Question-and-Answer Session
Unidentified Analyst
[Question Inaudible].
Albert Tylis
For a New York non-traded REIT, it probably, with the equity REITs it actually tends to be a little higher for own real estate. So I would think it will lease – and we haven’t set the fee scale yet but it will probably be higher.
Unidentified Analyst
[Question Inaudible].
Albert Tylis
The big picture parameters right now and they are not finalized is we would probably share the fees in the business and our broker dealer would raise the capital and that’s the value we are bringing, they are bringing the investment and track record to the table and the idea is we have split those fees. Now when I say split, remember we are splitting not with the individuals but with the company that we are also a part owner of. So even if we split at the non-traded REITs fees 50:50 we are still getting a disproportionate amount of that because we also own a piece of the equity in the business.
Unidentified Analyst
The non-traded REIT has been around for a long time. It just seems like it’s gained momentum and or gained steam over the last maybe year or two, something about capital being raised, one thing that may not be on their – every REITs are seeing the potential regulatory issues around the non-trade REIT product, there is a spin 1214 or 1113 that’s out there. And maybe you can just talk about that what you are seeing on potential regulatory front? Is this just a standard check the box for tendering in the SEC or is there something behind this where the non-traded REIT business is going to be materially altered in the next couple of years?
Albert Tylis
I think the regulations that are out there that are existing as well as potentially coming down the pipeline, they all relate to one fundamental thing which is proper disclosure and transparency and the way we have built this business I think as a public company institutional sponsor in the space that I think has lacked that and maybe even continues to this day to really lack that kind of good thoughtful, careful fiduciary type sponsor where we think it’s positive but we are trying to be at the forefront of that type of disclosure. We are trying to be more transparent.
We are trying to be open with our investors and to the extent, it takes under as additional regulations around that we are completely comfortable with that and think that’s a net positive. And if there are others who feel less comfortable having that level of disclosure because they are not used to being a listed company and not used to the transparency and the openness that we deal with, that could be a net positive for us.
So I think improvements in the business – the business is probably reach $ 20 billion this year, the non-traded REIT business which will be a record and even with the issues the industry has had historically. So I think it has a lot of legs and I think improvements to disclosures and things like that should be better for the industry and certainly we feel like it’s better for us.
Daniel Altscher – FBR Capital Markets & Co.
Maybe just talking about the real estate income II and I, they kind of run side by side with NorthStar on the lending side of business. How do you deal with potential conflict of interest for say a transaction that you both want to go after at any time?
Albert Tylis
Yeah, we have them and this is part of our effort to be good fiduciaries and treat the retail investors and these non-traded REITs are no different than we treat the more institutionally weighted side at NRS and when an asset meets the criteria for both entities we have a rotation policy and that’s most – as you pointed out its most typically done with a mortgage loan where both companies want to – it’s the same team, it’s the same process it’s the same discipline and it’s a pure rotation. So we will approve it within the committee meeting and wherever, whichever entities turn it is to have that asset that’s how it goes.
The minor exceptions to that really deal with transactions that are very large that we split and when we do split those, those have been on the pari passu basis, not creating, not seen so nothing like that where you can have a perceived conflict but making sure we are treating both entities fairly. And we have done that really largely with the two large private equity deals that we have done where those really were NorthStar transactions they are more what we do, not so much on non-traded REIT but we know how highly we think of those and how well those have performed and we think they will continue to perform, we felt like to be a fiduciary we did want to allocate a piece of that of both of those transactions to our non-traded REITs.
Daniel Altscher – FBR Capital Markets & Co.
A question I get often from investors is something on the lines of… is non-traded REIT business sounds great, it’s key heavy, it’s capital light, the fees last until almost a perpetuity but until they don’t, hopefully for a long time, why not do this all day long and only do this, why go out there and raise capital or invest in anything else beyond just being an asset management company?
Albert Tylis
We are trying very hard to grow the business in a responsible way and I think that’s an important element so we are not just saying let’s go and sell 10 products at once, we hire as many people as we can and risk losing the controls that we think are appropriate in order to build the long-term sustainable business. So we are doing it thoughtfully carefully in a measured way while we still have very substantial growth in the business.
