NorthStar Realty Finance Corp. (NRF)
Q4 2009 Earnings Call
February 25, 2010 10:00 AM ET
Executives:
David T. Hamamoto – Chairman, President and Chief Executive Officer
Andrew C. Richardson – Executive Vice President, Chief Financial Officer and Treasurer
Albert Tylis – Chief Operating Officer and General Counsel
Analysts:
Jim Shanahan – Wells Fargo
Steve Delaney – JMP Securities
Presentation:
Operator
Welcome to the NorthStar Realty Finance Fourth Quarter and Full Year Conference Call. (Operator Instructions).
The conference is being recorded today, Thursday, February 25th, 2010. And I would now like to turn the conference over to Al Tylis, Chief Operating Officer and General Counsel for NorthStar Realty Finance. Please go ahead sir.
Albert Tylis
Thank you very much. Welcome to NorthStar's fourth quarter and full year 2009 Earnings 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 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 generally accepted accounting principles.
Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with generally accepted accounting principles in the access 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 Hamamoto
Thanks Al and thank you for joining us this morning. In addition to Al, I am joined today by Andy Richardson, our CFO and Dan Gilbert, our CIO. Today, I will briefly review the past year and provide an update on where we currently see commercial real estate market conditions and what we expect throughout 2010.
Next I will review the more significant initiatives undertaken during 2009, which I believe positioned NorthStar well for the difficulties and opportunities we see going forward. Andy will then review our fourth quarter and annual results for 2009.
2009 proved to be another challenging year for the broader commercial real estate market. Macro economic conditions continued to pressure real estate fundamentals although still broken CMBS markets and banking capital issues combined to severely restrict new debt capital of any meaningful size for our markets.
We’ll need to see broader business expansion and unemployment to decrease the four real estate property cash flows meaningfully increase. Alongside the economic recovery, we will also need to see more liquidity in the secured debt markets.
In both cases we had some positive movement on those fronts in 2010. But it will be slow and not enough to significantly reduce the overall stress being built by our borrowers. At this point, we expect the U.S government will allow the TALF programs for commercial real estate to expire during the first half of this year.
TALF is modestly successful at reducing credit spreads or senior CMBS bonds and consequently some banks are beginning to prepare for new securitizations later this year. We expect the overall real estate credit issues will increase during 2010 and we also anticipate the credit risk management activities will continue to be our largest area of focus. We hope that the economy will grow this year and we also expect that interest rates will remain low for most of 2010.
Low LIBOR rates currently are benefitting borrowers with floating rate loans such as in our portfolio as monthly debt service costs are lower, to the extent rates increased more quickly than the economy improved and pressure on credit will get worse.
During 2009 NorthStar used these uncertain conditions to its advantage to further strengthen its balance sheet. Despite finishing 2009 with $238 million of liquidity, which is $19 million less than at the end of last year, we retired a $139 million of debt using just $56 million of cash and made a $53 million repayment in connection with the three year extension of our Wells Fargo Bank debt.
Aggregate annual interest savings from these repurchases and repayments totals approximately $9 million per annum based on current interest rates. We also generated $36 million of cash in the fourth quarter by selling a portfolio of assisted living net lease properties at a gain to our original purchase price.
We've always been very defensive with liquidity and with respect to not deploying fresh capital into new investment similar to our strategy last year. We've also been aggressive in strengthening our balance sheet.
During 2009 the securities markets presented opportunities to make compelling investments. NorthStar monetized appreciating securities such as REIT when the corporate bond markets rally and CMBS securities as the TALF program became active. These gains as well as the gains from discounted purchases of our liability offset credit charges in our loan portfolio.
During 2009, in the aggregate we sold $476 million base amount of security, recognized a $74 million aggregate net gain and invested in $870 million base of security with $320 million. Of course it’s very difficult to predict future levels of portfolio gains, which will largely depend on the amount of credit spread tightening if any, during the year.
