Ladies and gentlemen thank you for standing by. Welcome to the NorthStar Realty’s Second Quarter 2011 Conference Call Results. During today’s presentation all participants will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) Today’s conference is being recorded August 4, 2011. I would now like to turn the conference over to our host Mr. Al Tylis, Co-President and Chief Operating Officer of NorthStar Realty Finance. Please go ahead.
Thank you very much. Welcome to NorthStar second quarter 2011 conference call. Before the call begin I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
I refer you to the company’s filings made with the SEC for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made in the course of this call.
Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation and this information is not intended to be considered in isolation or the substitute for the financial information, presented in accordance with Generally Accepted Accounting Principles. Reconciliations of the non-GAAP financial measures to the most comparable measures prepared in accordance with Generally Accepted Accounting Principles can be accessed through our filings with the SEC at www.sec.gov.
With that I am now going to turn the call over to our Chairman and Chief Executive Officer David Hamamoto. David?
Thanks Al and thank you every one for joining us. In addition to Al I am joined today by Dan Gilbert, our Co-President and Chief Investment Officer and Debra Hess, our Chief Financial Officer. The pace of the US economic recovery slowed during the second quarter largely driven by among other things the European sovereign debt concerns, stubbornly high unemployment rates and Washington’s prolonged process on reaching a decision on raising the debt ceiling.
Despite the adverse economic indicators commercial real estate fundamentals remain relatively stable even continuing to improve in certain sectors and geographic markets. In addition liquidity continued to return to the commercial real estate debt market with $8 billion of CMBS issuance during the second quarter. Although we saw an increase in borrower cost of capital due to the macro driven headwind.
Unfortunately the newly issues securitization market has experienced some recent setbacks with two deals, one was pulled by the issuer and the other due to rating agency issues after being sold to investors. Despite these challenges we continue to maintain confidence in the longer term economic recovery and are seeing the effect of the positive trends in commercial real estate fundamentals appearing in our portfolio by means of improved underlying property level performance metrics. During the credit crisis we strategically showed up liquidity and built a solid balance sheet that has positioned us to grow.
During the first half of this year we were pleased to return to the capital markets with two corporate capital raises, including an offering of exchangeable notes and common stocks, generating net proceeds of $232 million. We are using our significant liquidity to make opportunistic investments that we expect will generate attractive risk adjusted returns and excess cash flow to NorthStar.
During the first half of the year, we actively repurchased our own CDO bonds, which continue to be a compelling opportunity due to the attractive yield to maturities and tangible book value accretion. As of June 30th we own $495 million of our own CDO bonds of which $315 million were repurchased in the secondary market at a weighted average price of 25% at par. We also recently started to recognize the benefits of key strategic investments made NorthStar last year.
In July we received our first equity distribution from the capital source CDO that we acquired last summer. The July 2011 distribution was $14 million including $7 million previously held in an escrow account and $7 million quarterly distribution. I'd like to now turn the call over to Al who will further discuss our business strategy and objectives.
Thanks, David. As NorthStar moves forward, we intend to keep the disciplined approach that has served us well during the last several years. At the same time, we have shifted to offense and hence continue to make opportunistic investments utilizing our unrestricted cash and our low-cost non-recourse CDO finance. One recent investment example is that we have signed an agreement to acquire CDO from cap lease for $23 million. The collateral is primarily investment grade credit tenant leases, corporate credit notes and some CMBS funds.
Similar to the cap source CDO acquisition, the cap lease CDO acquisition is in line with our strategy of investing in transactions where we are able to utilize our distinct expertise and our proprietary information while also bolstering our asset management business and enhancing shareholder value.
We've also made significant progress on a term facility which when put in place will allow us to continue our core debt origination business in a way that will be accretive to NorthStar. In addition, we do believe that the structured finance markets will ultimately come back in a form that will allow us to access long term match funded finance.
Lastly, we continue to make good momentum in distributing our non-listed RE products. As of June 30th, we have raised a total of $57 million including $18 million in the second quarter versus $9 million for the first three months of the year. During the second quarter, we executed selling agreements covering over 30,000 registered representatives bringing our total selling agreements to brokered dealers to more than 40,000 registered representatives.
While we are very excited to have such a large influx of new selling agreements, there is generally a ramp-up period between the time we sign agreements and the time the capital is raised. We remain very optimistic that the capital raising will increase in the future with the newly signed representatives and have already started receiving our first subscriptions from those folks.
I'd like to now turn the call over to Debra who will review our financial results for the second quarter. Debra?
Thanks Al and good morning everyone. I'd like to take a few minutes to primarily discuss our GAAP and our ASSO results for the first quarter and the key drivers that changed quarter-over-quarter and our book value as of June 30th. As you saw in today's press release we recorded a GAAP net loss of $52 million or $0.60 per diluted share for the second quarter. The large contributor of our GAAP loss is the non-cash fair value adjustment. We mark our real estate securities portfolio, our CDO bonds and our trust-preferred to fair value for the income statement. This represented $104 million or $1.14 per diluted share of the GAAP loss.