Look, while we were raising one product we were now raising two I think we have capacity to be up to as many as four at any given time and I certainly hope by next year that’s what we are doing. But you are right it is a great business but we feel like you have to do it responsibly, you have to do it thoughtfully you can’t just – we can double the size of our broker dealer but not have the quality of the people we have, the people who think the way we think, the people who will care about the NorthStar brand, care about what we build and we are not willing to risk that reputation or what we have built over the last nine to 10 years on people doing things that we don’t think are appropriate. So you got to do it carefully, you got to do it thoughtfully but we feel like we have done it and we can continue to do it in a material growth way.
Daniel Altscher – FBR Capital Markets & Co.
Maybe flipping, we will switch a little bit to the private equity side, other business, buying LP interest. You completed transactions and not too long a time, probably a couple more in the horizon my guess. Maybe you can give us a sense as to how big the opportunity set here might be this is not an appropriate transaction for every pension fund, not everyone is going to participate and this has to be structured in an appropriate way. What is kind of the opportunities that are we going to see too more of these transactions when it’s done or is this going to be one or two every year for the next 10 years?
Albert Tylis
My guess is it’s neither of those. I think what’s happened if you look at the non-real estate private equity space is a very liquid market that does billions and billions of dollars a year business. And for whatever reason the real estate side is right behind that. So there is clearly after we did the transaction with the TIAA-CREF the reason New Jersey ended up selling was because they saw that first transaction. And now there is these two transactions that are $ 1.7 billion and it’s opened the eyes of a lot of people, a lot of pension funds, endowments, foundations, that have desired liquidity but didn’t necessarily realize they can get it the way they need to get it and there we talked about this before, there are very specific nuances to each of the sellers and part of what we bring to the table is the ability to solve some of their issues to create structures that work for them and also work for us in a substantive way.
And I think there is – I think next year I think there is significant amount of business in this private equity space, I think there will be a lot of sellers out there that have seen these transactions, they will look and say, I would like to do this, this works for me. The reason – I also think there is an underlying dynamic here that also works now and next year and for some period of time but I can’t – you said something about one to two for the next 10 years the reason, there is one added fundamental and these structures are great.
They work very well substantively for us they work for the sellers that’s a huge component of this. But there is another, I think fairly material component which is what we have seen across these private equity funds and there is outliers to this, so I don’t want to say everyone will like that. But it took a while before the financial crisis or during the financial crisis for the private equity firms to actually write down their NAVs. And it probably took longer than – it certainly took longer than the public market stock, where the public market adjusted quickly in 2007-‘08 and you saw reprices on it, you didn’t see NAVs doing the same thing as these private equity funds do historically.
For the last several years, we have now seen this re-prices have all several years now had, when that it’s back and have been going up for the most part and the NAVs of a lot of these private equity funds have just recently started to go up. And that makes some sense because the public markets are going to be ahead of the private markets generally in pricing but I think even more importantly, you took your whims you went through the financial crisis that’s been a very difficult environment and what is the motivation absent or realization event to mark up your assets.
Maybe raising capital so it’s a good thing to have a better return but for the most part, it’s people managing and trying to do the best they can, We have seen there be that kind bias towards – even though values have gone up until realizations happened we haven’t seen that mark up and it’s been evidenced by when we have been getting realizations they are higher than where the NAVs were and that’s been making sense to us. It works to our benefit but that’s been making sense.
So I think there is that dynamic and it will come up overtime, there, there will be realizations, people will mark things up but it’s clearly lags the overall market and if you look at the two that we did, the blended NAV as a percent of cost is roughly 70%. So it’s a 30% discount to cost and remember this isn’t like every asset purchase at the top of the market. Even if it was you’d say probably shouldn’t be at 30% of the cost. These are largely good quality assets, good sponsors and good markets. It says some assets were purchased well before financial crisis, some certainly during and others after that are up a lot. So I think to blend that to a 30% discount to cost we feel like there is this huge embedded cushion, big picture in buying these portfolios and it’s certainly in the case in these two portfolios we purchased.
Daniel Altscher – FBR Capital Markets & Co.
I think you have quarter-on-quarter you were saying this is.
Albert Tylis
This is dangerous.
Daniel Altscher – FBR Capital Markets & Co.
Not that. This is maybe the best risk adjusted returning commercial real estate opportunity out there right now. But for those about who are not looking at the numbers and don’t see the fund, they don’t see the properties it looks like an opaque cash flow stream that were coming when it does so we don’t we have no idea what it actually means. So how can investors get more comfortable beyond the trustee?
