Description

While there has been a healthy amount of carnage in the marketplace and especially in the REIT space, we would like to highlight NorthStar Realty Europe Corporation (NRE) as a particularly compelling opportunity. NRE is an externally-advised REIT which owns predominantly Class A office properties  situated in primary markets across Germany, the United Kingdom and France. The company was spun off from Northstar Realty Corporation on October 31, 2015 and has traded at a deep discount to its NAV during its entire public life. As of September 30, 2017, the independent valuation prepared by Cushman and Wakefield valued the company’s NAV at $17.77 per share. It is worth noting that since this appraisal was performed, the US dollar has depreciated vs the Euro and Pound. At current exchange rates, we estimate the NAV would be approximately $1 higher, or $18.75.

We believe the management team has done an admirable job in an attempt to shrink the discount by selling non-core assets at a premium to their NAV and using the proceeds to buy back stock. The company has sold roughly $500 million of non-core assets over the past few years with another $240 remaining. We believe that once the company exits its quiet period, management will reinstate a share repurchase program. The company currently has $50 million of cash on its balance sheet with $76 million in assets held for sale. Assuming that half of the proceeds from the asset sales will be used to retire related debt, the company will have $90 million (15% of the market capitalization) at its disposal to buy back stock. Furthermore, the company has an additional 6 properties that are considered non-core, which are valued at $243 million by Cushman and Wakefield.

In addition to the company repurchasing shares, we believe Colony Northstar, the external manager, will continue to provide support to the platform. Following the quiet period, we think Colony will continue its accumulation of NRE stock. Last year, Colony acquired a little more than 10% of the company’s stock. It is worth noting that Colony acquired shares in the $12.50-14.55 range. We believe Colony views NRE as a growth vehicle for Colony’s European platform. They are incentivized to help bring the stock in line with its NAV in order for it to have an attractive cost of capital. If the stock is not trading in line with its NAV, it could not serve as an acquisition vehicle.

While it is always difficult to call a bottom in Northstar/CLNS entities, we believe that we have good fundamental downside protection here. Pro forma for the expected buybacks, the company will exit 2018 with a CAD of $1.19 per share and a dividend per share of $0.70.

TABLE BELOW:

Catalyst

We expect a deal or M&A to create a catalyst