This Housing Play May Be Overlooked

NEW YORK ( TheStreet) -- It's easy to be blase about Colony Financial's  ( CLNY) plan to spin off Colony American Homes (CAH), given the slump in many housing stocks and the fact that Colony ended up canceling an IPO of the business a year ago.

Still, there are reasons to think CAH, a portfolio of 16,000 single-family homes that is one of the largest single-family rental companies in the U.S., could win investors over the second time around. That would give a substantial lift to shares of Colony Financial, which has a 25% stake in CAH and is the controlling shareholder.

Richard Saltzman, Colony Financial's CEO, said Tuesday at a conference hosted by Keefe Bruyette & Woods that a CAH spinoff could occur in 2014 and is likely "within the next 12 months, plus or minus."

He added that the unit was structured "as a private REIT that eventually could eventually could go public. There are a lot of different ways to get public. You could do a conventional traditional road show kind of offering. Or you could do spins or potentially consolidation transactions that could kind of get you to the same place so all these options are under consideration."

Though shares of Silver Bay Realty Trust (SBY), a similar business, have fallen 9% over the past year, American Homes for Rent (AMH) another single family rental company, went public in August and has seen shares rise 15.32%.

What's more, Saltzman said during a conference call after Colony cancelled the CAH IPO that the company had originally targeted it for 2014 or 2015, but moved it up "based upon the perception that the market was wide open for this type of offer."

That window shut, however, when a sudden jump in interest rates killed enthusiasm for housing stocks.

Colony doesn't publicly assign a value to CAH, though it says it paid $550 million for its stake, including $295 million in 2013 and $255 million in late 2012.

Still, a May 20 report from Goldman Sachs analyst Eric Beardsley values the stake at just $529 million. By contrast, Moody's Investors Service assigned a value of $585 million to a portfolio of 3,400 CAH homes on March 20, when it rated bonds sold by CAH. That implies a value of $2.75 billion for CAH or $688 million for Colony's 25% stake.

Moody's arrived at its value by cutting 15% from what realtors said the properties were worth, even though it hired a third party to check the appraisals from the brokers and that third party agreed with most of the appraisals. So if you add back the 15% you get $790 million for Colony's stake, or $2.70 more per share than the $5.44 Goldman's Beardsley assigned to it.

On that calculation alone, you get to a price of $24.70 for Colony Financial, compared to Beardsley's $22 target. Colony Financial shares were trading at $22.27 midday Thursday.

But there is another element Beardsley left out. Colony owns 10% of the economics of CAH management, according to management comments at the KBW conference. I don't know how to value that and Colony doesn't say what it is. However, it is neutral at worst and most likely a positive.

There is obviously more to consider when valuing Colony Financial. CAH represents 31% of Colony's equity, according to Beardsley's report. Still, a successful IPO seems plausible, and if it happens it will likely give Colony Financial shares a healthy boost.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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