It was just over a year ago that Colony Capital effectively became a public company by combining with its listed mortgage real estate investment trust, Colony Financial. While the event was indubitably one of the biggest milestones in the Los Angeles-based real estate investment management firm’s 25-year history, the company is already gearing up for another merger – one that would allow it to operate on a much bigger scale – three times as big, to be exact.
Last month, Colony, NorthStar Asset Management Group (NSAM) and NorthStar Realty Finance (NRF) announced that they were in exclusive talks to enter a three-way merger. The potential deal was the outcome of a strategic review process that NSAM announced in January, disclosing that it was exploring alternatives for the company, including a possible sale.
“It’s a merger of equals,” said Jessica Levi-Ribner, an equity analyst at Arlington, Virginia-based investment bank FBR, in an interview with PERE. She noted that the market caps for the three companies are about equal – they ranged from $2.05 billion for Colony to $2.22 billion for NSAM to $2.34 billion for NRF as of press time. Levi-Ribber also added that all three platforms have recently been in flux – Colony in going public, NSAM in putting itself up for sale in response to its share price devaluation relative to its net asset value and NRF for shedding assets – including a planned sale of its manufactured housing portfolio to Brookfield Asset Management for $2.04 billion – in a bid to create liquidity.
Levi-Ribner added that NSAM and NRF each mirrored Colony’s two investment focuses of being both a strong investment management platform and a diversified equity REIT, respectively. By merging with the two companies, Colony “will become a more dominant force,” she said.
With NSAM, “it will give them a lot more firepower on the investment management side,” she said. Indeed, Colony and NSAM have some clear synergies – both companies, for example, sponsor debt funds. However, NSAM – which is co-sponsoring a $3.2 billion corporate debt fund and a $3.2 billion commercial real estate debt fund with Och-Ziff Capital Management – is a newcomer to the debt fund space, having officially launched both vehicles just this year, according to its first-quarter earnings report. The NSAM offerings therefore would benefit from Colony’s far more established funds management platform, which in turn would be bolstered with the two new products from NSAM.
Then there is NSAM’s retail business, which was the principal attraction to private equity buyers as a conduit to a substantial source of new investor capital. According to its earnings results, NSAM has raised a total of $4.1 billion in capital since inception and generated $34.2 million in asset management and other fees in the first quarter alone from retail investors. While Colony currently is more institutionally-focused and NSAM more retail-focused in terms of their investor bases, they will have products that they will be able to cross-sell to those investors as a combined company, Levi-Ribner observed.
In a research note last month, Levi-Ribner estimated that the combined company could have $25.8 billion of assets and $9.4 billion of equity. By comparison, Colony reported nearly $10 billion of assets and $5.3 billion of equity as of March 31 in its first-quarter earnings report. “It will really expand their AUM and is a really large leap forward,” she remarked.
Meanwhile, NRF has assembled a highly diversified portfolio with significant holdings, particularly in the healthcare and hospitality real estate sectors. Colony, for its part, has focused on developing a light industrial platform in recent years and also has built a vast single-family rental housing platform, Colony American Homes, which it merged with Starwood Capital’s Starwood Waypoint Residential Trust to form Colony Starwood Homes.
But while the broad range of real estate interests across the three companies can benefit the merged entity on multiple levels, it also presents a major challenge, being able to sell itself effectively to investors, said Levi-Ribner. “The market does not value very complex stories, right now,” she said. “Their particular challenge is to keep what is going to be a very complex story simple.”