NRE - NorthStar Realty Europe Corp

[writser]

NRE is a US-listed REIT invested in European office buildings with a somewhat sketchy history (spinoff from Northstar finance). Two write-ups were released about this name during the past few days.

 

http://clarkstreetvalue.blogspot.com/2018/11/northstar-realty-europe-clny-out.html

http://yetanothervalueblog.com/2018/12/nre-limited-downside-decent-upside-tight-timeframe.html

 

The thesis is very simple: pro forma ~$7 / share in cash, if you value that at face value real estate is trading at a ~30% discount to appraised NAV. Management is looking at strategic alternatives and has already reached an agreement to terminate the external management agreement with Colony/Northstar for $70m when they sell the company. If so sale is imminent on April, 30 NRE wants to internalize management. Looks like it is likely they'll either sell the whole company or sell the remaining real estate and wind down.

 

Results should be very satisfactory if they manage to find a buyer for the whole company in the next ~4 months. Looks like a decent investment if they internalize management and sell all the real estate themselves during 2019. Looks like a mediocre investment if the strategic review yields no results and they decide to stay independent. Senvest, a hedge fund discussed on this board, has a ~10% stake and has been pushing for action.

 

Read the blogs for more information - those guys did all the hard work.

 

The whole situation looks tempting to me. However, I'm a bit skeptical of the outcome in case they don't find a buyer. Selling their portfolio buildings individually and liquidating might take a while and could be costly - and that's even assuming that new management wants to liquidate.  Also there's the risk that appraised NAV is a bit too optimistic - management fees depend on it. On the flipside they've been selling assets around EPRA NAV the past few years. For now I'm letting the idea percolate a bit in my head. No position. Any thoughts?

[Foreign Tuffett]

NRE is a US-listed REIT invested in European office buildings with a somewhat sketchy history (spinoff from Northstar finance). Two write-ups were released about this name during the past few days.

 

http://clarkstreetvalue.blogspot.com/2018/11/northstar-realty-europe-clny-out.html

http://yetanothervalueblog.com/2018/12/nre-limited-downside-decent-upside-tight-timeframe.html

 

The thesis is very simple: pro forma ~$7 / share in cash, if you value that at face value real estate is trading at a ~30% discount to appraised NAV. Management is looking at strategic alternatives and has already reached an agreement to terminate the external management agreement with Colony/Northstar for $70m when they sell the company. If so sale is imminent on April, 30 NRE wants to internalize management. Looks like it is likely they'll either sell the whole company or sell the remaining real estate and wind down.

 

Results should be very satisfactory if they manage to find a buyer for the whole company in the next ~4 months. Looks like a decent investment if they internalize management and sell all the real estate themselves during 2019. Looks like a mediocre investment if the strategic review yields no results and they decide to stay independent. Senvest, a hedge fund discussed on this board, has a ~10% stake and has been pushing for action.

 

Read the blogs for more information - those guys did all the hard work.

 

The whole situation looks tempting to me. However, I'm a bit skeptical of the outcome in case they don't find a buyer. Selling their portfolio buildings individually and liquidating might take a while and could be costly - and that's even assuming that new management wants to liquidate.  Also there's the risk that appraised NAV is a bit too optimistic - management fees depend on it. On the flipside they've been selling assets around EPRA NAV the past few years. For now I'm letting the idea percolate a bit in my head. No position. Any thoughts?

 

Setup is reminiscent of $NYRT. So f***** hard to know how firm the NAV #s are.

[writser]

Yes, obviously that's the key question. I've been looking at this a bit more. The last few years they've consistently been selling at or around EPRA NAV (see some snippets below from calls and filings). It could be the case that they've sold the prime and liquid real estate and are left with the bad stuff but so far the independent appraisals don't seem ridiculous. Currently the portfolio has a 97% occupancy rate with a ~6 year average lease term. Largest pro-forma tenants are BNP Paribas, Invesco, Cushman & Wakefield (if we don't like your appraisals your rent will escalate!) and Moelis & Co. Most of their real estate is in big cities, i.e. London, Paris, Berlin, Hamburg and they have invested in property improvement over the past few years. The portfolio doesn't seem like total trash and I'm willing to believe that the independent valuation is a closer proxy of fair value than book value.

 

However, EPRA NAV was $20.85 last quarter. NRE should have roughly ~$350m or $7 per share in cash after paying the management termination fee and selling Trianon Tower. Assuming Trianon Tower was sold at appraised value the remainder is worth $12.45 and priced by the market at $9.25, i.e. a ~$160m discount on a real estate portfolio that was appraised at ~$1300m. So a ~12% discount to EPRA NAV. Probably a decent bet if they can sell the whole company at once in a few months but the margin of safety is a bit too thin for me. Also, currency movements have been slightly unfavorable the past few weeks.

