BLUEPRINT: Off the beaten path

The headquarters of Normandy Real Estate Partners isn’t located in a midtown Manhattan skyscraper, although it does have an office in that city (and a few others). Instead, the home base for the real estate investment firm, which specialises in distressed debt and value-added office strategies, does indeed resemble a home. 

Normandy’s out-of-the-way headquarters is housed in two revamped and conjoined former residential mansions in the historic and scenic town of Morristown, New Jersey. Founding partner Finn Wentworth tells PERE that the firm chose to base its operations in the suburban New Jersey town – an hour’s train ride outside of New York City – to not only stay closer to their families but to attract talented real estate professionals who realise that one doesn’t need to be in the Big Apple to do quality work. 

“We realised that what we do can be done outside New York City,” says Wentworth. “Being here enables us to get high-quality people with sophisticated backgrounds who want to raise a family in an environment that is healthy and rewarding.”

Just as it has decided to situate itself off the beaten path, Normandy has chosen to invest in assets that also are off the beaten path, such as distressed debt and value-added properties. However, the firm has been seeing some increased traffic on the road upon which it’s opted to travel. In the past year, Normandy won control over a roughly $1.1 billion debt fund formerly run by Capmark Financial Group, launched its latest commingled value-added vehicle and completed a $355 million recapitalisation of one of its signature investments.

So, it’s been a very busy time indeed for Normandy. And now, with the current wave of debt maturities facing the market, it’s looking as though the firm will become even busier in the months and years to come. 

Steady growth 

Normandy, which is perhaps best known for acquiring and selling the John Hancock Tower in Boston in partnership with Five Mile Capital Partners, has been hitting its stride of late. In 2005, three years after Normandy officially was formed, it had a staff of approximately 20 professionals and a couple million square feet under management. Now, the firm employs roughly 100 people working out of offices in New Jersey, New York, Los Angeles, Boston and Washington DC and manages approximately 15 million square feet of commercial property with an approximate gross asset value of $5 billion. On a net basis, Normandy currently manages $1.5 billion in equity.

Normandy’s assets under management (AUM) comes from two funds the firm raised itself – Normandy Real Estate Fund I and II – and the Capmark Structured Real Estate Partners Fund it acquired in May 2011 and rechristened as the NREP Real Estate Debt Fund. Furthermore, that AUM figure is expected to soon rise because, although the management team of Normandy declined to speak about it, sources familiar with the situation told PERE late last year that the firm currently is seeking to raise $500 million for its third value-added vehicle, Normandy Real Estate Fund III. 

According to managing principal Jeffrey Gronning, Normandy’s target investors are domestic and international pension plans, insurance companies, sovereign wealth funds and state municipal pension plans, as well as corporate investors. “It’s all institutional,” he adds. 

Getting the band back together 

Although Normandy officially formed in 2002, its core management team — Wentworth, Gronning and fellow founding principal David Welsh — goes back much further than that. “David, Jeff and I have worked together for 16 years,” Wentworth tells PERE, adding that he and Welsh first met at “a national platform that grew to more than 50 million square feet. We worked really well together. We had a lot of respect for each other’s talents.”

The national platform in question was Gale & Wentworth, a Florham Park, New Jersey-based diversified real estate investment and services firm that Wentworth formed with Stanley Gale in 1988. In fact, Gale & Wentworth was where Welsh began his real estate career. 

“I actually started interning at Gale & Wentworth when I was freshman in college,” Welsh says, noting that the firm was one of the largest operating partners of Morgan Stanley Real Estate Investing (MSREI) in the mid-1990s. It was through that relationship that Wentworth and Welsh met Gronning.  

“I spent twelve-and-a-half years at Morgan Stanley, working in the real estate investment business,” says Gronning. “David, Finn and I connected in 1996 by doing a series of investment programmes between Morgan Stanley and Gale & Wentworth. I got to know David and Finn very well during that period.”

In 1999, Welsh left Gale & Wentworth to join MSREI, where he began working with Gronning. Shortly thereafter, Gale & Wentworth was sold to Mack-Cali Realty in 2001, and Wentworth became president and chief operating officer of YankeeNets, the holding company of the New York Yankees, the New Jersey Nets and the New Jersey Devils. There, Wentworth helped form the organisation’s media company, the Yankee Entertainment Sports (YES) Network.

