NorthStar Shareholder Fuels Fire Against REIT Merger

Another activist shareholder has come out strongly against the planned merger between Colony Capital Inc. (NYSE: CLNY), NorthStar Realty Finance Corp. (NYSE: NRF) and NorthStar Realty’s current external manager NorthStar Asset Management Group Inc. (NYSE: NSAM), citing concerns about the combined company’s governance and value to shareholders.

Real estate investment trust (REIT) NorthStar Realty Finance, a major owner of senior housing real estate, announced the planned all-stock merger in June. The combined company, Colony NorthStar Inc., is expected to be a diversified global equity REIT with a pro-forma equity market capitalization of $7 billion and total capitalization of $17 billion. The new entity would have $58 billion of assets under management, situating it in the top quartile of the entire REIT sector. 

In a public letter addressed to a special committee on NSAM’s board of directors on Monday, NSAM’s largest shareholder, MSD Capital, criticized the planned merger as being of questionable value to NSAM’s stockholders. New York-based MSD Capital is the private investment company created in 1998 to exclusively manage the capital of Michael Dell and his family.

Colony NorthStar Inc.’s proposed governance structure, MSD Capital wrote, “falls short of good governance norms in many key respects.”

“We believe these shortcomings will hinder the interest of all three companies’ stockholders in achieving the type of full valuation for the combined company that is rightfully accorded to public companies with the highest governance standards and with the best possible management alignment with shareholders,” MSD Capital wrote.

The merger could be a positive transformational transaction for all three companies, as it has the potential to create significant value though cost synergies, scale, enhanced valuation and strategic focus, MSD Capital added. But MSD Capital does not plan to vote in favor of the transaction as currently proposed. 

Now, NSAM management must focus solely on value maximization for all shareholders, MSD Capital says, adding NSAM must not permit any conflicts of interest—particularly those that may arise from the possible triggering of severance and change of control payments—to hinder what is in the best interests of NSAM and all of its shareholders.

MSD Capital’s criticism of the proposed merger comes after Land & Buildings founder and Chief Investment Officer Jonathan Litt wrote a letter to NSAM shareholders in June questioning, among other things, Colony NorthStar Inc.’s planned corporate governance structure. Pitt has also publicly criticized the makeup of NSAM’s special committee members.

After the proposed merger, current Colony President and CEO Richard B. Saltzman is set to serve as CEO of the combined company. David Hamamoto, chairman of NRF and executive chairman of NSAM, is set to act as the combined company’s executive vice chairman. Thomas J. Barrack Jr., the billionaire who founded Colony, is set to serve as Colony NorthStar Inc’s new executive chairman of the board. 

If the proposed merger stands as is, the senior housing investment arm of NSAM—the public, non-traded REIT NorthStar Healthcare Income—will also be managed under Colony NorthStar Inc. As of December 1, 2015, NorthStar Healthcare Income had a total investment of $3.4 billion, with 64% of its equity portfolio consisting of senior housing communities.

NSAM had not responded to Senior Housing News’ request for comment as of press time.

Written by Mary Kate Nelson