Northstar Realty Finance's (NRF) CEO David Hamamoto On Q1 2014 Results - Earnings Call Transcript

May. 9.14 | About: NorthStar Realty (NRF)

Northstar Realty Finance Corp. (NYSE:NRF)

Q1 2014 Earnings Conference Call

May 9, 2014 9:00 AM ET

Executives

Al Tylis – President

David Hamamoto – Chairman and CEO

Debra Hess – CFO

Dan Gilbert – Co-President and Chief Investment Officer

Analysts

Stephen Laws – Deutsche Bank

Dan Altscher – FBR

Bose George – KBW

Matthew Howlett – UBS

Steve DeLaney – JMP Securities

Operator

Good day, ladies and gentlemen, and thank you for standing-by. Welcome to the NorthStar Realty Finance First Quarter 2014 Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference would be opened for questions. (Operator Instructions).

I’d now like to turn the call over to Al Tylis, President of NorthStar Realty Finance Corporation. Please go ahead, sir.

Al Tylis

Thank you very much. Welcome to NorthStar’s first quarter 2014 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, any statements made during the course of this call that refer to the non-traded REIT that we are speaking to sponsor, what products are reality do not constitute an offer of any securities for sale.

Furthermore, 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’m now going to turn the call over to our Chairman and Chief Executive Officer, David Hamamoto. David?

David Hamamoto

Thanks, Al, and thank you everyone for joining us this morning. In addition to Al, I’m joined today by Dan Gilbert, our CIO and Operating Officer, Debra Hess, our CFO; and Ron Lieberman, our EVP and General Counsel.

On a macro level, U.S. GDP growth was slower than expected in the first quarter, however recent economic indicators such as employment growth and consumer spending have been pointing to acceleration in the economy. The Federal reserve continues to taper stimulus efforts and at the same time remains committed to keeping short-term rates near zero and still economic growth strengthens further.

Investor interest remains strong for U.S. commercial real-estate, limited near-term supply growth in most asset classes and in most markets coupled with economic drivers that contribute to rental growth across most asset classes have continued to drive commercial real-estate vales.

Liquidity in the commercial real-estate debt market also continued to improve with $19 billion of new issuance, non-agency CMBS during the first quarter of 2014, which is projected to be approximately $90 billion for 2014, compared to the $80 billion during 2013.

At Northstar, we continue to build on our strong momentum, and we remain highly focused on building a best-in-class commercial real-estate investment and asset management business. We’re off to a solid start in 2014 having committed to $3.2 billion of new investments including $500 million on behalf of our non-traded REIT.

We also continue to make progress towards the previously announced spin-off of our asset management business, Northstar asset management group or NSAM.

Among our commitment investments, it’s $1 billion acquisition of the innkeepers portfolio with Chatham Lodging which is expected to close later this quarter. I’m extremely excited about this transaction both from the standpoint of owning a primarily by-coastal portfolio concentrated in strong metropolitan areas that I believe will outperform as the economy continues to recover, as well as beginning another strategic relationship for Northstar, this time with Chatham and Jeff Fisher to go along with our recent strategic relationships with RXR Realty, Jay Flaherty and Arium Group which I’ll discuss momentarily.

The innkeepers portfolio included was approximately 6,100 rooms across 47 out-scale extended sale hotels and premium branded select service hotels and largely supply constraint market.

We believe that we are buying many of these first generation, predominantly Marriott branded assets as substantial discounts to their replacement costs and with extremely attractive NOI margins due to the lower cost structure compared to full-service hotels.

With Northstar having been a leader, a lender in the lodging space for many years, including as a lender and as an owner of the Milford Hotel in New York, and having spent substantial portions of my career involvement in the lodging business, I believe that diversifying into this state is a natural extension for Northstar, and further evidence, the breadth and depth of our commercial real-estate platform.

We remain on-target to complete our spin-off later this quarter, and are increasingly excited about the opportunity for NSAM, including opportunities to expand globally with an initial focus on expansion into Europe.

