NorthStar’s Decline — Insiders Don’t Care?

NRF imageNorthStar’s decline of 74%? Investors have been right to grouse about the stock performance of NorthStar Realty Finance (NRF). The last year has been abysmal, with the stock down a whopping 74% from its 52-week high. Much of the blame has been leveled at management and its self-serving practices, and investors have attributed management’s lack of alignment to the stock’s performance. Certainly some of the blame is warranted, but insiders still do own significant stakes in NorthStar, and have purchased more recently. Moreover, their ownership, often in the millions and worth potentially at least three times its value today, still provides them a lot of incentive to make NorthStar Realty Finance a winner. Let’s look at the numbers.

Below I’ve prepared three tables that highlight various aspects of insider ownership. The first one shows management’s current ownership, its value at $10 (today), and its value at $30 (less than 6 months ago), as well as the difference between the two figures.

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As you can see, insiders lost quite a bit in just the last six months as NorthStar plunged. Chairman David Hamamoto’s position today would have been worth $10.4 million more in mid-August, conservatively. The positions of other insiders is less, especially for CFO Debra Hess, but Director Al Tylis and CIO Dan Gilbert would have otherwise had multiple millions more. But those positions also incentivize these insiders to increase the value of NorthStar. A return to $30 per share, around net asset value, would create significant wealth, as well as likely increase the share price of the external manager, of which these insiders also own significant stakes.

Not only do insiders own significant stakes in NRF, the size of their positions has been growing recently, as you can see in the table below.

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Overall, it looks like insiders are willing to hold on to their shares at current prices. Hamamoto’s stake is up 61% from Sept 30, 2015, as both he and Tylis purchased stock in the open market around $19 per share in early November. Hamamoto added about $2.6 million to the position, while Tylis acquired 50,000 shares for around $950,000. Tylis actually re-initiated his position, after having closed it. But given the stock’s significant decline, about 45%, since Tylis and Hamamoto bought, it certainly would be a vote of confidence to see them jump in again.

Finally, the last table, detailing insider ownership since the spinoff.

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Whereas insiders have been adding or holding recently, the trend of insider ownership since the spinoff of the external manager has been clear: down. Among these four top insiders, positions have shrunk between 36% and 56% over 18 months. Yet because this is a point-to-point comparison, they don’t reveal that Tylis’s position was at 0 for three full quarters, while Hess cleared out 83% of her position from the top, before adding more recently.

Those significant declines in insider ownership are not exactly confidence-building when you consider that the business is structured to favor the external manager. But insiders still do own significant stakes in the REIT, and therefore have some incentive to make the stock appreciate. After all, in the medium term that appreciation should favor their much larger positions in the external manager.

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For all of our coverage on NorthStar, click here.

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