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.

 

 

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.

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.

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.​