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NorthStar Realty Finance Corp. (NYSE:NRF)

Q4 2011 Earnings Call

February 17, 2012 10:00 am ET

Executives

Al Tylis – Co-President, COO and Secretary

David Hamamoto – Chairman and CEO

Dan Gilbert - Co-President and CIO

Debra Hess – CFO

Analysts

Joshua Barber - Stifel Nicolaus & Company, Inc

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the NorthStar Realty Finance Fourth Quarter 2011 Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today Friday, February 17, 2012.

I’d now like to turn the conference over to Mr. Al Tylis Co-President and Chief Operating Officer for NorthStar Realty Finance. Please go ahead, sir.

Al Tylis

Thank you very much. Welcome to NorthStar’s fourth quarter and full-year 2011 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, 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 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 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, thanks everyone for joining us. In addition to Al, I’m joined today by Dan Gilbert, Co-President and CIO and Debra Hess our CFO.

During the fourth quarter of 2011, the U.S. economy continued to recover at a slow pace, although recent economic indicators such as employment and business growth have been pointing towards a more of positive trend. Commercial real estate fundamentals improved during 2011, and during the first part of 2012 we’ve seen a rally in the CMBS market, showing further market improvement.

Liquidity in the commercial real estate debt market also improved during 2011, but still remains limited due to the pace of new securitization and the lack of lending by commercial banks. Throughout 2011 we continue to expand our overall platform and steadily increase the cash flow and earnings of the company. As a result, this past week we were pleased to have announced a second consecutive quarterly dividend increase to our common, representing a 35% increase over the last two quarters. As we move into 2012, we find ourselves well positioned to continue to grow the cash flow of the company.

We've historically made it a priority to manage our liquidity and liabilities, and as a result we have a very strong balance sheet with available unrestricted cash, foreign access of any corporate debt maturities coming due in the next several years. With the significant volume of commercial real estate loans maturing over the next several years, we see a compelling investment environment for lenders who have access to capital, a senior management team that is well versed in real estate and complex capital structure and an established in-place commercial real estate loan origination platform.

During 2011, we completed over $800 million of new investments, which included over $300 million of new loan origination for us and our sponsored non-listed REIT. As a step and further returning to our main business line, during the first quarter we closed on two separate $100 million credit facility; one for financing loan origination, and another for AAA CMBS investment.

In addition to our main business lines, we continue to make significant progress in building out our non-listed REIT business including our broker-dealer. Our capital raising pace continues to accelerate further solidifying our position as the key player in the non-listed REIT sector.

Overall, 2011 was a strong year for NorthStar, and we believe due to our broad commercial real estate platform investment expertise and solid balance sheet, we’re well positioned to capitalize on future opportunities and create long-term shareholder value.

Now, I’d like to turn the call over to Al, who’ll further discuss our business strategy. Al.

Al Tylis

Thanks David. During 2011, we focused on continuing to build our franchise and long-term shareholder value through strategically deploying capital into accretive new investments and continuing to build our asset management business.

Going forward we will continue to execute on our strategy of expanding our business volume, while diversifying our sources of capital to the growth of our asset management business. In addition, we will continue to seek to capture relative values through opportunistic investments such as investment opportunities within our own $7 billion commercial real estate portfolio and what we believe to be very attractive pricing of [selling] of our own CDO bonds.

As of today, we own $376 million of our original investment grade CDO bonds at $258 million discounts at par which represents significant embedded cash flows that we may realize in future periods. We’re also continuing to leverage our commercial real estate platform by seeking out opportunities to acquire CDOs from third party managers such as the CapitalSource and CapLease transactions.

As mentioned earlier, we have returned to our main businesses of loan originations in CMBS investing. As of today, we’re substantially invested on our new $100 million CMBS credit facility. The investments consists of AAA rated securities with significant credit support resulting in an attractive risk adjusted return which is expected to be greater than 20%.

Turning to our loan origination business, we've an extensive pipeline of potential attractive investment opportunities including over $300 million of term sheets and process on new loan originations. Having now completed the reinvestment period for our last two CRE debt CDOs in early February and utilize all the cash in those CDOs. With our recently closed $100 million loan facility we’re well positioned to take advantage of the opportunities available to us and generate attractive returns for our shareholders.

We’ve dedicated significant resources in the pursuit of continuing to diversify our sources of cash flows through the expansion of our asset management business. Our non-listed REIT business which is a significant component of this asset management business continues to pick-up momentum at a rapid pace. We're beginning to realize the benefits of being one of the few fixed income vehicles in this sector.

During the fourth quarter, we raised $65 million for our CRE debt oriented vehicle, NorthStar Real Estate Income Trust or NS REIT, which was close to double the $33 million we raised in the previous quarter. As of today, we have a total of nearly $200 million of capital raised and had originated and acquired $134 million of loans and CMBS investments in NS REIT.

The non-listed REIT industry has over the last several years raised approximately $8 billion to $10 billion per year, with over 80% of such capital typically raised by the top-10 sponsors. According to a leading industry publication NS REITs capital raising was in the top 10 in the industry in each of the last two months.

Our significant progress in this sector is a testament the strength of our wholly owned broker-dealer that we spent the last several years building. We’re also close to finalizing $100 million credit facility for this vehicle which will allow us to further accelerate our investment pace and demonstrates our strong presence as a sponsor in this sector.

