On January 27, 2014, Rayonier Inc. (NYSE: RYN) announced plans to spin off its Performance Fibers business into a stand-alone company. The new company has yet to be named. Upon completion of the transaction, current CEO Paul Boynton will assume the CEO position at the spin entity. The separation still requires a favorable ruling from the IRS in regards to the tax-free nature of the transaction, an effectiveness declaration of SEC filings, and final approval from the Board of Directors. Management plans to file an initial Form 10 with the SEC this week and expects to complete the transaction by mid-2014. The company plans to maintain its annual dividend of $1.96 per share through the time of the transaction.

The performance fibers peer group trades at much lower earnings multiples than forest products companies. In addition, timberland companies may be valued on other multiples such as land value and assets. The separation may provide more transparency for the two businesses.

RYN is structured a Real Estate Investment Trust (REIT). The company operates in three segments: Forest Resources, Real Estate, and Performance Fibers. The performance fibers segment produces materials used in cigarette filters, LCD displays, pharmaceuticals, and cosmetics among others.

The Performance Fibers segment generated EBITDA of $386 million in 2013, representing an 8% decline from 2012. The new company could be compared to Sateri Holdings Ltd. (1768 HK), Tembec Inc. (TMB CN), and Domtar Corp. (NYSE: UFS). This peer group trades on average at 5.8x 2013E EBITDA. As a secondary point of reference, it should be noted that competitor Buckeye Technologies was acquired in 2013 by Georgia-Pacific LLC for $1.5 billion, or 8.1x trailing EBITDA and 1.8x trailing sales.

For the following valuation exercises, corporate costs are allocated based on percentage of assets. When applying a peer group 5.8x multiple or 8.1x takeover multiple to segment EBITDA of about $374 million, a fair value of $2.2 to $3 billion is reached.

The Forest Resources and Real Estate segments generated combined $253 million in EBITDA in 2013, a 57% increase from the prior year. The majority of the increase can be attributed to the sale of non-strategic timberlands. Excluding the performance fibers business, RYN will have total assets of approximately $2.7 billion. Competitors include Weyerhaeuser Co. (NYSE: WY), Plum Creek Timber (NYSE: PCL), Louisiana-Pacific Corp. (NYSE: LPX), and Universal Forest Products (NASDAQ: UFPI). This peer group trades on average 1.5x assets. Applying that multiple to post spin RYN would derive an enterprise value of $4 billion. It should be noted that the peer group includes both REIT and non-REIT competitors. Through this preliminary exercise, a pre-spin enterprise value of $6.2 to $7.1 billion can be derived.

On January 21, 2014, Starwood Waypoint Residential Trust provided updated asset data in an investor presentation prior to its separation from Starwood Property Trust (NYSE: STWD). Shares will be distributed after the market close on January 31, 2014, with regular way trading scheduled to begin on the NYSE on February 3, 2014, under the ticker “SWAY”. Shares of SWAY, which is structured as a REIT, will be distributed on a 1:5 basis to STWD holders as of January 24, 2014. Trading on a “when-issued” basis is expected to commence tomorrow. The distribution will be conducted by way of a taxable pro rata special dividend.

Waypoint is Starwood’s single-family residential business, which includes single-family home rentals and related home loans. The spin entity will be externally managed by an affiliate of Starwood Capital. In October 2013, Starwood Capital acquired the management team of Waypoint Real Estate Group, a leading vertically integrated single-family rental operating platform. Terms were not disclosed. Waypoint’s co-CEOs, Gary Beasley and Doug Brien, will serve as co-CEOs of SWAY. As noted in the initial Starwood Property Trust Spin-Off Report (December 18, 2013), the fair value calculations would be adjusted based on the finalized distribution ratio, capital structure, dividend policy and changes in company/industry fundamentals.

Between the end of 3Q 2013 (September 2013) and November 2013, the spin entity expanded its book value to about $1.047 billion (from $854 million) and its asset base to $947 million (from $797 million). In addition, the peer group multiple expanded modestly. As a result, the post-spin fair value estimate for SWAY rises to $26 per share (from $22).

If the stock trades at a modest discount to book value, it may create an attractive entry point for long-term investors, as noted in the initial Spin-Off Report. Management notes that homes were purchased at about 29% below replacement value. Eliminating the discount on the homes would value the business at about $31 per share. The disadvantage of the new single-family rental REIT is that it is at the initial stages of a new industry (albeit one with great potential for growth) and has yet to generate significant cash flow or pay out sizable dividends. However, it is worth noting that multi-family and apartment REITs, including Equity Residential (NYSE: EQR) and Avalonbay Communities Inc. (NYSE: AVB), typically trade at P/Bs of 1.8x. Applying a 1.8x multiple to SWAY’s book results in a fair value of around $40 per share. Given the varied opportunities for stock price appreciation, whether through rising residential prices, the decline in the discount to replacement value, or through proven sustainability of the business model, the stock would be recommended for purchase below book value ($26 per share).

STWD had a book value of about $3.5 billion as of September 30, 2013, exclusive of assets and liabilities related to single-family homes that will be part of the SWAY spin-off. STWD breaks down those assets and liabilities between its core Real Estate Investment Lending business and assets and liabilities acquired in the LNR transaction.

The core business accounted for $2.4 billion in book value, or about 67% of total post-spin STWD book value. STWD defines its core business as “the origination of floating rate loans for transitional situations.” The company originates or invests in commercial mortgage loans, mezzanine loans, commercial mortgage-backed securities (CMBS), preferred equity, and mortgage-backed securities. The expectations are for an annual leveraged compounded return of 10.8%-12.0%, while taking a relatively conservative approach to loan origination and acquisitions.

STWD will retain its $1.84 per share dividend following the separation, as the spin entity was not a meaningful contributor to cash flow. Based on the historic dividend yield, as well as the peer group dividend yield, and P/E multiple, the valuation remains unchanged at about $25 per share. Please see the initial Starwood Property Trust Spin-Off Report for more details.

On January 20, 2014, Kimball International Inc. (NYSE: KBALB, OTC: KBALA) announced plans to spin off its Electronic Manufacturing Services segment into a stand-alone company called Kimball Electronics. KBALB will retain its furniture manufacturing operations. Upon completion of the transaction, current CEO James C. Thyen will retire. Kimball Electronics Group President Donald D. Charron will serve as CEO of Kimball Electronics, while Robert Schneider, KBALB’s current CFO, will assume the CEO role at Kimball International. The separation still requires legal opinion in relation to the tax-free status of the spin-off, an effectiveness declaration of SEC filings, and final approval from the Board of Directors. The transaction is expected to be completed within 8 to 12 months.

The company also intends to combine the current dual class structure into a single class of shares. As of September 2013, there were 8.3 million Class A shares and 30.2 million Class B shares outstanding. Class A shares elect all but one director, while Class B shares have a small dividend preference. Class A shares are fully convertible to Class B shares on a 1:1 basis. Once Class A shares account for less than 15% of shares outstanding, the dual class structure is eliminated. The transaction is pending additional A shares being converted.

EMS serves a variety of industries, including medical, automotive, and industrial. Facilities are located in Poland, China, Mexico and the US. The company manufactures electronic assemblies, circuit boards, and wiring harnesses. In 2012, the EMS segment lost its largest contract with pharmaceutical company Bayer AG (BAYN). BAYN represented 19% of segment sales in F2011 (ending June 30). EMS’s most significant customer is now Johnson Controls Inc. (NYSE: JCI), representing 17% of segment sales in F2013. EMS generated revenue of $703 million in F2013, representing a 14% year-over-year increase. The EMS segment competes with Benchmark Electronics Inc. (NYSE: BHE), Jabil Circuit Inc. (NYSE: JBL), and Plexus Corp. (NASDAQ: PLXS). EMS’s EBITDA margin in F2013 of 6.5% is slightly above the peer group. If Kimball Electronics were to be valued at the peer group average based on sales, EBITDA, and assets, an enterprise value (EV) of $297 would be derived.

