NorthStar Realty Finance Corp. Q1 2008 Earnings Call Transcript

NorthStar Realty Finance Corp. (NRF)

Q1 2008 Earnings Call

May 8, 2008 10:00 am ET

Executives

Richard J. McCready - Executive Vice President, Chief Operating Officer

David T. Hamamoto - Chairman, President, Chief Executive Officer

Andrew C. Richardson - Executive Vice President, Chief Financial Officer, Treasurer

Daniel R. Gilbert - Executive Vice President

Daniel D. Raffe - Executive Vice President

Albert Tylis - Executive Vice President, General Counsel

Analysts

James Shanahan - Wachovia

Douglas Harter - Credit Suisse

David Fick - Stifel Nicolaus & Company, Inc.

Jeremy Banker - Citigroup

Klaus Von Stutterheim - Deutsche Bank

Jeff Miller - JMG Capital

Dan Fisher - Wachovia Securities

Presentation

Operator

Welcome to the NorthStar Realty Finance first quarter 2008 earnings conference call. (Operator Instructions) I'll now turn the conference over to Richard McCready, Chief Operating Officer for NorthStar Realty Finance.

Richard J. McCready

Welcome to NorthStar's first quarter 2008 earnings 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 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. I should add that 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 generally accepted accounting principals. Reconciliations of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.SEC.gov.

With that, I'm going to turn over the call to our Chairman and Chief Executive Officer, David Hamamoto.

David Hamamoto

In addition to Rick McCready, our COO, I'm joined today by Andy Richardson, our CFO, Dan Gilbert and Dan Raffe, both EVPs, and Al Tylis, our General Counsel.

I'm going to start off the call today by reviewing current market conditions, where we see potential investment opportunities this year, and why we believe that the proactive strategy implemented by NorthStar during 2007, when rumblings in the credit markets began to grow louder, to aggressively focus on liquidity, credit risk management, and to emphasize patience and caution in our investment process will continue to best serve the interests of our shareholders by maximizing long-term value for the company. I'll then hand the call over to Andy to review financial highlights for the quarter.

It's been just two months since our last earnings call and a lot has happened in the market since that time. Early in March, broader market credit spreads continued to widen, culminating in the near bankruptcy of Bear Stearns and its rescue by the Fed. Since that event, the Fed has taken even more aggressive actions to inject liquidity into the financial markets and credit spreads consequently began a tightening trend that continues today. The Fed's implied backstop to the financial system appears to have put a floor on risk pricing, but we still believe there is reason to be very cautious and that significant downside risks remain in the market.

In short, our outlook has not changed and our priorities remain the same. Transaction volumes in commercial real estate remain very light, and while credit spreads are in many cases several hundred basis points tighter than just over a month ago, there is not much liquidity backing this trend.

We believe that the most significant risk to commercial real estate credit relates to future macroeconomic performance, and there remains significant downside risk to economic conditions resulting from increasingly high commodity prices, inflation and weakening consumer credit. Also, a prolonged lack of market liquidity will put even more pressure on commercial real estate borrowers and lenders as more borrowers reach loan maturities or extension deadlines.

NorthStar has positioned itself well to be patient in this environment. We ended the quarter with $312 million of liquidity. Furthermore, all of the outstanding debt on our balance sheet now matures beyond 2009 or has extension options permitting NorthStar to extend initial maturities beyond that time.

As many of you know, approximately $4 billion of the CDO term financings we manage are in their reinvestment period, which allow us to reinvest cash proceeds from repayments without having to repay the cheap debt financing. We also have over $535 million of preferred securities having a blended cost of just 8.2%.

We have been using the majority of the cash generated from repayments in our CDOs to reduce NorthStar's future funding obligations under existing loan commitments rather than putting out the capital into new investments. We felt that in a market where asset prices had been trending downward that this was a better use of that capacity. As a result, we have reduced our expect out-of-pocket cash equity needs for future funding from over $130 million at the beginning of 2008 to about $60 million for the remainder of the year.

Consistent with market trends, credit metrics in our portfolio weakened slightly during the quarter, but overall we continue to be pleased with the ability of our assets to withstand these difficult conditions. None of our borrowers are late on contractual interest or principal payments. This is an area on which we focus constant and disciplined attention. In fact, our investment professionals are spending a significant portion of their time working with and augmenting the resources of our portfolio management group to identify and to aggressively manage weaker performing assets to protect our capital.