Albert Tylis
Yeah, look I think it’s a lot of what I just alluded to, right? You have we disclosed the broad set of parameters around these funds. We show all the distributions, how much of it is income, how much is return on capital. We show you where we are as a percentage of cost and you can make some pretty high level assumptions and get to some pretty easy numbers by just saying look this isn’t old capital market and stuff but I know buying at 30% discount to cost and then on top of that I know the waterfall that we own it through so just pick a dollar and run it through a waterfall, see what it does.
Debra Hess
We also provide I mean some pie charts so we feel little bit of like property kind of some geography scale of a sense of what’s actually in the underlying funds and we also do for the growth in and out. So you can see what that’s doing. So based on what I was saying there is some information there that you can use and we are just subject to confidentiality in terms of our ability to give you the detail by far but we have tried to really give you as much as we think could be helpful to get little at least as much granularity as we can sort of offer.
Daniel Altscher – FBR Capital Markets & Co.
Right and now that you are in partner in all these driven funds I guess there is some potential responsibility that comes along with potential opportunities and so have you had opportunities to sit on advisory boards at this point, talk about maybe asset disposition or talk about potentially opportunities to partner with some of these various private equity funds whether it’s lending opportunity or a joint property opportunity.
Albert Tylis
Yeah we always thought that – that’s a good question. We always thought that that was a nice intangible benefit. I mean there is one is just information. The underlying portfolio say have over $ 50 billion of real estate that’s managed by institutional or investors across U.S. You get good sense of how just assets are performing in a pretty varied spectrum of the market. So the information flow has been great. Two, on the advisory boards, on the meetings I think it’s been helpful but one we actually did along with one of the GPs we knew them before but I think it came to fruition largely because of the relationship through our selves being a LP in the deal so yes and I think there are more of those to come.
I think the other thing that we found is going to these meetings and whether it’s advisory board or annual meetings, meeting the other owners is the LPs have been as valuable, maybe more valuable than spending time with the GPs. A lot of GP is. We there are some we know some we don’t but we have a fair amount of relationships in the industry and that includes lot of these GPs. The LP is these institutional investors we have never really raised money that way so they are largely not familiar to us but going to meetings and spending time with them you know they were the new guys in the room, they see us, they understand we have done, they pick our brands well, the transaction how we got there and I could see that definitely opening up to us for new transactions.
Daniel Altscher – FBR Capital Markets & Co.
Sure, sure, totally. You know I guess maybe just sticking with the private equity business a little bit you know there’s a good thing going on, people will pick-up and find a new need to know, add a bit of secret that you have been active in this business and you are looking to do more as well. So why is everyone in the world doing this and will they?
Albert Tylis
Yeah look I think it’s a couple of things. There are few dedicated private equity funds that do this and they are the main people that we run across in the transactions. I think the amount of inquiry we have had from people who want to participate with us and or invest in future deals is been substantial and that sort of leads me to believe that if a lot of very smart investors think that we are doing something smart people will try to find a way to get into the space.
So I don’t doubt that others will tend to get in. That entry point is not easy. You know we were able to enter because we came up with something that was different, unique, creative that nobody else was really thinking about and that’s why we did that transaction and now when other multiple people bid on the New Jersey transaction but you know based on you know our dialogue with them I think there is a bias to us because they knew we did $ 700 million deal so we are logical buyer of a $ 900 million deal. We have executed, we have performed and we’re now perceived as a leader in this space.
So I think having that first mover advantage is very important. I think another barrier for smaller more hedge fund type investors that don’t have the deep real estate teams the amount of let me one of the things that’s downside of the business is the amount of work and effort that goes into—we underwrite every asset as much as we can and it’s again $ 50 billion between these two. I mean this is, we have 150 people in NorthStar. We used a lot of people to get our arms around what we were buying and understanding, even I think that broad picture approach works. We nonetheless do what we always do and you know we’re disciplined, we are thoughtful, we are careful and we underwrote this in a great deal of detail so I think and thereby we can be more precise in how we pricing structure deals than I think somebody who is got two to three people in the real estate group is trying to figure out the transaction. So I think that’s an impairment.
I think another thing is we continue to find that as when we are a lender or relationship oriented, we have never been, we are not aggressive lenders. We worked well with people during financial crisis and I think what’s a lots of GPs have been or have been borrowers of ours in the past and I think we fall into a pretty nice spot where even though probably some of our elements of our business might be perceived as competitive, ultimately they don’t view us as somebody they have an issue with being an LP and they are comfortable with NorthStar as their partner they are comfortable with NorthStar as somebody who is you know we are not going to just kind of close our eyes to things but we’re also going to be – we are not going to be difficult if it doesn’t warrant it and we’ll be good, potentially helpful LPs.
