Understanding the Value of Commercial Real Estate Debt
Forward Looking Statements This brochure includes forward-looking statements that can be identified by the use of words such as “will,” “may,” “should,” or other comparable terminology. Statements concerning future performance, cash flows, and any other guidance on present or future periods constitute forward-looking statements. Forward-looking statements involve significant risks and uncertainties and you should not unduly rely on these statements. You should be aware that a number of important factors could cause our actual results to differ materially from those in these forward-looking statements including the risks summarized below and the risks described in our filing with the Securities and Exchange Commission. The statements made herein are as of the date hereof and we undertake no obligation to update these statements except as may be required by applicable securities laws.
Investment Risks Consider the following risks before making an investment in NorthStar Real Estate Income Trust, Inc. (NorthStar Income), a public, non-traded real estate investment trust (REIT): • We have limited operating history and the prior performance of our sponsor may not predict our future results. There is no assurance that we will achieve our investment objectives. • Challenging economic and financial market conditions could significantly reduce the amount of income we earn and further reduce the value of our investments. • The amount of distributions we may pay in the future, if any, is uncertain, and you may lose a part or all of your investment. • If we pay distributions from any source other than cash flow from operations, including offering proceeds, borrowings or sales of assets, investors’ overall return may be reduced. The fees that we pay to our advisor reduce our cash flow from operations, which may limit the distributions we pay and investor returns. • No public market currently exists for our shares and we are not obligated to effectuate a liquidity event by a certain date or at all. • You will not have the opportunity to evaluate the investments we make subsequent to the date you subscribe for shares, which makes your investment in our shares more speculative. • We depend on our advisor to select our investments and conduct our operations. We pay substantial fees to our advisor that were not negotiated at arm’s-length and increase investors’ risk of loss. • We intend to invest in commercial real estate loans and mezzanine loans. The collateral securing our loans may decrease in value or lose all value over time, which may lead to a loss of some or all of the principal in our investments. Mezzanine loans are generally not secured by a direct interest in the underlying property. • We expect to use leverage in connection with our investments, which increases the risk of loss associated with our investments. • Our borrowers may not be able to make debt service payments to us due to changes in economic conditions, regulatory requirements and other factors. • Our advisor and its affiliates may face conflicts of interest as a result of compensation arrangements, time constraints and competition for investments. • If we raise substantially less than the maximum offering, we may not be able to acquire a diverse portfolio of investments and the value of our shares may vary more widely with the performance of specific assets. • If we internalize our management functions, your interest in us could be diluted and would incur other significant costs. • We may change our investment policies without stockholder consent. • We set the offering price of our shares arbitrarily. This price is unrelated to the book or net value of our assets or to our expected operating income. • Our sponsor has agreed, under certain circumstances, to purchase our shares in order to provide additional funds for distributions to stockholders. These purchases will dilute the equity ownership of public stockholders. • Our charter does not require our directors to seek stockholder approval to liquidate our assets by a specified date, nor does our charter require our directors to list our shares for trading by a specified date. • Failure to qualify as a REIT would adversely affect our operations and our ability to make distributions. • Our intended investments in commercial mortgage-backed securities (“CMBS”) and other structured debt securities will be subject to risks relating to the volatility in the value of our assets and underlying collateral, default on underlying income streams, fluctuations in interests rates, decreased value and liquidity of the investments and other risks associated with such securities which may be unknown and unaccounted for by issuers of the securities and by the rating agencies. These investments are only appropriate for investors who can sustain a high degree of risk. • As with any real estate investment, there are various risks including but not limited to: unfavorable market conditions, loss of principal and limited liquidity.
Investment Suitability Investors in NorthStar Income must have net worth of at least $250,000, not including home, furnishings and personal automobile, or gross annual income of at least $70,000 and a net worth of at least $70,000. AL, CA, IA, KS, KY, MA MI, OR, PA and TN have higher suitability requirements and recommendations. Please review the prospectus for state specific suitability standards prior to investing or recommending that clients invest. This sales and advertising literature is neither an offer to sell nor a solicitation of an offer to buy securities. An offering is made only by the prospectus. This literature must be read in conjunction with the prospectus in order to fully understand all of the implications and risks of the offering of securities to which the prospectus relates. A copy of the prospectus must be made available to you in connection with any offering. No offering is made except by a prospectus filed with the Department of Law of the State of New York. Neither the Securities and Exchange Commission, the Attorney General of the State of New York nor any other state securities regulator has approved or disapproved of our common stock, determined if the prospectus is truthful or complete or passed on or endorsed the merits of this offering. Any representation to the contrary is a criminal offense. Securities offered through NorthStar Realty Securities, LLC, member FINRA/SIPC, an affiliate of NorthStar Income, the dealer manager for NorthStar Income.
