NorthStar Realty Finance CEO Discusses Q3 2011 Results - Earnings Call Transcript

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NorthStar Realty Finance Corp. (NRF) Q3 2011 Earnings Conference Call November 3, 2011 10:00 AM ET


Al Tylis – Co-President, COO and Secretary

David Hamamoto – Chairman and CEO

Debra Hess – CFO


Stephen Ross - Deutsche Bank

Joshua Barber - Stifel Nicolaus


Good morning ladies and gentlemen, thank you for standing by. Welcome to the NorthStar Realty Finance Third Quarter 2011 Conference Call. During today’s presentation, all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today November 3rd 2011. And I would now like to turn the conference over to 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 third quarter 2011 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.

Additionally, certain non-GAAP financial measures will be discussed on this conference. Our presentation of this information is not intended to be considered in isolation or as a substitute to the financial information presented in accordance with Generally Accepted Accounting Principles. 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 to everybody for joining us today. In addition to Al, I’m joined today by Dan Gilbert, our Co-President and Chief Investment Officer and Debra Hess our CFO.

During the third quarter, the US economy continued to grow at a slow pace due to various factors which included global issues such as the European debt crisis as well as domestic problems such as historically low consumer confidence and prolonged tie in employment, continued market volatility, which resulted in CMBS spreads widening during the put a strain on commercial real estate capital markets activity.

And new CMBS issuances is now projected to be approximately $30 billion for 2011 compared to an original projection of $40 billion. Despite macro concerns, investor interest remains strong for commercial real estate which was evident in the performance of our portfolio.

In addition we remain optimistic in the long-term US economic recovery and are well positioned to capitalize on current market opportunities and drive future growth. Throughout the year we’ve been aggressively making opportunistic investments in expanding our commercial real estate platform.

During 2011, we have completed approximately $600 million of new commercial real estate loan and other opportunistic investments utilizing both our unrestricted cash and CDO availability, which has been steadily increasing the earnings power and free cash flow to NorthStar. 25% increase in our common dividend.

We announced last night provide what we believe to be a balance between distributing additional cash flow generated by our assets while still retaining a portion for accretive new investment opportunities. In addition our liquidity position remains strong and we currently expect to have approximately $150 million of unrestricted cash at year-end before factoring in any new investments combined with a recently post $100 million credit facility for CMBS investment and another facility that we are close to finalizing.

We should have substantial dry powder to capitalize on future opportunities and continue to grow our earnings and cash flow. We’ve been making strong progress in our non-listed REIT initiatives and recent capital raising velocity has been increasing significantly.

As of today, we have over a $100 million of capital raised which is an important benchmark and clearly identifies us a leading new sponsor in the industry. It is expected that non-listed REITs will rise over $8 billion in 2011 with a large portion going to top sponsors.

We are confident in our ability to become a top sponsor in this space to generate a meaningful long-term fee stream to NorthStar. We have a broad commercial real estate platform with over $7 billion of assets which are managed by teams of skilled investment professionals overseen by a seasoned management team.

Due to our platform, we’ve been able to continue propelling forward even in volatile times and we are well positioned to grow our company over the long-term. I’d like to now turn the call over to Al who’ll give further discussions of our business strategy and objectives. Al?

Al Tylis

Thanks David. In terms of our business going forward we’ll continue to pursue opportunistic investments focused on our asset management business and strategically return to our core businesses of loan origination CMBS investing in an accretive way. We are nimble and well positioned to extract relative value in today’s volatile markets while continuing to build our franchise value focusing on long-term business objectives.

For example, the prolonged European debt crisis creates renewed opportunities for us to repurchase our CDO bonds including some European banks that have exposure to Eurozone sovereign debt. Repurchasing our CDO bonds remains a compelling investment opportunity due to the attractive risk-adjusted returns.

We also are continuing to leverage our commercial real estate platform by seeking out opportunities to expand on our asset management strategies as demonstrated by our acquisitions of CDOs from third-party managers such as the $240 million CDO acquired during the third quarter from CapLease.

Currently we manage 11 CDO vehicles with $6 billion of total assets. A key component of our asset management business is focused on our non-listed REITs. We are starting to see the benefits of the infrastructure that we’ve built over the past few years and sponsoring a debt-oriented vehicle and industry focus on earnings and capital preservation. Being a public company sponsor with a high degree of transparency and public reporting requirements is also proving to be highly beneficial.

