Wrapping our Heads Around This REIT Merger

chart01.pngThe complex merger between the two giants NorthStar and Colony Capital intensifies the uncertainty in the beleaguered shares of NorthStar Asset Management (NSAM) and NorthStar Realty (NRF). The brand new company Colony NorthStar involves merging of three public companies. Shareholders of NorthStar Asset Management will own 32.85% of the upcoming company, Colony Capital (CLNY) 33.25%, and NorthStar Realty Finance 33.90%.

Well, to be honest, coming to terms with the merger between NSAM (an external advisor to NRF), an equity REIT (NRF) and a mortgage REIT (CLNY), is not what I would call an easy task to do. The combined management team says they resulted in a leading global equity REIT with an embedded investment management platform. However, they draw a comparison between themselves and Blackstone and Brookfield, which are not necessarily the global equity REITs we know. That actually sounds more like an inverse of their claim, a platform for managing investments coupled up with embedded equity REITs.

To add on to that, despite the fact that NSAM along with NRF shareholders total to ⅔ of the company combined, both Colony and NorthStar have equal rights when it comes to nomination of board members. In the same way, major management positions will be filled by officials of Colony, which looks to me as though NorthStar seems to be paying the price (lack of credibility) for the move they made dissociating NRF along with NRE (the European Branch) late last year.

It is crucial to note that Colony Capital rose from a merger of its external manager and operating company, becoming an internally-managed real estate and investment management company last year. The move had adverse impacts on their shares because we notice a significant drop of 27% over the last 12 months. This, surprisingly enough, was not as devastating as NSAM and NRF, which lost a whopping 40% and 61% respectively. The market, in the same way, was not sure about the recent merger, seeing as the combination of the shares from the three companies didn’t perform quite well at first.

Superficially, Colony Capital appeared to be more on the gaining end. In addition to getting better transaction terms, it came with the lowering of their leverage level down to 49% from the former 53%. Owners of NSAM shares, the activist Land & Buildings made a complaint of the company barely seeing any form of accretion to their shares.

To summarize it all up, the merger didn’t seem to help NorthStar shareholders that much.

NorthStar Asset Management Group Inc. (NYSE: NSAM), Colony Capital, Inc. (NYSE: CLNY) and NorthStar Realty Finance Corp. (NYSE: NRF)

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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