Our second quarter AFFO totaled $56 million or $0.61 per diluted share. This compares sequentially with $21 million or $0.26 per diluted share in the first quarter of 2011. The key drivers of our second quarter performance include a provision for loan loss that was $14 million related to poor loans in the second quarter and this compares to $29 million for eight loans and one JV investment in the first quarter. Realized gains of $31 million for the second quarter versus $21 million in the first quarter. As we said in the past, I cannot predict the amount or timing of realized gain. The key components during the second quarter was the gains from sale of real estate securities and debts of $51 million and this was offset by losses on our CDO bond repurchases and slot terminations of $20 million. G&A expense was $27 million in the second quarter compared to $19 million in the prior quarter. This increase was predominantly related to the accrual for long term components of our 2009 incentive compensation plan based on current projected performance metrics.
One other item to note during the quarter is related to the sale of our interest in the operator of 34 of our healthcare net lease property. Part of the sale we are consolidating the results of the operator. Upon sale our quarterly rental income and operating expenses decreased by commencement amount which was approximately $11 million. Rental income was partially offset by an increase of $4 million related to new REO asset.
In terms of book value, our GAAP book value was $9.26 per diluted share as of June versus $11.11 as of March. The primary reason for the decrease was due to the change in fair value. The remainder of the decrease was due to the net impact of the common equity rates and the fact that the capital was not fully deployed for the entire second quarter.
We expect that the effects from all our new recent investment activity will be more accretive both cash flow and earnings, and this will be prospectively as it’s deployed for a full quarter. Due to the noise of the fair value adjustments on our GAAP book value we also reported the calculation of our adjusted book value which totaled $7.35 per share at June. This amount represents the book value with all fair value adjustments, non-cash loan loss provisions and accumulated depreciation and amortization were excluded.
This concludes our prepared remarks for today and now we’d like to open up the call for questions. Operator?
Thank you. Ladies and gentleman, we will now begin the question and answer session. (Operator Instructions) Our first question comes from the line of Stephen Laws with Deutsche Bank. Please go ahead.
Stephen Laws - Deutsche Bank Securities
Hi, good morning. Nice quarter. I wanted to see if you could maybe expand on your comments about the securitization markets, the rating agency issues, with the recent deal in the market place, I think the Goldman Sach’s deal. Can you talk maybe kind of what you are seeing in the market, how you think that will play out as we see more liquidity come back into the system and then maybe kind of how that’s changed your views on looking at deploying some of your excess capital here. So maybe just kind of general market developments that you saw in July?
Yeah, I think obviously there were a few hiccups in July, but I think overall from a macro perspective we believe that the securitization market are coming back and are trending in the right direction and as we mentioned we are working on a credit facility and we believe that you know the ability to ultimately match fund our long business is a viable strategy. The hiccups in July or the SNC (ph) sort of debacle which I would put into hopefully an isolated incident, but more generally the other deal that was purely a pricing issue where the owner of those loan on demand leverage and the pricing back up a little. So, he just wasn’t willing to finance at that level. But I think overall we believe that it might not be $35 billion to $40 billion which would be estimate, but we still see a fair amount of the incremental CMBS issuance and over time that market continuing to develop and grow and be an integral part of our strategy going forward.
Stephen Laws - Deutsche Bank Securities
Great. Could you touch on the portfolio, it looks like from the press release no change in the NTL status. Still too low, it's totaling $41 million of principal amount. I guess $2 million of book value. Can you talk about your portfolio? If we do see the economy to weaken what are your thoughts there as to how your portfolio is positioned given kind of concerns on a macroeconomic level?
You know, we – I think those trends are positive, if you see the magnitude of the loan loss provisions. I think overall we are seeing that that had improved. That doesn’t mean that we couldn’t have some surprise. But I think directionally we feel pretty good about what’s happening with real estate fundamental. And I think on the up side particularly in the multi family sector we are seeing a very strong bid for multifamily, which I think we are going to be the beneficiary of.
Stephen Laws - Deutsche Bank Securities
Great. I guess one last question, it looks like you guys continue to do good job diversifying your income stream with some fee income from different strategies you’ve got. Can you talk about how you see your mix of income changing as we go forward and you guys look for more opportunities to add to some of the other businesses?
Yeah. As we have been discussing our investment strategy was related – trying to take a Barbell approach where we bought back our CDO bonds at big discounts for the benefit of book value accretion, and clearly that trade has been a very good one for us that we are uniquely positioned to capitalize on. But given the coupons on those bonds, they weren’t – they were kind of a drag from a cash flow perspective. And, so the other part of the strategy was to look for strategic opportunities that are cash flow generating and help support yield and dividend. And to that end transactions like the capital source CDO and now the cap lease CDO are transactions that are strategic, fit into our business model of being able to manage commercial real estate CDOs more efficiently than others in utilizing our infrastructure and those investments generate very solid cash flow returns which again should help cover and support the dividend and create a positive trend in cash flow.
Stephen Laws - Deutsche Bank Securities
Great and thanks a lot for taking my questions.
Thank you. I show no further questions at this time. Ladies and gentleman this does conclude the NorthStar Realty Finance second quarter 2011 conference call results.
If you would like to listen to a replay of this conference please dial 1800-406-7325 or 303-590-3030 and enter the access code of 4459199 followed by the pound sign.
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: email@example.com. Thank you!