In fact, 2001 was the one year when the trio was fractured, with Wentworth working at YankeeNets and Gronning and Welsh working together at MSREI. The following year, Welsh and Wentworth decided it was time to reunite. “We had worked really well together for a decade,” Wentworth tells PERE. “And with me completing my YES Network responsibilities, we were able to get the band back together.”

Wentworth and Welsh re-joined forces in 2002 and started doing business under the name Normandy Real Estate Partners. When the firm first began, it hadn’t yet launched any funds, instead entering into deals with its own capital. It wasn’t until 2005, when Gronning left MSREI to join Normandy, that the nascent platform launched its fund business. 

“Initially, it was David and I, with Jeff still at Morgan Stanley,” says Wentworth. “We started doing deals as Normandy with Morgan Stanley and other institutional partners on a one-off basis, but we kept working on Jeff to get him over with us. In 2005, he came over and we launched our institutional fund business.”

Wentworth notes that Gronning leaving the safety and comfort of MSREI to join Normandy was a “bold” move since the investment bank was in the midst of its “peak performance” period. “In 2005, we had such a successful operating platform and a strong track record that we saw an opportunity where we could access our institutional capital relationships directly, as opposed to going through joint ventures with groups like MSREI,” adds Gronning on joining the Normandy team and helping the firm get into the fundraising business. 

Normandy’s secret sauce

The managing partners of Normandy agree that the firm’s specialty in the distressed debt and value-added office space comes from extended experience, knowing the capital markets as well as the operating side of things and its longstanding relationships within the industry.

“So what’s the secret sauce in Normandy?” asks Wentworth. “It’s being able to have the sophistication and skill to navigate the debt stack and melt that right into our vertically integrated operating platform, where we add value to the real estate the old-fashioned way.” 

“It’s the capital markets expertise married with the operating expertise,” adds Welsh. “Finn’s and my roots are on the operating side, while Jeff’s roots are the capital markets and the institutional management side. That combination is unique in today’s environment, where distressed debt opportunities are prevalent. We really benefit from our operating team, which manages each facet of our integrated model and helps us to see the whole picture when we approach deals.”

Gronning also points out that Normandy is able to succeed in its particular niche by taking advantage of the longstanding relationships that the three executives have cultivated through their tenures at Gale & Wentworth and MSREI. 

“It’s an opportune time for us to leverage our capital markets expertise and our 15-year relationship network that we’ve created in the capital markets to identify opportunities to acquire institutional-quality real estate that we can reposition, stabilise and sell to lower cost capital,” Gronning says of Normandy’s traditional value-added strategy. Indeed, the team’s skill set gives the firm the ability to “buy high-quality assets in really good markets at a fundamentally better basis” at a time when the market is seeing a great deal of deleveraging, recapitalisations and foreclosures taking place. 

Below the radar

The partners at Normandy are quick to point out that keeping a relatively low-profile and being non-competitive paradoxically gives the firm a competitive advantage. 

“We’re below the radar, very relationship-oriented and fairly quiet about what we do, but in fact we have been one of the more active groups in the distressed debt space,” notes Gronning. “We aren’t high-yield paper buyers, rather we’re getting into deeply distressed situations where we’re buying debt for control.”

Welsh agrees with his colleague, adding: “We are mainly looking at single-asset or small portfolio situations, so we’re not competing for the large mega-deals.”

Indeed, the current real estate environment — particularly in the distressed debt acquisitions space — is becoming increasingly competitive. As a result, Normandy tries to avoid situations in which it is in a competitive process. Rather, it looks to focus on off-market transactions. 

“We continue to look for deals where we can acquire through direct relationships with the seller,” Welsh adds. “We try to avoid situations where there are competitors.”

Signature deals

In terms of transactions that exemplify Normandy’s strategy, the management team cites the quick—and massively profitable—turnaround of the John Hancock Tower in Boston. In fact, Welsh points out that it was one of the first large distressed debt deals completed after the downturn. 

After buying discounted mezzanine debt positions in June 2008, Normandy, in partnership with Five Mile Capital Partners, purchased the John Hancock Tower through a foreclosure auction for $660 million in March 2009. By May 2010, Normandy had executed several new leases at the 1.7 million square-foot office tower, including a long-term lease with Bain Capital for 270,000 square feet, bringing the occupancy rate up to 96 percent from 80 percent. 