We did take our first credit loss reserve this quarter, and frankly I would say that, as a lender with a nearly four-year public track record, it was somewhat inevitable we would eventually take a credit loss provision, especially given market conditions. The good news is that we've been proactive in assessing risk and this asset has been on a watch list for several quarters, and it was identified early as a weaker performing asset. While the $19 million first mortgage is still being paid currently by the borrower, we believe that it is prudent to take a credit reserve to cover the potential loss in the event we need to foreclose and sell the asset.

Finally, I must reiterate that NorthStar has no direct exposure to the single family mortgage and housing market. Our only residential condo exposure is just 2.6% of our balance sheet assets and nearly all of it is located in the strong Manhattan market. We have a low basis in these properties, averaging $612 per square foot.

On the investment side, we made virtually no new commitments in the first quarter. This is not an indication that there were no investment opportunities in the market, but that risk pricing trends, volatility and continued low market liquidity levels led us to conclude that on a longer-term basis we were better off holding our capital for more attractive returns later this year.

Clearly there is a near-term cost to earnings in holding large amounts of liquidity, but as managers with significant equity stakes representing over 11% inside ownership in the company, we are more focused on long-term value than short-term earnings results.

Andy will review our financial results in more detail, but we have mixed feelings about the very low interest rates that exist today. LIBOR rates, to which most of our assets and debt are indexed, declined nearly 200 basis points from the fourth quarter of 2007 to the first quarter. The low rates have been beneficial to our borrowers and portfolio credit overall because interest coverage gets stronger at our underlying collateral properties and interest reserves last longer.

On the other hand, lower floating interest rates mean lower earnings, even with match-funded debt. The dramatic decrease in floating rates cost us several cents of earnings this quarter, although LIBOR has stabilized and recently increased from the lows we saw in March.

While we don't bet on interest rates, we don't seem them materially declining from here.

Recently we have started to see more financial institutions that are willing to sell commercial real estate assets at discounts and with acceptable financing levels that are more interesting to us. We are targeting minimum high teens ROE levels for new investments and clearly expect to generate a more attractive risk-return level for new investments than in the past. We also have seen some pretty attractive return opportunities in our own CDO debt, and this month we opportunistically purchased small pieces of our own debt at double-digit un-leveraged current yields.

Maintaining high excess liquidity levels in this environment is clearly our conservative bias, but we also want to opportunistically take advantage of the superior investment opportunities we're beginning to see. Seeking ways to recycle capital from lower ROE assets has been a priority of ours since the second half of last year.

As we've discussed before, we have been working to recycle capital from our health care net lease assets in the Wakefield joint venture in which we have approximately $200 million of equity invested. We currently have just earned a 12% return on equity on this investment and valuations in the health care industry have held up very well.

Earlier this year we hired an adviser to explore a sale or recap of the portfolio so that we could free up capital to invest at higher and accretive returns. We received interest in the portfolio and continue to work with these parties on a potential sale. The process has taken longer than we had expected and is indicative of the market we are in today. Buyers generally are not moving quickly, and we are also seeing that many of them are trying to buy assets at levels below long-term intrinsic value.

Because of this dynamic we may recapitalize to portfolio with subordinate debt to free up capital and to retain the option to monetize our equity position in a more attractive market later on. We believe the long-term fundamentals of the health care industry are very strong, and a partial monetization with the option to realize the upside at a later date would be a very good outcome for this portfolio. We also believe that a financing recap could be accomplished more quickly and potentially by early third quarter. Recycling capital from Wakefield is an important strategic initiative for us because the reinvestment of this lower earning capital should enable us to mitigate the impact of lower interest rates on our core earnings.

On the private capital raising front we have said that we don't expect the closing earlier than the second quarter. Some very well known pension funds have expressed interest and they are going through the process of underwriting and approving NorthStar as a manager. This has been a slow process, but one in which we believe we are making positive headway. We are still optimistic that we can have a first closing on our real estate debt fund later this year.

Now I'd like to turn the call over to Andy, who'll review the first quarter results.

Andrew C. Richardson

In addition to reviewing our earnings results, credit and liquidity, I will also briefly review highlights from each of our business lines.

For the first quarter, our net income was $195.3 million or $3.14 per share. Our first quarter net income includes $215 million of net unrealized gain relating to applying FAS 159 fair value accounting. AFFO for the quarter was $24.2 million or $0.35 per share.