We expect to generate annual cash flows from fees of approximately 3% on total capital raised which would translate into approximately $30 million of cash flow per year for $1 billion offering. Our business is scalable providing the capacity for additional offerings in the space, therefore we view these fees as upside without any significant increase in our G&A.

As David mentioned earlier, we are excited about our three year $100 million credit facility for CMBS acquisition. Based on current opportunities in CMBS we anticipate utilizing this facility to acquire short duration Triple-A CMBS with significant credit support to generate total returns in the mid-teens with potential upside. An additional facility that we are close to finalizing will be aimed in allowing us to return to our core business of loan originations in accessing our attractive pipeline of investment opportunities which is only been enhanced by the pullback of capital market-sensitive originators.

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

Debra Hess

Thanks Al, and good morning everyone. I’d like to take a few minutes to discuss our GAAP and our AFFO results for the quarter and our cash generated from our investments.

As you saw in today’s press release we recorded a GAAP net loss of $25 million or $0.26 per diluted share for the third 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 CapSource CDO bonds and our trust preferred debt-to-fair value through the income statement. This amount represented $43 million or $0.43 per diluted share of that GAAP loss.

Our third quarter AFFO totaled $29 million or $0.29 per diluted share. As David mentioned, through out the year we worked to settle the increased cash generated from our investments and in addition to recently increasing our dividend by 25%, we are retaining excess cash flow which permits us to make additional accretive investments. In a recent presentation we posted on our website we outlined the source of cash flow by categories of investments providing this type of information is consistent with our efforts to be transparent with our investors.

Based on annualizing our fourth quarter 2011 projections and before factoring in any new investments, total cash generated from our investments is projected to be approximately $175 million to $185 million. Note that this projected cash flow does not include any potential return of our invested equity.

Currently, we only require $58 million per year for fixed charges which include interest on our exchangeable notes on our TARP and our preferred dividend. Our runrate cash G&A is expected to be approximately $60 million to $65 million per year.

Some high level commentary about these cash flows is as follows. We are in collateral management based on our 11 CDOs and as both David and Al mentioned, we continue to raise capital through our existing and potential future non-listed REITs which we expect increasing fee streams for NorthStar without any additional capital at risk.

We have $2.5 million of commercial real estate debt investments that are primarily financing type CDOs. As of September 30, we only had three non-performing loans representing $41 million in aggregate principal amounts and $2 million book value, which is unchanged from the prior quarter. A majority of our debt investments are first mortgage loans that we directly originated providing for more control and flexibility than purchased investments.

As a result, we feel really confident about the levels in the field. Our $3.3 billion portfolio of real estate securities are primarily CMBS of which approximately a third will purchase at a significant discount to PAR. These securities are financed with six different CDOs. This is where we may see the most volatility in terms of the cash flows due to factors beyond our control such as rating agency downgrades. However we believe that certain of these CDOs that are not currently cash flowing has the potential to return invested equity over time.

Today we have opportunistically repurchased $307 million of our originally investment grade rated CDO bonds. They had a weighted average original credit rating of AA minus. And we have – we bought them at a $256 million discount to par. These bonds typically have significant credit support and we feel these bonds have likelihood to repay at par. We will generate cash flows to be interest payable on these bonds as well as realizing in cash the discount as these bonds repay.

For instance we own a meaningful amount of senior bonds in several of our securities CDOs that are currently not cash flowing, which could repay in the near future based on their position and the capital size. This quarter we expanded our CDO table in the press release to provide some more transparency on each CDO. In addition to our investment financing CDOs we manage a $1 billion commercial real estate portfolio comprised of $410 core commercial real estate in suburban office retail and industrial properties and a $517 million portfolio of healthcare properties.

At September 30, our core net leased portfolio was 94% leased with an approximate seven year weighted average lease terms and our net leased healthcare portfolio was a 100% leased to third-party operators with weighted average lease coverage of 1.4 times and an approximate eight year weighted average lease term.

In summary, we feel very good about our current investments and the stability strength and diversity of our cash flow. This concludes our prepared remarks for today. Now let’s open up the call for some questions. Operator?



Thank you. We will now begin the question-and-answer session. (Operator instructions) And our first question comes from the line of Stephen Ross with Deutsche Bank. Please go ahead.

Stephen Ross - Deutsche Bank

Hi, good morning. Congratulations on the dividend increase.

