Presentation Transcript

1. March 2010
2. REAL ESTATE MARKET OVERVIEW What happened to our industry…
3. Rialto Capital Management (“Rialto”) Lennar Corporation (“Lennar”) Clayton Holdings (“Clayton”)
4. Rialto and Lennar – History of Innovation and Strong Results Lennar, founded in 1954, has taken advantage of many real estate cycles since its formation as a homebuilder and land acquirer / developer One of the first to invest in and workout large portfolios of distressed real estate assets (>$5 billion of non-performing loans) One of the first to enter Japan to workout large portfolios of distressed real estate assets (>$8 billion of non-performing loans) Closed Legacy Securities PPIP Fund after being selected by US Treasury – Potential capacity subject to final closing of $44 billion dedicated to CMBS and RMBS Early pioneer of commercial CDOs and B-notes LNR’s $4.2 billion “go-private” transaction Lennar was one of the first to issue builder bonds to fill home mortgage void left by failing savings & loans LNR / Lennar acquired one of the largest public land companies (Newhall Land and Farming) that led to the creation of LandSource Asian Financial Crisis, Russian Debt Default & LTCM Bailout Rialto acquired interest in Clayton Holdings, Early 1980s Recession Bank / S&L Failures S&L / Real Estate Led Recession U.S. Residential Dislocation and Financial Crisis 1954 1970s 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Evolution of CMBS Market Evolution of European Real Estate CMBS / Structured Finance Market Mr. Krasnoff’s relationship with Lennar (as outside advisor) begins Mr. Krasnoff founded Rialto to take advantage of turmoil in today’s residential market Closed innovative Morgan Stanley / Lennar / Rialto $525 million land venture Mr. Krasnoff and Mr. Miller co-found LNR Property Corporation Producing over half of Lennar earnings, LNR spun-out as a separate NYSE-listed company Formation of Lennar Land Partners Entered the European market to take advantage of significant transition from public to private ownership of real estate assets Lennar’s Asset Management Division (led by Mr. Krasnoff and the predecessor organization to LNR) honed skills working with banks and savings & loans to turn around troubled assets Early pioneer in the development of the CMBS market and first buyers of non-investment grade mortgages coupled with special servicing Became industry leading buyer and special servicer of non-investment grade CMBS (thru 2007). Worked out billions of dollars of non-performing loans Raised $1.125 billion LNR Commercial Property Investment and $700 million LNR European Investors Funds to take advantage of skills in commercial property development and in US and securities and structured debt in Europe Rialto and Lennar have a long history of identifying opportunities, particularly in troubled markets, and responding with innovative strategies that have yielded strong results
5. WHERE IS THIS GREAT OPPORTUNITY? There is pent up capital, yet transaction velocity is at historically low levels Source: Prequin Source: Real Capital Analytics Dry Powder: Private Equity Real Estate Funds Transaction Volumes Still Low… (Billions) (Billions) CRE transaction volumes are down 72% YTD
6. THE TIME IS NOW “Price-Enablement” Has Begun $0.80 $0.80 Seller’s book value (Original par = $1) “Marked-to-market” Book value becomes less important (May be under new control or difference may be “bridged” by infusion of capital or other incentives) Additional Loss Seller is Willing to Take vs. Book Value Price under which selling assets creates insolvency $0.50 Price-EnablingEvents Government Seizures Equity Infusion “Good / Bad” Bank Tax Incentives Recapitalization Bankruptcy “Bid-ask” spread creating “price-disabled” seller Seller is “price-enabled” Rialto pricing* (Turned down as too low) Rialto pricing* (Accepted) $0.10 $0.10 Recent government events have provided the catalyst for the creation of “Price Enabled” sellers and the conditions for clearing distressed assets at commercially reasonable prices * Pricing assumptions based on current economic conditions with a continued decline in home values.
7. BANK SEIZURES 1990s vs. Current Cycle Number of Banks Assets Resolution 1990s: That Was Then… 2008-2010: This Is Now From January 2008 to 2010 YTD, over 180 banks have been seized 140 of these banks have failed in 2009 FDIC currently has over 700 banks on watch-list From 1984 to 1992, 1,452 banks and S&L’s were seized by the FDIC Bulk of this action taken after RTC was formed in 1989 RTC finished its job and was merged into FDIC in 1995 Total assets held by failed banks was almost $250B (excludes $307B for Washington Mutual) Total assets held by failed banks was $266B RTC / FDIC clearing process cleaned the system and allowed for banks to lend again FDIC has begun the process of clearing these assets through its Structured Loan Sales program Institutional Risk Analytics rates 2,200 Banks “F”, forecasting over 1,000 will be seized during this cycle. The 2,200 represent $4.4 trillion in assets
8. DISTRESSED LOAN PORTFOLIOS – FOCUS FDIC Asset Disgorgement Over 27,000 loans with a total face value of $17.5 billion have been sold by the FDIC since January, and the agency is becoming more aggressive with bringing assets to market – although there is generally a 12-month lag between bank failure and asset disposition FDIC: Sales, January 2008 – February 2010 FDIC Sales Volume since January 2008 $ in millions $ in billions * Q1 2010 data is as of February 10, 2010.