We invested virtually no new equity capital during the first quarter and received approximately $7 million of equity capital from loan repayments.

We delivered a 22.8% ROE for the first quarter excluding G&A and inclusive of the FAS 159 impact on book equity. NorthStar also continued to generate strong ROEs in each of its business lines, especially in light of the much lower interest rate environment.

Net interest income, which is interest, rental and advisory fee revenues less interest expense, property operating costs and asset management fees decreased to $3.6 million from the fourth quarter 2007 to $40 million. The decrease was principally due to LIBOR rates, which were approximately 190 basis points lower than the fourth quarter 2007.

Prepayment penalties and other income totaled about $1 million this quarter, consistent with the fourth quarter. Our securities fund, whose income is recorded as equity in earnings of non-consolidated ventures, generated approximately $3.6 million of AFFO for the quarter, $2 million greater than last quarter.

General and administrative expenses excluding non-cash stock-based compensation increased approximately $1.6 million from the fourth quarter to $11.1 million. The majority of the increase was due to accounting and auditing fees, which are traditionally higher in the first quarter due to the preparation and filing of our annual audited financial statements.

This quarter NorthStar adopted FAS 159, the fair value option. As we've discussed in prior quarters, FAS 159 provided the one-time right to determine effective January 1, 2008 which financial assets and liabilities existing at that date we would mark to market. FAS 159 allowed us to recoup an enormous amount of lost book value from the old accounting methodology and to recognize the value embedded in our long-term liabilities.

We had historically recorded only our securities assets and none of the related liabilities at fair market value, resulting in a significant reduction to our book value well in excess of our true capital at risk in our securities term financings.

We've also said that our over $4 billion of CDO term financings, many of which are in their reinvestment periods, and our $286 million of 30-year trust preferred subordinate notes have very a long and flexible term and extremely attractive costs whose value was not historically recognized in our financial statements.

We believe the adoption of FAS 159 has allowed NorthStar to more appropriately reflect the company's economic value on it's financial statements. In fact, our annualized dividend of $1.44 per share yields 11.6% against our March 31 book value of $12.44 per share.

There's a lot of additional disclosure in this quarter's 10-Q about FAS 159. Over 89% of our fair valued assets and liabilities were classified as Level 1 or Level 2, so a substantial amount of our marks were obtained directly from dealers.

We also included a book value roll forward schedule in the back of the earnings release summarizing the items resulting in the biggest changes to book value from the end of 2007 to March 31 of this year.

As you might conclude from the market value adjustment on our liabilities, we are seeing some very attractive opportunities in some of our own debt securities. For example, we recently acquired about $8 million face value of our own investment grade CDO term debt with a credit rating of BBB at a price below 50. On a leveraged and un-leveraged basis, these discounted debt acquisition opportunities in our own securities provide some of the best risk-return opportunities we see in the market today.

On the investment activity front, a common theme you have heard from us over the last few quarters is our cautious and patient approach to investing capital in these volatile markets. The first quarter activity reflects this approach, and we made just $4 million of acquisitions in our health care net leasing business and didn't acquire any net lease properties in our core office, industrial and retail portfolio.

At March 31, the un-depreciated cost basis of the health care net leased assets was $739 million, and these assets were financed with $515 million of non-recourse mortgage debt. NorthStar had approximately $211 million of equity invested in this portfolio.

For the core portfolio, our un-depreciated cost basis at March 31 was $533 million. The assets were financed with $396 million of non-recourse mortgage debt, and our equity invested was approximately $137 million.

In our real estate lending business, we made no new loan commitments and funded $58 million under prior period commitments during the first quarter. We also had $63 million of loan repayments.

From a credit standpoint, the overall first and last dollar weight average loan to value remained consistent with last quarter at 25.4% and 79.9%, respectively.

In the securities business, NorthStar invested $4 million in two real estate securities transactions during the quarter. The securities portfolio had 15 upgrades totaling $73 million of securities assets and six downgrades representing $45 million of assets during the first quarter.

Our securities assets continue to have very strong credit quality, with an average credit rating of BBB (flat).

At March 31, exclusive of assets we manage in the securities fund, we had approximately $1.5 billion of CMBS securities under management in our REIT of which 84% were issued prior to 2006.