I think there are a lot of private equity funds that won’t necessarily be afforded that same courtesy. I think they are going to be another private equity fund whose sole business is raising money institutionally, privately a big part of the business raising that capital privately, I think then trying to buy into another person’s business that’s 100% direct competitor, I think that’s a problem for them, without naming names. I think that’s and that’s a part of the universe that you would think would be interested as real estate private equity should want to do this but you know real estate private equity firm one buying an interest in real estate private equity firm two, real estate private equity firm two gets to approve that not obvious that they want a competitor whether it’s on advisory board or even just showing up in annual meeting talking to their investors.
We are not the ones raising money from those investors their competitor is and getting information on what they’re doing and investments. They might be in the same markets. We know there are lot of real issues. I think you start to knockout lot of the private equity funds, you start to knockout hedge funds, you kind of knockout smaller institutions, you look at public companies there are quite a few companies that have as broad a business as we do, that does fit into our overall business. I think you start to narrow the field pretty substantially and again not to say there should be other people involved but again if I gauge it by the amount of calls we’ve had to be able to say, “hey, can I just buy into your deal” because some of those same people can just as easily try to participate try to win the deal but may be they proceed that is an issue and there is so I’d rather just partner with NorthStar. So I think there is multiple reasons why there is a competitive advantage for us.
Daniel Altscher – FBR Capital Markets & Co.
You know one of their business line that you could say you’ve been early to get into yet seems to be heating up a little bit more also with something may be some of mine TC based private equity funds is manufactured housing. And I guess for our benefit A, why do you and other P shops see an opportunity in private – in manufactured housing and also everyone are trying their way which point does it become a very crowded space and the trade and probably gets too competitive to do get bigger and it’s done with?
Albert Tylis
Look it’s been let’s say it isn’t flattering with the number of high profile private firms that have recently set up shop and/or looking at transactions in manufactured housing space after we have been fortune up to buy over a $ 1 billion dollars. And I know why they are coming into the phase because it’s attractive. It’s a low risk business, it’s a stable steady durable cash flow stream that in today’s financial market you could lock in long term capital against some non-mark to market bases delivers into double digit returns and that’s good business and that was part of the piece as why we did it.
We, – billion two that we bought part of the portfolio we mentioned in the last call that we locked in on the ten year of victory debt on that when the ten year with sub 2%, and at 4% ten years fixed rate and non-recourse, mid-teens current on then we think that’s going to go up over time. And to offset that’s a no brainer and it’s delicate, it’s not enough the sexiest asset class right but it is a great durable it’s low CapEx of the high margin business.
And so we look at what we bought already as materially in the money because where we’ve seen its cap rates, if anything has slightly tighter than we like to see, they are flat to where we bought the assets but the financing today is a 100 basis points wider and that financing today that we have is assumable. So literally if we want to sell it today we could sell for I could say substantially not more than more we paid for.
And so as I look at the good thing is from the competitive standpoint the industry remains very fragmented and ELS which stands oldest manufactured housing that’s the largest owner of these rental pad sides I think they had as last reported somewhere in the area of a 150,000 of sell these sites because there are about 4 million across the country so it by far the largest player in this space has still a very small fraction of the overall industry.
So I think it remains fragmented it not surprise two private equity firms in there you know our operators the largest private owner and operator of these rental pad sides in the country we think they are best in class and we continue to work with them, we are working with them on the transaction we’ve talked about on the earnings call. And I think that business generally has legs and again it’s I guess nothing else if flattering and I think it says something about what we did earlier that you are seeing some very high profile private equity firms back into the space.
Daniel Altscher – FBR Capital Markets & Co.
And just on the well I guess aggressive may be the industry has gone , you just mentioned the CapEx may be flattish since you done the transaction. So to assume that means that even if these looking at this they are not wildly overbidding just trying to win at this point. Anything there being responsible for what may be their capital actually work?
Albert Tylis
So far we haven’t seen – we saw one portfolio that we saw got bid very aggressively actually too aggressively we just said it was just way out there and we were in the mix, we spend time on it and ultimately it didn’t happened and that was a new entrant and it wasn’t one of the larger private equity funds because new entrant had haven’t done this before and probably didn’t figure out their capital in that.
