Who is Looking Out For NorthStar Realty?

chartAs 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)

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.

What’s The Matter With NorthStar Realty Finance?

chart01NorthStar 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.

chart02Last 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.

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.