NorthStar Realty Finance (NRF) is undergoing a transaction that should create a lot of value for shareholders, and my Special Situations portfolio is setting up a synthetic long to take advantage of the move. NorthStar today is an internally managed REIT, but it will split off its asset management arm into a publicly traded entity and convert to an externally managed REIT. The move has already had a positive effect on the stock, but I think there's more upside on the way.

The business and special situation
NorthStar owns and manages a range of commercial real estate, including nontraded REITs, health care, manufactured housing, and hotels. It also engages in opportunistic purchases of real estate private equity interests and loan originations. Its results have allowed the company to raise its dividend from just $0.10 each quarter three years ago to $0.25 per quarter today.

But the split-up of the business is what I find really compelling. The new asset management arm will direct the operations of the soon-to-be externally managed NorthStar REIT and collect fees. And oh, the fees: The company collects a base asset management fee and then further fees as the dividends ratchet up. In short, the asset management arm will see revenue clock up quickly even on relatively modest growth at the REIT. The new company should trade at a healthy multiple as well. Suffice it to say, the economics are very favorable here. For those who want more on valuation, stop by my discussion board.

After the split, management expects the REIT to have 2014 cash available for distribution of $0.79-0.85 per share. The asset management arm should have cash available for distribution of at least $0.32-0.34 per share before incentive fees and assuming the REIT issues no more equity for the year. So expect that latter number to come in higher when all is said and done. At today's prices, you're getting a good deal on one asset or the other and at least a fair deal on both.

Foolish takeaway
Whatever way you slice it, NorthStar still looks cheap. I think options could return several hundred percent over the next 18 months, and so my Special Situations portfolio will initially set up a leveraged synthetic long, going long the $17 January 2016 calls and short the $17 January 2016 puts in the next few market days.

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