We’re excited about our prospects for leveraging our infrastructure and broker-dealer to launch additional products in this space including NorthStar’s Senior Care Trust which is currently in registration.

In summary, we feel very good about commercial real estate fundamentals, and we’re looking forward to growing our business and increasing shareholder value throughout 2012.

I’d like to now turn the call over to Debra, who’ll review our financial results for the fourth quarter 2011. Debra.

Debra Hess

Thanks Al, and good morning, everyone. I’d like to take a few minutes to discuss our GAAP and AFFO results for the quarter, our investment portfolio and the related performance.

As you saw in today’s press release, we recorded a GAAP net loss of $83 million or $0.86 per diluted share for the fourth quarter. The largest contributor of our GAAP loss is the non-cash fair value adjustment. We mark our real estate securities, our NorthStar and our CapSource CDO bonds and our trust preferred debt-to-fair value through the income statement. This represented a $115 million or $1.15 per diluted share of that GAAP loss.

Our fourth quarter AFFO totaled $44 million or $0.44 per diluted share. In the previous quarter, we discussed the source of this cash flows by category of investment and coverage relative to our current dividend level. As we move into 2012, we remain confident about our cash flows and the continued growth as we continue to force capital and [audio break] that we entered into in the fourth quarter.

Our $1 billion commercial real estate portfolio is basically unchanged from the prior quarter. It’s comprised of $404 million of core commercial real estate portfolio of suburban office retail and industrial property and a $552 million portfolio of healthcare properties.

At year-end our core net lease portfolio is 94% leased, with a 6.4 year weighted average remain in lease term, and our healthcare portfolio was a 100% leased to third-party operators with a weighted average lease coverage of 1.4 times and a 7.6 year weighted average remaining lease term.

This concludes our prepared remarks for today. And now, let’s open up the call for questions. Operator?

Question-and-Answer-Session

Operator

Thank you, ma'am. (Operator Instructions) Our first question is from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.

Joshua Barber - Stifel Nicolaus & Company, Inc

Hi. Good morning. And thank you very much for your expanded disclosure on the CDOs. Question for David and Al, when you guys are thinking about your primary investment vehicles for NorthStar going forward, how do you think about the balance between the private REIT and the on-balance sheet investments?

David Hamamoto

Yeah, Josh, I think – we think about really on the broker dealer side building out an asset management business, which will include multiple vehicles. As we mentioned, we’re going to launch Senior Care soon, but we think we get out up to three products of our own that we distribute through our broker dealer. That heavy lifting is really getting name recognition, getting a relationship in all of the 45,000 brokers working with us. We’re at that point now and so now, it’s a question of creating scale, so, we can build a sizeable asset management business there, but clearly we’ve to balance the investments within those vehicles with making sure that we can also invest on the balance sheet.

Historically, over this last year, the balance sheet has been focused on much more opportunistic investing, but as we’ve now been able to access credit and are going back into our core lending business, there will be an allocation of some of those opportunities between NS REIT and the balance sheet of which we’ve a policy and we’ll handle it fairly.

But I think the good news is given where we’re, we’re uniquely positioned because we’ve a fee business that’s off-balance sheet where we’re raising a lot of money and we can scale that. And at the same time, the banks are providing us right at where we can go back and be competitive and generate very attractive returns by making loans on the balance sheet.

Joshua Barber - Stifel Nicolaus & Company, Inc

Okay. When it comes to your CDOs, can you just give us a little bit more detail both on the loan side and on the security side? First, are there any CDOs you still have open reinvestment period? And second of all, what you think the duration of most of those assets are going to be broadly speaking?

Al Tylis

Josh, its Al. The CDO 9 just predominantly securities base is in reinvestment through July of this year and that will be the last one, everything will be out of reinvestment. In terms of the average life of the assets across the board, as you know it’s very dependent on the deal as well as the underlying assets. So it’s very – sort of hard question to be able to address any level of certainty and understanding particularly with respect to loans that we originated, something they have the maturity, but there maybe opportunities for us even within the CDOs to work with borrowers and extend assets over time. So it’s hard that – sort of tag an expected life of the assets.

Joshua Barber - Stifel Nicolaus

Sure. Well, maybe sort of working around this, what is your 2012 loan and CMBS maturities look like? And when you talk about the cash flow from the repurchase of CDO bond, what do you think the timeframe is for recognizing some of that cash flow?

Al Tylis

I will take the second part first, and we will give you the answer on the other one momentarily. But the -- the cash flows -- the discount that we talked about in excess of $250 million and that is not including the income that we earn from those CDO bonds, which is already $12 million to $13 million a year. Perhaps we have to guess, we would say 200 -- $250 million probably comes really over the course of probably give or take five years. It’s probably a fair ballpark, it could be little bit shorter, it could be longer.

Joshua Barber - Stifel Nicolaus

Okay.

Al Tylis

And in turn we have our -- in terms of loans maturing including extension is $285 million in 2012.

Joshua Barber - Stifel Nicolaus

Great. Thanks very much.

Operator

Thank you. (Operator Instructions). And that does concludes the question-and-answer session for today. If you would like to listen to replay of today’s conference, please dial 1-800-406-7325 or 303-590-3030 with the access code of 4510941. ACT would like to thank you for your participation. You may now disconnect.

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