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Land And Buildings Letter To Northstar Asset $NSAM

Dear Fellow NorthStar Asset Management Shareholders:

We continue to evaluate the proposed tri-party merger between NorthStar Asset Management, NorthStar Realty Finance and Colony Capital and have been engaging in extensive discussions with the presumptive management team of the combined companies. At this point, we believe it is important to publicly highlight what we see as some of the pros and cons of the transaction, as we believe several strategic and corporate governance issues need to be addressed.

The Good News:

By successfully addressing the issues outlined below, the proposed Colony NorthStar combination has the potential to be a must-own equity REIT, given its unique co-investment business model, which could trade at a valuation in-line or above the REIT sector.

The proposed Colony NorthStar equity REIT currently has substantial valuation upside given it will pay a 9.4% dividend yield and trades at 6.9 times 2017 cash flow1, while equity REITs overall today pay a 3.5% dividend yield and trade at 20x 2017 cash flow.

Our Concerns:

Business Strategy/Communication

To date in our discussions with the presumptive management team, we are concerned that they are reluctant to let go of the more complicated real estate investments of their past, and at the same time embrace changes which would maximize value for all shareholders.

In order to maximize shareholder value, we believe Colony NorthStar should:

  • Clearly state that Colony NorthStar will be an equity REIT which will concentrate on the ownership of core and core plus traditional real estate in predetermined sectors, such as warehouse, rental residential, net lease and healthcare.
  • Clearly state that the company will generate outsized returns in these asset classes by making co-investments in funds which Colony sponsors, generating additional fee revenue on top of traditional real estate returns.
  • Clearly state that the company will avoid esoteric investments which have hurt both Colony’s and NorthStar’s valuations over time.
  • Articulate a strategy that will drive G&A/operating margins higher and leverage lower.

Corporate Governance

Given the NorthStar complex’s checkered history, in our view, with respect to executive compensation, conflicts of interest and other critical governance matters, starting off on the right foot in this area will be critical for the merged company.

In order to maximize shareholder value, we believe Colony NorthStar should:

  • Reduce the proposed size of the Board, given that a 13 person board could be unwieldy and expensive.
  • Add a highly regarded shareholder representative, to a smaller more nimble board, who can help craft a clear, compelling strategy for fellow shareholders.
  • Require board members to step down from the board, if the person’s investment in the Company goes below a predetermined threshold.
  • Have a de-staggered board and permanently opt out of the Maryland Unsolicited Takeover Act (MUTA), which would eliminate the Company’s ability to re-stagger the board without shareholder approval.
  • Clearly state that Colony NorthStar will strive for best in class corporate governance in all facets.

Creating a Must-Own Equity REIT

To date, management has failed to clearly articulate a strategy for the combined company. After extensive discussions since the announcement of the merger with presumptive CEO Richard Saltzman and Chairman Tom Barrack, we believe they are making progress in understanding what it takes to be a “must-own” REIT, but still need help breaking old habits. Namely, there remains some reluctance to embrace the traditional real estate investment model that has proved successful in the public markets.

The reason we believe Colony could be transformed into a must-own equity REIT is rooted in their ability to generate outsized returns on traditional real estate investments as a function of their co-investment private equity model when compared to other equity REITs. Pension funds, sovereign wealth funds and endowments continue to have a voracious appetite for traditional real estate and the high yield it offers. If Colony committed, for example, $1 billion to a private fund to own traditional real estate, they should be able to raise $4 billion in additional capital, earning attractive returns on its investments as well as performance fees on the third party capital.

We continue to maintain our live six person director nominee slate for the NSAM board. NSAM has not had or even scheduled its annual meeting – likely in the hope the merger will be approved prior to having to hold the meeting. If the combined companies publicly address the concerns outlined above, we believe the transaction would gain significant support from shareholders, including ourselves. However, should the merger be voted down by NSAM shareholders, we believe NSAM has other attractive strategic options available for shareholders to unlock substantial value, and we would proceed with a vote for our nominees to the NSAM board.


Jonathan Litt

Founder & Chief Investment Officer

Land and Buildings