We also made progress in our asset management initiatives during 2009 filing two registration statements with the SEC, one to take public a majority of our health care business called NorthStar Healthcare Investors and the other for NorthStar Real Estate Income Trust on which we expect to raise rate capital in the unlisted REIT market.
Last month we begun investing equity rates in a smaller private REIT for high net worth investors called NorthStar Income Opportunity Trust. Over time we’d like to see our asset management business become a more significant part of our company with management fees in NorthStar ranging from to 1 to 2 points of equity raised per annum. As such our expectation that we will allocate a portion of our liquidity for opportunities for co-investment and asset management activity.
Last month we declared our first quarterly cash dividend in 2010 and we remain one of the only companies in our competitive set that has consistently delivered a regular quarterly cash divided through this cycle.
I’d like to turn the call over to Andy to review our results for the fourth quarter and the full year of 2009.
Andrew Richardson
Thanks David. I’ll start with our earnings results for the fourth quarter and full year and go into more detail on credit liquidity and our balance sheet.
In the fourth quarter, our GAAP net loss includes of a FAS 159 adjustments of a $165 million or $2.21 per share. AFFO for the fourth quarter was $21 million or $0.25 per share. We invested approximately $6 million of equity capital and received approximately $51 million of loan repayments during the fourth quarter.
Net interest income, which is interest, rental and advisory fee revenues less interest expense, swap interest expense, property operating costs, and asset management fees was $24.2 million, an approximate $5 million decrease from $29.2 million in the third quarter of 2009.
The decrease is primarily attributable to lower interest rate swap income and higher borrowing comp accounting for $3 million of the decrease. Reclassification of approximately $1 million of net income from properties sold in 2009 to discontinued operations and approximately $1 million of higher property operating expenses in the fourth quarter.
For the full year of 2009, our GAAP net loss, inclusive of FAS 159 adjustments, was $151 million or $2.16 per share. AFFO for 2009 was $83 million or $1.07 per share. We invested approximately $79 million of equity capital and received approximately $106 million of loan repayments during the year.
Net interest income was $105.4 million, an approximately $24 million decrease from $129.4 million in 2008. General and Administrative expenses for 2009 excluding non-cash stock based compensation totaled approximately $50 million, which is consistent with 2008.
Salaries and other cash comp costs were down $2 million compared to 2008. Professional fees and other G&A expenses increased approximately $1.8 million over 2008, primarily relating to increasing costs of portfolio management activities.
For 2009, net realized gains from purchasing NorthStar’s issued liabilities at discounts to par totaled $60 million and net gains from security sales totalled $74 million. These gains exceeded credit losses and reserves across our asset base.
For 2010, we expect to continue to see difficult credit conditions as the economy slowly recovers and a lack of real estate debt capital available to finance debt maturities. We cannot predict the amount, if any and timing of realized gains that maybe generated from our portfolio for 2010. This type of income will be dependent on many factors including factors outside of our controls such as market credit spreads and general market condition.
For the four quarter, NorthStar's book value decreased approximately a $179 million from the prior quarter due primarily to mark-to-market adjustments on NorthStar's liabilities from tighter credit spreads, which made the liabilities more valuable and therefore decreased book value.
GAAP book value as of December 31st was $13.59 per share. The earnings release contains a detailed reconciliation between our third and fourth quarter 2009 book values. If all mark-to-market adjustments and accumulated depreciation were excluded, book value would be $7.40 per share at December 31st.
Investment activity was light during the fourth quarter. Beginning in September, the market for our exchangeable notes rallied significantly with our corporate debt offered in the 80 to over 90% of par range. We were not interested in further purchases at these levels. We did however continue to monetize gains in our securities portfolio.
During the quarter, we invested a $152 million in securities by primarily using $117 million of cash generated from security sales and uninvested cash in our CDO. During the fourth quarter we also funded $14 million of preexisting commitments under an existing loan representing approximately $4 million of equity capital and received $51 million from full and partial loan repayment.
Our remaining non-discretionary funding commitments relating to loans not financed in CDO's totaled $28 million at December 31st. We expect that the unrestricted cash needed for these commitments is approximately $9 million and the majority will be funded this year.