So I’ve seen a couple of those with those that could just have never gotten done so we are not seeing truly not seeing at this point kind of a heated market for these rented assets.
Daniel Altscher – FBR Capital Markets & Co.
I have got a bunch of other questions but we don’t mean to [inaudible] so let me not open up to the floor if anyone has anything they want to talk about?
Unidentified Analyst
As you’ve needed capital, you have gone to the common equity markets to raise it, can you talk about whether there is capacity for leverage on the existing assets as well as perhaps whether it’s an assets is leveraged a whole life or these can be [inaudible] before the income stream coming on the non-traded REITs even private equity funds.
Albert Tylis
Yeah, I must say, there is clearly you can have for leverage we mature as a company maturely deleveraged over the last couple of years it’s only intentional as you know our goal is been to create a less cyclical more durable business and part of that involves the deleveraging that we think is appropriate. And we clearly think there is capacity for leverage and I think one of the other things that we are seeing now as a lot of the investments we made are – whether it’s the cash flow that we are retaining it’s only paying out 75% of our income mortgage compared to competitors paying out over 100% or capital that’s coming back from our private equity funds, there is a lot of capital starting to be recycled through the system and then you also layering in our non-traded REITs that are raising more and more money. So the ability to do more business without having to always to tap the equity markets is continuing to increase to answer your question you ask there is capacity for leverage and something we certainly be looking at.
Unidentified Analyst
[Question Inaudible].
Albert Tylis
Sure the New York transaction is expected to close this year and I don’t just find out reason why it would and the acceptations actually closed in couple of weeks but certainly towards the end of the year. And in terms of the CDOs I mean I think there are one or two opportunities to do these kind of full collapses but as important is what we did last quarter and we’ll continue to do in next quarter to which is just to de-consolidate CDOs even if we are not collapsing them, because the level of transparency and what it does to the balance sheet and people whether a new investors or existing investors it’s been least feedbacks we had so far seem so helpful so people – and I mean is it’s been so helpful for an analyst to understand and see the numbers more clearly.
So we are class and it makes economic sense and is viable but I think just as important is ultimately just deconsolidating most if not all of those CDOs so that people can actually see what we own. We own volumes we have equity as opposed to billions of dollars of assets and billions of dollars of I think they’ll clean up the balance sheet significantly.
Daniel Altscher – FBR Capital Markets & Co.
Last question then you guys felt that getting out as [inaudible].
Albert Tylis
Yeah, so it’s definitely in our minds, it’s I think your point is right, in it that we are not, the stocks done pretty well this year, did well last year, but we are not given what we have done as a business we do not feel like we are getting credit for and maybe it’s a combination of the asset management business and our existing. I am not sure it’s just that, but I think we are not getting credit. I think if you just look at, we are trading at a mid-eight dividend yield. You probably take our peer group is trading probably a good hundred basis and they are playing a hundred plus percentage of their cash flow and we are paying out 75%.
So something is off. And you kind of layer in the fact that we own a lot of hard assets, we own assets that are traded in the public market at much higher multiples, which includes an asset management business that we have seen traded north of 20 multiples. So it’s a combination of things that we don’t feel like we are getting credit for and when we feel like we are not getting credit we have to evaluate things like it’s been on.
Daniel Altscher – FBR Capital Markets & Co.
And just following up quickly as last question, on attempting to deconsolidate more of the CDOs that are remaining, can it be just as simple as trying to sell the Clover Management D stream or the duties and – it’s gone.
Albert Tylis
Yeah, pretty much.
Daniel Altscher – FBR Capital Markets & Co.
So why not now?
Albert Tylis
I mean some of it involves like the Capstone CDO was the one loan CDO we did we that involved the consent process. So we are in the middle of that we hope that gets done. And then I think it’s for some of the other deals it’s a balance right because giving up control on our loans CDOs we felt pretty good about we feel they are doing well, with the level of oversight and management necessary relative to what it used to be, we feel like, yeah if someone else does it that’s okay that shouldn’t materially impact us in the deals that are back more by CMBS or we have exposures on volumes and so on that’s just the calculation we have to make right. So yes it’s fairly it’s really a control issue and so if we are willing to cede control to a third party that works.
Daniel Altscher – FBR Capital Markets & Co.
Great I think we are right on time so I want to thank you Al and Debra for joining us today.
Albert Tylis
Great, thanks.