Changes could be in store for one the nation’s major owners of senior housing real estate, if an activist shareholder prevails.
Land and Buildings, a New York-based hedge fund, has urged NorthStar Asset Management (NYSE: NSAM) to recombine with NorthStar Realty Finance (NYSE: NRF), a publicly traded real estate investment trust (REIT). The asset management company was spun off from NRF in 2014, and it externally manages the REIT. As of Sept. 30, 2015, NorthStar Realty Finance held a health care portfolio of $6.8 billion, about 44% of which was assisted living or independent living assets.
Founder and Chief Investment Officer of Land and Buildings, Jonathan Litt, penned the Jan. 22 letter, writing that NorthStar Asset Management is “materially undervalued” and called combining the companies a “straightforward solution.” He also noted that since the spin-off, shares of both businesses have fallen more than 50% from their highs.
The action is reminiscent of other calls by disgruntled shareholders for major companies to prioritize boosting stock value. Last fall, John Levin of Levin Capital Strategies sent a public letter to New Senior Investment Group (NYSE: SNR) on similar grounds that the company needed to take action to reclaim shareholder value.
Earlier this month, after an initial letter from Land and Buildings, NorthStar announced it was seeking “strategic alternatives” to boost shareholder value and had hired Goldman Sachs to begin evaluating strategies.
“We believe our current share price undervalues the company,” Executive Chairman David T. Hamamoto said in a statement earlier this month. “Our board of directors and management have always been committed to acting in the best interests of our shareholders and we are aggressively seeking ways to maximize shareholder value.”
A $200 million non-cancelable management fee from NRF to NSAM could be worth nearly $2.6 billion at a 7% yield after taking a $20 million G&A allocation, Litt specifies in the letter sent Friday. This contract, he says, is valuable to other investors, though NRF is the most logical buyer that would allow the REIT to be internally advised and managed. NRF could raise the funds to purchase the contract by selling off other assets, potentially including senior housing assets.
NSAM could then use the proceeds of the sale to benefit shareholders to the tune of $13 per share, 20% higher than its current value. While the sale of the NRF contract is Litt’s primary strategy addressed in the letter, he does not rule out the possibility of other options to return value to shareholders, including a complete sale of the company.
Investors seemed to react well to the letter. Shares of NRF were up 7.54% in mid-morning trading Friday, while NSAM shares were up 7.3%.