NorthStar Realty Finance's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: Colony NorthStar, (CLNS)

NorthStar Realty Finance Corporation (NRF) Q1 2012 Earnings Call May 3, 2012 10:00 AM ET


Al Tylis – Co-President, COO and Secretary

David Hamamoto – Chairman and CEO

Debra Hess – CFO


Joshua Barber – Stifel Nicolaus


Good day ladies and gentlemen, thank you for standing by. Welcome to the NorthStar Realty Finance First Quarter 2012 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 Thursday, May 03 of 2012.

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

Al Tylis

Thank you very much. Welcome to NorthStar’s first quarter 2012 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 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

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 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 and Ron Lieberman, our General Counsel.

During the first quarter of 2012, US economic indicators signaled increased positive momentum towards domestic recovery, although renewed concerns over Europe sovereign debt crisis contemporarily slowed down this progress.

Commercial real-estate fundamentals continue to get stronger and we saw a rally in the CMBS market during the first few months of 2012. Liquidity in the commercial real-estate debt market continues to return with $5 billion of US CMBS issue during the first quarter of 2012 and current projections ranging from approximately $30 billion to $35 billion for the full year.

In addition, the recent pricing of two securitization backed by non-conduit loan collateral indicates the broadening of investor appetite in the securitization market, which is a positive signal for us. While we’re not predicting the eminent return of the CDO markets that exists several years ago, we do believe that some form of securitization should become available to commercial real-estate finance companies like ours that have proven track record, deep investment organization and a willingness to retain risk associated with loans that we directly originate.

This past week, we announced our third consecutive increase to our common dividend representing a 50% increase in cash distributions over the last three quarters. As we look ahead through the remainder of 2012, we’re well positioned to continue to strategically grow the cash flows and earnings of NorthStar and we intend to regularly evaluate our dividend accordingly.

Turning to our investment strategy, our balance sheet remains solid with minimal corporate debt maturities relative to our liquidity which is enabling us to deploy our cash offensively in a compelling investment environment.

On the loan origination front, we see an increasing opportunity for NorthStar to earn attractive risk adjusted returns on its capital, given the positive market dynamic which include high supply demand imbalance fuelled by the significant amount of commercial real-estate debt maturities coming due over the next several years and the limited amount of capital available from debt providers such as banks.

We’ve been actively pursuing this opportunity and have directly originated $162 million of loans in 2012 including on behalf of our non-traded lease and have a significant pipeline of load originations in the late stages of execution.

The first mortgage loans that we have originated year-to-date our balance sheet have a current leverage yield of 17%. While we view this as an extremely compelling risk adjusted returns and believe that we can continue to originate first mortgage loans with similar characteristics, we’re also continuing to be opportunistic in our investment focus.

Opportunistic investments that we have made historically such as the acquisition of the CapSource and CapLease CDOs, repurchases of our corporate debt at steep discounts during the financial crisis and acquisition of our CDO bonds has been a hallmark of our success to date, and we’ll continue to pursue these types of opportunities that create long-term value for our shareholders.

Turning to our asset management business, we continue to make significant progress in building out our non-traded REIT business including our broker-dealer. Our capital raising pace continues to accelerate and we are clearly becoming a key player in the non-traded REIT sector as well as continuing to be a top-10 money raiser.

During the first quarter of 2012, we closed a $100 million credit facility with NorthStar Real-Estate Income Trust or NorthStar Income, which demonstrated our strength as the sponsor in this sector and ability to access capital and enhance return.

With the current build-out of our broker-dealer, we’re excited about our prospects for leveraging our infrastructure, to launch additional products in this space including our healthcare oriented vehicle, NorthStar Healthcare Income Trust or NorthStar Healthcare, which will be focused on debt and equity investments in the mid-acuity senior housing space, and which we expect to begin offering shortly.

We’re committed to our long-term business objectives and with our broad commercial real-estate platforms and solid capital structure, we’re well positioned to continue to grow the cash flow, earnings and franchise value of NorthStar.

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

Al Tylis

Thanks David. We remain committed to our strategy of expanding our main business lines of loan originations and investing in CMBS, Healthcare and core net lease properties as well as capitalizing an opportunistic investments and continuing to increase our sources of capital through our asset management business.