The furniture segment manufactures office furniture products, including desks, seats, tables, cubicle systems, and storage units. The segment has 11 US production facilities, including seven in Indiana and two in Kentucky. Orders from the hospitality industry and the Federal government have declined in recent years. Two large non-recurring orders helped in F2012, but led to a significant EBITDA reduction the following year. The segment generated $500 million in sales in 2013, a 5% decline from 2012. The business can be compared to Knoll (NYSE: KNL), Herman Miller Inc. (NASDAQ: MLHR), HNI Corp. (NYSE: HNI), and Steelcase Inc. (NYSE: SCS). But KBALB’s furniture EBITDA margin appears to be well below the peer group average, perhaps due to excess capacity or underutilized labor. As such, an estimated value range can be based on the low end of comp multiples and the peer group average based on EBITDA, and assets, resulting in an EV of $172 to $239. It should be noted that the EV estimate utilizing F2013 EBITDA is significantly lower than other metrics. Based on this rough, preliminary exercise, a pre-spin sum-of-the-parts EV of $469 million to $536 million is reached.

On January 8, 2014, ONEOK Inc. (NYSE: OKE) announced shares of ONE Gas Inc. will be distributed after the market close on January 31, 2014, with regular way trading scheduled to begin on the NYSE on February 3, 2014, under the ticker “OGS”. Shares of OGS will be distributed on a 1:4 basis to OKE holders as of January 21, 2014. Trading on a “when-issued” basis is expected to commence on or about January 16, 2014. The transaction still requires an effectiveness declaration by the SEC.

The spin-off entity distributes natural gas to more than two million customers through the utilities Oklahoma Natural Gas Company, Kansas Gas Service, and Texas Gas Service. The parent will maintain its 41.2% interest, including general partner (GP) interest, in master limited partnership (MLP) ONEOK Partners LP (NYSE: OKS). ONE Gas will make a cash distribution to the parent of $1.13 billion at the time of separation.

The fair value for OGS remains unchanged at $33 per share, as lower net debt ($1.13 billion compared to the previous $1.2 billion) is offset by a higher peer group dividend yield (3.8% vs. 3.7%) and lower P/E multiple (16.7x vs. 17x). Please see the initial ONEOK Spin-Off Report (November 29, 2013) and FLASH (December 4, 2013) for further details. The fair value for post-spin OKE is raised to $53 per share (previously $52) based on an average of the unchanged DCF model, and management’s cash flow guidance (adjusted for the post-2014 expected tax rate). The modest change is based on a lower peer group dividend yield (3.5% compared to 3.7%).

On January 8, 2014, Hess Corp. (NYSE: HES) filed a Form 10 with the SEC disclosing the company’s intention to spin-off its retail chain of gas stations. In conjunction with the filing, the company announced that it will also solicit offers for purchase of the entire retail business. Upon receipt of any offers, the company will determine which alternative is better for shareholders. The new company, to be called Hess Retail Corp., is expected to apply for listing on the NYSE under the symbol “”HRE””. Hess Retail stores operate under the Hess, Hess Express and Wilco Travel Plaza brand names. As of September 30, 2013, Hess Retail had 1,258 company operated locations, of which 1,177 were convenience stores and 81 were larger, highway based travel plazas. The company has received a Private Letter Ruling from the IRS with respect to the tax-free status of the proposed spin-off. The transaction still requires an effectiveness declaration of SEC filings.

HES is one of the last remaining integrated oil companies that continues to own and operate a substantial chain of retail gas stations, as ExxonMobil (NYSE: XOM), BP (NYSE: BP), and others sold their stations over the previous decade to focus on higher returns from exploration and production. HES was highlighted in the January 2014 Spin-Off Report Radar Screen.

HES’s announcement follows Paul Singer’s Elliott Management LP’s disclosure of a 4% stake in the company in January 2013, indicating the likelihood of pushing for Board seats at the time. In May, HES agreed to split the CEO and Chairman roles to forestall a possible proxy fight with Singer ahead of its annual Board meeting. With John Hess announced to remain as CEO, three Elliott nominees joined the reconstituted Board. In July 2013, HES announced an agreement to sell its energy marketing segment to a subsidiary of Centrica plc (CNA LN) for slightly more than $1 billion.

