Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

NorthStar Realty Finance Corp (NYSE:NRF)

Q4 2012 Results Earnings Call

February 14, 2013 10:00 AM ET

Executives

Al Tylis - President

David Hamamoto - Chairman and CEO

Debra Hess - Chief Financial Officer

Daniel Gilbert - Chief Investment Officer and COO

Ron Lieberman - EVP and General Counsel

Analysts

Stephen Laws - Deutsche Bank

Gabe Poggi - FBR Capital Markets

Joshua Barber - Stifel Nicolaus

Operator

Good morning, ladies and gentlemen and thank you for standing by. And welcome to the NorthStar Realty Finance Fourth Quarter 2012 Conference Call. During today's presentation all parties will be in a listen only mode. Following the presentation there will be a question-and-answer session and instructions will be given at that time. (Operator Instructions)

As reminder this call is being recorded today February 14, 2013. I would now like to turn the call over to Al Tylis, President of NorthStar Realty Finance Corp. Please go ahead.

Al Tylis

Thank you very much. Welcome to NorthStar's fourth quarter and fiscal year 2012 earnings conference call. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements.

These statements are based on management's current expectations and beliefs, and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I refer you to the Company's filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The Company undertakes no duty to update any forward-looking statements that may be made in the course of this call.

Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with Generally Accepted Accounting Principles can be accessed through our filings with the SEC at www.sec.gov.

With that, I am now going to turn the call over to our Chairman and Chief Executive Officer, David Hamamoto. David?

David Hamamoto

Thanks Al and thanks everyone for joining us. In addition to Al, I am joined today by Daniel Gilbert, our CIO and COO; Debra Hess, our CFO and Ron Lieberman, our EVP and General Counsel. The U.S. economy continues to slowly show signs of recovery, while lingering the U.S. policy uncertainty. The housing market continues to pick up momentum and could be a significant positive contributor to economic growth in 2013. Additional commercial real estate fundamentals continue to improve as investor interests in this sector remain strong and low interest rates continue to support the increase in value of commercial real estate assets.

Liquidity also continues to improve in the commercial real estate markets evidenced by increasing demand for new CMBS issuance. During 2012 there was $45 billion of CMBS issuance compared to original expectations of $30 billion to $35 billion and the new issue markets continue to be strong. The $11 billion of new issuance already pricing in the first week of 2013 and full year 2013 projection is ranging from $50 billion to $65 billion.

2012 was a period of strong growth and transformation for NorthStar, leveraging our broad and established commercial real estate platform. We have been since -- we committed to $1.3 billion of highly accretive investments, while continuing to grow our asset management business. These investments were across a broad spectrum of commercial real estate asset classes, which further diversified our asset base and cash flows and many of which have potential equity upside in addition to expected long-term stable cash flows.

As such cash flow continued to increase throughout the year and yesterday we announced a sixth consecutive increase to our common stock dividends representing an 80% increase in cash distributions to our shareholders over this period. The cash available for distribution that we expect to earn in 2013 is significantly higher than our current dividends. We see our 2013 corporate presentation that will be furnished following market close this Friday for more detail on our projected cash available for distribution in 2013. Going forward, we will continue to seek to prudently balance distribution with retaining cash flow for accretive investments.

Our non-trade REIT business continues to gain significant traction. Our capital raising pace remained strong and we are in an exclusive group of top 10 sponsors for capital raising in this sector. Our second non-traded REIT offering NorthStar Healthcare Income or NorthStar Healthcare, focusing on debt and equity investments in the mid-acuity senior housing space continues to execute selling agreements with broker dealers, many of which are returned participants from our [initial] non-traded REIT NorthStar Real Estate Income Trust or NorthStar Income I.

We recently broke escrow in NorthStar Healthcare and we expect sales to begin in the near future. NorthStar Income I will close its $1 billion offering in July 2013 and we are currently in the registration process with a third non-traded REIT NorthStar Real Estate Income or NorthStar Income II, which is expected to have a commercial real estate debt focus similar that NorthStar Income I.

Our goal is to leverage our wholly owned broker dealer to continue growing this business by entering the market with new vehicles and products. As we begin 2013, we will continue to be nimble in our investment approach and are well positioned to take advantage of many interesting opportunities that we see across commercial real estate. We're focused on investments that exhibit strong cash flow characteristics and provide the best risk adjusted returns for shareholders, whether in the form of loans, equity or a combination of the two.

