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Shareholders Never Liked Colony’s $2B European REIT But It Actually Did A Good Job

The Trianon office building, about to be sold for $760M.

It seems fair to say that stock market investors didn’t warm to NorthStar Realty Europe.

The company was listed in the U.S. in 2015 by then-parent NorthStar Realty, which had bought around €2B ($2.25B) of European offices in less than a year, 52 properties in nine countries.

Its shares have never traded at or near its net asset value, sometimes trading at a discount to NAV of up to 40%. Stock market investors thought it had bought its assets for too much at the top of the market, and did not like the fact that the company paid a big management fee to NorthStar Realty.

Today the company has a portfolio valued at $2.3B, a net asset value of $20.85 a share, but its shares trade at $16.50.

In 2017 NorthStar Realty was bought by Colony Capital, which took over the management of NorthStar Realty Europe, and things did not improve. The merger has not run smoothly — Colony’s shares have fallen sharply and Chief Executive Richard Salzman was ousted, with founder Tom Barrack taking the reins.

NorthStar Realty Europe came under fire from an activist investor, and has agreed to undertake a strategic review, which could see the portfolio sold. It will also terminate its management agreement with Colony.

The irony of all of this is, when it comes to the portfolio it manages, NorthStar Realty Europe has increased the value significantly.

The portfolios it bought were a mixed bag of assets in nine European countries, but it has narrowed its focus to just the U.K., France and Germany, and it has exited four countries entirely. As of March this year, it had sold $570M of assets at a 4% premium to their book value.

It has leased or renewed 657K SF across its 3M SF portfolio and its entire portfolio is now valued at 24% more than the price for which the assets were bought.

A major step in the breakup of the company is about to be achieved, again at a big profit. Buried in the company’s third quarter results was the news that it has agreed to sell its biggest asset, the 710K SF Trianon office in Frankfurt for €670M ($762M), 25% more than it paid for the asset. It is being bought by a Korean investor, which Thomas Daily reported as being Igis Asset Management.

The sale will see NorthStar Realty Europe exit almost a third of its portfolio at a big premium to the price it paid.

It will not be quite so easy to do the same with its two other largest assets, Portman Square House in the West End of London and Condor House in the City. While the German market has continued to boom since 2015, with yields continuing to fall, London has flatlined as a result of Brexit in the same period.

But the two assets are fully let, and NorthStar Realty Europe has increased the rents by 16% and 13% respectively since it bought them, and they are likely to appeal to the Asian investors who continue to show faith in Europe. The combined value is likely to be more than £300M.