An investment in commercial real estate may improve portfolio stability, increase diversification, create potential for capital appreciation and serve as a potential hedge against inflation.
Understanding the Role of Commercial Real Estate in a Diversified Investment Portfolio Over the last several years, many investors discovered their portfolios were not as protected from downside risk as they thought, and the traditional 60/40 allocation of stocks and bonds was not enough. Now more than ever, investors are considering alternatives to get back into the market, while protecting their original capital. Comprehensive investment planning and more effective diversification strategies may help achieve lower correlation to traditional asset classes.
The key to constructing a successful investment portfolio is diversification; combining holdings in assets, whose returns move independently of each other, thereby reducing portfolio volatility while providing an opportunity for potential capital appreciation.
Diversification does not eliminate risk and does not assure better performance. An investment in NorthStar Income is not a direct investment in commercial real estate or commercial real estate debt. An investment in NorthStar Income is subject to fees and expenses that do not apply to such direct investments.
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Why Real Estate Investment Trusts?
Real Estate Investment Trusts, or REITs, are a practical way for investors to gain access to professionally managed commercial real estate debt and equity. REITs were created in the early 1960s and were developed by the U.S. Congress as a way to allow individual investors access to large-scale, income-producing real estate. In order to qualify as a REIT, a company must have the bulk of its assets and income derived from real estate. In addition, a REIT must distribute at least 90% of its taxable income to shareholders, therefore, have the potential to provide consistent streams of income to investors.
The most common types of REITs include: publicly traded REITs that trade on a national stock exchange or public, non-traded REITs whose shares do not trade on an exchange. Generally, major characteristics include: Publicly Traded
Public Non-Traded
Holding Period
Flexible
Long-Term Investment
Share Price
Variable (traded on an exchange)
Stated Share Price
Liquidity
Highly Liquid
Very Limited
Volatility
Exposed to stock market fluctuations
Insulated from day-to-day fluctuations of stock exchange
Investing in non-traded REITs involves various risks including, but not limited to, limited liquidity to investors and a lack of transparency in the share price. Public, non-traded REITs pay more fees than publicly traded REITs. 4
The Potential Benefits of Investing in REITs Given the historic uncertainty of the financial markets, we believe adding an investment in commercial real estate to a traditional investment portfolio may provide investors with a number of potential benefits including: • Capital preservation
• Potential for capital appreciation
• Reduced portfolio volatility
• Low-correlation to other major asset classes
• Portfolio diversification
• Inflation hedge
Including an allocation to public, non-traded REITs may allow investors to participate in the overall benefits of investing in REITs without being subject to market volatility. However, public, non-traded REITs have limited liquidity and lack price transparency in comparison with publicly-traded REITs. In addition, an investment in commercial real estate does not guarantee that the benefits described above will be realized.
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Combining debt-focused and equity-focused REITs in a portfolio may help increase diversification, reduce overall portfolio risk and may enhance total return.
REITs are typically classified in the following categories: Debt-Focused REITs Instead of buying properties directly, debt-focused REITs generally provide capital to finance commercial real estate properties.
Equity-Focused REITs Equity-focused REITs generally acquire, manage, operate and sell commercial real estate properties.
• Generate revenue from contractually agreed upon interest payments.
• Generate revenue from rent which is the contractual obligation of the tenant.
• Emphasize cash distributions and preservation of capital.
• Emphasize long-term growth through asset appreciation.
• May offer better protection against declines in real estate property values.
• Investors’ capital may fluctuate as property values move up or down.
• Investors’ capital may decline if the borrower fails to make interest or principal payments or the value of the underlying property declines.
As with any real estate investment, there are various risks including, but not limited to: unfavorable market conditions, loss of principal and limited liquidity. An investment in REITs does not guarantee that the benefits described above will be realized. 6
We believe there are strong market dynamics and growth opportunities for companies that are well capitalized and have specific debt expertise.
Our Debt-Focused Approach It is estimated that $2.4 trillion in commercial real estate loans will mature through 2016.1 Yet traditional sources of debt, which hold almost one-half of commercial mortgages, have provided significantly less capital than they once did. Limited capital is likely to put tremendous pressure on owners to locate financing for loans that are maturing. The capital supply and demand imbalance should result in significant investment opportunities, offering attractive yields relative to their risk. Commercial real estate debt investments are typically secured by tangible assets, such as land or buildings. When an individual or an entity lends money to finance the purchase of a commercial real estate property, a binding loan agreement is signed with the borrower. 900
$
800
$
COMMERCIAL REAL ESTATE TOTAL ORIGINATION VOLUME
700
$
(in billions)
600
$
COMMERCIAL REAL ESTATE LOAN MATURITIES
500
$
400
$
(in billions)
300
1) Barclays Capital U.S. Securitized Products: Outlook 2013. Compiled using data from US Federal Reserve, Index, and Barclays Capital.
