I don’t often point out the good calls I’ve made here on InvestorPlace, mostly because I don’t want to give anyone an excuse to point out the bad ones.
In this case, however, I will take a bow on my 2012 call on Northstar Realty Finance (NRF), when I said, “If Northstar has played its cards properly — and its expertise suggests that’s the case — then this may be an extremely undervalued REIT with the possibility to return three or four times your investment, in addition to the dividend.” When I wrote that, NRF stock was at $5.50. Today it’s at $15.61, after reaching a high of $17.93. That’s a 230% return if you took the risk.
Northstar Realty Finance has executed extremely well in the past two years. Some of the company’s risk relates to interest rates, as even a small increase in borrowing costs would cut into its margins. The interest rate environment has benefit the company, but that’s not the whole story. If management wasn’t able to execute, low interest rates would mean nothing.
The other benefit NRF stock enjoys is that it intends to unlock value by spinning off its asset management business. That’s also part of the reason for the stock’s increase, but certainly not all. In addition, there were rumors swirling that the company would sell itself, but management specifically denied that in the last quarter’s conference call.
NRF stock has made some great deals recently. The company expanded aggressively into the hotel space, which has been seeing strong growth, by making a $1 billion acquisition for 47 branded hotels with a total of 6,100 rooms. The company also made a minority purchase in a European hotel chain. This adds to the REIT’s 80 healthcare facilities, mostly consisting of assisted living facilities.
Besides actual property ownership, NRF stock originates loans. Q1 saw a $167 million common and preferred equity purchase in a 17-state industrial entity. It provides NRF stock with a 50% ownership on an entity valued at $406 million, so the company effectively got it at a discount.
NRF stock presently pays a 6.4% yield, but it is considering splitting the dividend when it spins off its management business.
So after this big run, is NRF stock still a buy? I think the business is on very solid footing now, having made great strides in the past two years. If you hold the stock, I would suggest selling at least half your position to lock in the gains, and set a 7-10% stop loss. I would then redeploy the proceeds into one the company’s series of preferred shares. Because preferred stock tends to move very little as far as absolute price, yet throws off great yields, it reduces your exposure to movements in the underlying common stock, while still permitting those dividends.
All the preferred shares have a par value of $25. The Series A is an 8.75% issue, trading at $25.08. The Preferred B series is an 8.25% issue, trading at $24.64. The Series C is an 8.875% issue trading at $25.12, with an 8.5% series D trading at $24.72. The company is also issuing am 8.75% Series E this week. The Series A and B are callable next month, so I’d avoid the series A in the event it gets called and is trading above $25.
Otherwise, these are all pretty close. I prefer to purchase below or at par when possible. Is it worth buying the Series B with the possibility of a 1.5% capital gain increase if it returns to par, which would offset the 0.625% loss in yield? I don’t think the difference is large enough to be material. I think I’d just as soon grab the Series E, providing it trades around par when it opens.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of Asymmetrical Media Strategies, a crisis PR firm, and PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.