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NORTHSTAR REALY FINANCE CORP. HFAC Financial Sector: Final Stock Pitch. REAL ESTATE INVESTMENT TRUSTS. The REIT structure is designed to provide a similar investment opportunity in real estate as mutual funds provide for stocks or bonds. REIT pools investors money
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NORTHSTAR REALY FINANCE CORP HFAC Financial Sector: Final Stock Pitch
REAL ESTATE INVESTMENT TRUSTS The REIT structure is designed to provide a similar investment opportunity in real estate as mutual funds provide for stocks or bonds. • REIT pools investors money • A share is represents a fraction of ownership in all of a REITs real estate investments. REITs: • 75% of total investment assets must be in real estate • At least 90% of taxable income must be distributed in dividends • Pay no corporate income tax • Can be publicly or privately held; public REITs are listed on exchanges like common stock • Must have 100+ ‘shareholders’
NorthStar Realty Finance Corp. • Internally managed commercial real estate finance company with a $854 million equity market capitalization • Three primary complementary business lines focused on commercial real estate: • Commercial real estate lending • Real estate securities investment and management • Net leased (owned, not operated) corporate and healthcare-related properties • No direct exposure to the single family housing and sub-prime residential lending sectors
Porter’s Five Forces:REAL ESTATE INVESTMENT TRUSTS (REITs) NorthStar Realty Finance
RIVALRY • REAL ESTATE IS A MANY NICHE MARKET • Equity (ownership) and debt (lending) • Type of real estate: industrial, commercial, residential, healthcare • Geographic location of real estate • A REIT may diversify (or specialize) in any combination of investments • 90% DIVIDEND YIELD REQUIREMENT • Access to affordable capital is key • Low, interest long-term debt is less costly and hedges risk of interest rate increases • REITs DEPEND ON THE STRENGTH OF THEIR PORTFOLIO! • Real estate usually appreciates over time • Relative liquidity of real estate assets • Exposure to credit risk • Favorable lease, debt, borrowing arrangements are key
THREAT OF SUBSTITUES • REITs OFFER A UNIQUE INVESTMENT OPPORTUNITY • Allow individual investors to make real estate investments that are affordable and less risky than purchasing one piece of real estate • INSTUTUIONAL INVESTORS • Private equity funds, investment banks and limited real estate partnerships have access to a larger capital base and can buyout REITs • REITs maintain a tax advantage over institutional investors
BUYER POWER • WEAK: REITs DEPEND ON THE REAL ESTATE MARKET • REAL ESTATE MARKET IS MOVED BY MANY ECONOMIC FACTORS: • Interest rates (long term, short term risk free rates) • Mortgage rates (prime rate) • Unemployment rates • GDP • Vacancy rates • New development rates • Supply constraints • This is why the strength of the underlying portfolio is key!
SUPPLIER POWER • STRONG: FEW INVESTMENT ALTERNATIVES • REITs are attractive securities for individual investors to diversify • WEAK: RELY ON OVERALL MARKETS • Dividend yield requirements mean REITs must constantly raise capital; heavy reliance on markets
BARRIERS TO ENTRY ENTERING THE REIT ‘MARKET’: GETTING THE TAX ADVANTAGE • OWNERSHIP TEST: REITs are required to hold at least 75% of assets in real estate, or real-estate related securities • PAYOUT TEST: At least 90% of taxable earnings must be paid out in form of dividends • OTHER: • Minimum of 100 shareholders • 20% max of assets may be in taxable subsidiaries ENTERING THE REAL ESTATE MARKET • Real estate supply constraints, geographic trends, etc. • Capital constraints: access to cheap capital • Interest Rates: a double-edged sword • HIGH rates: Increase demand for rentals/leases, thus residential REIT's profitability • HIGH rates: slow economic growth, i.e. GDP, retail sales and office, industrial and retail REITs suffer losses
Competitors:Impac Mortgage Holdings iStar Financial Inc Northstar Realty Finance
Competitor A:Impac Mortgage Holdings (IMH) NRF IMH Market Cap: 611.85M 43.37M Revenue: 154.75M -308.59M Last Trade (on Tuesday 12/11): 9.62 0.56 Net Income: 40.10M -476.21M EPS: 0.619 -6.258 Operating Margin: 39.18% 141.529% Beta: 1.51 1.65 Dividend: .36 .10
Competitor A:Impact Mortgage Holdings (IMH) NRF • Invests in real estate debt businesses (deals with debt investments of income-producing real estate properties), real estate securities, and net lease property businesses • Revenue almost doubled in third quarter • No exposure to residential lending, so not hit by subprime problems IMH • Dealt with Alt-A mortgage investments, commercial mortgages (has stopped dealing with mortgage lending) • Hasn’t met NYSE’s listing requirement • Bigger company, earns less • Delayed filing its 3Q 10-Q • Discontinued warehouse lending, non-prime mortgage operations • % of delinquent loans in portfolio doubled to 6.12% from last year
Competitor B: iStar Financial Inc (SFI) • Offers custom-tailored financing to high-end private and corporate real estate owners • The company participates in lending and corporate tenant leasing, through which it provides capital to corporations and other owners who control facilities leased to single creditworthy customers. • Corporate acquisitions: TriNet Corporate Realty Trust, Inc. in 1999, Falcon Financial Investment Trust, Oak Hill Advisors, L.P. and affiliates in 2005, and commercial real estate lending business Fremont Investment and Loan, a division of Fremont General Corporation, in 2007 • As of December 31, 2006, owned 380 office, industrial, entertainment, medical, and retail facilities in 38 states. • Had a portfolio of 17 hotels under a long-term master lease with a single customer.
