New Jersey lands buyer for RE secondaries

The New Jersey Division of Investment has agreed to sell $925 million worth of stakes in real estate funds as part of an effort to pare down the number of managers in its property portfolio. A partnership between NorthStar Realty Finance, NorthStar Real Estate Income Trust and funds managed by Goldman Sachs Asset Management (GSAM) is the buyer in the transaction, according to a filing with the US Securities and Exchange Commission.

The partnership initially has agreed to pay $510 million to New Jersey for up to 25 real estate fund interests in a transaction that is expected to hold its initial closing by next month, with subsequent closings thereafter. NorthStar Realty Finance, a publicly-traded commercial real estate investment and asset management company, holds a 70 percent stake in the partnership, with its non-traded REIT affiliate and GSAM each holding 15 percent stakes.

Under the agreement, the partnership will receive 85 percent of distributions from the fund interests, while New Jersey will receive 15 percent for a three-year period following the closing date of each fund interest. In the fourth year subsequent to the closing of each fund interest, distributions will be divided equally between the partnership and the pension plan. After a four-year period, the buyers will receive 100 percent of all distributions upon payment of the remaining $415 million to New Jersey.

The transaction, which involved an offering of approximately $1 billion of real estate fund interests, was said to be executed near par. That is considerably higher than other real estate secondaries transactions that typically involve a 15 percent to 20 percent discount to the fund interests’ net asset value (NAV). 
 
The New Jersey sale is believed to be the largest real estate secondary transaction to have closed. The offering is said to have included fund interests from managers such as Walton Street Capital and BlackRock, according to a source familiar with the deal.
 
Meanwhile, the deal marks the second large real estate secondaries transaction for NorthStar, which agreed to buy partial interests in 51 real estate funds from a financial services firm in December, according to an SEC filing. In that transaction, NorthStar and the seller – said to be TIAA-CREF – formed a joint venture in which Northstar paid approximately $390 million in cash for its partial fund interests, which had an NAV of approximately $765 million, while TIAA-CREF retained $375 million of capital in the funds. 

NorthStar also had a priority return in that partnership, where it would receive 85 percent of distributions and TIAA-CREF would get 15 percent until the former received $585 million of distributions, after which the situation would be reversed until TIAA-CREF received a return of its remaining capital. For distributions thereafter, 51 percent would go to NorthStar and 49 percent to TIAA-CREF.

PERE first reported in January that New Jersey was exploring a possible real estate secondaries offering. By March, the pension plan had received offers of interest from approximately 25 firms, which subsequently were narrowed to a pool of 14 and then five. Real estate secondaries firms Landmark Partners and Partners Group were said to be among those firms in the final round.

The real estate secondaries sale follows New Jersey’s offering of more than $1 billion of private equity stakes through the secondary market in 2011. It continues the pension plan’s effort to offload poorly performing or redundant investments from its portfolio.