NorthStar Realty Finance Corp ( NRF)

Q2 2011 Earnings Call

August 04, 2011 10:00 a.m. ET

Executives

David Hamamoto – Chairman and Chief Executive Officer

Debra Hess – Chief Financial Officer

Albert Tylis – Chief Operating Officer

Daniel Gilbert – Co-President and Chief Investment officer

Analysts

Stephen Laws – Deutsche Bank Securities

Presentation

Operator

Ladies and gentlemen thank you for standing by. Welcome to the NorthStar Realty’s Second Quarter 2011 Conference Call Results. During today’s presentation all participants will be in a listen only mode. Following the presentation the conference will be open for questions. (Operator Instructions) Today’s conference is being recorded August 4, 2011. I would now like to turn the conference over to our host Mr. Al Tylis, Co-President and Chief Operating Officer of NorthStar Realty Finance. Please go ahead.

Al Tylis

Thank you very much. Welcome to NorthStar second quarter 2011 conference call. Before the call begin 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 call. Our presentation and this information is not intended to be considered in isolation or the substitute for the financial information, presented in accordance with Generally Accepted Accounting Principles. Reconciliations of the 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 am now going to turn the call over to our Chairman and Chief Executive Officer David Hamamoto. David?

David Hamamoto

Thanks Al and thank you every one for joining us. In addition to Al I am joined today by Dan Gilbert, our Co-President and Chief Investment Officer and Debra Hess, our Chief Financial Officer. The pace of the US economic recovery slowed during the second quarter largely driven by among other things the European sovereign debt concerns, stubbornly high unemployment rates and Washington’s prolonged process on reaching a decision on raising the debt ceiling.

Despite the adverse economic indicators commercial real estate fundamentals remain relatively stable even continuing to improve in certain sectors and geographic markets. In addition liquidity continued to return to the commercial real estate debt market with $8 billion of CMBS issuance during the second quarter. Although we saw an increase in borrower cost of capital due to the macro driven headwind.

Unfortunately the newly issues securitization market has experienced some recent setbacks with two deals, one was pulled by the issuer and the other due to rating agency issues after being sold to investors. Despite these challenges we continue to maintain confidence in the longer term economic recovery and are seeing the effect of the positive trends in commercial real estate fundamentals appearing in our portfolio by means of improved underlying property level performance metrics. During the credit crisis we strategically showed up liquidity and built a solid balance sheet that has positioned us to grow.

During the first half of this year we were pleased to return to the capital markets with two corporate capital raises, including an offering of exchangeable notes and common stocks, generating net proceeds of $232 million. We are using our significant liquidity to make opportunistic investments that we expect will generate attractive risk adjusted returns and excess cash flow to NorthStar.

During the first half of the year, we actively repurchased our own CDO bonds, which continue to be a compelling opportunity due to the attractive yield to maturities and tangible book value accretion. As of June 30 th we own $495 million of our own CDO bonds of which $315 million were repurchased in the secondary market at a weighted average price of 25% at par. We also recently started to recognize the benefits of key strategic investments made NorthStar last year.

In July we received our first equity distribution from the capital source CDO that we acquired last summer. The July 2011 distribution was $14 million including $7 million previously held in an escrow account and $7 million quarterly distribution. I'd like to now turn the call over to Al who will further discuss our business strategy and objectives.

Al Tylis

Thanks, David. As NorthStar moves forward, we intend to keep the disciplined approach that has served us well during the last several years. At the same time, we have shifted to offense and hence continue to make opportunistic investments utilizing our unrestricted cash and our low-cost non-recourse CDO finance. One recent investment example is that we have signed an agreement to acquire CDO from cap lease for $23 million. The collateral is primarily investment grade credit tenant leases, corporate credit notes and some CMBS funds.

Similar to the cap source CDO acquisition, the cap lease CDO acquisition is in line with our strategy of investing in transactions where we are able to utilize our distinct expertise and our proprietary information while also bolstering our asset management business and enhancing shareholder value.

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