For those of you unfamiliar with my preferred Investment philosophy, The Basics Underlying Investments Viewed Through the Eyes Of A Preferred Investor will explain how and why I became a preferred investor. More importantly, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.
However, I'm forced to confess that I've written this article in response to Brad Thomas's It's Time To Cash In The NorthStar Preferreds SA article. I do this, not because I agree or even disagree with Brad's position, but I do this because, if he is right, I sense a wonderful near-term buying opportunity.
When considering the acquisition of NorthStar's (NYSE:NRF) preferred shares, NRF-A, B, C, D, or E, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.
Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to NorthStar. Below is a snapshot of a slice of that page:
Click to enlargeA quick review informs us that NorthStar is a diversified commercial real estate investment company organized as a REIT. It claims that through its investments, it produces attractive risk-adjusted returns and stable cash-flows it distributes to its investors. At the time of its IPO, it had a market value of $3.7 billion, which I like because in my experience, companies with under a billion dollar market value are more prone to bankruptcy than are those larger companies in the event company-specific, sector-specific, or when general market forces might turn against them. However, on July 1, 2014, NRF spun off its asset management division, which became NorthStar Asset Management (NYSE:NSAM). In the following year, October 12, 2015, NRF spun off its European real estate business, which became NorthStar Realty Europe (NYSE:NRE). Later in this article, I will briefly discuss the general market and investors' reaction to these spin-offs.
Let's click on the Find Related Securities to examine any preferreds this company has to offer:
Here we learn that NRF offers five preferreds, (NRF-A, B, C, D, & E), which are offered at respective interest rates of 8.75%, 8.25%, 8.875%, 8.50% and 8.75%. I find it interesting that the cost of borrowing has not changed much since 9/8/06 when it sold its earliest issue, the A Series at 8.75%, and its last, 5/12/14, the E Series at the same rate.
Now let's click on NRF-C itself. I'm particularly partial to investigating the preferred offered sporting the highest coupon rate. Because this page contains more information than can be covered in a snapshot view, I suggest you open the page and view it as I discuss the information that interests me:
- I like that this preferred is cumulative, meaning that in event that payments are suspended, they accumulate and are owed the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company that will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds. Although bank preferred dividends are usually secure, they are almost always non-cumulative, consequently, I don't buy them.
- These shares are callable at the company's option on 10/11/17 at $25.00 plus any accrued interest owed.
- They pay a dividend of $2.21875 per share per year, or 0.5546875 per quarter, paid 2/15, 5/15, 8/15, 11/15 of each year.
- At the time of their IPO, these shares were unrated by Moody or S&P, which really doesn't concern me, but might concern a more conservative investor.
- These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
- Dividends are NOT eligible for the preferential income tax rate of 15% or 20% depending upon the holder's tax bracket.
- As usual, preferreds upon liquidation, rank senior to commons and junior to debt, both secured and unsecured.
- This issue is pari passu with the other four preferred issues, meaning in the event of liquidation they all stand equal to each other.
However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers, and at least marginally understand a company's financial statements and conference calls. Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interest in mind rather than those of the preferred shareholder, which on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.
Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two web sites to get an abbreviated, yet broad-based view of the particular company I'm considering making an investment in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of NRF.
Above is a Yahoo Finance screenshot of NorthStar Realty's five-year chart, which, as far as I'm concerned, is the picture of the possible result of two spin-offs that was certainly not appreciated by the market and NRF's investors as displayed by the dramatic price drop that began shortly after the second spin-off was completed. I am intimately aware of what happened because I had first invested in their common shares in 2008, and uncharacteristically held them until shortly after the second spin-off when NRE was created. I immediately got rid of NSAM's shares awarded me in the first spin-off. After the second, both NRF and NRE were gone, unfortunately not soon enough, even though I still racked up a tidy profit from the appreciation of my initial investment in NRF. That was the final nail in the coffin of me ever owning common shares again. I, as many NRF investors, believed, and still believe, that we were screwed by NRF's management, especially when learning of the sweetheart deal it made with its NSAM spin-off. Pending legal actions, which honestly I have not followed, abound. Yet, I still hold a substantial amount of its various preferreds, not because I like the board or its actions, but because, as is my mantra, it will steal the golden eggs, but will not kill the goose that lays them. As a preferred shareholder, the board's and my interests align.
Above is a screenshot taken from a Finviz view of NRF's present financial highlights. Interestingly, the company's market value has dropped to $2.39 billion from $3.7 billion on 10/27/04 at the time of NRF's IPO. It also showed a loss of ($218.90) million, and although it has recently trended higher, common to just about every other company I reviewed, all it proves is that a rising tide will lift most ships, except for those sinking (I added that last little tidbit). Its stock price over the past year has fallen by approximately 61.30%, yet it has recently risen by 13.84% during this last quarter, which means little as I have explained above. I also find its long- and short-term debt/equity at 2.92, which I'd like the more knowledgeable SA members of my audience to comment on, as I am certain they are more equipped than I do so.
According to the Yahoo chart above, NRF had a dramatic rise from late 2012, and as dramatic a fall after its second spin-off, which resulted in placing it solidly back in the middle of peer group over the past five-year period I chose to examine. Had you invested in its commons five years ago, you would have outperformed the S&P, especially when factoring in the dividends received. Had you invested in 2014, you'd have been crushed. Its above charted peers are: Kimco Realty Corp. (NYSE:KIM), Kite Realty Group (NYSE:KRG), Pennsylvania Real Estate Investment Trust (NYSE:PEI), and Simon Property Group (NYSE:SPG).
The final chart illustrates the three-year price movement of the preferred issue NRF-C we are interested in. This is the chart of a company preferred that might, or might not, suffer a near-term dramatic price fall according the Brad Thomas's article, which I provided the link to at the outset of this article.
My bottom-line decision is to study charts of the past few years' performance of the company's common shares, coupled with whether or not said company is, over time, prospering or losing market value. Ultimately, I have to decide how safe this company is from an existential standpoint rather than how well its share price will perform over the next quarter or the following year. I must decide whether or not I believe in the long-term survivability of NRF, which I do. However, this is NOT a suggestion that you either sell or buy at this moment. In fact, I urge that you NOT buy, but watch and wait. Because if Brad is correct, which I have no way of telling, the price of the preferreds across the boards will drop precipitously, possibly matching the dip at the beginning of the year. That's when the time will be right to let the buying begin. Because, as I mentioned above, I do not believe that this company will face an existential threat, and if you are fortunate enough to buy shares in the mid to high teens, you will reap a wonderfully high effective yield and a terrific upside profit if and when the shares are called.
Disclosure: I am/we are long NRF-C, NRF-D, NRF-E.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.