NorthStar Realty Finance's (NRF) CEO Jonathan Langer on Q2 2016 Results - Earnings Call Transcript

| About: NorthStar Realty (NRF)

Northstar Realty Finance Corp (NYSE:NRF)

Q2 2016 Earnings Conference Call

August 04, 2016 09:00 AM ET

Executives

Albert Tylis - CEO, NorthStar Asset Management Group

Jonathan Langer - CEO, NorthStar Realty

Debra Hess - CFO

Dan Gilbert - CIO & COO

Ron Lieberman - EVP & General Counsel

Keith Feldman - MD, Capital Markets

Analysts

Jade Rahmani - Keefe , Bruyette & Woods

Germain Mitch - JMP Securities

Jessica Ribner - FBR Capital Markets

Operator

Good day and welcome to the NorthStar Realty Finance’s Second Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Albert Tylis, CEO of NorthStar Asset Management Group. Please go ahead, sir.

Albert Tylis

Thank you very much. Welcome to NorthStar Realty's second quarter 2016 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.

Furthermore, certain non-GAAP financial measures will be discussed on this conference call. Our presentations 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 will now turn the call over to NorthStar Realty's CEO, Jonathan Langer. Jonathan?

Jonathan Langer

Thank you, Al. Good morning, and welcome to NorthStar Realty’s second quarter 2016 earnings conference call. Joining me on the conference call today in addition to Al, are David Hamamoto, our Chairman; Dan Gilbert, our Chief Investment and Operating Officer; Debra Hess, our Chief Financial Officer; Ron Lieberman, our Executive Vice President and General Counsel; and Keith Feldman, our Managing Director of Capital Markets.

The U.S. economy continues to moderately expand despite global uncertainty driven by factors such as the U.S. presidential election, growth concerns in China and the potential impact in Europe from Brexit. The increasing spends of monetary and possibly fiscal policy support around the world, have led to a recent rally in financial markets after a volatile start to the year. The U.S. commercial real-estate market remain solid with continued strong investor demand, particularly with interest rates likely to remain at historically low levels for the foreseeable future.

Occupancy and rent growth are healthy across most property sectors and geographies and NOI for institutional quality real-estate remains above prior peak levels. As you know, on June 3, 2016, NorthStar Realty, NorthStar Asset Management Group and Colony Capital announced the tri-party merger which will create a world class diversified real-estate and investment and management platform. We are very enthusiastic about the merger and transformation into an internally managed equity REIT with established institutional and retail asset management platforms.

Upon confirmation of the merger, Colony NorthStar will become one of the largest independent real-estate companies in the world with almost 60 billion in assets under management. We are confident that Colony NorthStar’s enhanced scale and diversification, large balance sheet, low leverage and strong liquidity profile position the Company for enhanced long term shareholder returns. Following the merger, NRF shareholders can realize the full benefits of our substantial asset monetization and the resulting attractive financial profile of the combined Company as an internally managed REIT.

In terms of the merger process, we are making tremendous progress as the three companies continue to collaborate to prepare for the combination. To that end, we filed a joint proxy statement and perspective on July 29th and anticipated successful closing in January of 2017. We look forward to continue updating investors as appropriate.

Now, I would like to take a moment to provide an update on our strategic asset monetization initiatives. For the past three quarters, we have been focused on increasing our liquidity profile and capitalizing on strong private market valuations for real-estate assets throughout the monetization. To-date we have completed approximately 2 billion of asset sales, which have generated approximately 1 billion of liquidity for NorthStar Realty. This 2 billion is comprised by the sale of approximately 1 billion of real-estate assets and 1 billion of real-estate private equity funds, commercial real-estate loans, real-estate securities and corporate funds.

In addition, we currently have approximately 2.5 billion of assets in contract to be sold. These sales will generate an additional 900 million of liquidity in the coming quarters. This 2.5 billion includes the previously announced definitive contract to sell our manufactured housing portfolio for a gross price of 2 billion, generating net proceeds of approximately 615 million in early 2017, as well as a contract to sell six multifamily properties generating net proceeds of approximately 50 million in 2016.

More recently, we have entered into an agreement to sell a number of real-estate private equity funding trust, which will generate approximately 250 million of proceeds. There were number of additional monetization efforts, NorthStar Realty continues to pursue and around which we have made substantial progress. These efforts include the sale of a minority interest in our healthcare real-estate portfolio and the sale of our interest in a triple net lease industrial real-estate portfolio. These additional monetization efforts, if completed, will generate approximately 500 million of additional net proceeds to NorthStar Realty. During NorthStar Realty’s financial second quarter of 2016, financial results are largely in line with expectations, driven by consistent operating performance across the majority of our real-estate businesses.

