NRF Shareholders, Don’t Celebrate Too Early

chart01Last Friday, NorthStar Realty Finance (NRF) announced its Q4 results, along with several initiatives intended to close the gap between its intrinsic value of $25 (per management) and share price of almost $13. The announcement brought a breath of fresh air to NRF, as well as its external manager, NorthStar Asset Management (NSAM) and spinoff European branch, NorthStar Realty Europe (NRE).

Last week, NRF increased by 24%, while NRE increased by 7%, and NSAM increased by 5%. Following the spinoff of NRE in late October 2015 and a 1-for-2 reverse stock split at the beginning of November, NRF share prices plummeted by more than 50%, reaching a 52-week low of $8.38 on February 9.

There were three major takeaways from the announcement.

  1. NFR is in the process of selling almost $2 billion in assets, which should raise approximately $930 million in cash. This will be used to pay down debts and repurchase stocks. They are negotiating interests in real estate private equity funds, commercial real estate loans, securities, and commercial real estate.
  2. NRF is pursuing the possibility of recombining itself with NSAM. To spearhead this initiative, they will create a special committee of independent directors advised by UBS.
  3. After the spinoff and reverse stock split, dividend has been set on $0.40. With this change, its annualized dividend yield is now a more realistic 13%. In our list of dividend yields, NRF has passed the baton of highest yield among REITs to CorEnergy Infrastructure Trust.

If you are a recent NRF shareholder, congratulations, you have just made some bucks by tapping into a deeply discounted REIT stock. Now, if you have been a long-term NRF shareholder, I’d be cautious to celebrate. Here are the reasons why.

  1. The share price is still 50% lower than its late October price (after spinoff).
  1. Activist Lands & Buildings have not added NRF shares to its portfolio, only NSAM and NRE. According to Lands & Buildings 31 Dec 2015 Form 13F, their position for both NSAM and NRE doesn’t even reach $10 million, which is smaller than their average individual portfolio position. If the size of this position reflects potential share price appreciation, risk to make the interference work in their favor and effort, not buying NRF and only allocating a small position to NSAM and NRE is not a good sign. Since it is likely that they haven’t profited from it yet, they will keep pushing for changes as a result. They just released another letter this Monday, addressing NSAM’s lead independent director.
  1. NSAM will not let NRF go. I truly believe that a standalone NRF would be the best for NRF shareholders. Although Land & Buildings suggested that NSAM sold NRF management contract and distributed a special dividend from the sale proceeds, this seems to be only a remote possibility. There is an overlap between the boards of NSAM and NRF. Previously, NSAM had hired Goldman to look for strategic alternatives for the company. NRF just hired UBS to pursue a recombination with NSAM. We don’t really need a crystal ball to see that both sides are preparing for a merger.
  1. In an apparent attempt to validate a recombination with NSAM, NRF has created a special committee with independent directors and hired an investment bank to act as a financial advisor. Forming the committee of independent directors doesn’t change the fact that the NRF board is biased toward NSAM’s interests. This seems to be a move to give increased legitimacy to NSAM’s decisions.

Source: NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Realty Europe Corp.(NYSE:NRE), Northstar Asset Management Gro(NYSE:NSAM), Land and Buildings

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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