NORTHSTAR REALTY EUROPE CORP NRE
November 06, 2015 - 5:09pm EST by
elehunter
2015 2016
Price: 11.97 EPS 0.96 1.20
Shares Out. (in M): 64 P/E 12.47 9.98
Market Cap (in $M): 762 P/FCF NA NA
Net Debt (in $M): 1,519 EBIT 135 169
TEV ($): 2,281 TEV/EBIT 16.9 13.5

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Description

Investment Idea:

 

 

 

NorthStar Realty Europe (NRE) is a newly-formed European commercial real estate company with approximately $2.6 billion (at cost) of investments located throughout Europe, comprising 52 primarily class A office properties.  The properties encompass about 520 thousand square meters with a weighted average occupancy of 93% and a weighted average remaining lease term of 5.5 years.  Top tenants include BNP Paribas, Cushman & Wakefield, Ernst & Young and Deloitte.  As the parent company, NorthStar Realty Financial Corp (NRF), from which NRE was spun out, has been written up previously on VIC, this write-up will focus entirely on the spinco (NRE).  The stock began trading on the NYSE on a “when-issued” basis on October 20th, and began trading regular way on November 2nd.  With an expected distribution rate of $0.60 per share, the stock at $11.97 is trading at a dividend yield of 5.0%.  This vehicle was designed by management of NRF as a “plug and play” way for U.S. investors to gain exposure to European real estate.  We think the stock is worth $19 conservatively - for detailed valuation assumptions, see below. 

 

 

 

Here’s what we like about NRE:

 

 

 

  1. Scarce asset in a space with tailwinds: With spreads of price office yields over 10 year sovereign bonds yields at wide levels vs the 10 year average and the ECB very early in the process of QE, we think the direction of cap rates is likely to go in the right direction, and there are few good vehicles (particularly those targeted to US investors) to take advantage of this tailwind

  2. Strong management team: Anyone with a long history of investing in REITs will appreciate the importance of a solid management team.  Mahbod Nia, the CEO of NorthStar Realty Europe and Al Tylis, the CEO of NorthStar Asset Management Group, have strong reputations with well documented track records.  This should go a long way.

  3. Strong pipeline of future acquisitions: Management has openly discussed a figure in the EUR 20-30B range in terms of interesting potential transactions, many multiples of the current portfolio value at cost.  Part of the reason for the large pipeline is that regulators in Europe are forcing liquidations of open-end funds.  NRE had been using the parent (NRF)’s high cost of equity capital to complete transactions, and based on early trading, it appears that NRE will enjoy a much lower cost of capital.  Those who have braved the turbulent waters of MLPs and more recently, “yieldcos”, should have a good appreciation for the virtuous cycles that can be created by low cost of capital deal machines. 

     

    Below is a bit more detail on the current portfolio of properties.

     

 

Breakdown by Country

   

Breakdown by Type

   

Country

% Rental Income

% Occupancy

 

Type

% Rental Income

   

UK

25%

99%

 

Office

90%

   

Germany

21%

90%

 

Retail

4%

   

France

19%

93%

 

Logistics

4%

   

Netherlands

18%

99%

 

Hotel

2%

   

Italy

10%

95%

         

Other Europe

7%

 

         
               

Property Detail

           

Country

Type

 

 

# Buildings

Occupancy

Square Meters

Avg Annual Rental Income / Sq Meter

Belgium

Office

   

4

77%

23,602

210

UK

Office

   

9

99%

57,921

604

France

Office/Industrial

 

6

93%

95,424

230

Germany

Office/Industrial/Hotel/Residential

23

90%

210,020

287

Italy

Office

   

2

95%

30,924

398

Netherlands

Office

   

4

98%

73,247

298

Portugal

Office/Retail

   

2

91%

15,475

181

Spain

Office

   

1

100%

4,025

177

Sweden

Office

   

1

94%

9,685

241

Total

 

 

 

52

93%

520,323

312

               

Lease Expiry Schedule

           

Year

Occupied Square Meters

Percent of Occup Sq Meters

In-Place Rental Income

Percent of Rental Income

# Tenants

Percent of Tenants

 

2015

51,108

11%

8633

6%

26

7%

 

2016

31,030

6%

9690

6%

31

8%

 

2017

24,637

5%

5362

4%

32

8%

 

