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

NorthStar Realty Finance Corp. (NYSE:NRF)

Q1 2010 Earnings Call

May 06, 2010 am ET

Executives

Al Tylis - Chief Operating Officer and General Counsel

David Hamamoto - Chairman and Chief Executive Officer

Andy Richardson - CFO

Dan Gilbert - CIO

Analysts

Jim Shanahan - Wells Fargo

Gabe Poggi - FBR

Dave Fick - Stifel Nicolaus

Presentation

Operator

Good day ladies and gentlemen thank you for standing by welcome to the NorthStar Realty Finance first quarter conference call. During today’s presentation all parties will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded Thursday May 6, 2010.

I would now like to turn the conference over to Mr. Al Tylis, Chief Operating Officer and General Counsel for NorthStar Realty Finance. Please go ahead.

Al Tylis

Thank you very much. Welcome to NorthStar's first quarter 2010 quarterly conference call. Before the call begins, I'd 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 can be accessed through our filings with the SEC at www.sec.gov.

With that, I'm 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 this morning in addition to Al I am joined today by Andy Richardson our CFO and Dan Gilbert our CIO.

NorthStar’s first quarter 2010 financial results reflect ongoing challenges in the commercial real estate sector and the outlook we have discussed two months ago on our year end 2009 call. Liquidity is slowly sleeping peacefully -- leaping back into the market but macro economic and employment conditions would not materially improve but we continue to believe real estate fundamentals will remain challenging for the next several quarters.

Financing through real estate assets remain scarce and although several banks have re-staffed their commercial mortgage lending operation the terms being offered by banks for new loans which they intended to securitize is presently unattractive and leveraged in pricing levels which make it difficult but not impossible but most real estate investors with pre existing mortgage debt on their properties to transact.

Nevertheless we believe investor interest in the sector is increasing, returned expectations are decreasing and we are beginning to see the bottom in some core CBD markets such as New York City. Since the crisis began we have intently focused on liquidity, credit risk and portfolio management.

We are continuing efforts to generate liquidity in our lending portfolio and we believe there are significant refinancing and our credit risk associated with the assets. To that end April we sold for 82% of par a $39 million performing mezzanine loan back by hotel collateral and maturing in August 2011 generating $32 million of cash liquidity and a $7 million first quarter credit loss.

Our non performing loans or NPL decreased by $15 million in the first quarter with the resolution of one asset and no new loans were added to the NPL list. We also currently expect the further resolutions with some of our NPL assets in the second quarter. While pace of new NPL has slowed recently and we are resolving several of the loans on the list, we are working hard on a number of assets we got and they are difficult to predict at this time.

On a positive note CMBS credit spreads have generally continued to tighten since the beginning of the year and liquidity is coming back into the market.

We believe that this trend is likely to continue as investors have turned their attention to the relatively attractive yield in the CMBS compared to other fixed income markets. Our real estate securities portfolio appreciated in value by nearly $100 million during the first quarter and spread continued to tighten at the beginning of the second quarter but we did not realize the gain associated with the increase in value.

Finally during the quarter we made steady progress with our asset management initiative. Our broker dealer subsidiary named NRF Capital Markets was recently registered with the SEC and is now a FINRA member we are very excited to now have over a dozen highly regarded professionals with many years of experience in the non traded REIT space to distribute our sponsored REIT.

We expect our first registered REIT NorthStar real estate income trust to become effective soon and we are currently raising equity through the Reg D exemption in the non traded REIT market as well. The total targeted equity rate for our registered REIT and S-REIT is $1 billion. As we have mentioned in the past the new REIT investment objective will be initially focused on lower leveraged commercial real estate financed assets and equity investments and their cost of capital will be lower than NorthStar today.

So in summary I would like to turn the call over to Andy who will review results for the first quarter.

Andy Richardson

Thanks David for the first quarter our GAAP net loss inclusive of FAS 159 adjustments was $25 million or $0.33 a share. AFFO for the first quarter was negative $34 million or negative $0.41 per share. We invested approximately $11 million of equity capital and received approximately $24 million of loan repayments during the first quarter.

Net interest income which is interest rental and advisory fee revenue less interest expense swap interest expense, property operating costs and asset management fees was $24.7 million compared to $24.2 million in the fourth quarter of last year. General and administrative expenses for the first quarter excluding non cash stock based compensation totaled approximately $18 million.

Exclusive of a one time charge G&A was $1 million lower in the fourth quarter of last year. Realized gains totaled a net $1 million for the first quarter compared to $39 million in the fourth quarter of 2009. As we have commented in prior quarters we cannot predict the amount if any end timing of realized gains that may be generated from our portfolio in future period.

This type of income will be dependent on many factors including several factors outside of our control but just market credit spread and general market condition. Overall our security portfolio appreciated by nearly $100 million during the first quarter and we did not realize this depreciation through security sale. For the first quarter NorthStar’s book value increased approximately $149 million from year end 2009 due primarily to the consolidation of 4 security CDO financing which had previously been accounted for as off balance sheet financing.

