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Invest the Buffett Way: Buy Common AND Preferred Shares

Berkshire's Heinz deal demonstrates how to invest in both

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NorthStar Realty Finance

Common: NYSE:NRF
Preferred: NYSE:NRF-PC

NorthStar does a little of everything: It loans money for commercial real estate properties; invests in commercial mortgage-backed securities and collateralized debt obligation notes backed by CMBS’; invests in net lease properties; and manages other people’s commercial real estate assets.

Three years ago, NRF shares were trading at less than 50% of book value; today, their valuation is more than triple that. Not to worry, though — this past year was a good one for the small-cap REIT, and 2013 looks even better.

In NorthStar’s Q4 conference call, it projected that a minimum of 87 cents per share in cash would be available for distribution in the coming year, 18% higher than in 2012. It expects to pay a 72-cent annual dividend on the common, which at its $8.32 closing price on Feb. 21 is a yield of 8.7%.

NRF has three series of preferred shares with coupon rates of 8.75%, 8.25% and 8.875%, respectively. I’ve chosen Series C, which pays the highest coupon rate and currently yields that amount. Given its projections of net distributable cash in 2013, it should have at least $25 million left over after paying out both the common and preferred. Also, it’s important to note that NorthStar’s preferred shares are cumulative in nature; dividends are to be paid ahead of common shareholders.

The common and preferred combine for a yield of 8.75%. There’s obviously some risk involved here, but if you don’t bet the farm, I think you’ll do just fine.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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