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Activist Calls For Break-Up Of $2B Colony-Managed European REIT

The Trianon office tower in Frankfurt

An activist investor has called for a REIT managed by Colony Capital to sell its assets or be taken over by Colony because its shares are trading at such a big discount to the value of its assets.

In a letter on 25 September Senvest Management called on the board of NYSE-listed NorthStar Realty Europe to take action to cut the discount to net asset value at which the firm’s shares trade — currently about 40% — principally by selling its assets. Senvest owns a 10% stake in the company.

“The private market, which provides the basis for the NAV calculation, clearly assigns more value to NRE’s assets than the value ascribed by public market investors,” Senvest said. “Indeed, we think that institutional investors would have great interest in the assets but clearly have no interest in the shares.”

Senvest said the quality of the $2.1B portfolio is good and the management has done a good job, but the company has always traded at a discount because of the high management fee it pays to Colony.

“We believe the most significant factor behind NRE’s substantial discount to NAV is the company’s unjustified reliance on an external manager, Colony, which charges a management fee that further pressures the company’s expense ratio,” the letter said.

“NRE’s association with Colony has not helped the stock price. A review of Colony and NRE’s historical stock price performance appears to show a correlation. Further to this point, since Colony’s stock price started its precipitous decline in December 2017 from $12/share to $6/share over the course of three months, NRE’s shares followed suit.”

Colony took over the management of Northstar Realty Europe following its acquisition of fellow listed real estate fund manager Northstar Asset Management in 2016, a deal which analysts have said has caused Colony itself to underperform the wider market.

Northstar Realty Europe was created when its parent company went on a €1.6B European office acquisition spree, buying assets including Portman Square House in London and the Trianon office tower in Frankfurt, Germany, bundling the assets into a new REIT and spinning it off.

The problem was, Northstar shareholders did not necessarily want to own shares in a company owning European assets, and the company has traded at a discount since its inception, even though the value and rents of its portfolio has been growing.