We elected to use fair market value accounting for the related assets and liabilities in advance of the January 1, consolidation. The initial consolidation which we detailed in the press released NorthStar’s book value by approximately $180 million. In general we are seeing the impact of tighter credit spreads in our fair value adjustments resulting in higher aggregate values for our assets and liabilities compared to 2009.

GAAP book value as of March as of March 31, was $15.40 per common share. The earnings release contained the detailed reconciliation between our fourth quarter 2009 and first quarter2010 book value. If all unrealized mark-to-market adjustments, non-cash credit loss reserves and accumulated depreciation were excluded book value would be $8.02 per share March 31.

Investment activity was late once again during the first quarter. We invested approximately $11 million of equity capital comprised of $7 million relating to two top line purchases net of the US government financing and $ 4 million related to unrestricted cash need for $10 million of preexisting future funding commitment. We received $24 million from full and partial loan repayment.

Reflecting our 2009 focus on reducing our non discretionary unrestricted cash needs our remaining non discretionary funding commitment relating to loans not financed in CDO totaled $23 million at March 31. We expect that the unrestricted cash need for these commitments is approximately $7 million and the majority will be funded this year.

On the credit front the first quarter loan loss provisions totaled $36 million and includes a $7 million charge relating to $39 million performing mezzanine loan which we filled in April and which was accounted for as a held-for-sale asset at the end of the first quarter.

Credit loss reserves totaled $109 million at March 31, relating to 12 loans having an aggregate $311 million principal balance. As always our credit launch reserve levels incorporate the best information we have at the time. We are continuing to work through our number of assets whose outcomes are difficult to predict.

At March 31, we had 5 NPL or non performing loans totaling $84 million. During the first quarter we foreclosed on and sold the hotel collateral relating to a $15 million first mortgage loan that was an NPL at year end. The assets have been reserved for in prior periods there was no material P&L impact from this transaction.

No loans were added to the NPL list during the first quarter. Credit remains an ongoing challenge as our borrowers continue to suffer from a weak macro economic environment and scarcity of reasonably priced debt capital. Non cash flowing collateral such as instruction project and land as the growth continuum experienced the most challenging credit issue.

This instruction in land back loans represent approximately 5% of our total balance sheet assets. The majority of our managed securities portfolio is now consolidated on our balance sheet and we continue to manage approximately $900 million in our securities fund.

During the fourth quarter 2009 and first quarter of this year our CMBS portfolio experienced a large amount of negative ratings action that we have been expecting since early last year. During the first quarter approximately $700 million of our security experienced down grade action and the portfolio’s overall weighted average credit rating was BB, BA 2 at March 31.

Consistent with our experience in prior quarters despite ongoing negative ratings action across the CMBS sector a vast majority of our managed CMBS securities are current and paying according to their contractual term. We have no short term or revoked financing and all of our securities are financed the maturity and CDO term financing or are held un-leveraged that we not only have the intent but also the ability to hold these assets till maturity.

At March 31, we were in compliance with the financial in our debt facilities our nine managed CDO financings were in compliance with the related interest in collateral coverage tests. The table contained in the supplemental information section of the earnings release chose the status of the CDO coverage tests.

If we were to fail any of these test cash flow from the respective financing would be temporarily diverted from NorthStar to repay senior debt until the failed test is back in compliance. Credit rating downgrades of the CMBS collateral backing our security CDO 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 CCC rated securities before OC deteriorates. Our security CDO continue to comply with our coverage tests largely because investment opportunities have allowed us to invest in discounted securities that resulted in increased OC cushion.

This strategy has proven to be effective to date preserving cash flow has consistently been our priority in managing our CDO financing. The CMBS and REIT bond market have experienced increasing liquidity this year and some of our securities investments are currently trading near par or premium supplier.

Going forward we may seek to monetize gains and or sell securities even if such transactions may temporarily cause some of our CDO cash flow to be used for amortization because we believe such transactions create the best long term value. This is a especially true for the three CDO in which we no longer have reinvestment rate or for which we received minimal cash flow.

In our loan CDO’s 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 $4.5 billion at March 31. up from $3.7 billion at December 31 and principally as a result of a consolidation of our core CDO financing which we were accounted for as off balance sheet financing at year end.

Consolidated leverage based on the outstanding principle balance of our debt rather than mark to market adjustments was 84% on March 31. NorthStar had approximately $214 million of total liquidity at March 31, comprised of $117 million of unrestricted cash and $97 million of unvested cash in our CDO term financing.

This concludes the prepared remarks for the day now lets open up the call for questions. Operator?

Question-and-Answer Session

Operator

Thank you we will now begin the question and answer session. (Operator Instructions). Our first question comes from the line of Jim Shanahan with Wells Fargo Securities, please go ahead.

