The NorthStar downgrade – where a Keefe Bruyette Woods analyst lowered his price target on NorthStar Realty Finance (NRF) from $23 to $13 per share – must be a joke, right? This downgrade comes from the same analyst we highlighted in November for his arbitrary discount for external management. Now he’s back with more of the twisted logic of that earlier report, except this time, in addition to the lower price target the analyst lowered his rating from outperform to market perform. All this follows after the stock has fallen well below even the revised price target of $13. Cart, meet horse. So what’s so backward about this downgrade?
Let’s return briefly to the point we made about the KBW November report.
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.
In a post a few days later we noted that management had come out with an even more conservative estimate of NAV than had the KBW analyst. So we should have seen the analyst apply his “management discount” to downgrade the stock on that new news, right?
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.
In this most recent report on February 9, the KBW analyst provides lower valuations on assets, which in itself is not absurd given the decline in markets and asset values. Still, the American economy remains reasonably strong, despite what the market is signaling.
The humdinger, where the real intellectual dishonesty hides, is the reported increase in the discount for external management to 35%. This is the kind of dishonesty for which the investment banks are well reputed. So why does the “external management discount” suddenly grow from 27% to 35%? The analyst is again trying to make his price targets line up with the market, and again falls short. It’s this type of “fit the facts to the model” approach that’s disgusting.
After KBW’s reports and downgrades that chase the stock down over the last few months, where were the insightful analyses before the fact? And where’s the careful look ahead at a stock that’s trading at less than 3 times its trailing cash available for distribution and with cash and credit, as of the last report, to buy more than 30% of the company at current prices? This KBW report is the type that the Wall Street sell side is justly demonized for, “after the fall” downgrades with shoddy reasoning.
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