We currently have an extensive and diversified pipeline of investment opportunities with attractive risk adjusted returns with a blend of investment opportunities that offer higher current returns and others that offer longer term yields to maturities. Some of our more opportunistic investments have lower initial cash yields but are expected to generate higher and longer-term IRRs.

We anticipate maintaining a balanced approached to current cash flow available for distribution as well as building long-term value for our shareholders and we expect the net cash that we will earn from our investments for 2012 to be comfortably in excess of our current annualized common stock dividend of $0.60 per share.

Please refer to our Q1 updates to our corporate presentation which will be posted on our corporate website at the end of this week. For additional information, relating to our current projection of net cash, that we expect to earn from our investments in 2012.

In terms of our opportunistic investments, our CDO bonds, many of which are owned by European banks have become more readily available in recent months. The dynamic of European banks becoming more active sellers of our CDO bonds is something that we have been anticipating for some time. The principle proceeds that we could receive from our CDO bonds that we have purchased year-to-date is approximately $168 million which we purchased at an average price of $0.50 for $84 million discount to par and an expected IRR well in excess of 20%.

As of today, the total principle proceeds that we could receive from all of our CDO bonds is $706 million of which $527 million were originally investment grade rated that we repurchased in the secondary market at $339 million discounts to par. This $339 million discount, if realized in the future, we translate into $2.84 per share of cash profits for shareholders, will not necessarily being reflected as such on our GAAP financial statements.

This amount would obviously be a meaningful economic benefit to our shareholders and would be in addition to our $188 million of capital invested to repurchase these bonds. In addition, we’ll continue to see to capture relative value through other types of opportunistic investments, including opportunities within our own $7 billion commercial real-estate portfolio such as the Hancock Tower in Chicago. This is an example where we are partnering with the major financial institution to gain control of an asset that was collateral for one of our loans, and we expect to earn very attractive IRR in this investment.

We continue to diversify our sources of cash flows with the expansion of our asset management business. Our non-traded REIT business which is a significant component of our asset management business continues to have a strong capital raising phase. During the first quarter of 2012, we raised $77 million of our CRE debt oriented vehicle of NorthStar income with an additional $31 million raised in April bringing us to over $100 million raised for 2012 and $267 million of capital raised in total.

As this business continues to grow, which as David mentioned, we expect will shortly include the offering of NorthStar Healthcare, we are confident that this will result in a significant long-term fee stream for NorthStar that will be highly valued by the public markets.

We’re also thrilled with our win in the lawsuit relating to our property in California that was formally net leased to WaMu. The winner versus the $46 million judgment against NorthStar and we also expect to get back our $26 million bond that we posted as collateral in connection with the lawsuit, allowing us to put more cash to work for the exciting investment opportunities that we’re seeing.

And I’d like to now turn the call over to Debra, who’ll review our financial results for the first quarter of 2012. 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, and our investment portfolio and the related performance.

As you saw in today’s press release, we recorded a GAAP net loss of $34 million or $0.33 per diluted share for the first quarter. The largest contributor of our GAAP loss is the non-cash fair value adjustment. We mark our real estate securities portfolio, our NorthStar and our CapSource CDO bonds and our trust preferred debt-to-fair value through the income statement. This represented a $74 million or $0.69 per diluted share of that GAAP loss.

Our first quarter, our AFFO totaled $51 million or $0.47 per diluted share. Of the non-cash fair value adjustment, $123 million relate to our third party outstanding CDO bonds. As underlying asset values continue to improve, the values of our CDO bonds continue to go up, resulting in unrealized GAAP losses. Interestingly, these GAAP losses actually validate the embedded the value we see and repurchasing our own CDO bonds at significant discounts to par.

In other words, as we report these non-cash GAAP losses, economically our investments in our own CDO bonds are actually appreciating an increasing value for our shareholders, which as Al mentioned could translate into $339 million of cash profit to our shareholders.

We continue to have a strong investment portfolio and remain confident about the related cash flows and their continued growth as we continue to deploy capital into new investment opportunities. As a result of our increasing cash flows, we were able to increase our common dividend again this quarter, making it three consecutive quarters in a row.

As of March 31, we had $2.6 million of commercial real estate debt investments that are primarily financed in five CDOs that are non cross collateral versus each other. As of March, we had only two non-performing loans representing $39 in aggregate principle amount and $29 million current value, and this excluded the Hancock Tower Loan that we expect to restructure eminently.