Moving on to credit, our borrowers continued to suffer from poor economic conditions and a lack of refinancing capital. At December 31st, we had six non-performing loans or NPLs totaling $99 million, representing approximately 5% of our gross loan portfolio.
During the fourth quarter, we were foreclosed out of a $9 million land loan on the NPL list and added two first mortgage loans totaling $26 million due to maturity default. Both loans are backed by cash flowing hotel collateral. At December 31st, we had reserves totaling $38 million for the NPL assets.
Credit loss reserves totaled $81 million at December 31st. During the fourth quarter we recorded $21 million of additional credit loss reserves relating to 10 loans and we charged-off a $9 million loan, which had previously been fully reserved.
Loans backed by non-cash flowing collateral such as land and construction projects are experiencing the most challenging credit issues. Land and construction loans represent approximately 8% of our total balance sheet assets of which 23% of that balance is currently on our NPL list.
Our $4 billion managed securities portfolio continues to suffer ratings downgrades with downgrade actions impacting approximately $900 million of our securities during the fourth quarter. Weighted average credit rating of our managed securities portfolio decreased to BB at December 31st, from BB+ last quarter.
Despite the continued negative ratings, action across the CMBS sector a vast majority managed CMBS securities are current and paying according to their contractual term.
We have no short-term or repo financing in all of our securities or financed to maturity in CDO term financing were or held un-leveraged that we not only have the intent but also the ability to hold these assets to maturity.
At December 31st, approximately $1.6 billion of securities directly owned by NorthStar are managed in off balance sheet financing with issued liabilities totaling approximately $1.3 billion.
Effective January 1st of this year, a new accounting standard resulted in our consolidation of these securities and their related CDO liabilities. We elected to fair value the assets and liabilities of these financing and do not expect the consolidation to have a material impact on our earnings and stockholders equity. We will continue to manage approximately $900 million securities in our security fund which is an off balance sheet investment vehicle.
During the fourth quarter we acquired out partners interest in the healthcare net lease portfolio for consideration valued an approximately $7 million and sold for $95 million, the portfolio of the assisted living facility located in North Carolina and received net proceeds totaling $36 million after debt repayment and transaction cost. NorthStar recognized the $14 million gain relating to the sale which is not included in our AFFO.
Moving to the right side of the balance sheet, we renewed and extended our Wells Fargo bank debts, which was more fully described during the third quarter earnings call and NorthStar now has no final corporate debt maturities until June of 2012.
At December 31st, we were in compliance with financial covenants in our debt facility and there are nine managed CDO financing in compliance with related interest and collateral coverage set.
The table contained in the supplemental information section of the earnings release shows the status of the CDO coverage tests. If we were to fail any of these tests, cash flow from the respective financing will be temporarily diverted from Northstar to repay senior debt until the failed test is back in compliance.
Credit ratings downgrades to the CMBS collateral backing our security CDOs can negatively impact OC tests if downgrades reach certain levels even if the security is fully performing. Typically a CDO can have a maximum amount of triple-C rated securities before OC deteriorates.
This quarter the CMBS market continue to experience ratings downgrade actions. Notwithstanding these actions, our security CDOs continue to comply with our coverage test largely because investment opportunities have allowed us to invest in discounted securities that resulted in increased OC cushions.
This strategy has proven effective to-date. However it is difficult to predict the timing and severity of future ratings actions and whether future downgrades will cause us to not comply with our OC tests in our security CDOs.
In our loan CDOs, actual loan defaults negatively impact OC. The agencies may also downgrade our issued CDO notes. But such downgrades would have no liquidity impact on Northstar.
Consolidated assets totaled $3.7 billion at December 31st, down slightly from $3.8 billion at September 30th. Consolidated leverage based on the outstanding principal balance of our debt excluding mark-to-market adjustments was 80% at year end. Northstar had approximately $238 million of total liquidity at December 31st, comprised of $139 million of unrestricted cash and $99 million of un-invested cash in our CDO term financing.
