Is NorthStar Realty Running Into a Buzz Saw?

With more than 5,400 stocks to choose from, the universe of investment possibilities is enormous. You could get tips over the company water cooler or from Internet discussion boards. A better way might be to look for stocks based on what you already know and own.

Motley Fool CAPS helps you focus your energies by providing you with a personalized Stock of the Day. Using its supercomputer, it looks at stocks currently in your active pick list, stocks picked by highly rated players with lists similar to yours, industries in which you currently have active picks, and Saturn's orbit around the sun. Well, maybe not that last one -- but it targets areas in which you already have an interest.

By pairing up the opinions of some of the top investors in the CAPS community, CAPS provides you with a handful of companies on which to begin your own due diligence and research.

Based on my outperform ratings on real estate investment trust Walter Investment Management, as well as underperform ratings on Hatteras Financial and Invesco Mortgage Capital, the CAPS supercomputer thought I also might be interested in NorthStar Realty Finance (NYSE: NRF  ) , one of five Stocks of the Day it recently offered up for my consideration.

Let's see what the REIT has going for it that might warrant an investment, even if it hasn't yet been picked for you. Just remember, as smart as the CAPS algorithm may be, it's still just an algorithm, so be sure to look before you leap on any of its suggestions.

NorthStar Realty finance snapshot

Industry Real estate investment trust
Market Capitalization $513 million
Revenues (TTM) $124.7 million
Dividend and Yield $0.54, 10.1%
Cash $144.5 million
Debt $3.3 billion
CAPS Rating (out of 5) ****

Source: Motley Fool CAPS; S&P Capital IQ. TTM = trailing 12 months.

Buy what you know
The commercial real estate market collapse that many analysts expected, myself included, never materialized. Although considerably weakened, the market has clung by its fingertips, and if the most recent data by the National Association of Realtors are correct, the CRE market has pulled itself back from the precipice.

While the majority of the debt underwritten during the market's heyday is now coming due, the NAR says banks are handling things better these days. With vacancy rates inching down and rents rising, the worst of the storm has passed.

Follow the pole star
That's good news for NorthStar Realty Finance, which manages a portfolio of commercial real estate debt, commercial real estate securities, and commercial properties. Although it posted negative funds from operations of $76.6 million in the fourth quarter, that was up dramatically from the -$265.6 million FFO it recorded last year. And adjusted FFO rose nearly 10% to $43.7 million, though a higher share count caused it to fall year over year on a per-share basis.

Through a combination of raising capital and paying down debt, NorthStar puts itself on a firmer financial footing. It's also finding tenants for its properties, as 94% of its property portfolio was leased with an average of 6.4 years remaining.

It's obvious, though, that you can't apply market conditions equally across the board. RAIT Financial Trust (NYSE: RAS  ) reported its occupancy rates grew to almost 84% from 79% the year before, while mall operator General Growth Properties (NYSE: GGP  ) has a 95% occupancy rate. But the Empire State Realty Trust, which owns the Empire State Building in New York and is in the process of planning an IPO, has only a 67% occupancy rate.

Wall Street certainly thinks NorthStar has righted itself, as all six analysts following the REIT believe it will outperform the broad market averages, and 95% of the CAPS members rating it agree.

Still cracks in the foundation
I'm not convinced the NAR was correct in blowing the "all clear" signal for the CRE market, precisely because of all that maturing debt. The Wall Street Journal reported commercial rents are still below what they were five years ago and could drop another 26%. Securitized office loan delinquency rates rose to 9% in December, up from 7.4% six months prior.

Still, certain markets look better than others -- and the same probably goes for different types of real estate. CreXus Investment (NYSE: CXS  ) , the spinoff from residential mortgage REIT Annaly Capital Management, acquired its first two net lease properties in Arizona, one of the markets that typified the boom-bust cycle.

NorthStar seems better positioned than many of its rivals, and with its stock trading at less than its book value, I've gone and marked it to outperform the broad indexes. Feel free to add it to your personalized watchlist, and let me know in the comments section below or on the NorthStar Realty Finance CAPS page if you think it's better off than its rivals if the CRE doomsday scenario comes true.

Even if NorthStar doesn't pique your interest, we've compiled a special free report for investors called "3 American Companies Set to Dominate the World," which gives a rundown of three American companies set to take over emerging markets. The report is 100% free, but it won't be around forever, so click here to access it now.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Annaly Capital. Motley Fool newsletter services have recommended buying shares of Annaly Capital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On March 02, 2012, at 4:09 PM, gembeader wrote:

    NRF has managed to maintain it's dividend since cutting it from $.40/quarter to $.10. Now, after two increases in a row, $.125 then $.135 looks like the dividends are on the rise along with the operating cash flows.

    No problems with increasing capital with 15,000,000 shares being held in secondary offering this week.

    IMO the outlook for this stock is extremely positive given it's dividend history, raising cash flow, and ability to raise capital. Further rumors about future properties that they may take control of would only enhance it's value.

    Management has proven to be keen in a tough environment, I trust them to continue to maximize the potential of this company

    Disclosure, long 60,000 shares

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