SFI Revenue: 419,395 Total Costs and Expenses: 322,330 Net income: 105,644 Last quarter interest income increased due to a $2.43 billion increase in the average outstanding balance of loans and other lending investments on portfolio (excluding loans from the Fremont acquisition). Interest income also increased $109.9 million due to additional interest earned from loans acquired in the Fremont acquisition. EPS: 10.78 Market cap: 3.77B EPS: 2.77 Div/Yield: 3.48 (11%) NRF Revenue: 112,678 Total Costs and Expenses: 98,700 Net income: 13,918 EPS: 15.54 Market cap: 593.34 M EPS: 0.62 Div/Yield: 1.44 (14.5%) Competitor B: iStar Financial Inc (SFI )
SWOT Analysis NorthStar Realty Finance
Strengths • Strong third quarter • High dividend yield • No direct exposure to subprime market
Weaknesses • Weak mortgage REIT market • Frozen market for CDO’s (collateralized debt obligation) • Significant investments in illiquid assets
Opportunities • Opportunities in new investments in: • Portfolio management and private equity • Middle-market lending • Global expansion
Threats • Risk to income from mortgage loans • General macroeconomic factors • Deterioration of real value of homes • Housing crisis is not over yet
Standard Valuation Metrics NorthStar Realty Finance
Standard Valuation Metrics -P/E: 15.5 (vs. 48.4 Industry and 24.8 S&P 500) -P/B: 1.30 (vs. 4.16 Industry and 4.67 S&P 500) --ROE: 9.47% (i.e. 7.3% return) -However, ROE above based on realized gains -Pre-Unrealized Market-to-Market Gain: 15.69% (12/31/2006) --Growth of book value; therefore, P/B drop
Standard Valuation Metrics -Div. & Yield: 1.44 (15%) -Net Profit Margin: 16.14% -Debt/Equity Ratio: 3.28 --Leverage = ((D+E)/E) = 4.28 (not too high) -Funds From Operations: $55,147, 000 (12/31/2006)
Financial Statement Analysis NorthStar Realty Finance
Income Statement • Rapid growth in gross profit over the past 3 years (every year, almost tripled or doubled) • Revenues and profits increased most; income operation costs/losses also increased
Balance Sheet • Rapid growth in total assets over past 3-4 years • Rapid growth in stockholder’s equity • Growth in total liabilities • Steady annual growth in net tangible assets
Slump in Q4 of 2007 • Reason: real estate securities and debt repayments
Slump in Q4 of 2007 Reasons for the drop in performance in the last quarter of 2007: real estate securities and debt repayments Could be a positive sign Due to the credit crisis, competitors affected also We predict that slump will be overcome in 2008
Discounted Cash Flow Analysis Northstar Realty Finance
DCF Assumptions Revenue Growth = 50%, 40%, 40% Total Expenses = 20%, 15%, 20% General Expense = 3%, 2%, 2% Net Interest Expense = 55%, 60%, 60% Other Interest Expense = 1M Tax Rate = 36%, 40%, 40% Depreciation = 2% Amortization of Tangible Assets = 0% Changes in Working Capital = 2% Capital Expenditures = 2% Change in Discount Rate = 11%
CONCLUSION Northstar Realty Finance
BUY RECOMMENDATION STRONG UNDERLYING PORTFOLIO Diverse investment types Diversity within type CURRENT PRICE IGNORES FUTURE GROWTH POTENTIAL PEG Ratio (5 yr expected): 0.90 PROVEN STRATEGY TO MANAGE RISK THROUGH CREDIT CRISIS ADDS DIVERSITY TO THE HFAC PORTFOLIO