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NORTHSTAR REALY FINANCE CORP

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

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  1. NORTHSTAR REALY FINANCE CORP HFAC Financial Sector: Final Stock Pitch

  2. 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’

  3. 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

  4. Porter’s Five Forces:REAL ESTATE INVESTMENT TRUSTS (REITs) NorthStar Realty Finance

  5. 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

  6. 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

  7. 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!

  8. 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

  9. 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

  10. Competitors:Impac Mortgage Holdings iStar Financial Inc Northstar Realty Finance

  11. 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

  12. 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

  13. 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.

  14. 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 )

  15. SWOT Analysis NorthStar Realty Finance

  16. Strengths • Strong third quarter • High dividend yield • No direct exposure to subprime market

  17. Weaknesses • Weak mortgage REIT market • Frozen market for CDO’s (collateralized debt obligation) • Significant investments in illiquid assets

  18. Opportunities • Opportunities in new investments in: • Portfolio management and private equity • Middle-market lending • Global expansion

  19. Threats • Risk to income from mortgage loans • General macroeconomic factors • Deterioration of real value of homes • Housing crisis is not over yet

  20. Standard Valuation Metrics NorthStar Realty Finance

  21. 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

  22. 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)

  23. Financial Statement Analysis NorthStar Realty Finance

  24. Financial Statement Summary

  25. 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

  26. 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

  27. Slump in Q4 of 2007 • Reason: real estate securities and debt repayments

  28. 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

  29. Discounted Cash Flow Analysis Northstar Realty Finance

  30. 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%

  31. CONCLUSION Northstar Realty Finance

  32. 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

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