David Hamamoto


Stephen Ross - Deutsche Bank

Well, I guess kind of piggybacking on that comment could you maybe talk about what really drove the dividend increase? Where the brightest outlook is as far as in your selective investments with the – you kind of continue to repurchase that CDOs I guess are kind of opportunistic. The CDO purchase, what business line do you see firming up or improving the most and kind of where are you most excited about the growth?

David Hamamoto

Yeah, Stephen, I think the dividend increases is really driven by the earnings power of the company and cash flow and I think that’s what drove it. It was sort of diversified across all businesses and as you know early in the year when we raised debenture capital we used that money to buyback opportunistically our CDO debt which were great long-term value creators.

We are buying low $0.30 on the dollar but they were relatively low yielding. But fortunately, we made some other investments that have been higher yielding and the portfolio has stabilized from a credit perspective reserves are down. And so I think the overall cash flow profile of the company, we feel very good about which is what drove the dividend increase.

Stephen Ross - Deutsche Bank

Yep. And the loan loss provisions continue to come down I believe sixth or seventh quarter in a row. Is that a trend we should expect to see continue or is there still potentially some lumpiness in that, as you look ahead maybe two to four quarters?

Al Tylis

As you know there is still challenges in the market but I think overall we feel very good about directionally what’s happening with real estate credits. And I think we’ve addressed a number of the issues in the portfolio we’re not without – things that we’re still dealing with. But I think directionally we feel very good about credit trends.

Stephen Ross - Deutsche Bank

Great. Thanks for taking my questions.


(Operator instructions) Our next question comes from the line of Joshua Barber with Stifel Nicolaus. Please go ahead.

Joshua Barber - Stifel Nicolaus

Hi, good morning. I was wondering if you could make some, or at least give us some more comments on the refinancing environment today. Clearly, as it does every quarter, loss provisions are starting to come down, but we started balancing that today with widening CMBS credits in a tougher lending environment. Can you tell us what you are seeing in terms of refinancing for your borrowers and where you guys think that you are able to put money out today?

David Hamamoto

I think Josh, clearly there has been a back up in the CMBS market in terms of what was happening four five months ago, but I think again, long-term we see that market coming back and there is still deals getting done albeit they backed up a little on credit and spreads have widened.

But we are seeing a diverse group of capital providers in the market not just for the securitized market but balance sheet lenders. More opportunistic investors and you take an asset class like multi-family given where rates and they are very aggressive lenders in that space. So I would say that, it’s off from where it was four or five months ago, but there is still a lot of capital out there and good real estate can get refinanced.

Joshua Barber - Stifel Nicolaus

How about real estate that’s still is in some various state of distress, I mean how is the line so to speak moved or where lenders are willing to put out capital today from they’ve might have been willing to do things five six months ago?

David Hamamoto

I think there is a lot of opportunistic capital available and I think given where overall rates are if you take through the risk was squeezed and you price that, their borrowers can be upward to pay more for capital that’s prepared to take some risk and I think you are seeing people that are prepared to take credit risk being willing to bet on real estate in certain markets. And again, markets differ but, markets with decent fundamentals and long-term value we’re seeing capital available that’s willing to take risk.

Joshua Barber - Stifel Nicolaus

Okay, that’s helpful. Following up on the dividend question as well, how much of your fourth quarter gross cash flow, that $175 million to $180 million number is coming from the CapSource, CDO and what do you think the sustainability of that cash flow is?

Al Tylis

Hey Josh, it's Al. The distribution that we received in the third quarter was the distribution that reflected two separate payments but on a quarterly basis, we think that number is about $7 million and we feel very confident with the over-collateralization cushion and the work we’ve done in that portfolio and the remaining assets continuing to perform for an extended period of time.

Joshua Barber - Stifel Nicolaus

Okay, and one last question. Can you just comment on the what seems to be a very tight interest coverage on the just acquired CapLease CDO?

Al Tylis

Sure. I think that deal has always had a reasonably tight interest coverage. I think there is – we have some ability, we think to expand that. Although I don’t envision that being an issue and I think that’s again a deal with extremely high quality collateral and we expect that to perform for many years.

Joshua Barber - Stifel Nicolaus

Thank you very much.


Thank you. (Operator instructions) And there are no further questions in queue at this time. That does conclude our conference call for today. If you would like to listen to a replay of today’s call, please dial 303-590-3030 or 800-406-7325 and enter the access code 4480879. We like to thank you for your participation and you may now disconnect.

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