I'd like to turn the call over to Al who will further discuss the business strategy and objective. Al?

Al Tylis

Thanks David. During 2012 NorthStar invested or committed to invest approximately $714 million of equity in $1.3 billion of grossed investments, including $411 million of equity in $691 million of investments during the fourth quarter. Our 2012 investments are projected to generate a weighted average return on equity of greater than 18%.

Additionally in 2012 we made $501 million of investments on behalf of NorthStar Income I. During the fourth quarter of 2012 NorthStar announced a $390 million of commitment to acquire limited partnership interest in approximately 50 real estate private equity funds managed by top sponsors with $275 million expected to be funded by NorthStar and $115 million by NorthStar Income I.

The acquisition price is based on the private equity funds aggregate reported NAV of approximately $765 million at June 30, 2012. This transaction provides NorthStar with structural protections while providing upside in a portfolio that effectively owns an interest in institutional quality commercial real estate throughout the country.

During the fourth quarter of 2012 we also acquired a $326 million portfolio of manufactured housing communities. The portfolio consisted of 36 manufactured housing communities in four states, the majority in Colorado, containing over 6,000 pad rental sites and 604 manufactured homes located across those sites. The portfolio is currently 86% leased.

This is a fragmented asset class that we like because it has historically been very stable with low turnover, low CapEx and consisted annual rent growth which provides strong current cash flow. We acquired this portfolio with an experienced operating partner that currently manages one of the largest manufacturing housing community portfolios in the country.

We initially sourced this investment through our relationships and we were looking at this investment as a potential mezzanine lender. Ultimately we determine that due to the strengthen and stability of the cash flows and the potential for equity upside to rent growth and capital appreciation acquiring the portfolio with an experienced operator and a very inexpensive 10-year fixed mortgage would generate the best risk adjusted returns for our shareholders. We expect to earn an initial cash on cash return of 15% on our $81 million of invested equity and believe there is also potential for appreciation in the portfolio.

Given the positive attributes in this sector and our best in class operating partner, we're looking to expand our investment in this area and have already seen a strong pipeline of new transactions.

On the loan origination front, we continue to be active. During 2012 we completed $740 million of loan originations predominately first mortgages for us and NorthStar Income I. Our recent CMBS transactions provided us with permanent non-recourse financing, which allowed us to lock in a very attractive yield on our invested equity and recycle our current credit facilities with new loan originations without taking on additional recourse debt.

Traditionally the success of the CMBS transaction and the visibility of a permanent financing source also opened the door for additional credit facilities, which we're in the process of moving forward. We're also looking forward to executing on additional CMBS transactions in 2013.

As David discussed, we continue to focus on expanding our asset management business with the growth of our non-traded REIT business. During the fourth quarter of 2012, our first CRE debt oriented vehicle NorthStar Income I, raised a $146 million and recently we've seen further acceleration in our capital raising pace now that we've announced that our $1 billion offering will be completed in June.

This vehicle currently has 20 CRE loans and 4 CMBS investments with an aggregate principle balance of $578 million. Based on our current fees and the projected growth of our non-traded REIT business for 2013, we expect to generate over $40 million of net fees in our asset management business this year. Because we're an internally managed REIT our shareholders are the direct beneficiaries of this low risk and high multiple business that does not require significant capital investment.

We believe that our internal structure is not always valued in the public markets and the growth of our asset management business inside NorthStar is the starkest example to-date with the value that gets retained by shareholders of internally managed REITs rather than by external managers.

I'd like to now turn the call over to Debra, who will review our financial results for the fourth quarter 2012. Debra?

Debra Hess

Thanks, Al. Good morning, everyone. I would like to take a few minutes to discuss our GAAP and AFFO results for the quarter and our investment portfolio. As we saw in today's press release, we recorded a GAAP net loss of $28 million or $0.20 per diluted share for the fourth quarter 2012.

The largest contributor of our GAAP loss is the non-cash fair value adjustment. We mark our real estate securities portfolio, our NorthStar and comp store CDO bonds and our trust preferred debt to fair value through the income statement. This represented a $118 million or $0.82 per diluted share of the GAAP loss.

