Northstar JV Buys High Yield Distressed Residential Assets

by REIT Wrecks on August 20, 2008

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.

Click here for an updated Mortgage REIT list, including current yields

REIT Dividends
Disclosure: At the time of this writing, long NRF

Be Sociable, Share!


Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Previous post:

Next post: