FBR Explains 'Dual Purpose' Of Northstar's $875 Million Senior Housing Deal

FBR & Co on Wednesday released a research note elaborating the 8K filed the previous evening by Northstar Realty Finance Corp NRF, detailing the $875 million acquisition of 32 private pay, independent living facilities from Fortress Investment Group LLC FIG's Holiday Retirement portfolio.

According to the 8K filed on April 1, diversified equity REIT Northstar Realty Finance Corp, and its external manager NorthStar Asset Management Group Inc NSAM formed a 60/40 JV, which entered into a purchase agreement to acquire the 3,983 senior housing units, located in 12 states and operated by Holiday.

FBR noted that over the past year, Holiday had been a seller of similar assets to other publicly traded healthcare REITs.

Tale Of The Tape – Big Picture

Notably, FBR & Co is a market maker for both Northstar entities:

• Northstar Realty Finance – $6 billion market cap: Outperform, $22 PT
• Northstar Asset Management – $4.6 billion market cap: Outperform, $30 PT

Related Link: Northstar Realty Finance: CEO David Hamamoto's Views On Performance And Spin-Outs

Senior Housing Deal – Deeper Dive

• FBR feels that based on previous deals, it is likely that this portfolio acquisition will be at an approximate 6 percent cap-rate.
• The 8K announcement stated the JV intends to use 10-year fixed rate debt for 70 to 75 percent of the portfolio cost, which FBR believes can be done for about 4 percent.
• The FBR back-of-the-envelope arithmetic works out to a levered return of 10.5 to 11 percent for the JV acquisition.

Two Birds With One Stone

• NorthStar Asset Management was spun out of Northstar Realty Finance last year to its shareholders and is NFR's external manager. One of NorthStar Asset Management Group's non-traded REITs is Northstar Healthcare Income (NSHI), which reportedly had a strong equity raise during Q4 2014.
• The 60/40 JV format allows for NorthStar Asset Management Group to put the "dry powder" from its successful equity raise to work for its non-traded REIT shareholders.
• FBR believes that Northstar Realty Finance Corp will be able to fund its 60 percent portion from cash on hand, so funding this JV will not result in any equity dilution for the publicly traded REIT shareholders.
• FBR noted that sources of equity funds for Northstar Realty Finance could also come from its credit facility, or a "draw down" from the $1.3 billion forward commitment from Northstar Realty Finance Corp's previous equity raise.

Just In Case

Additionally, FBR noted that Northstar Realty Finance Corp has a $340 million total investment in RXR Realty, with $290 million in the form of debt and preferred equity.

Related Link: A Flurry Of Real Estate Deals Suddenly Blankets NYC And New Jersey

RXR Realty is anticipated to close a large NYC office deal with Blackstone, which could be another source of funds, depending on the relative timing of each closing.

Deal Timing

While the 8K states that this deal will close on or before June 30, FBR would not be surprised to see it close far sooner for the reasons cited above.

This latest deal illustrates one of the ways a non-traded REIT and publicly traded REIT strategy can work together for the benefit of shareholders.

Investor Takeaway

The FBR $22 price target for Northstar Realty Finance Corp represents a potential upside of just over 19 percent based upon Wednesday's close of $18.47 per share. In addition, Northstar Realty Finance Corp currently pays a dividend yield of approximately 8.7 percent, which implies a potential total return of about 27.8 percent.

FBR's NorthStar Asset Management Group $30 PT represents a potential upside of 27.3 percent based upon Wednesday's close of $23.57 per share. In addition, NorthStar Asset Management Group currently pays a dividend of 1.7 percent, which implies a potential total return of 29 percent.

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