Colony NorthStar (CLNS) is a better value today than when we initially recommended it was last month; the quarterly dividend was recently raised 12.5% and the REIT now offers a 7.7% dividend yield, explains Ian Wyatt, editor of High Yield Wealth.
Colony NorthStar owns a global real estate portfolio composed of industrial, healthcare, and hospitality properties. Colony NorthStar also has an investment arm.
The investment business holds $56 billion of assets under management. It invests in public securities, private-equity partnerships, single-family rentals, commercial loans, and direct property and net-lease assets.
Given that Colony NorthStar has existed in its current incarnation for only six months and it’s revamping the business, year-over-year comparisons offer little direction. With that said, management appears to be moving in the direction to create value.
REITs are valued on their dividends, and dividends are supported by funds from operations (FFO) — the key cash-flow metric. Colony NorthStar pays a $1.08-per-share annual dividend, which offers a 7.7% yield.
Management expects FFO to land between $1.40-and-$1.58 per share in 2017. Given the present FFO coverage, Colony NorthStar has the financial wherewithal to not only maintain the dividend but to increase it generously.
We can say that Colony NorthStar shares are cheap -– absolutely and relatively. They trade at less than 10 times the forward FFO multiple. Cheapness has attracted a lot of institutional buyers in recent months.
Notable buyers include Vanguard Group, which bought 68.5 million Colony NorthStar shares; Baupost Group, led by value-investor guru Seth Klarman, bought 29.2 million; BlackRock bought 23.2 million shares to increase its holdings to 30.9 million.
A lot of institutional investors have boarded the Colony NorthStar bandwagon. In the first quarter, 222 institutions bought new positions in Colony NorthStar stock.
It is time for us to join the institutional crowd. Colony NorthStar shares are cheap, and that attracts smart institutional investors. It should also attract smart individual investors.
Once news of Colony NorthStar’s cheapness reverberates with the general investing public, you can be sure they won’t remain cheap for long. Suggested Action: Buy Colony NorthStar shares up to $15.
Ian Wyatt is publisher and chief investment strategist at Wyatt Investment Research.
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