 

Earlier today, we signed a definitive sale and purchase agreement to sell the Trianon Tower in Frankfurt for approximately $760 million, in line with the midyear valuation by Cushman & Wakefield but $86 million above the midyear 2017 valuation, which preceded the completion of certain value-enhancing asset management initiatives.

 

On September 24, 2018, NRE completed the sale of Office 123 in Lisbon, Portugal for $15 million, 6% above the mid-year Valuation, releasing $15 million of net equity to NRE and resulting in NRE’s exit from the Portuguese market.

 

On April 30, 2018, we completed the disposal of the Maastoren property in Rotterdam, our largest remaining noncore asset, for $195 million, 2% above the year-end valuation and a 20% premium to the midyear valuation, which preceded lease extensions with the main tenants Deloitte and AKD.

 

Couple of questions for me, if I may. The first was just a little more color on the 19 sales, $445 million, 2% above book value. Could you give us an idea of the range of disposals above and below book value? And particularly, how many were there needed to take a loss on and what premiums are achieved at the other end of the spectrum?

 

Hi, Mike. It's Mahbod here. So the sales happened throughout the course of last year and at a premium of about 2% above the independent valuation.

[writser]

Shares down ~9% since last post. Eur/usd basically unchanged. Pro forma a ~$350m net debt position and the remaining portfolio is trading at a larger discount. Market is a bit panicky so chances of a deal have probably decreased a bit (portfolio value itself might have decreased too). Still, a ~$70m drop on a ~$1300m portfolio in a few weeks seems steep. I bought a tiny starter position.

[Foreign Tuffett]

3 more properties sold, with an additional 3 under contract. Transactions are additive to NAV.

 

 

https://www.businesswire.com/news/home/20190110005290/en/NorthStar-Realty-Europe-Completes-Sale-U.K.-Assets

[writser]

On the one hand it seems like good news. However, if they keep selling properties it seems to get more and more unlikely that they will sell the whole company? Or is that too pessimistic and are they simply divesting some non-essential holdings for a nice price.

[Foreign Tuffett]

On the one hand it seems like good news. However, if they keep selling properties it seems to get more and more unlikely that they will sell the whole company? Or is that too pessimistic and are they simply divesting some non-essential holdings for a nice price.

 

No clue on the probability the entire company is sold in a single transaction. Also no clue on whether today's announcement makes that more or less likely.

 

I think they are down to only 17 properties. They might be able to liquidate all of them relatively quickly given (1) none of the remaining properties are large "trophy" type properties (2) all (almost all?) the properties are located in major European cities.

 

The worst outcome would be their continuing as a going concern after management is internalized. I think the more properties they sell the less likely this becomes. Now that Colony is on the way out as the external manager, its ~11% ownership should give them a big incentive to do the smart thing.

[Foreign Tuffett]

Trimmed this a little @ $16.50 as discount to NAV has narrowed.

[writser]

Trimmed this a little @ $16.50 as discount to NAV has narrowed.

 

Yeah. Two months down the road it looks more unlikely to me that they will sell the company wholesale as they keep selling individual properties. Also no news regarding any interest. Yet shares are trading close to an all-time high of ~$17, compared to a low of ~$14 in december. The discount to EPRA NAV has shrunk significantly. I only have a tiny tracker position left.

[writser]

NorthStar Realty Europe (NYSE:NRE) is up 5.2% after hours on word that it's moving into the S&P SmallCap 600.

 

Worst timing ever.

[writser]

Some tidbits from the Q4 press release and deck:

 

- As of December 31, 2018, total equity was $678 million (U.S. GAAP depreciated value), or $13.52 per share and EPRA NAV was $20.67 per share, which includes approximately $0.30 per share related to the incentive fee payable to NRE’s Manager for 2018 performance and costs associated with the strategic alternatives process.

-  Since the authorization in March 2018 through December 31, 2018, NRE repurchased a total of 6.1 million shares of common stock for approximately $83.4 million at a weighted average price of $13.73 per share.

- NRE joined the S&P Small Cap 600 index in February 2019.

- On March 1, 2019, NRE completed the disposal of Uhlandstrasse, an office property in Frankfurt, Germany for $41 million, representing a 65% premium to the allocated purchase price including funded capital expenditures and releasing approximately $25 million of net equity after repayment of financing and transaction costs.