Moving over to credit, risk management is one of our highest priorities. The overall credit performance of our portfolio has remained strong throughout the continuing difficult liquidity environment. NorthStar has no assets that are nonperforming or delinquent on scheduled interest or principal payments, and the company has no direct exposure to the single family mortgage and housing market.

NorthStar each quarter performs a comprehensive credit review of its assets under management and conducts weekly portfolio management review sessions to review highly active credit management situations. Based on this quarter's review, we added three real estate loan assets to the watch list, consisting of two first mortgages totaling $27.3 million and a mezzanine loan totaling $10.8 million.

The collateral underlying the first mortgages consist of a multifamily property for one $17.2 million loan and an industrial facility for a $10.1 million loan.

The mezzanine loan is backed by a hotel portfolio.

In addition, we took a $750,000 credit loss provision against the loan that was on our watch list for the prior two quarters. The loan is a $19.5 million first mortgage on two multifamily properties in Texas. The property performance has not improved, and the sponsor is not currently able to invest additional capital into the property.

No assets were removed from the watch list, which totals $96.6 million in outstanding balances. We believe the underlying collateral values support our basis and that no additional reserves are required at this time.

On the right side of the balance sheet we have very limited exposure to near-term debt maturity. The only maturity we have for the remainder of 2008 is the initial maturity in August of a $350 million secured credit facility for commercial real estate loans. We have $39 million of outstandings at March 31 and the credit facility can be extended for two additional one-year periods.

In addition, this past week we completed a recapitalization of the Monroe Capital middle market corporate lending venture. As part of the recapitalization, a sophisticated institutional investor with experience in middle market lending invested new cash equity capital into the business. The two credit facilities consolidated on NorthStar's balance sheet totaling $423 million of combined outstandings at March 31 and having stated maturities of March 31 and July 29 of this year were restructured into a long-term match-funded financing similar to a private CLO. Our invested equity capital remains in the venture, and a new investor will manage the asset.

From a balance sheet perspective, consolidated assets totaled $4.6 billion, down from $4.8 billion last quarter. The decrease was principally caused by mark-to-market adjustments associated with our commercial real estate security, and the write off of approximately $34.6 million of deferred costs associated with certain of our debt liabilities that are now fair valued under FAS 159.

Total on balance sheet [inaudible] March 31 decreased to 70% compared to 82% December 31, primarily due to the FAS 159 adjustments and senior debt to total assets was 64% at March 31.

On the liquidity and capital markets front, at quarter end we had $139 million of unrestricted cash, $100 million of un-drawn equity liquidity on our credit facilities, and $73 million of un-invested cash in our N-Star secured term financing for aggregate liquidity of $312 million. We also had $468 million un-drawn on our two real estate secured facilities as of March 31, 2008.

Although repayment volume has slowed somewhat, our $63 million of first quarter repayments demonstrates that our borrowers are able to refinance or sell their assets in this difficult environment.

In conclusion, we are pleased with NorthStar's continued solid credit and financial performance in this market. We continue to believe that conservative liquidity management, aggressive risk management and investment patience will create the best long-term value for our shareholders.

And with that we'd like to open it up for questions.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Shanahan - Wachovia.

James Shanahan - Wachovia

Does NorthStar then still have approximately $16 million of capital invested in the Monroe JV?

Andrew C. Richardson

I think after the recapitalization we're going to have about $80 million of capital in the JV, and it will be deconsolidated on our financial statements so we'll use the equity method of accounting going forward.

James Shanahan - Wachovia

Can you [inaudible] a walk forward there? If you were at $16 million at March 31, was there incremental capital invested or how did that work?

Andrew C. Richardson

No, we had $16 million of capital invested in the warehouse that matured on March 31 of '08 and it was extended as part of this recap, but we also had capital invested in the VFCC facility that had an initial maturity of July 29 of this year.

And then in addition to that we also had a 40% interest in the first CLO that Monroe did last year. They completed that one as well as a couple of third-party CLO equity interests in that business. So we combined our total investment in that middle market lending venture into this recapitalization.

James Shanahan - Wachovia

What is, at this point, given everything that's happened and the new financing, what is the anticipated annualized return on equity on the $80 million in capital that's invested in that vehicle now?

Andrew C. Richardson

It depends on the performance of the underlying assets, but we expect it to have a much lower yield than it had previously delivered on that highly leveraged warehouse.

