KBW Downgrades NorthStar Realty Because Of This Uncertainty

• Northstar Realty Finance Corp (NYSE: NRF) shares have been on a downward trajectory for three months, and have lost 50 percent since November 9.
• Keefe, Bruyette & Woods’ Jade J. Rahmani downgraded the rating for the company from Outperform to Market Perform, while reducing the price target from $23 to $13.
• NorthStar Realty’s repositioning could be complex against the backdrop of an uncertain environment, Rahmani stated.

The earlier Outperform rating reflected NorthStar Realty’s NAV valuation discount, and hopes of management’s strategic actions serving as positive catalysts, analyst Jade Rahmani said.

The analyst believes that there are four key dynamics that would likely drive the outcome for the company: asset sales, capital structure, dividend policy and external management by NorthStar Asset Management Group Inc (NYSE: NSAM).

Management indicated that it would consider asset sales to create liquidity to repurchase shares and reduce leverage over time. Moreover, the company may cut dividend. “While asset sales, share repurchases, and a dividend reduction may prove wise, the volatile capital markets and potential for widening cap rates in commercial real estate (CRE) significantly increase uncertainty,” Rahmani wrote.

Following asset sales, NorthStar Realty would probably have a smaller and weaker asset base with less cash flow, Rahman pointed out, while adding that leverage may decline modestly, remain unchanged, or even increase.

“Finally, NRF's external structure unless altered may limit upside given NSAM's fixed fee and the contract's non-¬terminability,” the Keefe, Bruyette & Woods report noted.

Taking into account the dynamics at play and in view of the recent volatility in the capital markets, a successful repositioning of NorthStar Realty is “a tall and likely lengthy order that could leave NRF in a weaker financial position in a corporate structure that unless changed, may ultimately prove insurmountable,” Rahmani commented.