Northstar Realty Finance Corp NRF
September 16, 2008 - 2:22pm EST by
2008 2009
Price: 6.82 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 428 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Bailouts are out, strong balance sheets are in, assuming that Lehman (not getting bailed out) is the start of a trend.  Financial companies with really strong balance sheets are going to be able to buy assets on the cheap from desperate sellers over the next year, and NRF is one of strong ones.


With better than a 20% current dividend yield, commercial REIT NRF is so cheap that it doesn’t need a long report to explain how good the risk/reward is at the moment.  All that one needs to know is that:


1)      The balance sheet is strong

2)      NRF is not exposed to the worst parts of the market

3)      Management is above average.


All three are true.



Balance Sheet


In addition to the $136 million of unrestricted cash and $53 million remaining of the $100 million unsecured credit facility as stated on the Q208 B/S, the company raised an additional $90 million (net) on July 10, 2008 by selling a convertible preferred equity interest in its Health Care Real Estate Venture, Wakefield Capital LLC (10.5% interest).  Liabilities are mostly long term, with the first significant amounts of debt coming due in July/August of 2010.  As CEO David Hamamoto stated in the past conference call:


“As a result of our approach NorthStar’s balance sheet as well positioned for this market with very little debt maturing until the middle of 2010 and strong liquidity of $295 million which includes the July 9 recapitalization of our healthcare net lease portfolio. Our credit track record continues to be one of the best in the sector. While we aren’t immune to the current weak market conditions we still have no non-performers in our portfolio.”



Market Exposure


NRF has yet to experience a nonperforming loan since inception, which speaks well to its direct mortgage underwriting discipline (mostly stayed away from leveraged syndicated financings) and the fact that it had no exposure to single family mortgages prior to 2008.  NRF is of course not entirely immune from the current economic environment (and has recently booked some reserves), but its record to date suggests that it will weather the storm far better than most other REITs.


In October of 2007, NRF entered into a joint venture with Goldman Sachs’ Whitehall Funds to opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases.  Each partner contributed 50% of the $350 million fund.  The venture had not yet made significant investments before June 30; on the conference call, Hamamoto claimed that the venture has evaluated over $1.5 billion of investment opportunities, but it has been exceptionally patient in deploying capital.


Since then, 2 investments have been made from this joint venture:


$11 million for 252 single family lots near Denver, CO from Quadrant Investment Group

$40 million of troubled land and construction loans from Wachovia in CA,AZ,FL, IL.


Northstar/Whitehall is targeting unlevered IRRs of 20% to 30% on such deals, but these investments are not expected to generate meaningful cash returns until the assets are resold several years from now.





David Hamamoto is the CEO and founder of Northstar.  He was the founder and former head of Whitehall Funds at Goldman Sachs, where he compiled a great track record.


Here’s an old article on Hamamoto’s involvement with Whitehall Funds:


Note that Hamamoto has been a frequent buyer of NRF stock over the past year, basically every time the stock went below 7.5.  No insiders have been selling.  Hamamoto personally owns around 5.5% of NRF.





The company has excess cash (which costs them around 11% annually) earning perhaps 4%, which the company expects to reinvest at 20% or better returns, which should be pretty easy to do as the market continues to fall apart.  Assuming $200 million is invested and the rest is kept as a liquidity cushion, that’s a 16% swing on $200 million, or $32 million, or about .45/share.  Considering that the TTM dividend is $1.44/share, that’s a big jump.



Final comments


I usually go into more detail when posting to VIC, and it is possible to drill down in more detail for Northstar (Though REITs are not an area in which I have a lot of expertise, so I’m not sure extra detail would mean extra insight).  But given the current valuation, strong B/S, cash waiting to be deployed, strong underwriting discipline, and the superior management responsible for all of that, I don’t see what else is needed to get comfortable with NRF.


Should the stock price increase beyond 10 or so, then some additional detailed study would be warranted.  But until then – enjoy the dividend.


Short term: $200 million excess cash gets invested at 20%+ IRR

Long term (3-5 years?): Whitehall/NRF's LandCap joint venture sells off properties purchased at distressed prices in 2008-2009.
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