On its October conference call, the company noted it may seek a private letter ruling from the IRS for a potential tax-free spin-off of the retail unit. Management has also indicated a potential MLP for its Bakken midstream business by 2015 and may consider a joint venture for those assets.

Rationale for the spin-off is likely rooted in the fact that under the current corporate structure, a majority of the company’s capital allocation is devoted to the more capital intensive exploration and production (E&P) business. As an independent company, Hess Retail can invest its cash flow into the stores, which may result in increased operating margins as the company may offer a wider selection of fresh foods and merchandise.

Through the first nine months of 2013, Hess Retail had revenue of $9.8 billion and EBITDA of $131.2 million (including the consolidated results from the WilcoHess acquisition). Annualizing the nine months, it can be estimated that the company could generate $175 million of EBITDA in 2013. The spin company could be compared to CST Brands Inc. (NYSE: CST), Casey’s General Stores Inc. (NASDAQ: CASY), and Alimentation Couche-Tard Inc. (CN: ATD), which on average trade at 9.3x 2013E EBITDA. It could be expected that upon separation, the retail business would see multiple expansion as HES currently trades at 4.4x 2013 estimated EBITDA. Applying the convince store peer group multiple to Hess Retail’s 2013E EBITDA would derive an enterprise value of $1.63 billion through this rough preliminary valuation exercise.

On December 19, 2013, Darden Restaurants Inc. (NYSE: DRI) announced its Board of Directors had approved a comprehensive plan to enhance shareholder value, including the separation of the Red Lobster chain of restaurants through a spin-off or possible sale. A final decision on the form of separation has not been made; however, management expects that it will be accomplished via a tax-free spin-off and completed in early fiscal 2015 (beginning May 26, 2014). The transaction still requires final Board approval, confirmation of the tax-free status of the spin, and an effectiveness declaration of SEC filings.

Darden is the owner and operator of several full-service restaurants, including mature brands such as Olive Garden and Red Lobster, as well as smaller growth businesses, including Eddie V’s and Bahama Breeze. As of September 2013, Red Lobster had 705 units, while Olive Garden had 834 restaurants, LongHorn totaled 445 units and the remaining six chains had a combined 190 locations. DRI owns about 50% of its properties, including 67% of the Red Lobster restaurants.

DRI’s announcement comes following pressure from activist investor Barington Capital, which sent a letter to the Board of Directors in September 2013 detailing a proposed restructuring of the company. Barrington’s plan suggested that Darden separate into two independent companies; one would manage the more mature brands Olive Garden and Red Lobster, while the other company would focus on higher-growth concepts such as LongHorn Steakhouse and the Capital Grille. In addition, Barington suggested that DRI’s real estate holdings could be transformed into a publicly traded REIT.

In conjunction with the separation announcement, management disclosed that post-separation DRI will open fewer restaurants, suspend the acquisition of additional brands, and reduce operation costs by at least $60 million annually. The net result should reduce capital expenses by $100 million annually. Darden will use the increased cash flow to fund share repurchases and dividends moving forward. Red Lobster and DRI intend to maintain the current $0.55 quarterly dividend following the proposed separation. DRI will have a dividend payout of 70%-75%, while Red Lobster is expected to have a payout of about 75%.

The removal of the more volatile Red Lobster sales should improve DRI’s earnings and growth profile, which may result in an increased valuation multiple for Darden. In the latest quarter, Red Lobster same store sales declined 4.5%, versus a decrease of 0.6% at Olive Garden, and 5.0% at Longhorn. The Red Lobster concept also generates lower EBITDA margins, approximating 10% versus 12% for the rest of Darden’s concepts.

