Pacific Office Properties Trust (PCE) had just disclosed their intention to raise $350 million through this market, and now NorthStar Realty Finance Corp. (NRF) is following suit with intentions to raise up to $1.1 billion in non-traded REIT equity. Whether NRF actually intends to raise this much in this market is uncertain. Offering $1.1 billion in non-traded REIT equity would be an absolutely huge undertaking, as it represents more than 10% of the market’s entire 2008 initial offering volume.
NRF remains one of my favorite Mortgage REITs, but the market has been just as unkind to NRF as it has to most other REIT stocks. The stock is down almost 70% since NRF’s chairman David Hammamoto bought a bunch of stock on the open market at $8.26/share only months ago. Management owns a significant amount of stock, so it’s no wonder they are pursuing cost-effective ways to recapitalize their balance sheet.
NRF and PCE are two of the only publicly traded Real Estate Investment Trusts to tap this market, but they are only the latest in a growing list of entities accessing this market. But do yourself a favor and don’t even think of buying a non-traded REIT. In just the first three months of the year, five companies have launched efforts to raise $7.2 billion of equity through non-traded REITs. By comparison, $9.6 billion of equity was raised in this market in all of 2008.
For Northstar, a non-traded REIT offering is an incredibly cheap source of equity capital. NRF intends to raise the equity through a new entity, so existing shareholders in NRF common will not be diluted. The new NRF non-traded REIT intends to pay its investors an annual REIT dividend of 8 percent, which would be higher than the 5-7 percent typically paid by non-traded REITs and far better terms on equity than what NRF could get elsewhere.
While the offering is undoubtedly very attractive to NRF with respect to the scant alternatives available, it remains to be seen how well shareholders in the new entity will fare. Investors will pay fees of as much as 7 percent to cover the cost of selling commissions; a 3 percent dealer-manager fee, and 3 percent to cover the costs of organizing the entity. Accordingly, only 87 percent of every dollar raised will actually go toward investing in mortgages.
NorthStar’s aim is to execute what it termed a “liquidity transaction” within five years of raising the capital. That could be a sale of assets, merger or listing on a stock exchange. Historical non-traded REIT returns are hard to quantify, because so few have executed their so-called liquidity events. Given how cheap this capital is, it’s no wonder.