City share holders.

This was above market expectations for a sale at around 10 to 11 billion yen, said Takahiko Kishi, senior analyst at Mizuho Investors Securities.

“I think that price reflects New City’s true asset value, and also became a reminder that many REITs still have good and marketable assets despite a recent plunge in their unit prices,” he said.

“This announcement is really positive for many REITs that are oversold.”

A subindex of Tokyo REIT stocks .TREIT jumped 3.9 percent on Tuesday, outperforming a 0.3 percent fall in the benchmark Nikkei share average .N225

The fate of New City, which owns upmarket apartments in central Tokyo, has been closely watched by investors for an indication of the current value of Japanese real estate in a market that has almost ground to a halt. [ID:nSP433292]

LONE STAR ROUND TWO?

Dallas-based Lone Star bought a failed bank, distressed golf courses, hotels and other assets in Japan starting about a decade ago.

It sold the last of the bank, Tokyo Star, last year and listed its golf assets as Pacific Golf International Holdings KK 2466.T in 2005.

The two-stage sale of the bank returned Lone Star 260 billion yen, nearly sevenfold its investment, and there are signs of it chasing more deals in the current crisis.

Sources told Reuters in February that Lone Star Funds was raising another $20 billion to invest in troubled assets, having already pushed deeper into distressed real estate as the credit crunch took hold in 2008. [ID:nN17379976]

In its latest Japanese deal, Lone Star is buying 6 billion yen in new shares in New City at 15,000 yen each and offering 35,000 yen a share to existing holders.

Lone Star plans to repay all the debt — about 102.6 billion yen — while it will offer an option to equity investors to sell their New City shares to Lone Star or keep them, said Makoto Tahira a lawyer at law firm Hiiragi Sogo.

New City will stop dividend payments until it finishes repaying the debt, said a lawyer at Nagashima Ohno and Tsunematsu. New City will not make any new property purchases and will rely on existing assets to generate cash, he said.

New City sought court protection from creditors in October last year with $1.1 billion in debt, making it the first Japanese REIT to fail.

Since then New City has been looking for an investor so it can stay in business. At the time it failed, its shares were traded at 14,200 yen.

The REIT sector has been caught in a severe property cash squeeze as the credit crisis combined with falling real estate prices, sending the REIT stocks subindex down two-thirds from its record high in May 2007.

Lone Star was among four final bidders for New City that included Goldman Sachs Group (GS.N), the state-owned Development Bank of Japan and Oaktree Capital Management, sources have told Reuters. [ID:nT51492]

Lone Star planned to list New City within five years, New City said. ($1=100.60 Yen) (Additional reporting by Mariko Katsumura; Writing by Rodney Joyce; editing by Mike Nesbit)

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