Our fourth quarter AFFO totaled $106 million or $0.73 per diluted share. The majority of the unrealized loss is driven by the mark-to-market of our CDO bonds to at par. While this created noise in our GAAP net income, it's a validation of the $700 million of our owned CDO bonds, many of which were purchased at significant discounts to par.

To summarize our investment portfolio as of December 31, we had $2.7 billion of commercial real estate debt investments, of which $2.3 billion are financed inside CDOs that are not cross-collateralized with each other. Most of our legacy equity is in the debt CDOs and they continue to perform well and produce stable cash flow.

The remainder of our non-legacy debt investments are either financed through our recent CMBS securitization or on our credit facilities, a majority of our debt investments on first mortgage loans that were directly originated and we have seen the credit trends in our underlying portfolio continued to improve steadily.

Loan loss reserves totaled $157 million at December 31 or approximately 7% of total loans related to 13 loans with a carrying value of $223 million. As of December 31, we only had one non-performing loan representing $13 million in the aggregate with a $7 million carrying value.

Our commercial real estate portfolio grew in the quarter to $1.3 billion at year end which included the acquisition of the manufactured housing community. Our real estate portfolio was comprised of 401 million of a net lease portfolio including suburban office, retail and industrial properties, 572 million portfolio of healthcare properties which are predominantly assisted living facilities, and 326 million manufactured housing portfolio. Overall the portfolio continues to perform well.

At December 31, our net lease portfolio was 94% leased, with an approximate 5.7 year weighted average lease term.

Our healthcare portfolio was a 100% leased to third-party operators with weighted average lease coverage of 1.3 times and an approximate [6.9] year weighted average lease term. Our manufactured housing portfolio was 86% lease.

Our securities business is currently more opportunistic in nature. As of December 31, our $2.5 billion portfolio is primarily CMBS, which is part of our legacy investments, which are financed in fixed CDOs. In addition to these business lines, as David and Al mentioned, we have been making strong progress in our asset management business through the growth of our non-traded REIT initiative.

We are confident that this is a high multiple business, which will generate long-term stable fee stream for our shareholders, [applying on] a market multiple to our over $40 million of projected net asset management fees in 2013 with already resultant several dollars per share of value for our shareholders.

This concludes our prepared remarks for today. Now let's open up the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question does come from the line of Stephen Laws with Deutsche Bank.

Stephen Laws - Deutsche Bank

Hi, good morning. Congratulations on a great quarter and a great year. As always, you guys did a great job of providing a lot of disclosure in the press release. I know we have an updated presentation. I think you said it would be out some time before the weekend.

But with that said, can you may be comment on what's driving the success behind some of the more unique transactions and how you're sourcing those as evidenced by the JV investment group of private equity investments, the manufactured housing investment and maybe some idea of where you're sourcing those and what the pipeline looks like or are these more just one-off opportunities?

David Hamamoto

Yes, Stephen, I think, as you know a lot of good deal flow is the function of relationships in this business. And I think that's something that you know NorthStar's uniquely positioned to take advantage of given the long-term history that a number of the senior people in the firm have had in the business. I started it at Goldman in 1983 and those relationships over the years tend to add up.

And I think you know part of the key today is making sure you're seeing an active pipeline but also being able to sort through it and figuring out you know where the opportunities are that that we should be focused on.

And I think one of the other interesting things about our business model is the fact that we can play all up and down the capital stack and in certain instances provide a one-stop solutions you know both in terms of debt and equity does position us very well to you know take advantage of unique field flow.

And as Al mentioned on the manufactured housing deal, you know that originally came in as a mezz investment as we did due diligence and figured, you know saw what kind of senior financing was available because of the strength of the CMBS market and you know the strength of the cash-on-cash returns on the equity. We converted that deal with an operating partner that we had a relationship with.

So I think that we have a lot of things going in our favor, the breadth of our relationships, the fact that we play all up and down the capital stack as well as access to capital that should enable us to continue to really pick off these unique opportunities that can move the needle at NorthStar.

Stephen Laws - Deutsche Bank

Great. And I think just specific to the JV private equity investment, you know the release talks about being entitled to distributions post June 30, is that anything you can quantify or may be how should we think about that or is it something that would be in the presentation tomorrow?

