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.

 

 

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.

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.

When the fundamentals aren’t being discussed

Release Date: 04 April 2015 (Extra Edition)

Last week, I posted a ranking of the US top-yield equity REITs. NorthStar Realty Finance Corp (NYSE: NRF) topped the list, sporting an 8.8 percent dividend yield. This week the stock is up slightly (0.7 percent), but the dividend yield continues to be attractive. As such, the stock is worth exploring in a little more detail. However, a look at NorthStar’s recent press releases shows that property fundamentals have not been the main point of discussion.

Background

NorthStar Realty is a Maryland-based diversified portfolio REIT in the commercial real estate realm, allocated largely in the health care and hotel sectors (65 percent of the 31 December 2014 portfolio). Its European assets will likely be spun out into a new NYSE publicly-traded company called NorthStar Realty Europe (NRE) by the second half of 2015. Over the past five weeks, NorthStar has raised US$ 353 million in common equity to buy properties in Europe, including the recently-closed acquisition of a €1.1 billion pan-European office portfolio.

Although it went public in October of 2004 as a mortgage REIT, NorthStar recently flipped into an equity REIT. It still has a debt component, but this is a minor portion of the portfolio (6.6 percent of its portfolio).

This past June NorthStar segregated its management off into NorthStar Asset Management Group Inc. (NYSE: NSAM), and since then both companies have been trading separately. NSAM acts as a brokerage firm for four non-traded REITs.

“Tension” between traded and non-traded

Conflict of interest has been the “elephant in the room” for this REIT. NSAM manages several funds, and there are questions about how management will deal with competing interests between different funds’ shareholders.

For instance, one question is whether NSAM will be able to fairly oversee both a traded fund (NRF) and non-traded funds, which have different asset management fee levels (management, acquisition, disposition and incentive fees). Remember that NSAM manages a pipeline of potential acquisitions and so must choose which fund gets to pick the best deals. This concern was also raised when the company decided to use NRF’s common equity offering proceeds to promote NorthStar Realty Europe’s growth and consequently spin it off. Although management argues that the spin-off unlocks value (as they discussed in their 6 March 2015 presentation, “Immediate value to NRF”), it still isn’t clear what’s in it for NRF.

This is a cloud hanging over NRF that could potentially harm stock performance in the long run. In my experience, concerns over conflict of interest have always driven share prices to discount territory that never realizes full value.

European arm

NorthStar’s European assets are valued at approximately $2.0 billion, and the real estate portfolio is comprised of 50 properties with five million square feet in prime locations, mainly in the United Kingdom, Germany, and France.

There are a number of positive points for NorthStar Realty Europe as part of an investment strategy. European real estate valuations haven’t recovered since the Great Recession. Cap rates relative to long-term interest rates have reached an all-time high. Upside on property value as appreciation of European REITs has historically signaled future appreciation of properties. And, of course, property diversification by country and type is almost always a valuable strategy.

Short interest spike

This March, short interest in NorthStar Realty rose more than 1,000 percent to 57,093,856 shares. About 19.2 percent of the company’s shares are now short.

Takeaway

Recent news associated with changes in management arrangements and the European spin-off has put NRF’s fundamentals on the back burner. I’m hoping that NSAM will refocus its energies on what matters. By the way, NorthStar is one of the few REITs (perhaps the only one) that does not disclose the operational metrics AFFO/FFO in its 10-K report.

Source: NorthStar Realty website, WSJ


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Written by Heli Brecailo

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.​