As many readers know, I have been following NorthStar (NYSE:CLNS) for years and was an outspoken critic of management, especially after the NSAM spin-out. Management destroyed value for shareholders while making themselves very wealthy. This concluded with the three-way tie-up of Colony, NSAM and NRF - the biggest beneficiaries of course being NSAM. Currently, there is a situation that has resulted from the merger that might help some investors get some of that money back. This is a "no fluff" note on this situation.
Prior to the merger, both NorthStar and Colony had their own preferred stock issues. NorthStar has traded "cheap" to Colony due to outstanding management issues, activist holders and confusion as to what exactly NorthStar was. Now that the companies have merged, the outstanding preferred issues (which were exchanged for new issues under the CLNS ticker) should trade at similar yields.
They don't. In this, there is good news and bad news. The good news is that holders of the existing Colony haven't watched their preferreds sell off to equal the NorthStar yields, and for holders of NorthStar, the bad news is that your preferred didn't rally to equal the yield of the Colony preferred.
That, however, is in the past. Right now there are opportunities for the existing Colony holders and choices for investors looking at Colony NorthStar preferreds.
A look at the outstanding:
I have highlighted my favored choice - the CLNSpE. While not the highest yield, it has over two years of call protection, an 8.50% yield and a yield-to-call of approximately 7.5%. There is no (originally) CLNY issue as attractive and the (originally) NRF issues don't have the lockout or the YTC that the E does.
The data graphically:
Of course, value within the complex is nice, but value against peers is better. A look at the peers.
The CLNSpE has a better yield than the peer group with the exception of New York Mortgage Trust (NASDAQ:NYMT), but if I had to own just one, I would pick the CLNS (fortunately, I don't have to pick and just so happen to own both). The stripped yield graphically:
In a nutshell, I believe that the CLNSpE is the most attractive in the complex. Further, holders of Series F/G/H should consider swapping into the Series E to pick up yield without losing significant call protection.
Of course, there are a couple of differences between share classes that investors should be aware of before positioning shares (these don't currently affect my selection, but they should be understood in order to understand the various risks of the complex). Start at the beginning from the merger proxy:
Colony NorthStar series A and series B preferred stock, which we refer to, collectively, as the series A/B preferred stock, Colony NorthStar series C, series D and series E preferred stock, which we refer to, collectively, as the series C/D/E preferred stock, and Colony NorthStar series F, series G and series H preferred stock, which we refer to, collectively, as the series F/G/H preferred stock, rank senior to Colony NorthStar common stock, Colony NorthStar performance common stock and any other class or series of stock that ranks junior to the Colony NorthStar preferred stock as to the payment of dividends or amounts upon liquidation, dissolution or winding up of Colony NorthStar, which we refer to, collectively, as the junior shares.
I have inserted the preceding section as the groupings are important. Specifically, differences arise within the change of control provisions. Instead of inserting the entire section, the following table is a simple summary:
I prefer the Series A/B covenants as there isn't an equity listing requirement and there are rate steps if the preferred isn't listed. The Series C/D/E CoC event is premised on the listing of the equity, which is less stringent than the A/B, and instead of a rate adjustment, there is an equity conversion feature, which could be beneficial. The F/G/H is similar to the C/D/E in all general aspects except that the permissable exchanges that the equity can be listed on is broader (which is becoming less important due to electronic trading).
Ultimately, this means that there could be pricing differences in the event of a change of control.
Disclosure: I am/we are long CLNS, NYMT, EPR, NLY.
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.