Northstar JV Buys High Yield Distressed Residential Assets
LandCap Partners, a fully discretionary, 50/50 joint venture between Northstar (NRF) and Goldman Sach's (GS) Whitehall Real Estate Funds, is buying $40 million of troubled land and construction loans from Wachovia Corp (WB), according to The Wall Street Journal.
This $40 million purchase will be the fund's second investment. Northstar committed $175 million to the venture, which is intended to capitalize on the high level of distress in the residential real estate markets. The fund has plans to invest in non-performing loans backed by residential land and equity interests in residential lots, and this purchase certainly fits within that scary scope.
According to the Journal, the loans are collateralized by 2,900 house lots, which are in varying stages of development, in states such as California, Arizona, Florida and Illinois. Wachovia sold the loans as a result of delinquent payments and the plunging values of the collateral. The $40 million purchase represents an almost 50% discount to the original face value of the loans, and by extension, an even higher discount on the original value of the collateral.
Northstar management expects these deals to generate unlevered IRRs of 20-30%, which is absolutely astronomical. There is a downside, however (aside from the obvious), and that is that these investments are not expected to generate meaningful returns until the assets are eventually re-sold, which may be several years from now.
Because NRF's capital has a current-pay requirement, including that for quarterly preferred and common equity dividends, this JV may start to create a near-term drag on earnings as more capital is invested without immediately generating significant cash returns. It's something to keep an eye on, but given NRF's performance thus far, I'm content to wait and see.
This $40 million purchase will be the fund's second investment. Northstar committed $175 million to the venture, which is intended to capitalize on the high level of distress in the residential real estate markets. The fund has plans to invest in non-performing loans backed by residential land and equity interests in residential lots, and this purchase certainly fits within that scary scope.
According to the Journal, the loans are collateralized by 2,900 house lots, which are in varying stages of development, in states such as California, Arizona, Florida and Illinois. Wachovia sold the loans as a result of delinquent payments and the plunging values of the collateral. The $40 million purchase represents an almost 50% discount to the original face value of the loans, and by extension, an even higher discount on the original value of the collateral.
Northstar management expects these deals to generate unlevered IRRs of 20-30%, which is absolutely astronomical. There is a downside, however (aside from the obvious), and that is that these investments are not expected to generate meaningful returns until the assets are eventually re-sold, which may be several years from now.
Because NRF's capital has a current-pay requirement, including that for quarterly preferred and common equity dividends, this JV may start to create a near-term drag on earnings as more capital is invested without immediately generating significant cash returns. It's something to keep an eye on, but given NRF's performance thus far, I'm content to wait and see.
Disclosure: At the time of this writing, long NRF
Labels: High Yield Mortgage REITs, High Yield REITs, Mortgage REITs, NRF
posted by RW at
12:00 AM
4 Comments:
I too am long on NRF and believe that they have strong competent management. However, I don't think that this is a wise investment strategy - to hold non-earning assets on the books - at this time in the real estate cycle. Not sure why Hamamoto and groupies have such a hard on for land. Maybe they know something we don't. I am willing to give them some room on this one.
"Not sure why Hamamoto and groupies have such a hard on for land."
Ummm, they're not making any more of it?
+++++++
This "Sale" is not even a drop in the bucket in terms of cleaning up the portfolio, but it does serve to establish a market valuation. So Wach's portfolio is worth no more than $0.50 on the dollar. Will they write down the value for 3rd quarter now that market value has been established?
"Ummm, they're not making any more of it?"
I have some Florida residential coastal land on the books that I am willing to sell for $.50 on the USD. They are definitely not making any more of it. My number is 1-800-SWAMP. The deal is golden.
By my quick math, this works out to less than $14,000 per lot. Land values in my (not particularly tony) burb of DC are closer to $200k per 1/3 acre. Assuming this stuff is eventually buildable (location, location...) this is cha-ching in the bank down the road. But agreed it may not look pretty sitting on the balance sheets for the next 3-5 years while this cycle runs its course.
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