NorthStar Realty Finance – Where’s the Downgrade, Bro?

NRF imageA couple days ago I lambasted KBW’s analyst for what seemed like a rather arbitrary discount applied to NorthStar Realty Finance (NRF). (You can see the original post here.) The analyst determined a figure of net asset value of $32.08 per share, whereas management reported in its filing last week that it estimated NAV at $29.07. So where’s the downgrade, bro?

Okay, let me dig into that argument briefly.

As I noted in the original post:

The analyst neatly lays out his net asset value calculations, and it really couldn’t be any clearer, with each property type broken out. It’s all totaled up at the end, with GAAP book value of $22.62 and net asset value of $32.08. With only the briefest of explanations – “for external management” and “above-peer leverage” – the analyst offers a 27% discount on NAV and sets the price target at $23.

Does “external management” always get a 27% discount? Are there some management teams that get a greater discount? A lesser discount? While it’s typical for investors to discount an externally managed REIT, what makes this the special number that just so happens to bring the price target right to GAAP book value? Curious.

So now that management’s estimate of NAV is out there – and more conservative, at 9% less than the analyst’s own estimate – will the KBW analyst revise is price target with a 27% discount to remain consistent? In other words, will we see a $21 price target announced?

Not likely, given what I surmise is the intellectual dishonesty behind the discount to begin with. That is, the completely arbitrary 27% “external management discount” was merely a mechanism to bring the price target in line with reported book value. It has nothing to do with a real estimate of the fair value of the stock. And of course, it would be even more silly to reduce the price target with management very likely engaging in a massive buyback that makes the dividend sustainable indefinitely.

So again it looks like the usual sloppy sell-side shenanigans.

For all of our coverage on NorthStar, click here.

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