What does the NorthStar complex have to do to get some love from the market? NorthStar Realty Finance (NRF) just spun off NorthStar Realty Europe (NRE) earlier this week, and the stock got beat with the ugly stick. NRE owns high-quality real estate in major European metros (Hamburg, London, Paris, Frankfurt, Berlin, Milan, and others). While it’s expected that externally managed REITs should be discounted, the discount being applied to NorthStar Europe is striking. Does the market hate external manager NorthStar Asset Management (NSAM) that much? Or is something else going on?
Given the potentially taxable nature of the transaction – NorthStar Europe was treated like a taxable dividend – it might not be surprising if some investors wanted to sit this one out and wait for the stock to trade publicly before maybe taking a dip. But the debut certainly fell short of management’s publicly communicated expectations of 20x+ multiples to FFO (a price of $24+), what European-listed peers are fetching. NRE now trades at less than 10x and pays a 5.3% yield, a real bargain basement. That multiple is still high enough for management to issue equity and make some deals, given Europe’s very low interest rates and the still-high spreads.
But look at it on an asset basis. Book value – on properties very recently acquired – comes to $887.1 million, or $13.92 per share, according to p.79 of the NRE prospectus (linked here). NRE’s market cap comes to $716 million. So the stock’s priced at 80% of tangible book value, to start. But wait…
The NRE investor presentation presents a different picture. As noted on p.8 there (linked here), equity comes to $1,338 million, not counting a $340 million convertible and $250 million in cash, or a net -$90 million. So on that basis, book value comes to $1,248 million, or $19.59 per share. Were assets marked up in a fair value adjustment as part of the spinoff? If not, then there’s still more upside.
Even if assets weren’t marked up, then this is a huge disparity. NSAM management has consistently reiterated that the properties have appreciated in value, and they’re selling a few of the smaller parcels for 40% above their purchase price. And there’s some indication that the prior owner of the SEB portfolio was a non-economic seller, so maybe they got a better price than otherwise there.
Now, you can believe management or not that properties have appreciated, but why would you own the stock if you think they’re poor investors? That’s like going to a concert to boo. Their track record suggests otherwise, too. So why is NRE trading at a significant (or massive, depending on your source) discount? Concerns over forex? Concerns over management? Concerns over management’s conflicts of interest?
It may well be the last, given NRF’s steep decline following the announcement of NRF’s dilutive acquisition of European properties in May. What do you think? Is NRE the value it seems?
For all of our coverage on NorthStar, click here.