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Colony NorthStar Inks $3.4 Billion Merger Agreement with Two Affiliated Non-Traded REITs

Colony NorthStar Inc. (NYSE: CLNS) and two affiliated non-traded REITs have agreed to merge and create a commercial real estate credit REIT with approximately $5.5 billion in assets and $3.4 billion in equity value.

NorthStar Real Estate Income Trust (NorthStar I) and NorthStar Real Estate Income II (NorthStar II) and a select portfolio of Colony NorthStar assets and liabilities will combine in an all-stock combination transaction to create a combined company named Colony NorthStar Credit Real Estate Inc.

Colony NorthStar’s board approved the transaction, as did the special committees and boards of NorthStar and NorthStar II. Upon completion of the transaction, Colony NorthStar, NorthStar I, and NorthStar II stockholders will each own approximately 37 percent, 32 percent, and 31 percent of the new company, respectively.

The closing of the transaction is conditioned upon a listing of the new company’s Class A common stock on a national securities exchange, which may take up to nine months following approval of the transaction by the NorthStar I and NorthStar II stockholders. The transaction is expected to close either in late 2017 or the first quarter of 2018.

If approved, the new company will be the second largest (by equity value) publicly-listed commercial mortgage REIT. Colony NorthStar will be the largest single investor and will serve as its external manager.

Colony NorthStar executive vice president and chief investment officer Kevin Traenkle will serve as CEO of the new entity, and Sujan Patel, Colony NorthStar’s managing director and co-head of U.S. investment management, will serve as CFO. The seven-member board of directors will include four independent directors.

Colony NorthStar will contribute substantially all of the U.S. investments within its other equity and debt segment that are transferable assets to Colony NorthStar Credit Real Estate. NorthStar I and NorthStar II will merge with and into the new REIT.

Colony NorthStar will receive both shares of Class A common stock and membership units in the operating company. The Class A shares will be subject to a lock-up restriction prohibiting sales for one year from the deal closing.

NorthStar I and NorthStar II stockholders will receive shares of the new company’s Class B common stock. Class B shares will convert to Class A shares in three tranches. Following the close of the transaction, 10 percent of the shares will convert within 30 days, 45 percent at 180 days, and 45 percent at one year.

If NorthStar I terminates the transaction in favor of a superior acquisition agreement, it may be required to pay a $21.7 million termination fee to NorthStar II and Colony NorthStar’s operating partnership. The termination fee will increase to $43.4 million if the transaction is canceled under other circumstances.

Similarly, NorthStar II may be required to pay a termination fee of either approximately $20.8 million in the event of a superior proposal, or $41.6 million if the transaction is canceled for any other reason.

J.P. Morgan Securities LLC is serving as lead financial adviser and Barclays is serving as financial adviser to Colony NorthStar, while Hogan Lovells US LLP serves as legal counsel.

Credit Suisse Securities (USA) LLC is serving as financial advisor to the NorthStar I special committee, and Alston & Bird LLP is acting as legal counsel to the NorthStar I special committee.

Moelis & Company LLC is serving as the financial advisor to the NorthStar II special committee, Venable LLP is serving as legal counsel to the NorthStar II special committee, and Greenberg Traurig LLP is acting legal counsel to NorthStar II.

Colony NorthStar resulted from the January 2017 merger between Colony Capital Inc., NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp. Colony NorthStar currently has $56 billion in assets under management and manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and traded real estate investment trusts and registered investment companies.

NorthStar Real Estate Income invests in real estate debt, select equity and securities investments predominantly in the United States. The offering was declared effective by the SEC in July 2010 and closed in July 2013 after raising more than $1.1 billion. As of the second quarter 2017, the company’s portfolio was comprised of 16 investments totaling nearly $2.2 billion.

NorthStar Real Estate Income II raised $1.1 billion in investor equity before closing the offering in November 2016 and oversees a $1.7 billion portfolio of 26 investments, according to Summit Investment Research.

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