In October 2010, it was revealed that Normandy and Five Mile were selling the 62-story, blue glass skyscraper—the tallest skyscraper in New England—to Boston Properties for $930 million. The transaction garnered the partnership a gross profit of roughly $269.4 million, or a 13.5x equity return on its investment just 18 months after acquiring the property.

“This deal best illustrates our strategy,” says Welsh of the 2009 Global PERE Award-winning deal. “We came in quick, navigated the debt stack, dealt with tranche warfare, created value and sold the asset after we re-stabilised the vacancy.”

However, the John Hancock Tower is not the only signature deal that Normandy has made. In November 2010, a joint venture between Normandy and Westbrook Partners bought a portfolio of three mezzanine loans totalling $108 million on 116 Huntington Street in Boston, 100 California Street in San Francisco and 1000 Wilshire Boulevard in Los Angeles for 70 percent of the face value. Normandy then sold the loans to separate buyers: 116 Huntington to Beacon Capital Partners in May 2011; 1000 Wilshire to Douglas Emmett, also in May; and 100 California to Embarcadero Capital Partners in November 2011. Those sales were completed at a total blended price of approximately 95 percent of face value.

“We bought those three mezzanine loans as a package from one institution with a loan-to-own strategy, but we don’t always need to get to the equity to make money,” says Welsh. “We monetised out of that portfolio by selling each of the debt positions and not converting into equity.”

Another deal of note occurred late last April, when Normandy offered the winning bid of $12.7 million for the GP stake in Capmark’s $1.06 billion real estate debt fund, Capmark Structured Real Estate Partners. The sale of the fund was part of Capmark’s plan of selling off its assets after filing for Chapter 11 bankruptcy protection in 2009. 

“I think that transaction really highlights the way we’ve been able to leverage not only our operating skill set, but also our capital markets skill set,” says Gronning.

“The original investors had to approve us,” notes Wentworth on taking control of the Capmark fund. “In the end, however, we gained the support of a really blue-chip roster of institutional investors.”

Day of the living dead

Welsh notes that, despite being formed as a value-added specialist, the current wave of debt maturities in the US is the ideal environment for Normandy’s distressed debt and asset speciality. “The acceleration of distressed office deals are playing into Normandy’s sweet spot,” he says. 

According to Gronning, there are a number of deals in the office space – acquired and financed between 2005 and 2007 – that have performed despite the downturn due to low interest rates and long-term leases. “It’s really only now that many of those loans are beginning to reach their final maturity and are going to default because the value of the property is way below the amount of the debt,” he explains.

Wentworth agrees. “In more than 30 years of being in the industry, I have never seen a pipeline like we are experiencing now,” he adds.

Indeed, the wave of debt maturities is accelerating in part because “there hasn’t been a real incentive for the current owners of those properties to invest capital in order to retain tenants, reposition the properties, address deferred maintenance, stabilise the assets,” Gronning notes. “And they’re at the point where the game is over.” 

Because of this, Normandy views the current market landscape as a continuation of what it’s been focused on for the past few years. “Over the next three years or so, there’s going to be a lot of acquisition opportunities for people who specialise in what we do, which is office space with a capital markets orientation,” says Gronning. 

“This is the day of the living dead,” adds Wentworth about the current market. “This is a zombie land that we’re experiencing.” This, of course, spells opportunity for not only Normandy, but for tenants seeking a higher-quality building and “a landlord that can afford them that opportunity.” 

Keeping investors happy

In an environment with a surplus of zombie buildings and zombie loans, how does Normandy not only entice investors to do business with them, but also keep them happy enough to come back? 

Some of it has to do with the firm’s track record and longstanding relationships in the industry. Another reason is strong performance. But Gronning suggests, for Normandy, it goes beyond those fundamentals. 

“When you look at us as an organisation, we’ve been together for a long time. I think that’s one thing for which people look to us,” Gronning says. “Whereas some other managers were forced to shrink in the downturn, our team is fully intact.” He adds that, not only is the management team intact, Normandy is actually “about 30 percent bigger than it was in 2008.”

Welsh agrees, adding that Normandy is also “highly transparent,” which makes investors trust them to seek out riskier deals. Not only that, but Normandy prides itself on being able to monetise its assets quickly. 

The future path

Looking forward, Wentworth tells PERE that adding value to its investment partners and Normandy’s associates is at the top of the list of the firm’s investment goals for 2012 and beyond. “That’s what gets us going as a group,” he says. “That’s number one.”