DRI currently trades at approximately 6.9x trailing EBITDA. On average, full-service mature restaurants Bob Evans (NASDAQ: BOBE), Brinker International (NYSE: EAT), and BJ’s Restaurants Inc. (NASDAQ: BJRI) trade at 9.3x trailing EBITDA. Growth concepts such as Texas Roadhouse Inc. (NASDAQ: TXRH), Del Frisco’s (NASDAQ: DFRG), and Ignite Restaurant Group (NASDAQ: IRG) trade at 11.7x trailing EBITDA (excluding outlier BWLD).

Over the previous twelve months, Red Lobster generated $261 million in EBITDA, versus the remaining DRI’s EBITDA of $726 million. Applying a 9.3x multiple, in line with more mature brand concepts, to TTM EBITDA would result in an enterprise value of $2.4 billion. It should be noted that out of the chosen peer group, Ruby Tuesday is exhibiting similar sales declines and trades at a heavy discount to the group, about 6.3x. If shares of Red Lobster were to trade in line with RT, the enterprise value would be $1.6 billion. Over the past three-to-five years, restaurant chains have been acquired for on average 8.5x trailing EBITDA. Using a takeover multiple, the Red Lobster could be valued at $2.22 billion.

Given that the remaining DRI will be composed of the mature Olive Garden and other growth concepts, a blended multiple appears appropriate for approaching valuation. Of the remaining $5.9 billion in DRI revenue, Olive Garden contributed 62% of sales. Assuming margins across the chains were relatively similar, and applying a 9.3x multiple to Olive Garden’s contribution, and 11.7x to the remainder would result in an enterprise value of $7.3 billion for post separation DRI. This rough, preliminary valuation exercise results in a sum of the parts range of $48 to $54 per share of DRI.

On December 13, 2013, Entergy Corporation (NYSE: ETR) and ITC Holdings Corporation (NYSE: ITC) announced they had mutually agreed to end efforts to merge ETR’s electric transmission business with ITC. The plan, announced on December 5, 2011, involved ETR divesting its electric transmission operations into a newly-formed entity and distributing shares of the entity to shareholders in a tax-free spin-off. The entity would then be merged with ITC in an all-stock Reverse Morris Trust transaction.  The two companies had failed to win approval from state regulatory boards for the merger.

On December 13, 2013, Simon Property Group (NYSE: SPG) announced its Board of Directors had approved a plan to spin off its strip centers and small malls as a REIT through a tax-free distribution to shareholders. The separation of SpinCo, to be named later, still requires an effectiveness declaration of registration statements by the SEC, acceptance of the new entity’s listing by an exchange, and final Board approval. SPG will maintain its current annual dividend of $4.80 per share, while SpinCo’s initial annual dividend is estimated to be $0.50 per share, assuming a 1:1 share distribution. Richard Sokolov, Simon’s President and COO, will serve as Chairman of SpinCo’s Board while David Simon, CEO of the parent, will also serve on the Board. SpinCo’s management is expected to be in place in 1Q 2014. The transaction is scheduled to be completed in 2Q 2014. The entity will pursue an investment grade credit rating.

SpinCo will own or have interest in 54 strip centers and 44 mall in 23 states, each generating $10 million or less in net operating income (NOI), for initial annual NOI of more than $400 million and funds from operations of about $300 million ($0.80 per share). The entity’s assets total about 53 million square feet with occupancy of 94.2% at strip centers and 90.4% at malls. SpinCo will have a significant presence in Illinois, Indiana, Ohio, Florida and Texas. The transaction is reminiscent of the 2011 spin-off by General Growth Properties Inc. (NYSE: GGP) of its Class B malls into Rouse Properties Inc. (NYSE: RSE).

Following the separation, the average size and sales per square feet for SPG’s remaining malls will expand. As a result, it is reasonable to assume SPG will receive a higher FFO multiple from investors, lowering the cost of capital. Sales per square foot will rise to $616 (from $579), occupancy will improve to 96.5% (from 95.5%) and NOI growth (for the nine months through September 30, 2013) widens to 5.5% year over year compared to 5.2%. Meanwhile, SpinCo can focus on a pipeline of $300 million in redevelopment and future development projects. Under the larger umbrella, some of these initiatives perhaps did not reach SPG’s necessary hurdle rate. In the four years through 2013, SPG invested about $158 million in these properties.

