Why Northstar Realty Finance Corp. Shares Popped Today

Is this meaningful or just another movement?

Alex Planes
Alex Planes
Apr 28, 2014 at 4:57PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Northstar Realty Finance (NYSE:NRF) are trading 8% higher this afternoon after topping out at an early gain of over 11%. News of a proposed acquisition by American Realty Capital Properties (NYSE:VER) is driving today's gain, but the fluctuations in price indicate the market is unsure that this deal will go through.

So what: American Realty is reportedly considering making a $20-per-share offer for Northstar, which would amount to a buyout price of roughly $6.5 billion. This would be American Realty's second big buyout in a year, if it goes through -- last October, the real estate investment trust bought out Cole Real Estate Investments for $11.2 billion, including the assumption of debt, in a deal that later shrank to just under $10 billion by the time it closed this February.

However, it's important to note that any negotiations are still in their very earliest stages, and no deal has yet been reached. Northstar's shares are trading at a 14% discount to its reported buyout price right now. American Realty is also trading over 2% lower today on news of the deal, as investors seem somewhat lukewarm on the possibility of this combination.

Now what: Both REITs boast solid dividend yields -- Northstar pays out 6.6% and American Realty's yield is 7.5% -- but it should be clear to investors which of these companies have been better managed over the past few years. Since Northstar went public in late 2011, it has produced total growth of 440%, but American Realty has rewarded shareholders with a mediocre return of 21% including dividends reinvested. If you're going to use today's news as a buy signal, I'd look at Northstar long before dipping into American Realty -- and hope that the deal doesn't go through, for the sake of your returns with that stock.

Editor's note: A previous version of this story incorrectly stated Northstar and American Realty's returns were 21% and 440%, respectively. The opposite is true. The Fool regrets the error.