Hedge funds that piled into real estate investment trusts are hurting the companies on their way out.
REITs that have had a relatively large portion of hedge fund owners are struggling with declining stock prices. NorthStar Realty Finance Corp. is one of the two worst performers this year in a Bloomberg index of 41 mortgage REITs, with a 39 percent decline. IStar Inc. has dropped 25 percent, Colony Capital Inc. has fallen 19 percent and New Residential Investment Corp. has slumped 10 percent.
Hedge funds are reducing their stakes in the REITs as market turmoil has caused some of the funds to struggle with liquidity issues. Stocks with a heavy concentration of hedge fund ownership get high valuations when things are going well, and shares are sold rapidly when the funds hit tough times, said Trevor Cranston, a REIT analyst at JMP Securities LLC.
“The selloff is quick,” Cranston said. “So it takes some time for a transition in ownership to happen and for the valuation to stabilize.”
The portion of hedge fund ownership of REITs including NorthStar and New Residential fell in the fourth quarter, according to filings with the U.S. Securities and Exchange Commission. Steadfast Capital Management and Maverick Capital, NorthStar’s two biggest hedge fund stockholders in the third quarter, reduced their stakes by 90 percent and 33 percent respectively in the three months ended Dec. 31.
Gem Realty Capital Management, previously one of IStar’s largest shareholders, sold its entire stake in the REIT from March 31 to Dec. 31. SAB Capital Management, which planned on returning most client money by mid-January, sold all its Colony shares, according to an SEC filing. The firm was one of Colony’s largest shareholders as of Sept. 30. New Residential saw EJF Capital reduce its stake by 83 percent, while SAB sold all of its shares in the REIT.
A smaller concentration of hedge funds will mean that shareholders will stick around longer, said New Residential Chief Executive Officer Michael Nierenberg.
“For us, the underlying fundamentals of our business continue to be very good,” Nierenberg said in a telephone interview. “We are more cautious now, as we should be. However, markets like this create great investing environments.”
New York-based NorthStar didn’t respond to requests for comment on its stock price and hedge fund shareholders. Jason Fooks, a spokesman for IStar, declined to comment, as did Jennifer Hurson, a Colony spokeswoman.