Al Tylis

Hey, Stephen, it's Al. We will have a little more information on that once we close and finish the consent process, but overall our initial views are certainly positive and probably better than we initially expected in terms of the pace of realization events and the amounts that are being realized by these private equity funds relative to the NAVs. So overall, it's certainly having bought that portfolio effectively as of 6/30 of last year, I think we've certainly seen appreciation values and certainly view it as a meaningful positive.

Stephen Laws - Deutsche Bank

Great. And then one final question just with regards to liquidity and cash flow, I think the press release mentioned $210 million of unrestricted cash adjusted for some expected closings of investments already announced. Can you may be talk about how you guys balance you know potential dividend increases versus using cash to fund new investments?

And then given the strong robust pipeline of new investments, how you are going to look to future capital raises whether that be in equity or some type of debt or maybe how you guys kind of think about all of that which I guess they kind of all -- is kind of the same question?

David Hamamoto

Yeah, and Stephen, as you know, we have this question all the time and a lot of these -- both of those issues are more of an art than a science, but I think we will continue to try to balance payout and making sure that shareholders receive a strong dividend with retaining some cash because we think the investment opportunities that we are seeing are highly accretive.

And similarly on the capital raising front, we balanced raising capital and balancing dilution with putting it into accretive investment opportunities and you know that's sort of our job and we will strike the balance, but I think the deal flows vary very strong. We like the tone of the market and I think more importantly we feel very good about the underlying cash flow characteristic of the business today which you know whether that means retaining more cash or you know growing distribution, it puts us in a very good position you know to strike that balance.

Stephen Laws - Deutsche Bank

Great. Well, I know you guys are all shareholder and what the internal management structure incentivize to focus on ROE driven raises. So I appreciate the time for questions and again congratulations on a great quarter.

David Hamamoto

Thanks.

Operator

And our next question does come from line of Gabe Poggi with FBR.

Gabe Poggi - FBR Capital Markets

I want to know if you can provide little more detail that you guys are quite opportunistic across different opportunities but specific to kind of low origination at the NRF level. Do you have any kind of (Inaudible) pipeline or what you'd like to do in 2013. Obviously the CMBS deal in November, do you think, my second question piggybacking on that is do you think permanent financing via CMBS is where you'd like to be going forward? Do you think that with the market talking about the return about CDO structure or CLO something little more nuance to maybe be flexible to the issue or [allows you] guys that something that you considering in talks with potential going forward.

David Hamamoto

Yeah. Gabe, we just in-terms of loan business, we're very focused and we mentioned that a few times about really driving the growth of the asset management business than creating franchise value for shareholders. So, that's a huge priority for us, so we'll have three vehicles that were in the process of managing. And both NorthStar Income I from one and NorthStar Income II's primary focus is on loans. So, in terms of that business and loans being a key part of the strategy, that will be there but also NorthStar on a balance sheet will also continue to be active in the lending business, although as you've seen -- we have a much more diverse array of investments and in somewhat more opportunistic. So, there'll be a balance on the balance sheet, the income vehicles which are the managed vehicles will be majority in lending.

So, we still will be a very active player in that space. And I think it's a combination of deal flow and seeing the right deals through our relationships picking the right credit with them obviously the second part of that is figuring our the best way of finance this. And I think match funded long term non-recourse financing is still a key component of our strategy. It's kind of one the key things that has helped us to be top legacy REIT performer in the space even in the downturn as a fact that we did have that non-recourse match funded financing. So, that will be key part of our strategy going forward you saw the first securitization that we did which executed very well and so clearly we're in dialog with the rating agencies and the bankers and are trying to figure out what's the best way of financing the businesses.

And you touched on the two options that more static deal but then also introducing things that do have reinvestment and where we compromised pricing on the front end for a little more flexibility restructure. And again, that's not a science that's more of an art but I think we've demonstrated that we have the experience to make the right calls there.

Gabe Poggi - FBR Capital Markets

Great. That's super helpful. And one quick question for Debra. Debra can you just give us 20,000 foot of NorthStar the big jump in interest income sequentially Q3 to 4Q and what drove that? That will be helpful. Thank you.

Debra Hess

Sure. We actually as you know, the [cash from CBO] we had some loans, that sit on our balance sheet at deep discounts. We had a fairly large loan pay off, (Inaudible) unexpectedly in the fourth quarter. And so we basically accelerated that discount in the fourth quarter.