- NRE had 50.1 million shares of common stock, operating partnership units and restricted stock units (“RSUs”) not subject to performance hurdles outstanding as of December 31, 2018.

- As of December 31, 2018, the termination fee due to the Manager was $64.6 million. No Incentive Fee will be payable to the Manager for any period after the termination date.

 

All good, but shares are up quite a bit since the beginning of this topic and are now trading, by my rough calculations, at a ~3% discount to EPRA nav, adjusted for termination & incentive fees. Maybe I sold a bit too soon but at current prices I'm not that interested in getting back in.

 

No news about the strategic review so far. Maybe the conference call today is interesting.

[writser]

On April 23, 2019, the Company and the Asset Manager entered into Amendment No. 2 to the Asset Management Agreement ("Amendment No. 2"), as amended by the Amendment, extending the date used in the definition of Triggering Date (as defined in the Amendment) from April 30, 2019 to June 30, 2019 to accommodate the ongoing strategic process as announced in the November 8, 2018 Form 8-K. Amendment No. 2 extends the time in which the Company has agreed to use commercially reasonable efforts, consistent with the fiduciary duties of the strategic review committee and the Company's board of directors, to enter into a definitive agreement providing for a NRE Change of Control.

 

As also contemplated by the Amendment, on April 22, 2019, the Company entered into an Employee Transition Agreement with the Asset Manager and the Asset Manager Parent (the “Employee Transition Agreement”). Pursuant to the terms of the Employee Transition Agreement, the parties agreed that certain employees of the Asset Manager and its affiliates would be available for hire by the Company or an acquirer of the Company from and after the termination of the Asset Management Agreement pursuant to the Amendment. The Employee Transition Agreement also (i) eliminates the Company’s obligation to reimburse the Asset Manager Parent for 50% of the cash severance payments payable to Mahbod Nia, the Chief Executive Officer of the Company, if his employment is terminated in connection with an NRE Change of Control, and reduces such reimbursement obligation from 50% to 25% of the cash severance payments payable to Mr. Nia if such termination of employment is in connection with an Internalization

 

Strategic review still ongoing.

[writser]

NRE traded down the past few months and is now trading sub-$16 again as the end of the strategic review (June, 30) gets nearer and nearer without any news. I haven't done my homework yet but EPRA NAV should be around $20.50 or roughly $19.25 if you subtract the termination fee payable. I.e. you buy the real estate at a low two-digit discount. Probably a decent bet if they sell or liquidate. Is the market getting jittery about NRE possibly continuing as a standalone entity? Seems like that would not be a good outcome for Senvest and Colony. Maybe the real estate valuations are simply too optimistic. We'll see. No position, but might buy some shares. Seems like a decent bet at first glance.

 

Decent writeup: https://konekoresearch.com/2019/06/20/northstar-realty-europe-strategic-alternatives-review-deadline-approaching/ . Seems a bit conservative with respect to what will happen with the RSU's but again, haven't done my homework yet.

[writser]

Down ~3% today as the end of the strategic review is only a few days away. The market is getting nervous. I bought a small position. An activist has a decent position, Colony probably also wants to sell after getting their termination fee, double digit discount to appraised NAV, and the company has been busy doing good things the past 12 months. The downside seems somewhat limited to me. Seems very likely somebody will snap up their assets one way or the other and I don't see it trading at a huge discount in the meanwhile. Still, not my best idea, small position, DYODD. Perhaps I'm underestimating the risk that the board will still come up with some convoluted transaction with Colony.

[writser]

The rumor mill is starting: "a consortium led by Vivion Capital Partner is bidding for NorthStar Realty Europe (NYSE: NRE), according to Bloomberg, citing people familiar with the matter. Negotiations are ongoing.". I've been buying a few extra shares. Situation is already attractive on its own and though I don't assign much weight to the rumors it's certainly a net positive. Still only a ~2% position, I'm a pussy - low conviction idea.

[writser]

And ... a deal is struck (link). ~$17.03 per share, early Q4 close expected. Shareholders should still receive a $0.15 dividend.

 

Interesting merger consideration: Under the terms of the merger agreement, NRE stockholders will receive in cash at closing, for each share of common stock, US$1.68 plus the U.S. Dollar equivalent of €9.26 and £3.82, representing an estimated per share merger consideration of US$17.03 based on three month forward foreign exchange rates.

 

Looks like the buyer didn't want any currency exposure. And they found a lot more costs to subtract from EPRA NAV than I did!

 

This was just a small position but there's food on the table again. Market provided a pretty good entry point a few days before the end of the strategic review (at least in hindsight). Also a nice selling opportunity when it was announced NRE would join the S&P small cap 600 this winter.