Turning to our major business lines performance. In our healthcare real-estate segment, net operating income was approximately 94.5 million in the second quarter, coming in at the higher end of our guidance range. On same store year-over-year basis, overall healthcare NOI increased 3.5% for the quarter, driven by stable occupancy levels and solid growth in revenue per occupied room. Our senior housing operating properties sub-segment in particular delivered strong growth year-over-year with NOI increasing 9% versus the second quarter in 2015.

This was driven through a combination of rate increases, which were up 3.6% over last year and an increase in our operating margins which grew from 28% last year to 29% this year. Our triple net lease portfolio delivered 2.8% growth year-over-year as contractual escalators in senior housing, skilled nursing and hospitals were in line with expectations. We remain pleased with the strong coverage in this portfolio, which stands at 1.7 times overall and 1.5 times for our skilled nursing triple net sector.

Turning to hospitality, on a consolidated basis for the quarter, we achieved EBITDA of 83 million, which was slightly below our expectations with flat year-over-year RevPAR growth. Our hotels experienced increased pressure on operating performance in the second quarter due to greater than anticipated room revenue displacement in hotels, which were under renovation, and generally sluggish industry conditions. We continue to implement an aggressive prefunded renovation plan from our acquisition of 167 hotels in 2014 and 2015. And as a result, we’ll be well positioned in the coming years with high quality and newly renovated assets. These renovations were the primary driver for second quarter RevPAR base last year. When we exclude the 36 hotels which were under renovation during the quarter RevPAR increased by 3.4% over last year.

Looking at the remainder of the year, we anticipate economic conditions to be similar to the current trends, and expect to push to complete our renovation projects. So we’re continuing to have an active construction schedule throughout the balance of the year. In summary, as hotel revenues and operating margins continue to tighten, our focus will remain on aggressive asset management, which include maximizing the benefits of our property renovation capital expenditures, pursuing real-estate tax appeals and seeking out high return on cost energy saving initiatives, all of which will help to drive incremental EBITDA.

There is one additional item I would like to mention with regard to our second quarter financial supplement. While we work through our registration statements for our merger with NSAM and Colony we will not be updating the NAV calculation that we typically provide in the supplement. However, if the various sales discussed on this call and on our earnings release were to close, we would certainly expect the aggregate effect of these sales to be positive relative to NAV calculations that closed after the first quarter.

As discussed, we’ve achieved solid results across our real-estate platforms and are incredibly pleased that we can realize the full benefits of our strategic asset monetization initiatives as internally managed REIT through our merger with NSAM and Colony.

With that, let me turn it over to Debra Hess for a more detailed discussion of the quarter’s results. Debra?

Debra Hess

Thank you, Jonathan and good morning everyone. As mentioned by Jonathan, we filed a joint proxy with perspectives that includes pro forma financial informations for the quarter ending March 31, 2015 and the year ended December 31, 2015. Given program providing pro forma financial informations, we were not able to present the full expected synergies from the merger nor the reinvestment cash from the NRF monetization and any tax statements expected from the merger.

As highlighted in this morning’s press release, for the second quarter, we reported CAD of 103 million of $0.56 per share. This number excludes approximately 10 million or $0.05 per share of CAD from the real estate private equity funds that we entered into an agreement to sell as of March 31st. In addition, the buyer will leave us 44 million of future funding obligations associated with these fund interest after the transaction. After the transaction NRF will have approximately 6 million of such future funding obligations for the remainder of the financials that we own.

Additionally, based on the new SEC guidelines, we have now included deferred tax in addition to current tax in reported CAD. For Q2, we had deferred tax benefit which resulted in an additional $0.01 per share of CAD for the quarter. Starting this quarter, we’ve included our indirect AUM from our interest in RXR and SteelWave in our total assets. As such, our assets as of June 30, 2016 totaled approximately 19.7 billion and pro forma for asset monetization initiatives as of August 2, 2015 such assets are approximately 17.4 billion.

With respect to our financial liquidity, we currently have approximately 800 million and including cash proceeds we expect to generate from assets monetizations under contract. This amount will reach approximately 1.8 billion. Of note that this does not include potential proceeds from the sale of an interest in our healthcare portfolio or our interest in the net lease industrial portfolio that Jonathan mentioned earlier. As a reminder, the tables in our quarterly financial supplement provides additional details regarding our investments and the underlying real-estate assets. This supplemental package is available at our Web site at www.nrfc.com.

Operator, please open up the call for questions. Thank you.

Question-and-Answer Session

Operator

Thank you [Operator Instructions]. We’ll take our first question from Jade Rahmani with KBW.

