Colony NorthStar to create second largest mortgage REIT

The publicly-traded vehicle, which would be seeded from the company’s balance sheet assets and two non-traded REITs, would have $5.5bn in assets.

Colony NorthStar is combining several of its holdings to form the second largest mortgage real estate investment trust, the Los Angeles-based firm said Monday, Private Debt Investor sister publication PERE reported.

The new vehicle, Colony NorthStar Credit Real Estate, comprises $1.8 billion worth of US assets from the “other Equity and Debt segment” on Colony NorthStar’s balance sheet, as well as $3.7 billion of assets from two non-traded REITs, NorthStar Real Estate Income Trust I and II, according to an investor presentation.

The combined entity would have $5.5 billion in total assets and $3.4 billion in equity value, ranking it second on the list of largest publicly-traded commercial real estate mortgage REITs, the presentation said. Starwood Property Trust is the biggest, with $4.6 billion in equity, and Blackstone Mortgage Trust is the third-largest, with $2.5 billion in equity. It is too early to know on which stock exchange or under which ticker symbol the new REIT would trade, a person with knowledge of the REIT said.

The mortgage REIT’s holdings would comprise 42 percent senior loans, 30 percent owned real estate; 20 percent mezzanine loans, preferred equity and commercial mortgage backed securities; and 8 percent private equity investments. About 75 percent of the REIT’s loans would be floating rate, and the portfolio will span property types and US markets. Kevin Traenkle, Colony NorthStar’s chief investment officer, would be the new REIT’s chief executive.

Colony NorthStar would own about 37 percent of the new REIT’s stock, while NorthStar I shareholders would hold 32 percent and NorthStar II shareholders would have 31 percent. The transaction is expected to close in late 2017 or the first quarter of 2018.

Earlier this month, Colony NorthStar chief executive Richard Saltzman said the firm was planning to roll up its balance sheet credit investments into a “third-party capital entity.”

The recapitalization of the firm’s conventional US debt book and related investments is “our number one top priority” over the coming year, Saltzman said on the firm’s second-quarter earnings call. “This is a legacy core competency of both Colony and NorthStar… we don’t want to do it in such a balance-sheet-heavy way as it’s currently configured today.”

The $1 trillion of projected loan maturities in the next three years, as well as regulatory constraints on other debt providers, including traditional banks and CMBS issuers, open the market for alternative lenders such as Colony NorthStar, according to the company’s investor presentation. Both a healthy macroeconomic environment and a favorable outlook for real estate also support the real estate lending business, the firm said.

Jessica Levi-Ribner, an analyst with FBR, wrote in a research note that the new REIT is the best way for Colony NorthStar to roll up its balance sheet investments.

“The non-traded REITs have finite lives, so Colony NorthStar eventually would have had to provide liquidity to shareholders down the road and asset under management fees associated with the funds would have disappeared. As such, we view the public structure as the better option from an earnings and liquidity standpoint,” she said.

Two other mortgage REITs sponsored have gone public in the past few months. In May, KKR had an initial public offering for its KKR Real Estate Finance Trust, raising $210 million, and last month, TPG went public with TPG Real Estate Finance Trust, amassing $220 million, PERE previously reported.

The real estate and investment manager was listed on the New York Stock Exchange as a REIT in January after the three-way merger of Colony Capital, NorthStar Asset Management and NorthStar Realty Finance was complete. The REIT managed $56 billion of assets as of June 30.