It’s been quite a roller coaster for NorthStar Realty Finance (NRF) and NorthStar Realty Europe (NRE) over the past couple months. Both have plunged as investors have become increasingly concerned about their externally managed structures and, for NorthStar Realty Finance, the sustainability of its dividend. But which is the better buy? In fact, is one a better buy than the other?
NorthStar Realty Finance
For NorthStar Realty Finance, the biggest overhang is that enormous dividend, coming in hot at $3 per share. That’s not too far below the Q3 annualized cash available for distribution (CAD) of ~$3.20. But as I’ve stated here, a dividend cut might actually boost the stock price, paradoxically. Cash not used to pay a dividend could be used for buybacks (or for something else that enriches the external manager. It’s funny ‘cause it’s true.)
But one thing’s for certain, the market thinks that the 25% dividend yield is getting slashed and burned. But frankly at this price how bad would the dividend cut have to be? A 50% cut, very drastic for something with even remotely stable cash flows, would still have the yield at 12.5%. And at that price, the market ostensibly still thinks it’s not sustainable, given today’s pricing.
Unlike NorthStar Europe, NRF doesn’t have the advantage of quantitative easing any longer. Two strikes? So while NRF is trading at trailing 3.7x CAD, that underlying cash flow may not all be there when the company reports in a few weeks. However, we do have some preliminary indications of NRF buying back stock, which I’ll get to in another post.
But what about NRF’s discount to net asset value? It was only a couple months ago that management came out with an estimate of $29.07 per share. So that puts the stock at a discount of 59%, if you believe the NAV estimate. I don’t have any particular reason to disbelieve it, except of course there’s always the question of whether it would/could actually trade to NAV. That’s an absolutely huge discount.
NorthStar Realty Europe
NorthStar Realty Europe may be the better buy, even though it’s apparently more expensive. It’s trading at 7.9x CAD, and with CAD of $1.20 per share, it’s nowhere close to being unable to pay its $0.60 annual dividend. That’s already a solid dividend of 6.4%.
And on an asset basis? As I noted in my prior coverage, management is reporting an adjusted book value, taking into account comparable properties, of $19.59 per share. So NRE is trading at a 52% discount to NAV, not quite as discounted as NRF. NRE also has the benefit of the European Central Bank’s QE program stoking asset prices, so investors should expect asset prices to continue to rise there for a while, as they did during the Fed’s experimentation with QE.
NRE’s other benefit over NRF is that it has marquee commercial real estate in major European business centers, though it did pay up for many of them and they don’t generate as much cash as NRF’s assets. But QE and a stronger European economy should continue to push the properties’ value higher over time, an advantage that the US markets don’t seem to enjoy anymore.
Given the quality of its European real estate and a still sizeable discount to net asset value, NRE would make a sensible choice over NRF. NorthStar Realty Europe is also a subject of the most recent Barron’s roundtable article, in which William Priest, CEO of Epoch Investment Partners, recommends the stock.
But does it make sense to own either?
Given that both companies are externally managed, they both have the same conflicts of interest that could lead to value destruction. External management has certainly been paid a lot for the 2014 spinoff. But top managers do continue to own significant amounts of stock in both the REITs as well as the manager. In any case, many investors have voted with their feet, opting to sell rather than stick around and wait for stocks that have plunged.
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For all of our coverage on NorthStar, click here.