One Type of Transaction is Key to Pricing RE Secondaries

Pricing is critical when it comes to closing any deal, but for real estate secondaries pricing can sometimes be an optical illusion.

In the second part of an interview on the state of the RE secondaries market, Jamie Sunday, a partner at Landmark Partners, and Phil Barker, senior managing director at CBRE Capital Advisors, talk about the impact that optical price has on closing deals and how the rise of structured transactions, including deferred purchase agreements, have helped both sellers and buyers achieve fair pricing.

PrivcapRE: When it comes to pricing, what have been the challenges for investors?

Jamie Sunday, Landmark Partners: Pricing optics has been, and continues to be, a key focus for many sellers. Over the last few years, overall pricing discounts have improved as fundamentals have been strong and distributions have accelerated.  Broader industry acceptance of structured transactions, especially deferred purchase transactions, has also been very helpful.

A simple example is if you were willing to pay 87 cents on the dollar, assuming an “all cash” closing, you could perhaps increase your price to 90 cents if the seller allows you to pay 50 percent of the purchase price at close and 50 percent in one year. For certain types of portfolios, this type of transaction has enabled secondary buyers to price to the IRRs they need and it has allowed sellers to achieve the optical pricing they require.

In a deferral transaction, when somebody says a deal was done at 96 percent of par, you need to understand the structure of the transaction to assess the pricing discount. A notional price of 96 percent of par paid over three years yields a true effective price that is lower than 96.

Barker: The important thing to really remember is that the discount, or premium, is not always the full picture. It’s a question of what NAV you’re looking at, what’s been happening with the funds—and you might find a situation where a particular price generates vastly different perspectives from the buyer and the seller. And therein lies some opportunities.

I had a seller of an open-ended fund [interest] that wanted to sell it on a published NAV at a 4 percent premium, and a buyer wanting to do it on a forward NAV, one quarter later, at a 1 percent premium. The fund was coming in as a total return in excess of 3 percent a quarter, so realistically we had a deal. But the seller could not go to his investment committee with anything other than a high premium of around 4 percent, even though mathematically it was the same as selling for a 1 percent premium at a later NAV. And the buyer at the same time couldn’t go to his investment committee because the absolute price was too high.

Sunday: That’s a great point as a par price could, in fact, be a 20 percent discount to true intrinsic value. I think that gets lost on people when they focus on discounts. Some sellers are truly focused on the headline risk of the optics. That’s where an attractive opportunity could exist for buyers.