2018

20,307

4%

4313

3%

27

7%

 

2019

95,673

20%

31462

21%

27

7%

 

2020

41,280

9%

16962

11%

17

4%

 

2021

79,279

16%

18738

12%

31

8%

 

2022

5,162

1%

983

1%

7

2%

 

2023

8,450

2%

5453

4%

15

4%

 

2024

58,960

12%

31245

21%

17

4%

 

Therafter

65,780

14%

18609

12%

170

43%

 

Total

481,666

100%

151,450

100%

400

100%

 

 

 

 

Valuation:

 

 

Below are some sensitivity tables as well as a comparables table.  There are multiple moving parts, but we think one important data point that seems to have been overlooked by the Street is that the $0.20 per share annualized CAD guidance does not take into account both the $340 million stock-settlable note transaction completed in late June 2015, nor does it account for incremental acquisitions that may be completed with the proceeds from the notes, nor from the $250 million of cash with which NRE was initially spun out.  We don’t have consensus numbers for P / CAD for the comp group butwith average yields of about 3.5% it’s easy to get comfortable with NRE’s 5% yield, especially with such a low initial payout ratio of 50% ($0.10 / $0.20). 

 

 

We think $19 is a pretty reasonable estimate for fair value, and that gives zero benefit for any new investments with disposable cash.    

 

 

Valuation

           

1) P / CAD multiple

         
   

P / CAD multiple

   

14.0X

15.0X

16.0X

17.0X

18.0X

Annual CAD per Share

1.08

15.12

16.20

17.28

18.36

19.44

1.14

15.96

17.10

18.24

19.38

20.52

1.20

16.80

18.00

19.20

20.40

21.60

1.26

17.64

18.90

20.16

21.42

22.68

1.32

18.48

19.80

21.12

22.44

23.76

             

2) Dividend Yield assuming 70% payout on CAD

     
   

Div Yield

   

5.5%

5.0%

4.5%

4.0%

3.5%

Annual div per Share

0.76

13.75

15.12

16.80

18.90

21.60

0.80

14.51

15.96

17.73

19.95

22.80

0.84

15.27

16.80

18.67

21.00

24.00

0.88

16.04

17.64

19.60

22.05

25.20

0.92

16.80

18.48

20.53

23.10

26.40

 

 

 

 

 

European REIT comps

           

Ticker

Company

 

Price

Div Yield '15E

Div Yield '16E

Payout '15E

Payout '16E

AOX GY

ALSTRIA OFFICE

12.21

4.1%

4.5%

111%

74%

CAI AV

CA IMMOBILIEN AN

17.67

2.8%

3.3%

52%

57%

DLN LN

DERWENT LONDON

3,758.00

1.1%

1.2%

65%

62%

FDR FP

FONCIERE DES REG

83.56

5.2%

5.4%

85%

84%

GFC FP

GECINA SA

115.50

4.2%

4.4%

87%

87%

GPOR LN

GREAT PORT EST

859.00

1.1%

1.1%

69%

67%

ICAD FP

ICADE

 

65.62

5.8%

5.9%

91%

87%

LAND LN

LAND SECURITIES

1,308.00

2.5%

2.7%

76%

73%

PMOX GY

DO DEUTSCHE OFFI

4.08

3.8%

4.3%

56%

54%

Average

 

 

 

3.4%

3.6%

77%

72%

 

 

 

 

 

Risks:

 

Interest rate risk: As with all REITs, rising interest rates will weigh against the whole group.

 

 

 

External management: NRE is externally managed by NorthStar Asset Management Group.  We have a lot of confidence in this management team, but it is worth noting that this company is dependent on an external manager. 

 

 

 

Reinvestment risk: A corollary to the external management question is that this company will be investing disposable cash and may do some portfolio restructuring as they see fit – we are taking some risk that they will make poor investment decisions.

 

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Portfolio Actions: This management team will not sit idly for long - expect to see some use of the $250 million in cash towards CAD-accretive deals. 

Coverage Initiation: We think there will be at least 5 initiations in 2016, and based on the comp group and the strong reputation of the management team, price targets will likely approach $20 per share.

QE by the ECB: Let's face it, the ECB is behind the Fed, and we know the playbook.  Get long European real estate and hold on for the ride!

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