As part of that effort, we announced earlier today that we have ventured into an agreement to acquire on the a minority interest in Arium Holdings, a well-established and European real-estate investment manager founded in 1988 with €6.2 billion of assets under management and over 180 people across seven offices in Europe.

As part of this investment, we expect to work with Arium to establish our European presence and answer into a joint-venture with them that will focus on investing in real-estate across Europe, including commercial real-estate acquisitions, loan originations and acquisitions and opportunistic investments.

The strategic partnership will provide both NSAM and NRF with a sophisticated platform that will dramatically accelerate our business in Europe, including the opening of our offices in London and in Luxemburg where Arium has an established presence for the past 10 years.

We are already evaluating an extensive amount of potential investments in Europe and are looking for capitals to work there soon. We see Europe at a good point in the commercial real-estate investment cycle, riding the U.S. economic recovery by a few years and with a scarce amount of news to fly over the last several years, providing an opportunity to deploy a substantial amount of capital that’s highly attractive risk adjusted returns.

The asset management piece that will be generated from our ownership interest in Arium will be effectively earned by NSAM, during increase in the base management fee at greater $10 million per year or the cash-flows that NRF receives from its ownership interest in Arium, similar to the concepts of our investment in RXR.

Turning to our non-traded REIT, we have raised capital to date of $1.5 billion and our capital raising case continues to pick-up strong momentum. We have seen almost 50% increase in sales per month for April from levels in December and we are already having a strong month in May with average daily sales of almost 15% from April.

We continue to maintain an add to a strong selling group of financial advisors and broker dealers, who would become loyal to the Northstar brand as we have differentiated ourselves in the market due to our ability to execute the business plans, we sold our non-traded REIT shareholders we would execute and by the quality of our investments and performance of our portfolio.

My way of example, our Northstar Income I portfolio is fully invested and produces a mid-teen cash on cash growth returns, which has provided ample coverage for our declared dividend in that product, which is a key metric this constituency looks at.

As a reflection of this loyalty, our selling groups were currently offered products, Northstar Healthcare and Northstar Income II, include effectively all the same participants we had for Northstar Income I in addition to many new participants who only sign-up for programs that have a track record of strong performance.

We continue to add new participants daily and this will only add to our capital raising momentum. In addition, we’re excited about the launch of our co-sponsored multi-billion dollar non-traded REIT with RXR Realty focused on commercial real-estate in the New York Tristate area and we plan to be in a position to start selling this product later this year.

With that, I’ll turn the call over to Al, who’ll discuss our business strategy and objectives. Al?

Al Tylis

Thanks David. During 2014, today we’ve committed to $2.7 billion of investments including approximately $980 million of invested equity projected to generate a weighted average return on equity of greater than 14%.

Additionally, during 2014 today, on behalf of our sponsor non-traded REITs, Northstar made approximately $500 million of investments. Among our first quarter investments was $1.1 billion healthcare real-estate investments, which closed earlier this week, and accordingly, the approximately $360 million of equity utilized in this investment did not contribute any CAD in the first quarter.

This healthcare real-estate portfolio is diverse, covering 80 facilities across 14 states with strong lease coverage and a balance between assisted living and skilled nursing facilities with a portion of the lower acuity assisted living properties owned through a radius structure, meaning that NRF would benefit from any growth of property level operating cash flows.

As of today, we own $1.6 billion of healthcare real estate assets and continue to actively work with Jay and building a preeminent healthcare real estate business.

We also remain active on the loan origination front, completing approximately $600 million of loan originations for us and our non-traded REITs year-to-date. As we have discussed in the past, Northstar continues to accept long-term compelling lending opportunities, each of the overall magnitude of commercial real-estate loans coming due in the next several years and the continued improvement in the securitization market.

As a good example of our proprietary deal-flow, we recently entered into an agreement to provide $167 million of preferred and common equity in an approximately $406 million, 3.6 million square-foot industrial portfolio that is 100% net leased for the remaining weighted-average lease term of over 12 years and well diversed by across 17 states.

As part of this investment which is behind in approximately 50% loan-to-value in-place mortgage, we will own half of the portfolio alongside the borrower. As a result of our significant equity ownership and controlled rights over the portfolio, we expect to consolidate the entire portfolio on our balance sheet.

This type of non-commoditized investing, where we provide multiple portions of the capital structure, allows us to build a best-in-class portfolio of commercial real-estate investments with strong current returns as well as upside.

As we continue to grow and expand our asset space and mix of assets, we’ve also been focused one expanding our sources of capital. To that end, we’re in the process of working on $500 million revolving credit facility, which provide us additional flexibility to operate our business and fund investments.

Regarding a topic that I think is less worthy of our time and attention we continue to get questions regarding market rumors that surfaced early last week. While our policy remains do not comment on market rumors, I wanted to take a moment and make a statement to put the topic to rest.

First, we are not currently looking to sell our business which we believe has tremendous upside particularly following the spin-off of NSAM. Nonetheless, and let me be clear, I am not in any way commenting on any of the recent rumors. So rumors aside, our board owners, our investors in duty to act in their best interest, and that includes evaluating credible proposals from third parties.

I do not think that we have been able to generate outside returns for shareholders for nearly 10 years with an approach that focuses on anything other than making decisions that are in best interest of our investments. That has been our focus and remains our focus now and will remain our focus following the spin-off of NSAM.

So, and back to focusing on our business, as that inspire investments and strategic initiatives as far as 2014, we continue to realize significant progress in building a more diversified commercial real-estate investment and asset management business.

Between our compelling and differentiated investment pipeline, and the ability to continue to scale our asset management business, we are extremely enthusiastic about the long-term value that we are creating for shareholders.

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

Debra Hess

Thanks Al, and good morning everyone. As you saw in this morning’s press release, we reported cash in the first quarter 2014 of $92 million or $0.28 per share. As Al discussed, our first quarter cash does not fully reflect the earnings power of our investment portfolio and in particular there was no cash from the recent $1 billion healthcare portfolio that we acquired.

While GAAP income is not particularly relevant, I wanted to point out that our first quarter 2014 GAAP loss included a $38 million non-cash technically realized loss, related to the exchange offer and other conversions.

Under GAAP, convertible notes that could be settled in cash or stock, like our convert, require x element, as company change them of a non-cash realized data loss in some of the different and the rate, the depth portion of those notes were issued at versus what they would be issued at, at settlement. In our case, this was from conversions and the exchange.

Looking at our portfolio pro forma for the NSAM and including the recently closed and announced $2.5 billion of investment from the healthcare, innkeepers and investor portfolio, our total assets excluding assets underlying our CDOs would be approximately $8 billion.

75% will be in real-estate with 64% for direct interest and 11% through indirect interest in private entity fund interest and our interest in RXR.

Including these recently closed and announcing that spend, our owned real-estate portfolio would be diverse from property type, including manufactured housing, healthcare, extended stay hotels, industrial office, retail and multi-family.

During the first quarter of 2014, we consolidated CDO 5 and we expect to deconsolidate two of the three remaining security CDOs, CDO 3 and 9 later this year. One remaining, CDO 1 has only approximately $64 million of assets and is callable in 2015.

As we have discussed in the past, the consolidation of CDO is positive in so many ways, most importantly, and improving transparency and reducing the complexity of our business and financial statements. We continue to wind down our legacy portfolio and for 2014 less than 10% of our cash flow will come from CDO equity distributions. With this percentage continuing to decrease as we continue to grow our investment portfolio.

In terms of the spin-off, we refilled the Form-10 on April 14, and we remain on track to complete the NSAM later this quarter.

So, with that I’d like to turn the call back to the operator for questions. operator?

Question-and-Answer Session

Operator

Thank you, ma’am. (Operator Instructions). And our first question comes from the line of Stephen Laws with Deutsche Bank. Please go ahead.

Stephen Laws – Deutsche Bank

Hi, good morning and thanks for the color on the quarter. And it looks like a lot of it investor activity taking so congratulations on that. I wish, you could provide a little more details on the Arium investment and I guess RXR as well, both have in place a minimum base fee of $10 million. How should we think about the returns necessary or investment pays either of those relationships that would be required to drive in the management fee in excess of that $10 million per year?

David Hamamoto

Yes, I think both of those investments are similar and they’re operating investment management businesses that primarily have the institutional private equity market. And the expectation is that Scott and the Arium folks will continue to be able to grow that business and increase AUM and increase fees. And we would expect to derive our proportional ownership in that increase in fees and NSAM.

Stephen Laws – Deutsche Bank

Great. Is there any timing as to how we should think about that, is that a bit later this year, is it 2015, is it longer tail than that as far as exceeding that $10 million minimum?

David Hamamoto

I think it’s too early to give guidance on that right now.

Stephen Laws – Deutsche Bank

Okay, fair enough. As we saw authority for a launching of kind of co-branded, non-traded REIT, is that a large global expectation of a business opportunity we could see here at Arium. And on the last call, you mentioned being comfortable with as many as four non-traded REITs in the market simultaneously or raising capitals in some, should we look to see something like that here in the near future?

David Hamamoto

I think coming to that conclusion at this point is the little premature as we’re just getting into Europe. And we’re excited about the relationship with Arium and starting the investment process. But I think, initially we’re going to be focusing on putting money from our existing vehicles that are currently in place.

But clearly, over time as be build NSAM, one of the objective is going to be to continue to raise multiple sources of capital. And as you’ve seen in Europe there have been a number of public managed vehicles for taking advantage of the European opportunity. Arium has extensive relationships with the institution. So, there will clearly be growth and focus vehicles in the future. In Europe, to say that it’s going to be from the non-traded REIT space, I think would be premature.

Stephen Laws – Deutsche Bank

Okay. And then, I guess, switching over to the large front, non-traded REIT, on those initial filings have been done. But can you maybe update us on where you are in the process of launching that and when you expect to begin raising capital in that vehicle?

Al Tylis

Stephen, yes, we had the initial filings, which is the potential filing with the SEC. So, we can’t help a lot about it. But we would expect to hopefully begin sales in a few months.

Stephen Laws – Deutsche Bank

Okay, great. Switching over to, I guess really the at least longer term what’s been a primary focus for quite some time, with ROE business that gets forgotten about. But it looks like, a couple of investments during the quarter and one post quarter end with 16%, 17% expected yields on equity, seems quite attractive.

Can you maybe talk about what you’re seeing in that space, what type of loans you’re really looking to originate to achieve those type of yields?

David Hamamoto

Yes, I think Stephen it’s a combination of taking advantage of transitional assets with first mortgages that might have a little more leverage in them but are also attractive to the financing markets. And that’s the combination of those things are really what’s going to drive those ROEs. But as we’ve said earlier, the securitization market continued to get more competitive and the ability to leverage our loans with senior financing has been a big driver for generating those mid-teen returns.

Stephen Laws – Deutsche Bank

Great. And then, one last question, I actually hate asking about dividends, but given the upcoming spend in June, and I believe particularly your second quarter dividends is only paid in August. Any color into how you’re going to approach the second quarter dividends around the spend as far as either paying it before the spend or go ahead and splitting up a Q2 dividend and having a separate dividend in our NSAM?

David Hamamoto

Stephen, we’re still taking some of that under advisement and also depends on the timing of the spend and a few other considerations which we, nothing specific to report on that yet.

Stephen Laws – Deutsche Bank

Okay, so to be determined. Great, thank you taking my questions.

Operator

Thank you. And our next question is from the line of Dan Altscher with FBR. Please go ahead.

Dan Altscher – FBR

Thanks, I appreciate you taking my call this morning. With the amount of transactions that are happening post subsequent to quarter end, can you give us a little bit of timing on liquidity needs to fund those transactions versus the timing of when you expect to spend to actually be affected?

Dan Gilbert

Yes, a number of these investments were just committed to. So, they’ll be closing over the next couple of months. But with – in terms of our funding, I think these investments require a total of around $450 million of capital. We’ve got a little over couple of hundred million dollars in our existing non-traded REITs and we’re raising money there daily.

As it relates to funding our balance sheet, we’re fortunate that we have multiple ways to raise capital. Al spoke about revolving credit facility that we’re working on. But we obviously have access to other types of securities like preferred equity, straight debt, convertible debt or common. And I think we’ll evaluate the markets as these deals get jolt for closing.

Dan Altscher – FBR

Okay. I think the takeaway I got from that is that liquidity needs between now and to spend around probably more than adequate to move on without, and I guess an equity raise, is that probably right?

Dan Gilbert

Yes, like I said, we’re evaluating – we’ll evaluate it as the deals flow I guess towards closing. And we generally fund our investment amongst the different vehicles that we have.

Dan Altscher – FBR

Okay, that’s great. Switching to the innkeepers portfolio, can you give us a little bit of stat here, what you think maybe the NOI might be on a cap rate, they think they’re buying on or the ADR or how much per key or anything like that?

Dan Gilbert

Yes, I think we’ll give them more complete disclosure as we get closer to closing. But as I said, on a macro level there are lot of big picture things that we like about the investment. I think one of the key components was having a partner like Jeff Fisher who has basically managed that portfolio since 1994, when he started innkeepers. So, it’s a guy with 30 years of experience in this particular sector of the hotel market and we think he understands it better than most.

And as you know in any, in the hotel business, the operating nature of the business is critically important. So having a partner that can manage the brand and manage the real-estate was critically important and the fact that he understood. And it’s on this portfolio for so long with the key ingredient. We also like the fact that the portfolio is heavily concentrated on the coast.

I think that’s 30% of the NOI comes from the West Coast and the majority of that from California. These are Gen-1 assets, meaning that they’re primarily the best located within their respect to market. And the majority of the portfolio is in the top 25 MSAs. We like the fact that most of the brands are residence and Marriott, top extended stay brand.

Margins in this particular sector are extremely high, I think 38% EBITDA margins. And that particular sector has got less volatility because magnitude of the SNB income is much smaller than full service. And these hotels are generating significant amount of cash flow, the CMBS market has the very aggressive bid for financing these assets at this point. And I would say that the replacement cost overall is probably at least 20% above what we’re paying per key.

Dan Altscher – FBR

Great. Thank you. That’s really, really helpful detail, definitely appreciate that. Maybe switching to a different topic that seems to be coming up a little bit more is what the SEC incendiary is looking to do on the non-traded REIT side to I guess enhance some disclosure on the customer statements.

Any initial thoughts there, any early thoughts there as to how this may impact the business plan and the sales progression positive or negative as we, I guess get that implemented into probably 2015 at this point?

David Hamamoto

Yes, Dan. I think, our view and I think we’ve talked about this in the past is, more transparency is a good thing. We’re used to level of transparency associated with being a listed company. And I think it takes when there is greater transparency in the non-traded REIT space I think that’s a long-term positive. I think it also potentially opens up the universe of investors in this space. And again, I think all those things should be a long-term positive for the industry.

Dan Altscher – FBR

Okay. And one just quick other one, now with this deal coming on in Europe, is there any process to the tax rate at NSAM, maybe seeing a little bit of improvement as maybe some more income has shifted offshore, is that still maybe a longer-term work-in-progress?

Dan Gilbert

Clearly, the more offshore European income the better it is for tax purposes. But I think for now I would continue to assume with the 20%.

Dan Altscher – FBR

Great. Thanks so much for taking the time.

Operator

Thank you. And our next question is from the line of Bose George with KBW. Please go ahead.

Bose George – KBW

Yes, good morning. Is there a way to think about how much excess capital you guys had during the quarter?

David Hamamoto

I think, if you look at those, the $360 million was the specific one, and that was $360 million of equity that was essentially un-invested during the quarter that got invested just this week in terms of that. And so, initially what we have left in terms of our cash and that was the biggest component of kind of the un-invested capital for the quarter.

Bose George – KBW

Okay, great. And in terms of, switching to just the book-value, you guys usually provide an economic book-value number. Is that something as you’re going to provide in the queue or just, because I wanted to just figure out the reconciliation there?

David Hamamoto

Yes, Bose. I think, as you know, we’re always trying to provide the best and most informative metrics for our investors than a year ago. We switched over from that referred to cash to try to get people a better sense of the true cash earnings power of the business.

And I think one of the things would be book-value and adjusted book-value metric is, it just doesn’t capture the value of what is a very large property owner and asset management business. And while a portion of the business is, remained a mortgage REIT like business, where our book-value metric is can be relevant.

I think so much of our business is different and we’re starting to find that the utility of that book value and adjusted book value number are just not that helpful for our investor base.

Bose George – KBW

Okay, great. And then, actually just switching to the hotel investment. Is there any sort of formal relationship with Jeff Fisher going forward in terms of future deals?

Dan Gilbert

We have nothing contractual but I think when we think about a guy like Jeff Fisher, we think of him along the lines of how we think about Scott Rechler at our SR, or Jay Flaherty in the healthcare space.

And I think as we develop this asset management business, having partners with that kind of experience and relationship in a very specific sector that we targeted to invest in, coupled with a background in the public markets which all three of them have. We think are very good partners for us in building our asset management franchise.

And so, while we have nothing contractual, we could certainly see doing more business with Jeff in the future.

Bose George – KBW

Okay, great. And then just one follow-up on an earlier question on the commercial loan. Actually, how much leverage are you going to put out and what’s your equity contribution?

Al Tylis

On what?

Bose George – KBW

On the commercial loans.

David Hamamoto

In terms of just on the loan origination business, I think you’d probably see, you’re seeing securitizations done anywhere from kind of 2:1 to 3:1 leverage. So it takes time we did securitization that would be our expectation.

Bose George – KBW

Okay, great. Thanks.

Operator

Thank you. And our next question is from the line of Matthew Howlett with UBS. Please go ahead.

Matthew Howlett – UBS

Hi guys, thanks for taking my question. Just if you could comment on the reports for bidding on Griffin American Healthcare, is there any color to provide on that?

Al Tylis

Yes, we’re not buying that.

Matthew Howlett – UBS

I’m sorry.

Al Tylis

Yes, we’re not going to – we’re not buying Griffin American Healthcare.

Matthew Howlett – UBS

Okay. So there is, they are true to the reports that come out either final as a bidder?

David Hamamoto

Hi Matt, we’re talking about – you have to say there are lot of ways unfortunately, that we can comment on market, we’re immersed, I think the main point for our investors is that we’re not going to be the buyer of that portfolio.

Matthew Howlett – UBS

Okay, got you. Great, thanks. And then, just technical question, can you still sort of model that in 60 million share count what we’re looking to spin-off and then pan, just trying to reconcile with the sort of tendering going on for all these changes to remain the exchanges on the senior exchangeable notes, is that still sort of the number we should ballpark?

Dan Gilbert

Yes, I think, again assuming all of the five and 38s exchange and so that number is, it’s approximately $360 million. And so, I would think about that as the largest number that you’ve had in the share-count.

Matthew Howlett – UBS

Yes, okay. And then, more of a longer-term question, when you look at this post spin of NSAM, when you looked at the capital structure of NRF. How do you envision that changing over time and do you have a number, you have that senior note coming due in September and then clearly you want to – with extra-long.

So do you want to begin to more look like some of the real property REITs out there in terms of profits and unsecured debt and so forth? How can we look at that sort of going forward, what should we sort of bake in, in terms of get cost down the road on that?

David Hamamoto

I think in terms of NRF, our focus has been on – in terms of our debt, I mean, if you look at one speed, one short-term notice paid-off, we essentially have almost no NRF corporate level debt and our focus has always been to minimize recourse and a cross collateralized mark-to-market debt, and essentially compartmentalized our borrowings within asset specific investments. And I think that served us extremely well during the financial crisis and I think it continues to be an efficient way for us to finance our business today.

And on a go forward basis and in terms of NSAM, we at first we did not expect it to have any corporate level debt and have a substantial amount of free cash flow and the uses of our little spike would be some combination of either giving that back to shareholders in the form of a dividend or repurchasing stock.

Matthew Howlett – UBS

Got you. And I guess, just a follow-up and build issue on secure debt one day get REIT and so part of that, would that take sort of a spin-out on sort of the other property businesses to get on that track or do you still use them on keeping everything particular right now and driving the cost of capital lower over time?

Al Tylis

Yes, I think look, it’s a potential path without any future spin-offs. I think it’s certainly prospective spin-offs of businesses that are in the public market today that have healthy unsecured ratings, it’s certainly a path towards that as well. So, I think it’s possible in either case and we’ll have to certainly evaluate as we go.

Matthew Howlett – UBS

Great. And then just last question, the – the CDOs that are still consolidated, I know those are performing well but they do, they did had some volatility to reporting number, what’s the timeframe of sort of getting all that be consolidated so the balance sheet is a little bit more easier to understand for some of the property investors that I know are looking at coming?

David Hamamoto

We’re actually at this point we’re down to 3 CDOs, that are consolidated, two of which we expect to be deconsolidated in the next quarter or two at most. And then our last one, which only had $60 million of assets has the call right next year, but we may also be consolidating that this year. So, I think we’re very closed and hopefully surely after in connection with the spin-off you’ll round up seeing a balance sheet in NRF that doesn’t include any consolidated periods.

Matthew Howlett – UBS

Great. That would be helpful. Thanks guys.

Operator

Thank you. And our next question is from the line of Steve DeLaney with JMP Securities. Please go ahead.

Steve DeLaney – JMP Securities

Good morning, everyone and thank you for taking my questions. I’ll be brief here because I know the call is running on. David, when we initially saw the hotel transaction reported in commercial mortgage alert last Friday, they commented on another portfolio in that article I guess we’ll call the Clarian Portfolio. And at that time, the reporter stated that in that bid process, a winner had not yet been announced.

I don’t know, I guess, my question is can you comment as to whether that potential transaction is still available to someone, in other words, is the process still open?

David Hamamoto

Yes, there sure have been a lot of market rumors that got asked in the press in the last few weeks.

Steve DeLaney – JMP Securities

You’re popular mainly.

David Hamamoto

I think that that process is still ongoing.

Steve DeLaney – JMP Securities

Okay, great. But we’ll stay tuned that if it trigger news when it’s appropriate. And now I’ll turn to you just to be democratic here with the questions, end of April, Freddie Mac, put up pretty interesting announcement out. They said that they were going to extend their successful K-Series securitization platform into manufactured housing I think some people have dubbed it series M.

I know this is fresh and you guys are slammed with 100 things going on. But just curious if you have any thoughts, you’ve got a billion thoughts with manufactured housing investments. And if you had time with your people to look at it to see if – just theoretically if there is a potential financing benefit from that new program when it’s up and running on your manufactured housing assets?

David Hamamoto

Yes, we saw that. It’s clearly a net positive in this space. CMBS markets have been pretty efficient, as buy-ins in these assets. But I think clearly having that as an additional source, if anything just adds competition for the financing which already is fairly aggressive given the stability of the asset class. So it’s definitely a positive for the sector.

Steve DeLaney – JMP Securities

Even if you don’t pull the trigger on our REFI obviously but lower cost to capital is just going to help asset prices and probably help your property value regardless of whether you use it.

And then, Debra, with respect to the spin-off, will there be a working capital transfer from NRF to NSAM, just cash amount that we should keep in mind when we’re modeling this. And I know you’re not going to give us an adjusted book value, it sounds like but even just to adjust GAAP book-value for some – for that feature of the spin-off, can you comment on that?

Debra Hess

Steve, so there will be some form of working capital. We haven’t figured out what the exact amount is but, internally we’ll currently start with some amount of cash. In terms of book value and that is not something that I could really comment on right now, we’re still kind of working through, finalizing the spend structure now.

Steve DeLaney – JMP Securities

Okay, thanks for the time and I appreciate your comments.

Operator

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