I’m Buying NorthStar Realty Finance

In May my Special Situations portfolio set up a synthetic long position on the pre-split NorthStar Realty Finance (NYSE: NRF  ) . I'm back today to announce another acquisition -- the post-split shares of NorthStar Realty Finance, a REIT yielding a very high dividend that should drive the stock price higher.

Why buy the REIT?
NorthStar also split off NorthStar Asset Management (NYSE: NSAM  ) , the more attractive business of the two. This latter company is a high-growth, low-capital business, and I think it could double in the next couple years as its fees from running the REIT and other businesses explodes upward. Why not buy more of that?

The major reason is that the options position already gives me huge exposure to this segment. And it's a high-multiple stock, which could drop if the market drops. So I'm not buying more largely for reasons of portfolio management.

In contrast, I think the REIT offers significant upside and lower downside through its high dividend. Pre-split, NorthStar was paying out about 90% of its funds from operations as a dividend. With management expecting FFO to clock in at $1.58-$1.70 this year, that would put the dividend around $1.50 at the same payout rate. So at today's prices, you're receiving nearly a 9% yield. That's much too high.

If you figure a 6.5% yield is normalized and that the REIT can grow income at 3%-4% annually, that implies a total yearly return of better than 10%. That's still attractive. So a 6.5% yield would put the stock at $23 per share and you get 9% a year while you wait. Add it all up, and I think shareholders could get up to 50% upside over the coming year.

Foolish bottom line
So my Special Situations portfolio is putting $3,000 -- about 4% of its capital -- into NorthStar Realty Finance. If the stock lingers around today's prices, I expect to buy more.

Follow me on Twitter: @TMFRoyal. And check out my dedicated discussion board.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.


Read/Post Comments (1) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 14, 2014, at 2:29 PM, IlluminatInvest wrote:

    Good call, finally someone that understands that NRF is trading at a nonsensical valuation post-split based on how much it will likely pay out, so I'd expect it to correct higher after they explicitely announce the payout amount.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3021426, ~/Articles/ArticleHandler.aspx, 12/22/2014 2:55:11 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement