NorthStar Realty Finance, a New York-based investment firm, has come from nowhere in 2013 to emerge as one of the biggest players in the real estate secondaries market.
In February, it spent $390 million buying a 51 percent stake in a portfolio of 45 real estate fund interests previously owned by financial services organisation TIAA-CREF.
Then in June, it teamed up with Goldman Sachs Asset Management to buy up to 25 fund interests with an approximate net asset value of $925 million from the New Jersey Division of Investment pension plan. It was one of the largest real estate secondaries transactions ever completed, and included fund interests from managers such as Walton Street Capital and BlackRock, according to a source familiar with the deal.
The price paid was apparently somewhere near par, which is considerably higher than most real estate secondaries transactions. However, the deal has an unusual structure: NorthStar is paying $510 million up front, but splitting the distributions from these fund interests 85/15 with the seller for the three years after the funds close. After a four-year period, the buyers will receive 100 percent of all distributions – following payment of the remaining $415 million to New Jersey.
Three or four years ago, this market was dominated by a handful of secondaries-focused firms, such as Landmark Partners and Partners Group, as well as 30 to 40 non-traditional buyers that played a lesser role.
However, in the past two to three years, the number of non-traditional buyers – hedge funds, pension plans, endowments and others that are interested in, but not dedicated to, buying real estate fund stakes – has ballooned to more than 200, one source says. And this trend looks set to be permanent, not cyclical, as potential buyers get more familiar with the secondaries market.
NorthStar is unusual even among non-traditional buyers: previously known primarily as a commercial real estate lender, the firm had no exposure to real estate funds prior to the TIAA-CREF transaction. But buying these fund interests is “an alternative, non-correlated way to get broad exposure to commercial real estate,” said Daniel Altscher, an equity analyst at FBR Capital Markets, a Virginia-based investment bank that follows NorthStar. “The motivation is to diversify the cash earnings streams for this company.”
The deal also allows NorthStar to capitalise as the commercial real estate market improves, Altscher suggests. He estimates that the firm acquired the interests at approximately 72 percent of what the New Jersey pension plan paid for them, thanks to falling valuations. “There is significant embedded upside to the underlying NAV as property values rise and move up toward – and perhaps beyond – the seller’s original cost basis,” he wrote in a research note.
He believes NorthStar is likely to do more secondaries deals like this – not least because of its partnership with Goldman Sachs, which will provide NorthStar with an additional channel for accessing deals (in both real estate and private equity).
It’s possible the emergence of deep-pocketed bidders like this may force the traditional players to change the way they do business – either by bidding higher (and consequently accepting lower returns) or by getting more skilled at sourcing, underwriting and structuring deals.
On the other hand, NorthStar’s acquisitions should encourage more vendor activity, as sellers see pricing improve and transactions like this become ever more commonplace. And a more active market ought to be good news for all concerned.
An earlier version of this article previously appeared in our sister title, Private Equity Real Estate (www.perenews.com)