David Hamamoto

But part of the variable, Jim, is that as part of the facility there's a 25% reinvestment-backed basket so that the term debt will stay out for a longer period of time and we can get the benefit of that leverage by reset and cycling the capital into higher-yielding loans as loans pay off or get sold.

But I think one of the variables will be how accretively that 25% gets invested. But I think in our projections we would expect that the ROEs would be below our core real estate portfolio performance.

James Shanahan - Wachovia

But a clear positive, I'm assuming then. You had discussed if the one facility within the Monroe JV, if it were to be terminated that the $16 million of capital would be at risk and would have been a loss. That's off the table, then, it sounds like.

David Hamamoto

Yes.

James Shanahan - Wachovia

Regarding credit quality, the $750,000 loss provision that was taken in the quarter, I think you'd discussed that it was on approximately a $19 million loan. Is that the multifamily property located in San Antonio?

Andrew C. Richardson

Yes.

James Shanahan - Wachovia

How much equity do you estimate is below your mortgage there?

Andrew C. Richardson

I think it's about $1 million to $1.5 million.

Operator

Your next question comes from Douglas Harter - Credit Suisse.

Douglas Harter - Credit Suisse

Could you just walk me through the future funding commitments you have. Is the total amount $60 million or is it $60 million over your current credit facility amounts?

Andrew C. Richardson

The $60 is what we expect from out of pocket, so it is exclusive of amounts that will be funded either in our CDOs and our credit facilities.

Douglas Harter - Credit Suisse

Do you have the absolute number for what those future funding commitments are?

Andrew C. Richardson

Yes, I think the total future funding commitments at the end of March are about $514 million.

Douglas Harter - Credit Suisse

And how does that compare to year-end?

Andrew C. Richardson

I think at year-end it was about $564 million.

Douglas Harter - Credit Suisse

And then, switching topics, on the health care lease portfolio, how much additional leverage do you think you could put on with sub-debt?

David Hamamoto

I would say probably 75 to 100.

Operator

Your next question comes from David Fick - Stifel Nicolaus & Company, Inc.

David Fick - Stifel Nicolaus & Company, Inc.

That last question really opens up a whole issue here. The total commitments I don't think were disclosed, and if you read your press release it indicates $60 million this year. Why wasn't that clearer in your release?

Andrew C. Richardson

Because what we said in our release is what we think our out of pocket capital needs will be for future funding commitments, and it's in our 10-Q every quarter. There's $514 million of total commitments at the end of the quarter, of which $302 million get funded in the CDOs where the loans are financed.

David Fick - Stifel Nicolaus & Company, Inc.

I understand that, but you say $60 million of cash needs. I'm looking at the release. But some of your existing loan balance and your cash is already committed to other; I just don't think it's clear. It might be better if it were laid out in future press releases.

Andrew C. Richardson

Well, that's the only nondiscretionary funding commitment that we have that would come out of the $139 million of unrestricted cash and the $100 million that we have available on our unsecured credit facility.

David Hamamoto

David, I'm sorry that it was confusing, but I think that if you look at the substance of what we're trying to say, what we're - we're very proud of our balance sheet, and I think that we've stressed that on a number of calls.

And I think the point we were trying to make is that we have these long-term CDO facilities that are able not to fund our existing commitments as well as to be able to be used for reinvestment.

David Fick - Stifel Nicolaus & Company, Inc.

And I don't mean to belabor the point. I understand that completely. But in doing initial analysis on a release like this, we're looking at those CDOs as having capacity and we recognize the strength of your balance sheet. We identify all these sources, and then we see what appears to be a use of $60 million and yet a portion of the liquidity we're giving you credit for isn't actual liquidity anymore, and that's not clear from the press release. That's really my only point.

David Hamamoto

But I think the two numbers, the $60 million we put in there because it was relative to the $312 which is, what we really focus on is equity liquidity on our books. So we've got $312 of equity liquidity at quarter end, and we have $60 million of nondiscretionary funding, leaving a pretty big balance of cash equity liquidity that can be invested in these high ROE opportunities.

David Fick - Stifel Nicolaus & Company, Inc.

The '08 and '09 asset maturities, can you review those for us at this point as well as your assessment of the likelihood of having to re-originate or extend?

Andrew C. Richardson

Yes, and this will also be in our Q when we publish it, but I think we have a lot of our loans, many of our loans, have extension options that borrowers can exercise if they meet certain criteria. We have initial maturities of about $389 million for the remainder of the year, but assuming all of the borrowers that can qualify for an extension do extend, we only have less than $1 million of maturities on a fully extended basis for '08.

