John Paulson’s Latest Real Estate Play

When you think of the major real estate players, you would not immediately think of hedge fund manager John Paulson. Sure, he put himself on the investment world map — and $3.7 billion into his net worth — when he bet the residential mortgage market would collapse several years ago.

However, Paulson is also very quietly becoming a major player in the depressed but recovering commercial real estate market. It is widely known that the hedge fund manager, who manages about $35 billion, made a killing on gold and shares of Citigroup in 2010. He also has a real estate fund, Paulson Real Estate Recovery Fund, which aims to buy undervalued real estate properties that are mired in depressed or distressed situations.

A spokesman for Paulson said they won’t comment.

Paulson already has two Recovery funds devoted to all kinds of investments, including defaulted loans and mortgages. Perhaps his biggest deal last year took place in October when he teamed up with Blackstone Real Estate Partners VI, L.P. and Centerbridge to purchase Extended Stay Inc. for $3.925 billion as part of the hotel chain’s Reorganization Plan approved by the Bankruptcy Court.

Earlier in the year, Paulson was part of a group that also included Winthrop Realty Trust, Capital Trust and Morgan Stanley’s special property group, that took control of former CNL Hotels & Resorts Inc. properties from Morgan Stanley’s real estate funds through a $600 million debt restructuring, according to Bloomberg.

The group then took control of eight luxury resorts, including the Doral Golf Resort & Spa in Miami. Morgan Stanley had bought the hotel company in 2007 at near the peak of the commercial real estate bubble. Bloomberg noted that under the deal, $200 million of corporate debt was extinguished and $400 million was converted into equity.

In August, Paulson was the only bidder for the Western assets of TOUSA, a homebuilder and financial services company, which is in bankruptcy. Paulson agreed to pay $42.4 million for 8,277 undeveloped lots and 22 model homes in three states.

Give Paulson credit. Unlike 2007, when he shorted residential mortgages he saw trouble before most others. This time Paulson is buying real estate already in distress because he is one of the first to see the turnaround.