SpinCo could be compared to a peer group of strip center operators including Kimco Realty Corp. (NYSE: KIM), Equity One Inc. (NYSE: EQY), Regency Centers Corp. (NYSE: REG) and Federal Realty Investment Trust (NYSE: FRT), which trade about 17x on a price/FFO basis with an average dividend yield of approximately 4%. Assuming $300 million ($0.80 per share) in initial FFO, a fair value would be about $13.60 per share, and based on dividend yield (initial expected dividend of $0.50 per share) of 4%, a fair value of $12.50 per share is reached through this rough preliminary exercise. Larger mall operators trade at about a 3.5% yield. Based on standalone parent’s maintenance of a $4.80 per share dividend, post-spin SPG has a fair value of $137 per share. Of course, if the current yield of 3.2% is unchanged following the transaction than investors would receive the spin for free. Alternatively, backing out the projected SpinCo FFO per share of $0.80 from the consensus SPG 2013 FFO estimate of $8.80 per share, and applying the larger mall P/FFO multiple of 19x results in a fair value of $152 per share. This rough, preliminary exercise generates a pre-spin fair value range of $149.50 to $166 per share.

On December 11, 2013, Exelis Inc. (NYSE: XLS) announced its Board of Directors had approved a plan to spin off its Mission Systems business (part of its Information & Technical Services segment) through a tax-free distribution to shareholders to be completed by summer 2014. The separation of Exelis Mission Systems, to be named later, still requires an effectiveness declaration of registration statements by the SEC, an opinion from legal counsel regarding the tax-free status of the transaction, regulatory board clearances, and final Board approval. The share distribution ratio and capital structure are yet to be determined. XLS will maintain its quarterly dividend, currently about $0.1033 per share. The parent will also retain and continue to service pension obligations. Mission Systems will be led by Kenneth Hunzeker, who has been the president of the unit since April 2011.

Mission Systems includes relatively low margin, limited capital expenditure services, such as facilities maintenance and management, vehicle and equipment maintenance, and logistics support. Management projects sales for this business to total about $1.5 billion with a 2014 pro forma operating margin of 5-7%. XLS has been cutting costs from this unit to meet more cost competitive standards from the Department of Defense for relatively commoditized services. The unit has no major re-competes in 2014, but has significant projects in Afghanistan and the Middle East.

Following the separation, XLS will have better growth prospects and a higher operating margin. As a result, it is reasonable to assume it will receive a higher earnings multiple from investors, lowering the cost of capital. It will also have far less exposure to US DOD, potentially useful at a time where margins for new contracts are under pressure after years of escalating budgets. According to management, less than 50% of revenue streams are generated by the US Army, Navy and Air Force, while nearly 6% of revenue is from commercial markets and about 15% from international clients.

Sales in 2013 for the non-Mission Systems businesses are expected to total about $3.4 billion with margins in the mid teens. Products and services include communication equipment, radar systems, imaging equipment (such as night-vision goggles), weather-monitoring and surveillance systems, as well as air traffic management. XLS is considered a major participant in Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance markets, otherwise referred to as C4ISR.

Exelis was a 2011 spin-off of ITT Corp. (NYSE: ITT) as the large industrial conglomerate attempted to separate the declining revenue, high pension expense defense business, while simultaneously spinning off its stronger margin, better growth water and fluids control business as Xylem Inc. (NYSE: XYL). The current transaction is extremely reminiscent of other recent defense spin offs, including the 2012 separation by L-3 Communications (NYSE: LLL) of its lower margin, slower growth services business Engility Holdings Inc. (NYSE: EGL), and the 2013 separation of lower US DOD-exposed Leidos Holdings Inc. (NYSE: LDOS) from US government IT services provider SAIC (NYSE: SAIC). All of these transactions appeared to be an effort to receive higher multiples and reduce the cost of capital for the stronger growth and margin business. Depending on the cash distribution from the spin entity, Exelis could buy back shares, raise its dividend or explore acquisitions.

