NorthStar Income II seeks to originate, acquire and asset manage a diversified portfolio of commercial real estate investments consisting of commercial real estate debt, securities and select equity investments. We target assets that generally offer stable current cash flow, attractive risk-adjusted returns and provide capital preservation.
Commercial Real Estate Debt
Our primary focus is to originate, acquire and asset manage the following types of commercial real estate debt investments.
First Mortgage Loans
First mortgage loans are loans that have the highest priority to claims on the collateral securing the loans in foreclosure. First mortgage loans provide for a higher recovery rate and lower defaults than other debt positions due to the lender’s favorable control features which at times means control of the entire capital structure. Because of these attributes, this type of investment receives favorable treatment from third-party rating agencies and financing sources, which should increase the liquidity of these investments.
Subordinate Mortgage Loans
Subordinate mortgage loans are loans that have a lower priority to collateral claims. Investors in subordinate mortgages are compensated for the increased risk from a pricing perspective as compared to first mortgage loans but still benefit from a direct lien on the related property or a security interest in the entity that owns the real estate. Investors typically receive principal and interest payments at the same time as senior debt unless a default occurs, in which case these payments are made only after any senior debt is paid in full. Rights of holders of subordinate mortgages are usually governed by participation and other agreements that, subject to certain limitations, typically provide the holders with the ability to cure certain defaults and control certain decisions of holders of senior debt secured by the same properties (or otherwise exercise the right to purchase the senior debt), which provides for additional downside protection and higher recoveries.
Mezzanine loans are a type of subordinate loan in which the loan is secured by one or more direct or indirect ownership interests in an entity that directly or indirectly owns real estate. Investors in mezzanine loans are compensated for the increased credit risk from a pricing perspective and still benefit from the right to foreclose on its security, in many instances more efficiently than first mortgage loans. Upon a default by the borrower under a mezzanine loan, the mezzanine lender generally can take control of the property owning entity on an expedited basis, subject to the rights of the holders of debt senior in priority on the property. Rights of holders of mezzanine loans are usually governed by intercreditor or interlender agreements that provide the mezzanine lender with the right to cure defaults and limit certain decisions of holders of any senior debt secured by the same properties, which provides for additional downside protection and higher recoveries.
In addition to our focus on the origination of and investment in commercial real estate loans, we may also acquire commercial real estate securities.
Commercial Mortgage Backed Securities (“CMBS”)
CMBS are bond investments collateralized by a diversified pool of commercial real estate senior loans. Generally, the underlying pool is comprised by hundreds of senior mortgage loans diversified by a wide variety of property types and geographic regions. Accordingly, these securities are subject to all of the risks of the underlying loans. The CMBS pool is tranched into different bond classes and receives ratings and resulting credit enhancement levels based on the risk profile characteristics of the underlying pool of senior mortgages’ risk profile. The tranching allows investors to match a wide range of potential investment objectives with different bond risk return characteristics.
Select Equity Investments
We may also choose to selectively acquire direct or indirect equity interests in real estate including:
- A partnership or a limited liability company, that is an owner of commercial real estate property;
- certain strategic joint venture opportunities where the risk-return and potential upside through sharing in asset or platform appreciation is compelling;
- private issuances of equity or debt securities of public or private real estate companies; and
- investments in a loan, security or other obligation for which the business of the related borrower is significantly related real estate.