Jim Shanahan - Wells Fargo

Thank you I had two questions please, my first is related to credit expenses. What is the outlook on managements expectations for lost provisions in the next two or three quarters?

David Hamamoto

Jim that is difficult thing to predict and as we said the conditions in the market remain challenging as you know that there is a beginning of the securitization market but on terms that are very conservative from a credit perspective though the ability to refinance is a very difficult thing for most of our borrowers and as a result I think we will probably continue to see restructuring getting done in our portfolio as opposed to payoffs and you can see that in terms of the level of pay offs that we had in the first quarter. There are signs though that the market is beginning to develop and I think to the extent we see continued decreasing in yields and people start taking a little more credit risk that ultimately that trend is very positive and we will start to see more pay offs but I think for the time being and in terms of our internal projection we would continue to anticipate that a lot of the loans that are coming due will end up being restructured and extended.

Jim Shanahan - Wells Fargo

That’s okay, the company continues to pay attention to quarterly distribution and I think we would all agree that the market is not giving you much credit for that despite the fact that the company is one of few in fact the only one that I can think of as a legacy commercial mortgage REIT that has paid a distribution to the downturn. I don’t think you are getting much credit for it. Is this does it make sense to discontinue the distribution and retain that capital?

David Hamamoto

I think we had a little different quality and a little different liquidity position than most of the other companies in the states and I think we remain committed to trying to maintain that dividend and I think the largest shareholder in the company the dividend is something that is important to me and to the extent that we can have the liquidity as well as sort of the near term earnings outlook that support paying the dividend I think it is something that we would very much like to continue to do.

Operator

Our next question comes from the line of Gabe Poggi with FBR, please go ahead.

Gabe Poggi - FBR

Good morning guys. A few quick questions. Can you remind us how much of your loan book was directly originated by NorthStar just general percentage?

Andy Richardson

I think the number was about 75% as a percentage point.

Gabe Poggi - FBR

Got you. And then what's the number of maturities you have in that book, are you guys going to disclose how many maturities you have in that? I mean I assume it will be that stuff like David just said will be extended. But do you have a lot of what we term the directly originated book, a lot of maturities this year that you expect to have to work through?

Andy Richardson

Yeah I think the I am just filling up the data right now I think it is a little bit over $300 million of final maturities this year? And I think we expect that based on what we know today that a majority of those will have to be restructured or extended.

Gabe Poggi - FBR

Okay. And then one final question, David, you would mentioned some positive trends that we are beginning to see in the CRE market, are you guys seeing any positive trends in the net leased space?

David Hamamoto

Well I think I would say that the iStar sale in terms of a level that they were able to achieve in that they always looked pretty positive I think certainly from my perspective the cap rate on those assets exceeded my expectations and I would say generally I think the market was positively surprised with where that portfolio traded.

Operator

(Operator Instructions) Our next question comes from the line of Joshua Barber with Stifel Nicolaus, please go ahead.

Dave Fick - Stifel Nicolaus

It's actually Dave Fick with Josh. We're a little slow in the up take perhaps regarding the consolidation process, can you just walk us through a couple of issues, what percent of par are you currently valuing your equity in the CDOs and where is that relative to the previous mark? And I guess the fundamental underlying question is was the write-up due to marking down the debt? I mean exactly what are the mechanics there?

Andy Richardson

I think the equity as it’s market today on the consolidation and is at a premium to par that we don’t I think when we consolidated we had about $108 million and I mean our cost base was not necessarily far because there is a lot of discounted bonds in there but the CDO notes have generally been market at bigger discounts than the securities.

Dave Fick - Stifel Nicolaus

Okay. We'll probably follow back with you on that then. Can you help us out with the reserves for this quarter, given that you didn't have any new NPLs, which is obviously a huge positive? What gave rise to the additional reserves, is this related to analysis of maturities, underlying assets and then how does that mix in terms of first, mezz and junior?

Andy Richardson

The mix is about 50% first mortgages or junior participations in first mortgages and a majority of those are first mortgages and the rest are mezzanine loan and the reserve that we took this quarter are some of those reserves are on a non performing loans but there is also reserves that we taken on performing loans just based on our outlook with respect to our desire to either restructure or foreclose in the collateral and sell the collateral. So just based on our current outlook to that.

Dave Fick - Stifel Nicolaus

And it's asset by asset, you don't do any general reserves?

Andy Richardson

That’s correct.

Operator

And this concludes the question and answer session please proceed.

David Hamamoto

Great, thank you everyone for joining and we will see you next quarter.

Operator

Ladies and gentlemen this concludes the NorthStar Realty Finance first quarter conference call. If you would like to listen to a replay of today’s conference, please dial 303-590-3030 or 1800-406-7325 with the access code 4282021. Those numbers again are 303-590-3030 or 1800-406-7325 with the access code 4282021. ACT would like to thank you for your participation you may now disconnect.

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 Realty Finance Corp. Q1 2010 Earnings Call Transcript
This Transcript
All Transcripts