And if you roll it forward to '09, there are $567 million of initial maturities, of which, on a fully extended basis, about $104 million would be due.

David Fick - Stifel Nicolaus & Company, Inc.

And so you're not looking at a significant program of widening spreads or getting any fees beyond the extension fees.

Andrew C. Richardson

Well, it's funny because I think at the beginning of the year we started with about, I think on a fully extended basis there would be less than $20 million of repayment, and we had $63 million in the first quarter. And I know it's very hard when you, no matter who you talk to, I'm sure you get tired of hearing this, it's hard to predict how many people extend versus sell or refinance. And clearly it's gotten more difficult in this market. But, we've already seen a baseline level and one quarter that's above what we disclosed to come back on a fully extended basis for the full year.

David Fick - Stifel Nicolaus & Company, Inc.

On the FAS 159 mark-to-market, can you walk us through how you did that, what's in and what's out? I presume that this was a bigger mark then we thought. We did anticipate a mark but, for example, you don't mark your CRE loans, okay, and so to the extent that there's debt matched to that, are you marking that debt?

Andrew C. Richardson

We're marking all of the CDO debt that's on our balance sheet, so yes. Yes, we are because we can get a dealer quote on that.

David Fick - Stifel Nicolaus & Company, Inc.

But that's not really matching assets and liabilities. That's giving you in essence a bump in book value that, to the extent that you've got to repay on a CRE, you're getting that at par, you're going to pay it off at par not at the discounted value for the debt.

Andrew C. Richardson

I think the way we looked at it was that the CDO liabilities are very long term in nature; they're 7 to 10 years. There's a lot of embedded value there. The loans underlying those assets, we have about $2 billion of loans. They're about three years' average duration. And going through and using subjective judgment on 110 separate loans that'd be Level 3 assets, we didn't think it was worth going through that process. But clearly, you could do a back of the envelope mark-to-market on those assets.

David Fick - Stifel Nicolaus & Company, Inc.

Mark the related debt, the directly related debt, and you've only got, best case, five years of replacement collateral time and probably the weighted average is three years or something like that now. Isn't that correct?

Andrew C. Richardson

About three and a half years.

David Fick - Stifel Nicolaus & Company, Inc.

I can tell you it doesn't sound like you're matching your liabilities and you debt and your assets in terms of this 159 mark in the CDOs. And then one minor question, why the large jump in asset management fees paid?

Andrew C. Richardson

Those are the management fees that we pay for the Wakefield assets. And we had just over a higher balance.

David Hamamoto

David, one thing on the FAS 159. We've obviously spent a lot of time thinking about this, and I think you're right in that, if you did mark the loans to market there'd probably be a discount on those short-term loans. But, order of magnitude, we think it's not that much different than the difference between the depreciated book value and fair market value on our own real estate.

And the other way that, because we do want our book value to reflect true economic value, and the other way that we tried to think about that was if you look at our dividend yield on our new book value of $12.44, it's just under a 12% yield on that book value, which is some indication supporting the economic value.

So those are just some other thoughts that we had when we went through this decision-making process.

David Fick - Stifel Nicolaus & Company, Inc.

Well, we'll talk offline about that. I just, most analysts and we do try to add in some assessment of real estate value and give you credit for that, and you're talking about apples and oranges. And to the extent that all of a sudden everybody repaid their loans tomorrow and they have the right to do that, your liability against those loans is now greater than book, and I don't get that but okay.

Andrew C. Richardson

It should be, right? If all the assets paid off and we had the ability to reinvest and we had this cheap debt, we know where the CDO debt trades. We get marked and dealers give us marks. We know that having those liabilities is incremental value to us.

Operator

Your next question comes from Jeremy Banker - Citigroup.

Jeremy Banker - Citigroup

I was wondering whether you could expand on your comment that you expect to see the best investment opportunities you have seen in years later this year. Is that indicative that you expect to basically look to make some significant investments in [inaudible] '08?

David Hamamoto

Yes. I think, given the liquidity that we have, some of the opportunities that we're seeing, particularly coming out of people that are holding paper, we think that we'll be able to buy good credit quality loans at a discount with financing provided by the seller that will generate pretty attractive risk-adjusted returns. And so we're starting to see the bid-ask spread narrow and assets start to trade, and our judgment is that in the second part of '08 that there will be good opportunities, and we will be acting on some of them.