Jade Rahmani

We appreciate the breakout of the new NOI components in the healthcare portfolio. Is there any seasonality among the various asset classes, for example hospitals, MLPs, senior housing?

Jonathan Langer

There is not really market seasonality in healthcare businesses.

Jade Rahmani

And just broadly on the healthcare portfolio, how is supply tracking and are there any major renovation plans at specific projects that we should be aware of?

Jonathan Langer

Yes, we don’t supply for healthcare housing segment which I assume is what you’re referring, which seems largely in line with the general market and how mix reports on supply. We’ve been pleased with performance. I mean our occupancies remain pretty stable and we’ve been able to tick up revenues and raise probably above what we would have expected. So we’re up in mid-3%s in terms of rate increases. In terms of major capital projects, there is nothing major. We do have normal course capital that we like to spend throughout the year, mostly ROI driven CapEx.

Jade Rahmani

The hotels business, it sounded from your comments like more of the impact, the headwinds was from renovations of your own portfolio than industry conditions. Is that correct?

Jonathan Langer

We excluded the ones, renovating were up close to 3%, RevPAR year-over-year. Clearly, there has been probably decelerating growth throughout in hotel business as a whole, which we definitely feel the impact of that given the diversity and how [indiscernible] we’ve got a broad based portfolio. We’re going to track roughly how the hotel business is doing. And in our segment, in particular, the property trends -- the corporate transient segment didn’t performed the way we would have hoped it would. But overall, we feel like we’re pretty solid positioned for this year, and next year going forward as hotels have been renovated.

Jade Rahmani

What’s the timing of the renovation completions?

Jonathan Langer

I think the balance of the renovations are going to occur over the next 12 months, going forward.

Jade Rahmani

Do you think the headwind will peak in future quarters, or did it peak this quarter?

Jonathan Langer

I wish I could tell you Jade. I mean, it's a tricky one to say. I mean I think we’re going to roughly track the U.S. economy and house the U.S. economy performs. So, U.S. economy continues to grow at the pace it's been growing. I would expect there to be a moderate growth trajectory for the hotel business as a whole.

Jade Rahmani

The PE funds, can you say what the IRR is pro forma for the announced sales? What kind of returns should we expect on what you’re going to continue to own.

Jonathan Langer

It's a little north of 14% Jade.

Operator

And our next question will come from Mr. Germain Mitch with JMP Securities.

Germain Mitch

Jonathan, what percentage of the hotels is under renovation?

Jonathan Langer

It's about 25% that were actual renovation this year.

Germain Mitch

Was it any specific portfolio that you guys acquired or is it just broad?

Jonathan Langer

Primarily in our inland portfolio where the renovations are happening, it's obviously one of the larger portfolios we bought in terms of number of assets. But that’s the one where we’re probably have the majority of renovations of an asset.

Germain Mitch

And what’s the plans for private equity, or is it all for sales or there is specific hurdle that has to be realized or achieved before you put certain funds up for sale. How should we think about how that winds down over time?

Jonathan Langer

As we mentioned, we try to be opportunistic, everything we’ve looked at, everything has a potential sale candidate and we like to sell portfolios where we feel like we’re getting attractive prices that are reflected on our NAVs and we feel obviously that’s the case here as well.

Germain Mitch

And then with regards to the healthcare joint venture, maybe if you can -- can you provide any perspective on without meaning who the partner, is the type of partner, where the interest was in a joint venture, maybe some sort of perspective there?

Jonathan Langer

We’re talking to a large institution that has an interest in establishing a healthcare presence in the U.S.

Germain Mitch

So it's foreign capital?

Jonathan Langer

Yes.

Operator

[Operator Instructions] Our next question will come from Jessica Ribner with FBR Company.

Jessica Ribne

Just going back to the NAV update, I just want to clarify, you’ve said that you expected the sales to be positive relative to your NAV in the first quarter?

Jonathan Langer

Yes, what I said was that assuming all the sales close that we talked about in the script that in total it will be positive to the NAV we published after the first quarter this year.

Jessica Ribne

And then going back to the hospitality portfolio, are you thinking about that opportunistically as well and in terms of asset sales and asset monetizations?

Jonathan Langer

Yes, there are people that have followed this and expressed interest, for example, and we undergo some prices from time to time. And so we look at that like we look at private equity for example, if there an trade we felt like we could do that would attract from our perspective, we would do it.

Jessica Ribne

And is there anything that’s off the table with regards to asset sales? Or as like you said with the P-funds like everything you’re just looking at bids?

Jonathan Langer

I would say pretty much everything is on the table from our perspective, that’s how we’ve always looked at it historically.

Operator

And there are no further questions at this time. And that will conclude today’s call. Thank you all for your participation.

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