NorthStar Realty Finance (NRF) has been our worst performing REIT stock this year. The company has shown a lousy return of negative 28 percent, along with a whopping forward dividend yield of 25 percent. It is puzzling to watch a REIT fall into such a severe downward spiral in such a short amount of time. NRF’s situation is critical, and I can only imagine the dead silence in the corridors of their headquarters in New York. Seriously, if I were CEO David Hamamoto, I wouldn’t be sleeping well, fearing the unknown. Just last week, NorthStar Asset Management (NSAM), NRF’s external advisor, hired Goldman Sachs in order to help find a way out of this mess.
NRF has focused so much on restructuring that operations were put on the back burner. This makes it more challenging to analyze the company. NRF intended to unlock asset value by spinning off their asset management team. NSAM was created to manage NRF and three separate non-traded REITs. Later on, NorthStar Realty Europe (NRE) has been spun off to hold NRF’s European holdings. On top of that, management fees and incentives brought up multiple concerns regarding their credibility as managers. During volatile times such as these, vulnerable companies, such as NRF tend to suffer the most.
Last week, Standard and Poor’s stated that NSAM has been operating as a stable business and assigned investment grade rating. The rating took into consideration a twenty-year initial contract with NRF that is automatically renewable and may only be cancelled ‘under very stringent circumstances.’ A smart investor would consider investing in the manager instead of the company; however, NSAM share prices have dropped considerably as well.
I would much prefer speaking to the quality of NRF’s tenants, management team experience, and growth prospects. Operationally, the company has not been performing poorly. According to their Q3 2015 results, the occupancy levels have been strong. That being said, the most difficult aspect of the company’s operational side is the fact that their portfolio is diversified. This makes it difficult to put NorthStar into a specific bucket. In addition, their assets are mainly comprised of healthcare and lodging, which have been threatened by oversupply in some cities.
Activists enjoy cheap stocks so that their actions can drive stock appreciation and reduce the gap between NAV and share price. This is currently happening with NRF. Activist Land and Buildings from Jonathan Litt has already sent a letter to management approving the hire of Goldman and Sachs. He has also asked for more time to evaluate strategic alternatives and nominate board directors.
NorthStar Realty Finance is not alone in this mess. Ashford Hospitality Prime, which is externally managed by Ashford, Inc, has been experiencing similar issues. Their shares have also dropped by 23 percent in 2016. Two activist shareholders, Rambleside Holding, and Sessa Capital have targeted both Ashford REITs. The later has even proposed that the company change all board of directors. This has most defiantly been a difficult time for equity markets including equity REITs. That being said, NorthStar Realty Finance has been the epitome of what is not working in the REIT investment space.
Source: NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Realty Europe Corp.(NYSE:NRE), Northstar Asset Management Group (NYSE:NSAM), Ashford, Inc.(AMEX:AINC), Ashford Hospitality Prime (NYSE:AHP), Ashford Hospitality Trust (NYSE:AHT), Fast Graphs, Yahoo!Finance.
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Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.