Jeremy Banker - Citigroup

And isn't there the risk that this might be too early in the face of a weakening economic environment?

David Hamamoto

There is, and obviously making those judgments are what we get paid for. And so I think part of what we're focusing on is things that are more senior in the capital stack that would withstand a prolonged recession.

Operator

Your next question comes from Klaus Von Stutterheim - Deutsche Bank.

Klaus Von Stutterheim - Deutsche Bank

Your assets all this quarter [inaudible] was $0.01 less than your dividend. Should we expect an adjustment to the dividend?

Andrew C. Richardson

I think a couple things. One is that we earned a lot more last year than we did this and we believe that, to the extent we're able to recycle some of this capital that we'll have significant coverage for the year, for the dividend for the year, at the $0.36.

Operator

Your next question comes from Jeff Miller - JMG Capital.

Jeff Miller - JMG Capital

Can you walk me through the three real estate securities loans that you put on the watch list? I just didn't quite catch which three they were and for how much.

Andrew C. Richardson

Sure, I can give you a little bit of a brief summary on those loans. One was a $17.2 million first mortgage against a multifamily property, and the performance of that property located in Florida, and the performance of that property has been negatively impacted by what's gone on in the residential sector in Florida, so the performance has been weaker. And we felt it was - we're comfortable with our basis, but we thought, we felt it to be prudent to add to the watch list.

The other one was a $10.1 million first mortgage on an industrial facility located in New York. Again, the leasing plan for that facility has been slow, and there's still some recourse responsibility that the sponsors have to help support that assets and we're comfortable with our basis again, but again, there's a lot of asset management time and attention devoted to that.

And then the final asset that we added was a $10.8 million mezzanine loan that is a loan backed by a small hotel portfolio where, again, some of the hotels were recently developed and they've come online and they haven't stabilized yet, and I think the borrower's a little bit behind their business plan there. And so again, there's a lot of time and attention being paid to that asset.

And those are really the three that we added this quarter. I think they total $38.1 million in the aggregate.

Operator

Your next question comes from James Shanahan - Wachovia.

James Shanahan - Wachovia

On the G&A line on the income statement, this has continued to exhibit a fair amount of volatility. Can you talk about some of the drivers that might lead to plus $5 - $6 million spikes in G&A one quarter and then a similar decline in a following quarter? And my follow up question, also related to G&A, have there been any major changes to the platform during the course of the first four or five months of this year or even late last year that we may not be aware of that reflect changes in the operating environment and the slower origination volumes, etc.?

Andrew C. Richardson

Yes, Jim, I think we focus on cash G&A, which is total G&A less stock-based compensation. I think that was around $11 million for the quarter. And so I think that we believe - and also, in my earlier comments I said that auditing and professional fees tend to be higher in the first quarter; they're probably $1 million to $1.5 million higher than they normally would be in all the other quarters. So that, I think on a run rate basis once you adjust for that I think we're at a $40 to $42 million cash G&A number for the year. And I think that that compares - it's about flat to where we were last year.

But on the personnel front, at year end as part of our normal process and part of recognizing where we are in the environment, we did reduce headcount in our investments area, but I would say that that reduction was partially offset by additional people that we added in our portfolio management group that's located in Dallas.

Operator

Your last question comes from Dan Fisher - Wachovia Securities.

Dan Fisher - Wachovia Securities

I heard you mention earlier that you had been buying back some of your CDO debt in the secondary market.

Richard J. McCready

Yes.

Dan Fisher - Wachovia Securities

Have you looked at comparing that to buying back some of the preferred, the NRF B and A? And sometimes the thing really, those trade off quite a bit, and it might be advantageous to be buying those at bargain prices.

Richard J. McCready

Yes, we have looked at all the securities and to date we've found that some of the senior classes in our CDOs we believe have the best risk-adjusted return. But obviously, to the extent there's a seller of any of our paper at a big enough discount, we understand the credit well so we're probably a very good buyer for any of those securities to the extent we like the price.

Dan Fisher - Wachovia Securities

But you haven't been actively doing anything with your preferred?

Richard J. McCready

We've looked at it and we just have felt the CDO bonds have been a better value at where we can buy them.

Operator

There are no further questions at this time.

Richard J. McCready

Thanks, everyone, for joining.

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: [e-mail]. Thank you!