Gronning adds that Normandy also plans to continue doing what it does best: taking advantage of the growing number of opportunities in the US office markets, primarily New York, Boston and Washington DC and selectively in Los Angeles and San Francisco. 

“This opportunity in the office space and around distress is really in the early innings,” Gronning says. “We’ve revved up the engines going back three years now, took great advantage of it, returned all the money that we invested during that period and are well-positioned and poised to take advantage of what we think will be an accelerating trend going forward. So it’s really a continuation of what we’ve been doing.”

Adds Welsh: “We are very selective in looking at and placing new capital, so it’s maximising profitability with our existing portfolio. Even though we see great opportunities on the horizon, we’re still very cautious and selective with deploying new capital.” Indeed, coming from a firm that does not need to be part of the break-neck speed of the New York City rat race, this attitude of ‘slow and steady’ makes perfect sense.   

“Discipline is the key word,” says Gronning. “When you look at the overall environment, the number of assets that are becoming distressed in the office space is actually increasing relative to other asset classes. Therefore, we think that, notwithstanding our past successes, the best is yet to come.”

Wentworth also notes that, going forward, Normandy is going to continue fostering a “tight-knit culture of success. When you meet anybody who’s been at Normandy, hopefully you can always say that’s the type of person I can a) trust and b) want to spend more time with.” 

Perhaps this culture is something that the environment provided by Normandy’s large yet homey, out-of-the-way New Jersey office can help facilitate. 

Normandy Real Estate Partners
Headquarters: Morristown, New Jersey
Other offices: New York, Los Angeles, Boston and Washington DC
Staff: 100
Assets under management: $5 billion (gross)
Real estate under management: 15 million square feet

Fund snapshot

Normandy Real Estate Fund 
Status: Closed, fully invested
Total equity: $450 million 
Strategy: Value-added industrial, office, residential and retail assets in the US

Normandy Real Estate Fund II
Status: Closed, currently investing
Total equity: $350 million 
Strategy: A diversified portfolio of value-added assets in the US

NREP Real Estate Debt Fund
(formerly Capmark Structured Real Estate Partners Fund)
2006 (Normandy took over in 2011)
Status: Closed, fully invested
Total equity: $1.06 billion
Strategy: Debt backed by assets in the US, primarily in New York, New Jersey, Boston and Washington DC

Normandy Real Estate Fund III
Status: Currently fundraising
Target size: $500 million 
Strategy: Value-added office assets in the US, primarily in New York, Boston and Washington DC and selectively in Los Angeles and San Francisco

Down in the valley

Normandy kicked off 2012 with the recapitalisation of a Los Angeles-area office building occupied by NBCUniversal.

In January, Normandy Real Estate Partners completed the $355 million recapitalisation of a 36-storey office tower in Universal City, California, thanks to a capital injection from Morgan Stanley Real Estate Investing (MSREI). The recapitalisation of 10 Universal City Plaza (UCP), the tallest building in the San Fernando Valley, includes the refinancing of $294.5 million of existing debt with a combination of new third-party debt and equity from Normandy and MSREI.

Normandy will retain a majority equity ownership interest in 10 UCP and will continue to manage the property on behalf of the partnership with MSREI. The new $200 million senior loan obtained by the partnership was co-originated by Citigroup Global Markets and JPMorgan Chase.

Normandy previously acquired the equity interest in the 774,240-square-foot office building that houses NBCUniversal in June 2009 through a UCC foreclosure of a larger mezzanine loan taken out by Broadway Partners. In doing so, the firm assumed $294.8 million of senior debt with a maturity date of January 2012. 

The completion of the recapitalisation follows Normandy’s earlier announcement of the renewal and expansion of a 427,000-square-foot lease with the building’s anchor tenant, NBCUniversal, for a 12-year term. 

“I have known Finn Wentworth at Normandy for more than a decade, and our relationship has always produced successful results,” says Michael Angelakis, vice chairman and chief financial officer of Comcast Corp., NBCUniversal’s parent company. “My experience with Normandy at 10 UCP was no different. The Normandy team worked directly with us to deliver a comprehensive and flexible plan that enabled us to extend our presence at the property.”

Jeffrey Gronning, managing principal at Normandy Real Estate Partners, notes that 10 UCP is Normandy’s only building in southern California, but the firm is looking to acquire more properties in the area.