This concludes our prepared remarks for today. Now let’s open up the call for questions. Operator?
Question-and-Answer Session
Operator
(Operators instructions). Your first question comes from Jim Shanahan – Wells Fargo.
James Shanahan – Wells Fargo Securities
The question about the real estate debt investment portfolio roughly, $1.9 billion. Can you please, Andy or David, just talk about the percentage of those loans in particular that have a final maturity in 2010 and 2011 inclusive of any borrower option expiry during those periods.
Andy Richardson
This will be in our 10-K when we file it but its about $314 million of loans having a final maturity in 2010 and $506 million having final maturities in 2011.
James Shanahan – Wells Fargo Securities
With those loans and lets just again focus on the more near-term maturities. With those loans that would – so I understand you that would include the borrower having exhausted all available options?
David Hamamoto
That’s correct.
James Shanahan – Wells Fargo Securities
Of those $314 million, do you have a view on – do you look at the collateral value or a view of what the real value might be recaptured in a refinance, when you think about loss reserves and non-performing or likely uncollectible type loans?
David Hamamoto
Yes I think obviously we looked at all the loans for reserve. I think the issue Jim is less about collateral coverage and I think it’s more about just the lack of refinancing capital available.
I was reading a report last night on the CMBS market and they were talking about the magnitude of the refinancing that were getting done in ’09 versus maturities and I think it was in the 50% to 60% range and you're obviously seeing more and more servicers extending loans just because of the lack of liquidity in the financing market and that’s what we've tended to see in our portfolio.
So in terms of these maturity deadlines that Andy has given you, I mean we are not planing on seeing this level of repayments until the refinancing market develops and we've seen some signs of securitization coming back but it’s going to be slow and it'll take longer. So I would expect that some of these loans would end up being modified and extended.
James Shanahan – Wells Fargo Securities
Now in a situation where it is modified, in the extent that I assume that NorthStar would agree to underwrite the loan and only modify our extend to the extent the company was comfortable with the – that there was equity in the assets and may even require I guess equity to be put to refinance or modify the loan?
David Hamamoto
Yes.
Operator
(Operator Instructions). Your next question comes from Steve Delaney – JMP Securities.
Steve Delaney – JMP Securities
Question Andy, on your CDO coverage test specifically on the CMBS this is page 10 of your press release. Is there a reason, I mean in looking at NorthStar one and two, the others have a higher OC cushion now than they did at offerings, those two have declined and have relatively small interest coverage.
Is there something unique about the CMBS in one and two versus say five or seven, that is caused one and two to under perform if I’m reading that right I would call that under performance, so correct me if I’m wrong, but is it vintage rating what’s up I guess with one and two?
Andrew Richardson
Those two deals actually have the probably older vintage CMBS in them, but they are beyond their reinvestment period. So the flexibility we have is, manage the test by selling securities and buying discounted securities is essentially gone in those two transactions.
So what you see as far as the erosion of the OC cushion is primarily just a factor of rating agency downgrade that we can’t, we have very limited ability to manage around.
Steve Delaney – JMP Securities
So as far as the remaining I guess four CMBS deals, what kind of average remaining reinvestment period do you have there?
David Hamamoto
I think in CDO three and five I can’t remember.
Andy Richardson
CDOs three, only has another month left to reinvestment. CDO five expires, the reinvestment expires later this year and then CDO seven and CDO nine in the 11 and 12 respectively.
Operator
(Operator Instructions). And as I show no further questions in the queue at this time, I’ll turn the call back to you for any closing remarks.
David Hamamoto
Thanks everyone for your support and we’ll talk to you next quarter.
Operator
Thank you. Ladies and gentlemen this concludes the NorthStar Realty Finance fourth quarter and year-end 2009 conference call. We thank you for your participation and if you would like to listen to a replay of today’s conference, you can do so by dialing 303-590-3030 or 1800-406-7325 and enter the access code of 420-5983 followed by the pound sign. You may now disconnect.
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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.
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