One may compare the spin entity to EGL, SAIC, CACI International Inc. (NYSE: CACI), and ManTech International Corp. (NASDAQ: MANT), which trade between 0.4x and 0.6x on a pension-adjusted EV/estimated 2013 sales basis. Applying management guidance for the Mission Systems 2013 sales of $1.5 billion values this entity at $600 to $900 million. Post spin, XLS could be compared to a group including Rockwell Collins Inc. (NYSE: COL), FLIR Systems Inc. (NASDAQ: FLIR) and L-3 Communications (NYSE: LLL). COL and FLIR have operating margins in the high teens, while L-3 has a margin in the high single digits. Management is guiding for a margin for the standalone business in the low teens so a multiple between these two groups of aviation electronics companies appears appropriate. Applying a 1.5x to 1.7x multiple, slightly below the average due to expected standalone costs, results in an enterprise value of $5.1 to $5.8 billion for post spin XLS. Through this rough, preliminary exercise, subtracting net debt and pension expense, the pre-spin fair value for XLS is about $5.7 to $6.7 billion, or $18.50 to $23.75 per share.

On December 10, 2013, NorthStar Realty Finance Corp. (NYSE: NRF) announced its Board of Directors had approved a plan to spin off its asset management business through a tax-free distribution to shareholders to be completed by 2Q 2014. The spin entity, to be named NorthStar Asset Management Corp., intends to apply for listing on the NYSE. The asset management business will be led by the current NRF management team. NorthStar Asset Management will generate an annual management fee of $90 million, an additional fee representing 1.5% of cumulative equity raised by NRF subsequent to December 10, 2013, plus incentive fees based on cash available for distribution through a 20-year contract with NRF. Management will host a conference call today at 10 a.m. ET. The transaction requires an effectiveness declaration regarding registration statements by the SEC and final Board approval.

The asset management business generates fees from sponsoring and advising on commercial real estate activities through three non-traded REITs. One managed REIT has raised $1.1 billion in capital, while the other two are currently in the process of raising an additional $2.75 billion. Through the first nine months of 2013, the asset management business has generated $25.3 million in operating income, up 240% year over year. NorthStar Asset Management will initially be structured as a C-Corp, however management will look for ways to pursue alternative structures in an attempt to optimize its tax status.

The parent is a diversified commercial real estate (CRE) REIT. The company focuses on originating, acquiring and managing CRE real estate and debt investments secured by income producing assets. Investments include office buildings, retail, industrial facilities, and hotels. As of 3Q 2013, the company had $1.6 billion in CRE debt and $3.5 billion in real estate investments. The company has been reducing its exposure to collateralized debt obligations (CDOs) and increasing investments in real properties including manufactured housing communities and healthcare facilities. The move from CDOs to real estate is likely an attempt to unlock value. Property REITs tend to trade at far lower yields than commercial mortgage REITS given the perceived lower risk of the assets.

The structure of the two entities, including incentive fees paid by NRF to the spin entity when certain thresholds are met, could be compared to the MLP general partner set-up. Based on the current assets under management, management estimates that NorthStar Asset Management will generate $155 million in gross fees and will have $0.30 per share in cash available for distribution (CAD). MLP GP C-Corps. yield about 4.5%. However, this reflects the low risk to payouts from the MLPs, which operate pipelines generating very consistent cash flows. If NorthStar Asset Management distributed $0.27 per share, based on a 90% payout ratio, the asset management could be valued between $4.91 and $6.00 per share, assuming the MLP GP peer group average or a slight discount.

Management estimates the post-spin parent will generate $0.80 per share in CAD. Assuming a 75% payout ratio, in line with NRF’s most recent distributions, the parent could distribute $0.60 per share. Based on an 8% and 9% yield, in line with other commercial mortgage REITs, the post-spin parent could be valued in a range of $6.67 to $7.50 per share. This rough preliminary valuation suggests a sum of the parts valuation of $11.58 to $13.50.