9. SUMMARY OF FDIC ACQUISITION Overview On February 10th, Rialto/Lennar announceda partnership with the FDIC in two portfolios of real estate loans emanating from the seizures of 22 banks and aggregating approximately $3.05 billion of unpaid principal balance (UPB) Rialto/Lennar’s equity investment is $243 million for a 40% equity interest, with the FDIC retaining the other 60% and providing 50% non-recourse debt at 0% interest for up to 7 years This values the combined portfolios at approximately $1.2 billion, or a little less than 40 cents on the dollar The combined pools contain over 5,500 loans secured by commercial and residential real estate ranging from undeveloped land to completed properties. Spread across the country with the largest concentrations in Atlanta, Las Vegas and Phoenix Almost all the loans contain personal recourse to the borrowers These transactions are among the first of many that the FDIC will need to complete 140 banks were seized in 2009, considerably more are expected to be seized in 2010 Over the last 12 months, Rialto has amassed a large servicing and asset management platform to prepare for this acquisition and to take advantage of future public and private opportunities Currently over approximately 50 employees (excluding Lennar and Clayton platform reach)
10. SUMMARY OF FDIC ACQUISITION Ownership Structure Combined KBW and Pentalpha Portfolios FDIC Structure The FDIC contributes loans into an LLC and sells a 40% equity interest The FDIC provides 50% financing in the form of purchase money notes at 0% interest rate – all cash flows go to repay notes until fully defeased Additional $54M funded for working capital reserves ($22M paid by Rialto, $32M by the FDIC), which will be used to fund day-to-day expenses of managing the portfolio $10M performance guarantee in effect until termination of the venture Distributions: 60/40 cash flow split with the FDIC after the debt is defeased; 65/35 after 25% IRR and 2.0x equity multiple; 70/30 after 35% IRR and 2.5x equity multiple The FDIC pays a management fee of 0.5% on UPB to manage and workout the portfolios Uses Sources Total UPB: $3.05 B(1) FDIC Debt: $627 M(2) (0% interest for seven years) Total Purchase Price: $1.22 B (40% of UPB) FDIC Equity: $365 M Lennar / Rialto Equity: $243 M 1 UPB before accrued interest, late charges and property protection advances 2 Includes an $18 million FDIC guarantee fee, which is not included in the purchase price of the portfolio of loans
11. SUMMARY OF FDIC ACQUISITION Portfolio Summaries KBW Portfolio – Residential AD&C* Pentalpha Portfolio – Commercial AD&C Comprised primarily of full recourse AD&C loans to developers and homebuilders, with many small loans to individual borrowers Comprised primarily of full recourse AD&C loans, including a mix of cash flowing assets, complete-but-vacant buildings and land Total Balance: $2.25B Total Balance: $799M Purchase Price: $858M Purchase Price: $360M Equity: $172M Equity: $72M # of Loans: 5,166 # of Loans: 345 Average Balance: $436K Average Balance: $2.3M Geography: NV – 43% GA – 18% AZ – 11% CA – 6% MO – 4% NC – 3% FL – 3% OR – 3% Geography: GA – 38% FL – 11% AZ – 11% NV – 11% CA – 7% TX – 3% WA – 3% SC – 3% Non-Performing: 92% Non-Performing: 88% Collateral: Raw Land: 14% Partially Dev. Land: 31% Finished Lots: 13% Incomplete Dwellings: 6% Completed Dwellings: 22% Commercial Land/Dev.: 8% Mixed Use: 1% Other: 5% Collateral: Retail: 29% Office: 16% Residential/Condo: 13% Mixed Use: 13% Hotel: 9% Industrial: 9% Other: 11% *Acquisition, development and construction.
12. Return portfolio acquisition basis through ‘quick win’ workouts (i.e. Discounted Payoff) Identify early on those assets that will not DPO and make a judgment as to whether they should be actively asset managed or foreclosed and liquidated SUMMARY OF FDIC ACQUISITION Resolution Options DPO Foreclose / Liquidate Asset Liquidation Restructure Loans Purchased
13. SUMMARY OF FDIC ACQUISITION Creating Value from Initial Acquisitions Restructure $60K Foreclose + Liquidate $50K Initial Acquisition Basis (per lot) DPO $40K Original Purchase Price $20K Shorter-Term Longer-Term Timeline
14. ADDITIONAL OPPORTUNITIES “Good” bank / “bad” bank structured sales The bank would carve out a specified pool of assets and contribute them to the ‘bad bank’ – remaining assets stay behind and form the ‘good bank’ The “Bad” bank assets are sold to new owners (A) and capitalized by seller financing through a senior loan issued by the bank with better than market terms The “Good” bank raises new equity to fill the “hole” created by selling its distressed real estate assets at a discount The “Good” bank is a profitable enterprise that is no longer burdened by the uncertainty of future losses associated with the real estate loans Rialto is bidding on the first of these innovative structures in the next few months “Bad Bank” RE Assets RE Assets <par$ Types: - Land - ADC C&I CRE Senior Loan (B) ‘Good Bank’ assets stay behind (A) Equity Original Bank Assets Liab. + Equity
15. QUESTION AND ANSWERS