Northstar Realty Europe – Activist Sees Opportunity in Advisor’s Change of Control

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UPDATE May 31 2017: Activist Bow Street Capital sold all of its Northstar Realty Europe shares to Colony Northstar on May 12 (link to SEC filing) and withdrew its acquisition offer.

Bow Street LLC has offered to buy Northstar Realty Europe for $13/share (LINK):

“We firmly believe that NRE’s true value will never be realized within the Company’s existing structure. To this end, we reiterate our proposal to acquire all of the common stock of NRE for $13 per share. This offer is fully financed by Bow Street and one of our capital partners – a publicly traded multi-billion dollar real estate company with available resources well in excess of the funds required to effectuate this transaction. Further, as we have previously expressed to the Board, our proposal does not factor any incremental sources of value that may be uncovered during our diligence process.”

Concurrently, we urge the Board to reject the NSAM management contract, an opportunity created by the pending merger between NSAM, NorthStar Realty Finance (“NRF”) and Colony Capital (“CLNY” or “Colony”)

Koneko examined Northstar Realty Europe on 10/28: (No Real Excitement for Northstar Realty Europe) and concluded:

“NRE’s low share price is an accurate reflection of its poor return potential due to unreasonably high expenses.  It’s hard to make any argument for investing in the company as a going concern.  Liquidation of NRE is not possible under the terms of the NSAM contract.  The lack of third party interest in acquiring NRF suggests there would be a similar lack of potential buyers for NRE.  That leaves a merger with Colony Northstar as the best hope for a positive NRE shareholder return.”

NRE’s net asset value was $16.60 at 9/30 (3Q financial supplement page 14) so liquidation of the company would produce a large profit over the recent market price of NRE shares and the $13 BS buyout offer.  Potential rejection of the NSAM management contract is the key point in Bow Street’s proposal.  The value of NRE has been depressed by the huge off balance sheet liability of the company’s contract with NSAM (LINK):

  • the agreement cannot be cancelled by NRE except for cause:

NRE may terminate this Agreement, effective upon 60 days’ prior written notice of termination from the Board of Directors to Asset Manager if (i) Asset Manager engages in any act of fraud, misappropriation of funds, or embezzlement against NRE or any of its subsidiaries; (ii) Asset Manager breaches, in bad faith, any provision of this Agreement or there is an event of gross negligence on the part of Asset Manager in the performance of its duties under this Agreement and, in each case, if it has a Material Adverse Effect on NRE and, with respect to a breach in bad faith or gross negligence, if the effects of such breach in bad faith or gross negligence can be reversed, such effects are not reversed within a period of 60 days of Asset Manager’s receipt of the written notice (or 90 days if Asset Manager takes steps to reverse such effects within 30 days of written notice); (iii) there is a commencement of any proceeding relating to Asset Manager’s bankruptcy or insolvency, including an order for relief in an involuntary bankruptcy case or Asset Manager authorizing or filing a voluntary bankruptcy petition that is not dismissed in 60 days; (iv) there is a dissolution of Asset Manager; or (v) unless the Board of Directors determines that qualification for taxation as a REIT under the U.S. federal income tax laws is no longer desirable, there is a determination by a court of competent jurisdiction, in a non-appealable binding order, or the Internal Revenue Service, in a closing agreement made under section 7121 of the Code, that a provision of this Agreement caused or will cause NRE to fail to satisfy a requirement for qualification as a REIT and, within 60 days of such determination, Asset Manager has not agreed to amend or modify this Agreement in a manner that would allow NRE to qualify as a REIT. Notwithstanding the foregoing, if Asset Manager assigns the Agreement to an Affiliate or a permitted assignee, the events in (iii) and (iv) with respect to such assignee shall not constitute grounds for termination by NRE.

  • management fees must continue to be paid to NSAM even if NRE or all of its assets are sold:

Notwithstanding the foregoing or anything else contained herein to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction of either party hereto, directly or indirectly, the surviving entity will succeed to the terms of this Agreement.

  • under the terms of the agreement NRE has paid $10.5mm in management fees  and total G&A expenses (excluding property level operating expenses) of $40.2mm in the first nine months of 2016.  The G&A run rate of 5.5% of NAV is a huge drain on shareholder return and severely impairs NRE’s value as a going concern.
  • the agreement can be assigned:
(a)    The Agreement may not be assigned (within the meaning of the Investment Advisers Act of 1940, as amended (the “Advisers Act”)) without the consent of the parties hereto.
(b)    Notwithstanding the foregoing, to the extent either party proposes, or any action is taken by either party that could be deemed an assignment of this Agreement as defined under the Advisers Act (an “Advisers Act Assignment”), both parties agree to consider such assignment in good faith and to not unreasonably withhold, condition or delay such consent. The parties would anticipate that consent would be granted in the event of a proposed Advisers Act Assignment to a party with expertise in commercial real estate and, together with its Affiliates, over $10 billion of assets under management. Both parties acknowledge that time is of the essence with respect to the consideration of any Advisers Act Assignment and each party shall: (a) respond to the party seeking consent of such assignment within 10 days of notification of an Advisers Act Assignment (the “Notification Period”) by the party seeking consent thereto; and (b) provide such consent or set forth the reasons why such consent shall not be given. To the extent the party whose consent is sought with respect to any Advisers Act Assignment fails to respond to the party seeking consent for said Advisers Act Assignment within the Notification Period, the consent of the party failing to respond shall be deemed to have been granted. The parties understand and agree that the terms of this Section 16(b) are material terms hereof and the Asset Manager would not have entered into this Agreement but for the benefit of such provisions.
The Investment Company Act of 1940 deems change of control of advisor to result in automatic termination of advisory agreements, but also permits assignment of agreements on an interim basis until shareholders have had an opportunity to vote for approval of a new agreement. (LINK)  NRE’s Northstar friendly Board of Directors is highly likely to consent to the interim assignment, but it appears that Bow Street has recognized that the shareholder vote provides an opportunity for NRE to either free itself from the burdensome contract or negotiate terms more favorable to NRE.
Developments in the Colony Northstar merger negotiations showed that Colony is willing to make concessions to aggressive activists:
  • NSAM’s largest shareholder stated in September that it would vote against the merger (LINK), but agreed in October to support the merger after an additional dividend was promised (LINK)
  • NSAM’s most vocal shareholder stated in September that it would vote against the merger (LINK), but agreed in November to support the merger after an agreement to reimburse undisclosed expenses (LINK)

Bow Street may be successful in extracting concessions that enhance NRE’s future shareholder value.  Or Bow Street may get Colony Northstar to acquire NRE on more favorable terms than would have been possible without the threat of rejection of the management contract.

Please note this article will be revised if any of the above information turns out to be incorrect.  Comments related to assignment of the NRE/NSAM contract and the requirement for a shareholder vote were written in a short period following the Bow Street news on Friday 12/09 and without legal consultation.

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