An 8.7% Yield on a Different Kind of REIT

Matthew Carr By Matthew Carr
Emerging Trends Strategist

Dividend Investing

We continue to be haunted by a volatile market.

On Friday, the Dow Jones Industrial Average had its modest gain for 2015 wiped out as all 30 of its components ended in the red. The index went into the weekend at 17,826 – up just 0.02% for the year.

The more than 276-point sell-off was the largest single-day drop in three weeks.

Anxiety and concern continues to brew as investors – and the market – try to make heads or tails of what’s coming next.

For me, pullbacks are steeped in opportunity.

I don’t see a major market collapse in the near term. I see a market trying to digest the effect of a stronger dollar, lower crude prices (which are driving down year-over-year earnings for the S&P 500) and the prospect of a Fed rate hike.

There’s also looming questions over the strength of the U.S. consumer and how much of a negative another bad winter was on sales.

In addition, earnings season – regardless of the quarter – is inherently a volatile stretch.

But there are always investments bucking the trend…

Not Your Typical REIT

NorthStar Realty Finance (NYSE: NRF) is up more than 5% year to date.

Last week, shares of the commercial real estate investment trust (REIT) bounced off their 200-day moving average to rally more than 3%. They rose more than 2% on Friday as the broader indexes lost 1.5% a piece.

On top of that, NorthStar Realty Finance is 6.3% off its 52-week high set in February. And it offers a nice current yield of 8.7% (or $1.60 annually).

In addition to bucking the broader market trends, NorthStar Realty Finance is also bucking a trend common among REITs.

REITs are either geographically or sector focused. NorthStar Realty Finance is neither.

Last year, the commercial REIT expanded from the U.S. into Europe. It now holds a $2 billion portfolio largely composed of office properties across Europe, including London and Paris.

In December 2014, NorthStar Realty Finance was also removed from FTSE NAREIT Mortgage Index… This happened because the company completed a $4 billion acquisition of Griffin-American Healthcare REIT. It signified NorthStar Realty Finance’s transition from an mREIT (or mortgage REIT) into a diversified REIT.

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It now holds more than 75% of its portfolio in hard real estate assets, with the Griffin-American acquisition adding 289 buildings across 32 states and the United Kingdom. These medical assets span across all four healthcare REIT categories: medical office buildings, senior housing, skilled-nursing facilities and hospitals.

Approximately 95% of these properties are leased, with the average remaining term being 9.2 years. In total, NorthStar Realty Finance now holds $18.5 billion in investments, with 82% composed of direct or indirect investments in real estate. It also plans to spin off its European assets into a NorthStar Realty Europe division.

So, unlike a lot of sector- or industry-specific REITs, NorthStar is more interested in opportunities. It’s not handcuffed to a specific sector or geography.

And the result of its opportunistic investment approach has been extremely rewarding.

In the fourth quarter of 2013, total property revenue stood at $64 million. It grew to $296 million in the fourth quarter of 2014.

Over the last 12 months, NorthStar Realty Finance has gained nearly 25%, more than doubling the performance of the Dow, the S&P 500 and the iShares US Real Estate ETF (NYSE: IYR).

northstar realty finance a cut above the rest chartBut thanks to another opportunity the company is set to finalize in the coming weeks, even more gains could be ahead.

20%-Plus Upside

Earlier this month, NorthStar Realty Finance announced a joint venture with NorthStar Asset Management Group (NYSE: NSAM) to acquire Fortress Investment Group’s (NYSE: FIG) independent living facilities.

NorthStar Asset Management was spun off of NorthStar Realty Finance last year. The $875 million deal will be split 60/40. But NorthStar Realty Finance could fund its share with cash on hand.

The 32 independent living facilities represent 3,983 senior housing units in 12 states.

After the acquisition was announced – which is expected to close sometime before June 30 – Wall Street analysts gave NorthStar Realty Finance a price target of $22. That represents an upside of 18.92% from the REIT’s current share price. I believe that’s a fair estimate.

If we throw in the 8.7% dividend yield, that represents a possible total return of more than 25%.

All in all, despite the volatility in the market, NorthStar Realty Finance is one company that appears to be making all the right moves.

Good investing,


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