NorthStar Realty Finance Corp. Q2 2010 Earnings Call Transcript

NorthStar Realty Finance Corp. Q2 2010 Earnings Call Transcript
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NorthStar Realty Finance Corp. (NRF)

Q2 2010 Earnings Call

August 5, 2010 10:00 am ET

Executives

Al Tylis - COO and General Counsel

David Hamamoto - Chairman and CEO

Andy Richardson - CFO

Dan Gilbert - CIO

Analysts

Jim Shanahan - Wells Fargo

Gabe Poggi - FBR Capital Markets

Joshua Barber - Stifel Nicolaus

Steve DeLaney - JMP Securities

Presentation

Operator

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Previous Statements by NRF
» NorthStar Realty Finance Corp. Q1 2010 Earnings Call Transcript
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» NorthStar Realty Finance Corp. Q3 2009 Earnings Call Transcript

Welcome to the NorthStar Realty Finance second quarter 2010 results conference call. (Operator Instructions) This conference is being recorded today, Thursday August 5, 2010.

I would now like to turn the conference over to Al Tylis, Chief Operating Officer and General Counsel for NorthStar Realty Finance.

Al Tylis

Morning and welcome to the NorthStar Realty Finance Corp second quarter 2010 quarterly conference call. At this time all parties have been placed on a listen-only mode. The floor will be open for questions following the presentation. Thank you very much and welcome to our conference call. Before the call begins, I'd like to remind, everyone, that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements.

These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

I refer you to the company's filings made with the SEC for more detailed discussion 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 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 www.sec.gov.

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

David Hamamoto

Thanks, Al, and thank you, everyone, for joining us this morning. In addition to Al, I am joined today by Andy Richardson, our CFO; and Dan Gilbert, our CIO. They'll briefly discuss our views on the pro real estate environment, then provide an overview of NorthStar's accomplishments since the first quarter.

Market original optimum entering 2010, which carried through much of next quarter was covered in the second quarter by the European sovereign debt prices, as well as U.S. economic data suggesting growth has been much more sluggish than expected. These events have resulted in significant amounts of capital remaining on the sideline.

Consistent with our view and comments during last quarter's conference call, we expect interest rate to remain low and business and employment growth remains slow through the remainder of this year. Even though investors have been cautious, liquidity and commercial real estate continue to steadily improve and is much better than a year ago, including some CMBS securitization.

Industry transaction volumes are still low relative to the historical levels and debt capital remains scarce except for the highest quality assets. However, we have received multiple bids for loans, when we captured the market. And have been able to generate liquidity through loan sale, when we believe the cash generated can be invested accretively when compared to the discount realized on sale.

Consistent with this strategy, during the second quarter we sold three loans having an aggregate outstanding principal balance of $93 million for $73 million strengthen in the right side of our balance sheet by repaying $304 million of recourse bank debt maturing in 2012.

Wells Fargo accepted $208 million cash and a $35 million principal participation interest in the mezzanine loan secured by retail properties in Germany. We've had a long relationship with Wells Fargo, and we and Wells believe that eliminating this legacy recourse debt with us, provides NorthStar with significantly expanded financial flexibility and a good runway to capitalize on opportunities, and in unique to our platform as the economy emerges from this deep recession.

To that end, Wells also received $2 million 10-year warrant struck at $7.60 and agreed to work with us to provide a new credit facility of up to $200 million with limited recourse guaranteed. Entire repayment transaction generated in net $58 million gain during the second quarter.

Embedded environment remains challenging, but we continue to make progress in dealing with problem assets. Non-performing loans or NPL fell to two loans totaling $50 million at the end of the second quarter; down from $84 million at the end of the first quarter, and $99 million at the end of 2009. NPLs now represent less than 3% of total loans at June 30.

Our second quarter credit loss provision was higher than in prior period, with 15% or $8 million of that amount is attributable to completed loan sales which did not necessarily indicate there is a credit issue.

On a non-traded REIT front, we have been raising and investing capital in our Reg. D REIT. A registered non-traded REIT for which we are seeking to raise $1 billion NorthStar real estate income trust, was recently declared affective by the SEC and should begin raising capital in the fourth quarter.

Both of these REITs are being distributed and marketed by our wholly owned broker dealer NRF capital market. As we've discussed in the past, we believe this market provides steady stable long-term equity capital, which complements our investment strategy and time horizon.

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