As a result of the value of numerous U.S. equity REIT stocks plummeting since the end of 2014, there are currently a number of discounted stocks available, which has plenty of activists focused on the potential hefty rewards. In the past several weeks, we have seen a couple of activist investors take an assertive stance in an effort to make their case, which also results in making money for themselves and their investors. One of the most notable cases, due to its size and complexity, involves NorthStar Realty Finance.
Since splitting in mid-2014, both REIT, NorthStar Realty (NRF), and management team, NorthStar Asset Management (NSAM), have seen a significant decline in their value. While NRF lost 64%, NSAM lost 37%. Unfortunately, this was the complete opposite of what management believed would happen. The management team, led by a former Goldman Sachs investment banker, had thought the separation would generate more value to the shareholders.
There are several external factors that can explain the recent fall of REIT stocks, but it’s important to point out that the management’s loss of credibility only made the fall worse. Last November, NRF completed a spin-off of its European assets, creating another REIT called NorthStar Realty Europe (NRE). Both separations (NRE and NSAM) brought to the surface a number of incentives that potentially conflict with shareholders.
To resolve any concerns regarding misalignment between management and shareholders, the best solution is to make NRF an independent, self-run REIT. Currently, NRF needs a management team that is both 100% focused on and committed to their assets. This means no incentive contracts, termination fees, or sharing of management attention and focus.
While some might consider recombining NRF and NSAM to be an option, it will not address the current issues because the concerns would not be gone altogether. NSAM also has non-traded REITS under its management. From a structural standpoint, it makes sense to have separate management companies take care of the funds. However, a merger of NRF and NSAM won’t change the fact that management must oversee several funds. As a result, potential conflicts between NRF and its sister funds will still continue.
Last Friday, activist Land & Buildings proposed that NSAM put up for sale the management contract with NRF, which could be worth more than NSAM’s market capitalization. One of the possible buyers, NRF itself, could sell some of its most valuable assets to buy the contract from NSAM. L&B estimates the contract to be worth $2.6 billion, while NSAM’s market cap is $2.3 billion. According to its balance sheet, NRF has almost $19 billion in assets.
Two weeks ago, NSAM had hired Goldman Sachs to explore strategic alternatives that would maximize shareholder’s value. Land & Buildings applauded this decision.
With both Goldman Sachs and Land & Buildings looking out for NSAM’s interests, what NRF’s board of directors should do right now is take control of their situation. Unfortunately, this is very unlikely to happen because the NRF board has not been engineered to act this way. Three of the four independent directors also serve as directors of NSAM.
Source: NorthStar Realty Finance Corp.(NYSE:NRF), Yahoo!Finance, Northstar Realty Europe Corp.(NYSE:NRE), Northstar Asset Management Group (NYSE:NSAM)
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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.