Description

We consider both NRF and NSAM to be attractive investments, and we think this writeup is best read in connection with the work done by brook1001 written on October 3 on NRF. This write up will focus on NSAM, but an understanding of NRF and the upside there is important to the overall thesis.

Briefly put: we see NSAM as a strong asset manager with a tremendous track record for value creation (as can be seen through the long term track record @ NRF) that has access to long term + permanent capital.  The company is paid locked-in management fees from both the public REIT, as well as the private investment vehicles.  These entities have hard locks on capital ranging from what we believe to be 3 to 20 years.  Besides for the step function increases paid to NSAM by NRF everytime NRF accesses the equity or preferred capital markets, NSAM and will receive additional incentive-based compensation dependent upon NRF dividend performance. 

While NSAM trades at a large multiple on current earnings, the fixed, annuity-like nature of its current earnings stream coupled with the potential to grow earnings meaningfully in the near term make this a very exciting story. 

Most REIT investors typically focus on dividends for the majority of their return. The non-traded vehicles typically focus on an investor with a target of a 7% total return, and the public REIT investors typically also focus on yield for the vast majority of their expected return.

Effectively what we have in the NRF/NSAM spin-off is a long dated cost of capital arbitrage between REIT/yield investors and total return investors. As long as management can find returns greater than the  cost of capital at NRF (which in the current environment we believe is ~7-9% ROE), NSAM will be able to continue to grow its business levering of other people’s money (the traditional REIT investor).  The combination of return arbitrage plus incentive fees plus locked in capital makes NSAM much more akin to a public GP than a traditional asset manager. 

Furthermore, the management team here is experienced with a proven ability to do institutional level transactions (as opposed to just single property transactions), and we believe their interests are highly aligned with NSAM shareholders’.  As such, we see an extraordinary path to growth driven by management’s continued strategy to increase NRF’s size through accretive, cash generative investments.  By our math, the company is currently trading at ~16x 2016 earnings.  However, we think there is significant upside here as the market begins to appreciate the safety and perpetual nature of these management fees (said explicitly: outside of bankruptcy, it will be nearly impossible for NSAM’s earnings to drop over the next five years), and additionally there are a variety of transformational deals possible at NRF that will ipso facto be transformational for NSAM.

Many market participants are concerned about the current market multiple of around ~20x 2015 earnings. Further, many investors hate the non-traded REIT market. The non traded REIT market has definitely grown recently and will most definitely slow down/shrink some; however this market has bounced around but according to data from a recent FBR research report the industry has been able to raise on average better than $6bb a year (give or take a year) since 2003. Let’s assume the non-traded REIT market shrinks back and that NSAM can only raise approximately $500mm a year in the non-traded REIT market  that NSAM can raise ~$1.5 billion of incremental capital a year @ NRF (which is a discount to the amount of public capital raised in the last 4+ months!). Let’s further assume no buybacks, and let the cash just build on the company’s balance sheet. We feel it is reasonable than that exiting 2016 we are trading at a multiple of ~16x; i.e. even with a deceleration from the current acquisition pace on the public side plus a large drop off on the non-traded side plus no accretive uses of cash; the company will be trading at multiple in 2016 that seems to more imply dead money than a massive value destroyer. 

 There are a multitude of catalysts here to drive value, the one we are currently most excited about is the closing of the healthcare deal announced with griffin, and what we think should be a spinout of NRF healthcare. NSAM has put the proper management team in place in order to spin off NRF healthcare; this will now give NSAM 2 separate vehicles to tap in the public markets (and should lower the cost of capital, which should lead to a virtous cycle of value creation). Over the long term we anticipate there being a multitude of businesses under NSAM including separately capitalized hotel, healthcare, real estate opportunities and triple net lease businesses. Further, NSAM is going to be asset light and generating meaningful cash which we anticipate will be used to enter new markets including potentially joining or purchasing a corporate lender/CLO type businesses or other longer term capital type vehicles.

A quick item we think of note that is important is the current troubles @ ARCP. ARCP + Cole is the monster in the non-traded REIT industry and as can be read in the WSJ article this weekend large brokers are starting to pull back from American Realty products. We feel it is quite natural to assume Northstar should be able to pick up meaningful marketshare. Estimates have ARCP + Cole at approximately 30% of all capital raising in the space in 2013 and 50% of the top 10 capital raisers. This is a meaningful opportunity for Northstar to pick up share at a perfect time as it has several strong non-traded REIT platforms in the market. Finally another real home run here is the potential for large asset sales out of ARCP into NRF. NRF we feel needs to gain further scale in its triple net lease platform. There were stories out of the FT about ARCP being in merger talks with NRF which were subsequently scuttled (WHEW!); however we do think if ARCP is serious about selling assets to buyback stock than NRF should be an aggressive buyer as it would allow scale for the triple net lease platform.

We think this is a great example of a business that while trading at a high multiple today, has multiple levers for value creation and should be a sleep at night compounder for many years to come. 

Catalyst

1.      We feel in the next 12 months Northstar will gain further traction at the expense of ARCP and other smaller players in the non-traded REIT market

2.      NRF will break into at least two, if not three pieces providing for further platforms for growth for NSAM.

3.      We anticipate NSAM will enter into several new joint-ventures with asset managers where NSAM can provide distribution and or capital in exchange for expertise further leading to a new platform for growth for NSAM

4.      Further capital raises at NRF or other large transactions such as the recent Griffon America deal.