Gabe Poggi - FBR Capital Markets

Great thanks. Good job guys.

Debra Hess

Thank you.

Operator

And our next question does come from line of Joshua Barber with Stifel Nicolaus.

Joshua Barber - Stifel Nicolaus

Hi. Thank you. Good morning. Following up a little bit on Gabe's question, David thanks for the answer there. I'm just wondering a bit especially as you're getting into more of a non-traded REITs on your balance sheet, would you anticipate that NorthStar is fundamentally changing or will be in some ways capital allocation in the next couple years as you do lot of less lending on your balance sheet more opportunistic where as the lending bucket would be more on the non-traded REIT side. Or do you think that NorthStar in terms of capital allocation will still be sort of diverse in opportunistic as it's been the last couple of years?

David Hamamoto

I think it's, like I said, we'll focus on where we think the highest value opportunities are and I think that the allocations that were made over the last 12 months are an indication how we're prepared to spread it around between the lending business and things that are more opportunistic. And again that's just where's the highest value added piece in the capital structure to play.

You saw we weren't in a lot of deployments a couple years to go and the CDO bond repurchases, that was where we saw the highest value now being more active in the core lending but also being opportunistic in acutaly owning equity and stable long term assets that have again good cash flow characteristics to support the dividend. But also taking advantages of cheap non-recourse enhancing with equity upsides. So I think we were -- we won't be afraid to play in various pieces of the capital structure. And I think by definition with the non-traded REITs being predominantly debt that the amount of pure lending on NorthStar's balance sheet of the percentage will decrease.

Joshua Barber - Stifel Nicolaus

Given that today in the especially given some of the performance of your CDOs would you guys be looking to sale a possible collapse any of those in the next year or two, and try to monetize that and redeploy it into longer duration opportunities today?

David Hamamoto

I think josh the CDOs that are backed predominantly by the loans we've originated, have very healthy cash flow, we expect that continue for an extended period of time, I think there's meaningful equity recovery there on all those deals. So collapsing those is not something we would look to do. On the other hand, I think there are some of large deals that are were backed by CMBS, where they -- where we don't have current cash flow but may own a meaningful amount of bonds throughout those capital structures, I think over the next year or two. I think we would look at the opportunity to collapse those and monetize the bonds that we own.

Joshua Barber - Stifel Nicolaus

Okay, and you guys mentioned that you manufactured housing portfolio that initially you were partnering, could you just describe that arrangement a little bit, is that a joint venture, is that a wholly owned but there's a management contract out there, is it a portfolio that splits the equity, could you just explain to us the mechanics of that portfolio?

David Hamamoto

Yeah, I would describe it as kind of a typical relationship that equities source would have with an operating partner as basically one of the things we liked about this deal is they were the largest private operators of these community that their manufacturing housing sector is a very fragmented industry with a lot of undercapitalized moms and pops. These guys have a 30,000 [pad] portfolio, have been in the business for couple of generations.

And this -- so we really liked their operating capability, so they basically are our partner, they co-invested so they've got skin in the game in downside but their organization is there to manage the portfolio jointly with us. So they've got co-investment in the venture with us. And they do earn a management fee for managing the portfolio with us, although we're very actively involved in working with them on driving value in the real estate.

Joshua Barber - Stifel Nicolaus

Okay and I would imagine it's a fairly small co-investment to their portfolio just bigger than [$326 million]?

David Hamamoto

Their co-investment was about $8 million or $9 million

Joshua Barber - Stifel Nicolaus

No equity, okay. And the 15% ROEs net of their management fee, that's cash on cash?

David Hamamoto

Correct.

Joshua Barber - Stifel Nicolaus

Great. Thanks very much.

David Hamamoto

Okay.

Operator

Ladies and gentlemen, that will conclude the conference for today. We do thank you for your participation on today's call. If you would like to listen to a replay of this conference, you may do so by dialing either 303-590-3030 or 1800-406-7325. You'll need to enter the access code of 4590713. Those phone numbers once again, are 303-590-3030 or 1800-4067-325 with the access code of 4590713 again we do thank you for your participation on today's call, you may now disconnect your lines of this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NorthStar's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts