Northstar Realty Finance Corporation (NYSE:NRF)
Q1 2011 Earnings Call
May 5, 2011 11:00 AM ET
Al Tylis – Co-President, COO and Secretary
David Hamamoto – Chairman and CEO
Joshua Barber – Stifel Nicolaus
Good day ladies and gentlemen, thank you for standing by. Welcome to the NorthStar Realty Finance first quarter 2011 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 today Thursday May 5th 2011. I would now like to turn the conference over to Al Tylis Co-president and Chief Operating Officer of NorthStar Realty Finance. Please go ahead, sir.
Thank you very much. Welcome to NorthStar first quarter 2011 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. Our presentation of this information is not intended to be considered in isolation or as a substitute to 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?
Thanks Al and thanks to everyone for joining us today. In addition to Al I’m joined today by Dan Gilbert, our Co-President and CIO and Lisa Meyer our Chief Accounting Officer. During the first quarter the US economy continue to recover from the global recession. Recent adverse conditions such as rising commodity prices and uncertainty overseas we maintain a confident outlook for continued growth through the end of the year and a continued recovery in the commercial real estate market that we anticipate NorthStar will be beneficiary of.
During the first quarter commercial real estate property fundamentals continued to improve and the commercial real estate debt market continue to open up to approximately $8 billion of CS, CMBS securitization completed during the quarter and $35 billion to $40 billion expected for the year. In addition balance sheet lenders such as bank and insurance companies are lending again providing additional liquidity into the market. As we head into what we hope will be an exciting time for commercial real estate investors and for our shareholders we think it’s important to briefly recap some of the events that have positioned NorthStar to be leading commercial real estate finance company.
Most importantly we were disciplined in our investment approach and management of our balance sheet leading up to and during the recession. We kept significant liquidity on hand throughout the last several years and limited our reliance on recourse debt. While repurchasing a significant portion of our recourse debt at cheap discount so far including $300 million recourse credit facility and approximately $124 million of our senior exchangeable note at an average discount of 56%. We also stayed away from most of the aggressive investment that were created by Wall Street and instead focused on investment that we directly originated. During the recession we didn’t only played defense but we also capitalized on investment opportunities that we felt that enhanced long term shareholder value such as acquiring over $1 billion of deeply discounted CMBS in 2009 and 2010 and acquiring $1 billion CDO from capital course.
Lastly while nearly all companies in our competitive stage stopped paying shareholders a dividend throughout the recession and to this day we have paid regularly quarterly dividends to our shareholders. During the first quarter of this year we were pleased to return to the capital markets in a meaningful with the raising of $172 million of 7.5% corporate unsecured notes that are exchangeable into NorthStar common stock in an initial exchange rate of $6.44 per share. The offering provided us with the ability to capitalize on one of the compelling investment opportunities available to us today.
Repurchasing our CDO bonds at significant discount at par will allowing us to very comfortably manage our modest corporate debt maturity that are coming due in 2012 and 2013. In 2011 to date we have invested total capital of $119 million including $68 million to purchase $207 million of our CDO bonds with an average original credit rating of A plus representing a 67% discount to par.
We own $477 million of our own CDO bonds, we have also repurchased $49 of our exchangeable note which leaves us with only $23 million outstanding on our 7.25% notes due in 2012 and $47 million outstanding on our 11.5% notes due in 2013 net of 10 million held in ESCROW. With a solid balance sheet and strong liquid we are actively working on an investment opportunities that we believe have the potential to enhance shareholder value and further grow our commercial real estate investment platform. Investments in our CDO bonds continue to be a primarily focus due to the attractive expected deals maturity and tangible book value accretion.
Additionally we are actively seeking opportunities to purchase CDO management contract and bond where we could leverage our unique expertise in the CRE CDO debt phase create value for our shareholders. Furthermore it’s important to remember we are uniquely positioned to capitalize on investment opportunities that present themselves within our existing $7.4 billion of assets including restructuring that involve new capital.
In the first quarter we were approved as commercial real estate mortgage special servicer by S&P and assigned a CMBS special servicing rating by Fitch. As of March 31st we own $2.8 billion our amount of CMBS comprising over 600 separate positions and will seek to win ourselves a special servicer in securitization for we become the controlling class holder which is expected to provide NorthStar additional fee income and potential new investment opportunities.
The resurgence of the CMBS market is also presenting interesting investment opportunities. In April NorthStar was selected as the winning bidder of the BPs in a new $2 billion CMBS securitization in which we intend appoint NorthStar as the special servicer. We feel that we have a competitive advantage in buying these positions due to our loan and CMBS underwriting capabilities and our qualification as a special servicer.
In addition to these exciting investment opportunities we continue to build our broker dealer to distribute our non-listed REIT product which is currently compromised of 27 individual including a 16% sales force that was recruited from some of the top participants in the non-listed REIT. We are currently raising capital for our $1.1 billion commercial real estate debt orientated non listed REIT. NorthStar real estate income trust and as of March 31st we have raised a total $40 million including $9.3 million in the first quarter with executed selling agreements with broker dealers covering an average of approximately 2700 registered reps during the first quarter.
We are adding additional broker dealers at an accelerated pace and currently have executed selling agreements with firms covering over 1200 registered reps and are in due diligence with additional broker dealer covering in excess of additional 20000 registered reps. We also have a $1 billion healthcare non listed REIT and registration which would be sold through our internal broker dealer. I would like to now turn the call over to Al who will review our results for the first quarter 2011. Al?
Thanks David. For the first quarter our GAAP net loss inclusive of negative $122 million of non-cash mark-to-market adjustments was $104 million or $1.33 per share. AFFO for the first quarter 2011 $21 million or $0.26 per share, during the first quarter we invested $40 million of unrestricted to repurchase the 138 million of NorthStar CDO bonds with an original credit rating of AA minus. At March 31 we owned 480 million of our own CDO bonds which are unencumbered and eliminated on NorthStar consolidated balance sheet.
As David mentioned we currently own 477 million of our own CDO bonds. We provided additional details this quarter in the supplemental information section of our earnings release regarding the CDO bonds that we own. During the first quarter we also invested 38 million to retire 36 million of our 7.5% exchangeable notes during 2012. NorthStar earned total management fees from its CDO of $4.8 million during the first quarter, these management fees are eliminated are eliminated on NorthStar’s statement of operations due to the consolidation of the CDOs. As in the past we included additional information regarding our CDO management fees, please in the supplemental information section of our earnings release.
In addition during the quarter we received $0.2 million of special servicing fees and $0.1 million of adviser fee sponsored non listed REIT. Realized gains totaled a net $21 million for the first quarter compared to $36 million for the fourth quarter 2011. Going forward you can’t predict the amount if any and timing of realized gains that may be generated from our portfolio. This type of income is dependent on many factors including factors outside of our control such as market credit spread and general market conditions.
General and administrative expenses for the first quarter excluding non-cash stock based compensation totaled approximately $17 million which is approximately $5 million lower than the prior quarter. $2 million of the decrease is related to reclassification of legal expenses and other cost directly associated with managing our assets, line items on our statement of operations and old asset management cost. The remaining decrease was primarily due to $2 million cost incurred during the prior quarter associated with [inaudible].
First quarter loan loss provision totaled $24 million and $8 million increase from the fourth quarter 2010. Loan loss reserve totaled $188 million as of March 31st or approximately 11% of the $1.7 billion NorthStar legacy bond portfolio. At March 31st an exclusive of the CapitalSource CDO loans we had two non-performing loans or NPL totaling $41 million and having a $2 million book value net of loan loss reserves. As of March 31st the CapSource CDO has seven NPL totaling $158 million and having $10 million book value.
NorthStar continues to manage a $1.1 billion at cost net lease to real estate portfolio consisting of 96 senior housing and two other healthcare related properties in 30 suburban offices industrial and retail property. The overall portfolio is 89% leased and has approximately 6.5 year weighted average remaining lease term. During the quarter we sold a lease interest located in New York for $7 million. The proceeds from the sale combined with $3 million from sale during the prior quarter are held in an ESCROW account at Earmark to repay the 11.5% exchangeable notes due in June 2013.
Our $3.3 billion commercial real estate securities portfolio had a weighted rating based on our balance of single B at March 31st which is the same rating to the portfolio at December 31st. At March 31st CDOs 1 and 2 which we had no reinvestment right were selling their overcollateralization subsequent to quarter end CDO 5 is also now passing its overcollateralization test most exclusively due to rating agency downgrades rather than realized loss on bonds. While we certainly to seek stay in compliance with our overcollateralization test those test doesn’t only tell the full story for example that we can CDO 1 today and have a return of capital to par recovery on the original investment grade bonds that we own in that CDO.
As of March 31st the CapSource CDO is passing its overcollateralization test with a $40 million cushion and there is $7 million held in an ESCROW account that we expect to receive depending resolution of certain assets. Consolidated assets totaled $5.4 billion at March 31st up from $5.2 billion as of December 31st. The increase was primarily related to an increase in the fair value of NorthStar CMBS portfolio. For the first quarter 2011 NorthStar’s GAAP book value decreased by approximately $103 million from December 31st to $11.11 per share.
The earnings release contains a detailed reconciliation between our fourth quarter 2010 and first quarter 2011 book values. Tightening market credit spreads continue to increase the value of our liabilities for which we have elected as one fifth times resulting in approximately $300 million decrease to book value for the quarter 2010 which was partially offset by an increase in the fair value of our CMBS portfolio of approximately $190 million in the quarter.
If all unrealized mark-to-market adjustments non cash long loss reserves and a cumulated depreciation were excluded book value would be $8.32 per share at March 31st. NorthStar received $60 million of repayments share proceeds in the first quarter within its CDO. NorthStar had approximately $285 million of total liquid at March 31st comprised of $193 million of unrestricted cash and $92 of unvested cash in our CDOs. This concludes our prepared remarks for today now let’s up the call for questions. Operator?
(Operator Instructions) And our first question is from the line of Joshua Barber with Stifel Nicolaus, please go ahead.
Joshua Barber – Stifel Nicolaus
Hi good morning, you had mentioned the CDO bonds that you have brought back but you know because they don’t show up in consolidation. Have you actually started retiring any of those or are they just being held for investment right now?
Josh the bonds that we’ve brought this year are being held for investment.
Joshua Barber – Stifel Nicolaus
Okay, you had mentioned also the BPS that you brought about the from the CMBS securitization, can you tell us what the total cash investment from NorthStar was for that investment?
We haven’t closed but we expect at this point that the cash total cash will be $27 million of which $7 million we expect to finance with unrestricted cash and $20 million of finance with restricted cash that’s currently in our CDOs.
Joshua Barber – Stifel Nicolaus
Okay and circling back to the CapSource CDO for a second is it fair to assume that you would have got that $7 million that’s being held in ESCROW right now. If not for the – I guess that’s related to the property for New York so I’m guessing it’s just REO sale that should have been cash flow to you anyway. Is that something you expect to change in the second quarter or as of now even though it’s positive OC and IC you would be getting cash.
The $7 million from the leasehold sale was not in the CapSource CDO so the reason we didn’t get that cash is that in that collateral for our 2003 notes and I referred the $10 million that’s held in ESCROW against those bonds so that’s basically being held in ESCROW to retire our exchangeable note.
The $7 million that’s in the CapSource ESCROW account is cash that we do expect to get in [inaudible].
Joshua Barber – Stifel Nicolaus
Is there any clarification I guess why it’s currently being escrowed do you expect that to continue in the future or do you think it’s – is that going to be a reliable source of cash going forward I guess is my question.
The reason its escrowed is just simply the structure of CDO when there are certain assets that are unresolved but we are working to resolve those over the next several months we expect to resolve those and would expect a cash flow to be distributed to us in the third quarter.
Joshua Barber – Stifel Nicolaus
Okay, thanks very much.
(Operator Instructions) And I’m showing no further questions at this time. Ladies and gentlemen this does conclude the conference call. If you would like to listen to a replay of today’s conference please 1800-406-7325 or 303-590-3030 and entering an access code of 443-3541. ACT would like to thank you for your participation you may now disconnect.