$
Post credit crisis average annual origination volume: $160 Billion (2008-2012)
200
$
100
$
0
$
2011 2012 2013 2014 2015 2016
Chart Source: Origination Volume: Mortgage Bankers Association 2011 Annual Origination Volume Summation and Q4 2012 Quarterly Survey of Commercial/MultiFamily Mortgage Bankers Originations (quarterly surveys extrapolated against actual historical originations). Loan Maturities: PPR, Federal Reserve, Trepp, ACLI. Data believed to be accurate but not guaranteed.
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NorthStar Realty Finance’s Disciplined Investment Process Real estate lending demands expertise, discipline and a proven process. The sponsor of NorthStar Real Estate Income Trust, Inc. (NorthStar Income) is NorthStar Realty Finance Corp. (NorthStar Realty Finance). As the sponsor, NorthStar Realty Finance manages all day-to-day and strategic activities of NorthStar Income including identifying, originating, acquiring and managing investments for the offering. NorthStar Realty Finance originates and underwrites the majority of its loans in-house, offering greater control over the structure of each investment. The objective of our investment process is designed to provide maximum downside protection and emphasizes: • Rigorous borrower criteria
• Loan terms structured in-house
• Stringent underwriting process
• On-going asset management
1. Borrower Criteria
2. Due Diligence and Underwriting Process
NorthStar Realty Finance works with numerous borrowers that include experienced regional real estate investors and the world’s largest institutional owners. For every loan we originate, we evaluate the borrowers thoroughly, including review of:
In addition to reviewing the credit worthiness of the borrower, NorthStar Realty Finance conducts rigourous due diligence and on-site property and market inspections for the property receiving the loans we make. Our underwriting process generally includes evaluation of the following property-level and market-level information:
• Personal financial statements • Current real estate portfolio and historical track record • Direct experience owning and managing the specific property type • Overall presence in the market • Credit/background search • References
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• Review lease terms/property financial statements • Evaluate market conditions, property location and the quality/condition of the property • Review local comparable properties • Analyze third party reports • Develop and refine cash flow projections and valuation analysis
Every loan we originate is secured by a property that we would be comfortable holding and managing ourselves in the event of borrower default.
3. Loan Terms and Diversification Criteria
4. Asset Management
NorthStar Realty Finance originates commercial real estate loans across a wide range of property types and geographic locations. We develop our loan terms based on the inherent risk and return characteristics of each investment, which generally include:
A dedicated NorthStar Realty Finance professional is assigned to each loan after closing. The asset manager visits the property, ensures conformance with the business plan, monitors and ensures compliance with the loan terms and regularly evaluates the investment and the borrower.
• Investment Size: Range from $10MM to $150MM • Interest Rate: Floating rate loans generally consisting of a spread over a LIBOR floor with initial interest rates of 7% to 10% depending on risk characteristics
In addition, NorthStar Realty Finance leverages a proprietary in-house database that provides instant access to real-time information to evaluate the performance of each investment.
• Term: 2 to 3 years with extensions • Structural Protection: Customize each loan to accommodate borrower’s needs and mitigate downside risk • Property Type: All types of commercial real estate including Office, Multi-Family, Hotel, Retail, Industrial and Healthcare • Geography: Throughout the United States Understanding the Value of Commercial Real Estate Debt | 9
Our business is focused on making commercial real estate debt investments that may provide capital preservation and produce risk-adjusted returns for our investors.
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About NorthStar Realty Finance NorthStar Realty Finance (NYSE: NRF) is a publicly traded commercial real estate investment and asset management company and is one of the first listed public companies to sponsor public, non-traded REITs. Our management team has extensive experience and an established reputation for delivering successful results. NorthStar Realty Finance is known for being nimble and opportunistic, which has been illustrated by our ability to execute investments and create stockholder value through multiple real estate cycles and changing market conditions. NorthStar Realty Finance at a Glance: • $8.7 billion of assets under management as of April 2013 • Direct in-house origination capabilities • Rigorous investment and asset management process • Public company reporting, controls and transparency • Management team averages approximately 20 years of commercial real estate investment experience with institutional backgrounds
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NorthStar Real Estate Income Trust, Inc. (NorthStar Income) is a public, non-traded REIT formed to originate, invest in and manage a diversified portfolio of commercial real estate debt, commercial real estate securities and select commercial real estate equity investments. The portfolio is diversified across a variety of underlying commercial property types and geographic locations and will be secured primarily by U.S. based collateral. We believe the scarcity of available capital is creating significant investment opportunities – those that offer attractive yields relative to their risk.
www.northstarREIT.com/Income | 877.940.8777
