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.

U.S. REITs: Flight to Quality

 

net leaseThis year so far net lease retail has gotten a head start on being the best performing REIT sector. Realty Income, National Retail Properties, and Agree Realty have been the companies with top returns, ranging between 9% and 14%. Their rally, however, has decreased dividend yields, generating discontent from dividend investors who do not appreciate reduced yields.

Investors are turning to net lease because they tend to be less volatile than the financial markets. Realty Income, for instance, has a beta of 0.12 for the last 36 months. That is, when the S&P500 varies by 1%, the stock only varies by 0.12% on average.

Also, net lease retail has a good record of paying dividends year after year. Realty Income, National Retail Properties and Agree Realty have been distributing similar or increasing dividends for many consecutive years (18, 26 and 5 years, respectively).

In addition, landlords love net leases because they push costs of maintenance, taxes and insurance to the tenant. Landlords like the convenience of not having to spend time and money maintaining the property. In the end, they benefit from a leaner cost structure and more stable funds from operations.

For all the reasons that I mentioned above, the increasing demand for net leases can be interpreted as a flight to quality.

Single Family Homes

At the same time net lease retail is experiencing a thriving performance, single family homes have been the worst performing sector so far this year. Last year’s announcement of the merger between American Homes 4 Rent (AMH) and American Residential Properties (ARPI) didn’t seem to help their stock performance in 2016. Since January, both AMH and ARPI stocks have dropped by almost 15%.

During the fourth quarter, activist Land and Buildings have tripled their position on ARPI.  On 31 December 2015, ARPI represented Land and Buildings’ second largest investment and Land and Buildings were one of ARPI’s largest shareholders. We don’t know yet if the drop is associated with a potential exit of Land and Buildings, which have applauded the merger decision.

As to the newly formed Colony Starwood Homes, the stock has been holding up better. Their 2016 return has been virtually flat. They will release Q4 results this Monday.

This week’s performance

This past week was another good week for REITs. We saw some familiar faces as top performing stocks. For instance, NorthStar Realty (NRF) has climbed to the top after the company has announced the sale of various investments, as well as the creation of a special committee to explore the possibility of recombining with its external manager NorthStar Asset Management. NRF stocks went up by 23%.

NRF rally must have been a relief for shareholders following weeks of poor performance. Nonetheless, there is still a long way to go if the company really wants to regain its November prices.

Check the reports for Dividend Yield by Sector and Weekly Returns.

Source: Realty Income Corporation(NYSE:O), National Retail Properties, In(NYSE:NNN), Agree Realty Corp.(NYSE:ADC), NorthStar Realty Finance Corp.(NYSE:NRF), Northstar Asset Management Gro(NYSE:NSAM), American Residential Propertie(NYSE:ARPI), American Homes 4 Rent(NYSE:AMH), Colony Starwood Homes(NYSE:SFR), Yahoo!Finance, SEC, Fast Graphs, Land and Buildings

Disclaimer: This is not a recommendation to buy or sell stocks. The highest-yield stocks are not necessarily the best portfolio investment choice. The purpose of this report — which is essentially a snapshot of information available on February 26, 2016 — is to reduce your stock analysis by enabling you to compare stock and sector performance. Please do your own due diligence before making any investment decision.

As of January 31, 2016, the equity REITs are constituent companies of the FTSE NAREIT All REITs Index. Companies whose equity market capitalization is lower than $100 million have been disregarded.

This report 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. 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.

Activists Ignore Investor Sentiment Against Lodging

chart02 Activists have ignored a lingering investor sentiment against lodging as a major driver. Instead, they have been looking for an uncertain fight. Last month, Sessa Capital targeted the Ashford REITs and Land & Buildings selected FelCor Lodging Trust.

While it’s impossible to deny that some lodging REITs have enjoyed a very strong operational performance, their share prices have all gone downhill anyway. In fact, the market hasn’t spared a single stock. We saw a big bloodbath in 2015 and 2016 hasn’t started out any differently. So far, lodging has been a bottom performer; something I hope will come to an end soon.

If I had to give a reason for this massive selloff, I’d say that investors have been afraid of oversupply. Although the lodging REITs deny that supply has outpaced demand, some investors are not keen on the steadily rising supply. Carter Wilson from STR wrote an interesting analysis of the current environment in the lodging industry.

Airbnb has also been mentioned as a reason, but anyone who travels abroad regularly knows that renting rooms, and even entire homes, is nothing new and has never made the hotel industry disappear. Yes, Airbnb has made it more secure and easier to rent rooms and homes, but I believe that it is farfetched to call it a major threat to hotels.

We have mentioned Sessa Capital’s case in a previous post. Early February they filed a lawsuit against Ashford Hospitality Prime questioning a huge termination fee that penalizes Ashford Prime if they elect a majority of directors not approved by its external management Ashford Inc. The share price fell by 33% this year, only trailing NorthStar Realty Finance’s 35% drop.

As to Land & Buildings, at the same time they were challenging NorthStar Asset Management for being undervalued, they were also making their case for FelCor Lodging Trust.

chart01 FelCor is a $1 billion market cap that invests in several types of hotels outside the gateway market, such as resorts and those in suburban and airport areas. If the new supply is being built in the gateway market, which currently receives most of the spotlight, the rationale was, why don’t we invest in a hotel REIT that is located elsewhere? According to L&B, FelCor is the hotel REIT in the best position to capitalize on this idea, as 57% of the investments are exposed to markets expected to outperform for the next two years.

When we last looked at FelCor in 2015, the company was experiencing a decline in revenues, as well as one of the highest leverage ratios among its peers. The good thing was that FelCor featured strong same store growth markets and its AFFO per share increased. To get rid of its reputation for low quality and reposition it as one of higher quality, the company has sold and renovated some of its assets.

Last month L&B listed several items that would help close FelCor gap between their net asset value per share and their share price. Among others, they recommended that they sell their NY hotels, reduce their current debt, buyback their shares, and enhance corporate governance. In response, FelCor said that they had already implemented these ideas.

FelCor, indeed, has an AFFO multiple that is below its peer average and like a good portion of the lodging REITs, FelCor has been undervalued. However, that doesn’t mean that I will be running out to buy their stocks just yet. The bloodbath in the sector is not over yet.

Source: FelCor Lodging Trust Incorpora(NYSE:FCH), Ashford Hospitality Prime(NYSE:AHP),Ashford, Inc.(AMEX:AINC),NorthStar Realty Finance Corp.(NYSE:NRF),Northstar Asset Management Gro(NYSE:NSAM),Land and Buildings, Fast Graphs, Yahoo!Finance

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.