A majority of our debt investments are first mortgage loans that we directly originated and we have seen the credit trends in our underlying portfolio continue to improve steadily. Loan loss reserves totaled $166 million as of March or approximately 7% of total loans and relates to 19 loans with a current value $253 million.

As of March 31, we have a $3.1 billion portfolio real-estate securities that are primarily CMBS, these securities are financed in six CDOs and on the credit facility that we entered into on the fourth quarter of 2011.

Our $1 billion commercial real-estate portfolio continued to perform well. It’s comprised of $404 million core commercial real-estate including suburban office, retail and industrial properties, and $559 million portfolio of healthcare properties which are predominantly private pay.

As of March 31, our core net lease portfolio was 94% leased, with an approximate 6.2 year weighted average lease term, and net lease healthcare portfolio was a 100% leased to third-party operators with a weighted average lease coverage of 1.4 times and an approximate 7.6 year weighted average lease term.

This concludes our prepared remarks for today. And I would like to open up the call for questions. Operator?

Question-and-Answer Session


Thank you, we will now begin the question-and-answer session. (Operator Instructions) Our first question is from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.

Joshua Barber – Stifel Nicolaus

Thanks, good morning. I may have missed this Debra, so I apologize. But of the $0.47 of first quarter AFFO, how much of that was from the WaMu gain?

Debra Hess

There were $20 million of the $51 million with a reversal.

Joshua Barber – Stifel Nicolaus

Okay, great, thanks. When it comes to the – you know, non-performing loans and loan loss reserves. It seems like, you know, every quarter that you know, the non-performing list which was pretty small to begin with continues to get smaller. I’m just wondering if you could talk broadly about why the loss reserves have sort of been ticking up, you know, not at any greater alarming pace but, you know, how come the pace of reserves have actually been somewhat increasing over the last you know, six quarters, given that, you know, overall credit trends seem to be improving?

David Hamamoto

Yeah, Josh. I think it just kicked up one quarter. I mean, I think the general trends are, you know, are positive.

Joshua Barber – Stifel Nicolaus

I mean, there was almost $60 million of loss reserves last year and then you know, almost $7 million this quarter. And in light of the fact that you know, most of your loans seem to be performing really well, you know, what are you seeing that’s necessitating those reserves and what’s actually have been happening to be loans that are getting reserves put on them?

David Hamamoto

You know, I think if you just look at the trends and you know, we can get you this data later. But if you look at the magnitude of the reserves over time, I mean, I think directionally you’ll see that you know, that the numbers are getting a lot smaller. And the actual number of loans where, you know, there our reserve is a lot smaller. So, it’s a pretty defined group of assets now that we’re dealing with.

And you know, it’s basically asset that we believe you know, have you know, or could be a restructuring or you know just general credit. But you know it’s the minimum. And I think you know, we’re up a $1 million or $2 million over the reserve from last quarter. So, overall the trends are positive and the numbers of issues are dramatically diminished now from a couple of years ago.

Joshua Barber – Stifel Nicolaus

Is there any CDO in particular that would have a disproportionate amount of loans with reserves on it today?

David Hamamoto

No, but I would say it’s pretty evenly balanced.

Joshua Barber – Stifel Nicolaus

Okay. And last question, what is your total credit line availability today both at the REIT level and at the non-traded REIT level?

Al Tylis

Hi Josh, at the non-traded REIT level, we’ve originated about $100 million of loans. And we hadn’t used the facility because we’re rapidly raising a lot of capital. And we intend to lever those shortly. So, right now, we can utilize the $400 million. And on our balance sheet facility right now we have about $65 million of availability.

Joshua Barber – Stifel Nicolaus

And that’s all on the loan facility and not on the CMBS facility?

Al Tylis

And there on the CMBS facility there is about $30 million still available.

Joshua Barber – Stifel Nicolaus

All right, great. Thanks very much. And good luck.


Thank you. (Operator Instructions). And thank you. There are no further questions in the queue.

Ladies and gentlemen, this concludes the NorthStar Realty Finance Corp First Quarter 2012 Results Conference Call. If you would like to listen to replay of today’s conference, you can dial 303-590-3030 or 1-800-406-7325 and enter the access code of 4532081 followed by the pound sign. We thank you for your participation. You may now disconnect.

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