On the surface, Northstar Realty Financial looks pretty good, the book value is over $17 per share, but the current price is only $3.5 per share. The dividend is 13% and $0.4, the historically maximum dividend is 4 times of what it is now. Cash flow is about $1, or 30% of market value.
The company also claims that they originate loans with executives controlling credit risk. There is 73M non-performing loans, but there is no new non-performing loans in the second quarter.
It also claims that it has 260M cash to cover potential losses.
With all those rosy pictures, the share is still traded at $3.5, the debt and preferred shares are traded at 50 cents on the dollar. Preferred share has 16.5% yield.
Although I know I can't fully understand its balance sheet and figure out all the stories of its asset, I still have looked into the 10-k for answers.
The majority of the debt are non-recourse, meaning the company is not liable for the debt, just the collateral will be lost, and those debt are not due until 10-30 years later. However, the 378M secured term loans from Wachovia is due in Novemeber 2009, with 1 year possible extension. This may be a big problem for the company. First, Wachovia now merged with Wells Fargo. Wells Fargo seems to be overly tough on credit controls. I think Wells Fargo will likely try every method to request more collaterals or partial payment this year, and push the company to pay in full as early as possible.
On surface, the company has 260M cash to pay the loan, but among them, 155M is restricted cash, which seems belong to the term debt transactions, although NRF can swap this cash with the asset under term loan, to pay back term loan, it also has 97M funding commitment.
The total loan asset maturity due this year is only 105M. So if Wells Fargo pushes NRF to repay all loan this year, the company will have no way to pay that. I don't know if NRF can extend to the next year, since all the terms in the contract are not disclosed in 10-k. Even if Wells Fargo doesn't require an immediate repayment, the next year's cash flow is likely to be tied onto the repayment.
Also the $17 book value is GAAP book value with its debt marked to market. The non-GAAP book value is only around $7.8 per share.
What bothers me is not just the potential problem on repaying the secured term loans, but also the dark cloud on the commercial real estate in general. I have seen estimate saying that 66% of 2009-2012 CRE maturity will have default or extension because they have no way to find refinancing.
Overall, there is very high liquidity risk and underlining asset deterioration for NRF. The current price $3.5 is not cheap at all.
Thursday, October 1, 2009
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