A REIT for Your Wish List

 | Dec 22, 2011 | 3:30 PM EST  | Comments
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As I looked for new ideas to round out my value investors' gift list this holiday season, I decided I would try thinking like a little kid at Christmas. If you have little ones that still believe a bearded fat guy brings the gifts and no actual cash money is involved, you know what I mean. Their lists usually look like the inventory records at Best Buy (BBY) and Toys R Us. The eight-year-old who resides in my house has all sorts of goodies on her list this year, including such unlikely items as a cellphone with a bright pink case, a laptop of her very own and two kittens she would like to add to the household menagerie. As I am sure she doesn't read Real Money, I will let you in a secret: She is not getting any of them.

But as the saying goes, if you do not ask, you will never receive. So, for my wish list, I decided to look for some triple-six stocks. Like a little kid with 52 weeks of commercials fueling his commercialistic Christmas fever, I hoped for a list of operating companies with decent businesses that traded at less than 70% of tangible book value, less than 7x earnings and paid at least a 6% dividend yield. Like a small child with dreams of high-end electronics, I expected to be disappointed. The market has not sold off enough to create a plethora of these situations.

At first glance, the list produced 12 names and I felt as though Christmas had come early for value and distressed investors. However, a second look shows that many of them are foreign companies that only pay dividends once a year. Although their yield based on 2011 is above 7%, most of the names are financials. Therefore, it is highly unlikely that they will even pay a dividend in 2012. Several more are shipping stocks and, given my results with buying shippers over the past 20 years, I think I would prefer the kittens. CommonWealth REIT (CWH) also made the list, but I own this stock and have written about it extensively, so it's not exactly a new shiny stock for our collection.

When I finished whittling the list down to reality, I was left with one new name to consider. It turns out to be a REIT that I have a small position in for some family accounts. Northstar Realty Finance (NRF) has been losing money this year, but its forward PE is 5, so I am willing to stretch the definition a little bit. NorthStar is a commercial real estate firm that is worth consideration for long-term portfolios at current levels. The company is involved in a broad range of commercial real-estate (CRE) activities and the firm will do very well when these markets recover over the next few years.

Northstar has more than $7 billion of commercial real estate assets under management, which is spread across several asset classes. Of the asset base, $3 billion is direct commercial lending with an average loan size of about $14 million. Another $3 billion is in real-estate related securities, including mortgage backed securities. The remaining $1 billion is in net leased corporate and health care related properties. The company is also expanding its asset management operations and is looking to raise $2 billion of unlisted real estate investment trusts (REITs). Management has assembled a sales team and is putting together a network of brokerages to sell the products to investors.

Management has done a tremendous job of managing the balance sheet during the real estate crisis. They bought back a good deal of their recourse debt at a discount in the past few years and currently have just $58 million of unsecured recourse debt maturing between now and 2015. With $150 million in unrestricted cash, this is a trivial amount of maturities and should pose no problems for the firm. The company has just two non-performing loans of only $2 million of carrying value on their books. Management has also been opportunistic and has successfully raised money to purchase CRE mortgage assets at distressed pricing during the downturn.

The stock is very cheap on the numbers. The shares trade at just 40% of tangible book value and 5x 2012's projected earnings. At its current price, the stock yields more than 11%. Unlike many other CRE-related REITs, NorthStar just raised its dividend by 25%.

This is not a risk-free or even a low-risk investment by any means. But for more aggressive, long-term conservative investors, NorthStar is a stock worth accumulating. Based on the stock's current valuation and the long-term recovery potential of commercial real estate, I am planning to add more shares to my holding by year-end.

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