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Event Date: 02/27/2015

Company Name: Northstar Realty Finance
Event Description:Q4 2014 Earnings Call
Source: Northstar Realty Finance
For more event information and transcripts,
visit <a href="bloomberg:EVTS%20%2FD%3AF%2D4804875%3CGO%3E">EVTS</a>
Q4 2014 Earnings Call
MANAGEMENT DISCUSSION SECTION
Operator:
Welcome to the NorthStar Realty Finance Fourth Quarter 2014 Earnings
Conference Call. Today's conference is being recorded. At this time, I'd like
to turn the conference over to Mr. Al Tylis, President of NorthStar Realty
Financial. Please begin.
Albert Tylis:
Thank you very much. Welcome to NorthStar Realty's fourth quarter 2014
earnings 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 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.
Furthermore, 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 www.sec.gov.
With that, I'll now turn the call over to our Chairman and Chief Executive
Officer, David Hamamoto. David?
David Hamamoto:
Thanks, Al. Thanks everyone for joining the NRF conference call this morning.
In addition to Al, I'm joined today by Dan Gilbert, our Chief Investment and
Operating Officer; Debra Hess, our CFO; and Ron Lieberman, our EVP and
General Counsel.
Macroeconomic environment remains positive as the U.S economy continues to
demonstrate a steady recovery. In fact, recent economic indicators such as
job growth and consumer spending have reinforced the view that the U.S has
finally passed the financial crisis and on a firm road to sustain healthy
economic growth. This favorable economic environment has supported improving
commercial real estate fundamentals, including expanding rental growth and
declining vacancy rates.
Further, sustained investor demand and limited near-term supply growth have
driven prices higher for commercial real estate. Additionally, there in 2014,
liquidity continue to improve in the commercial real estate markets with CNBS
issuance coming to approximately $90 billion for the year.
Turning to Europe, in January the European Central Bank launched an
aggressive bond buying program. Europe's commercial real estate market is
expected to be a meaningful beneficiary of the quantitative easing program as
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low interest rates will support real estate investment in the Eurozone.
Overall, we believe the long-term macroeconomic outlook for the European
commercial real estate market is very favorable with growing rents,
stabilizing or reducing vacancy levels and historically wide spreads between
cap rates and interest rates.
In both the U.S and Europe, the low interest rate environment continues to
provide for very efficient financing were our own real estate investments
through low cost, non-recourse and non-cross mortgages.
2014 was remarkable year for NorthStar Realty. We generated robust financial
results, achieved significant growth and continue to transform into a
diversified commercial real estate company with a focus on direct real estate
ownership across multiple asset classes, which we expect will generate
long-term durable cash flows with potential for future capital appreciation.
We entered 2015 with approximately 82% of our $18.5 billion of total assets
in own real restate or 80% if we exclude the European assets we're acquiring
and expect to be contributed to the recently announced European spin-off. As
you know we're committed to finding novel approaches to creating and
unlocking shareholder value.
With the opportunities we're seeing in Europe, and our accelerating growing
presence there, we recently announced that our Board of Directors approved
the plan to separate NorthStar's European real estate business into an
independent publicly traded equity REIT.
NorthStar Realty Europe is expected to be listed on the New York Stock
Exchange and we're also evaluating a potential dual listing in Europe.
NorthStar Realty Europe will provide investors with a separate and distinct
business focused on European commercial real estate investments through a
separate equity REIT with target leverage levels of 40% to 50%.
NorthStar Realty Europe will be differentiated from its peers due to its
ability to provide investors with the opportunity to gain PAN European
exposure in a single investment. We are excited to be investing at a critical
point in the Europe real estate cycle, which currently exhibits historically
widespread between cap rates and interest rates, much like the U.S several
years ago.
NorthStar Realty Europe will be well positioned to capitalize on improving
European macroeconomic trends and property fundamentals, including rental
growth and potential capital appreciation.
We believe this transaction will unlock value as many European equity REITs
trade at a substantial NAV premium and had a cash flow multiple and implied
cap rate that would translate into substantial immediate value creation for
NorthStar Realty shareholders.
We believe NorthStar Realty Europe is also poised for long-term value
creation as we apply our proven investment approach and take advantage of
substantial internal and external growth opportunities we see in this market.
In summary, we believe this spin-off will create a scalable equity REIT for
the lower cost of capital, superior access to capital, and a unique position
to execute on complex cross-border PAN European transactions, capturing
portfolio level discounts on high quality assets. As previously discussed, we
expect the spin-off to be completed in the second half of 2015.
As we look ahead, we remain committed to pursuing attractive commercial real
estate investment opportunity and seeking additional value enhancing
opportunities for our shareholders. Our intention is to continue executing
our disciplined investment strategy and diversifying our broad commercial
real estate platform.
Additionally, with our considerable own real estate across multiple asset
classes, NorthStar Realty is very well positioned to continue benefiting from
positive trends in commercial real estate.
I'll now turn the call over to Al, who will further discuss our business
strategy and objectives. Al?
Albert Tylis:
Thanks, David. Our fourth quarter operating performance was strong with
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reported CAD of $0.44 per share, despite seasonality and our limited service
hotel portfolio due to lower business travel during the holidays and winter
months.
During the fourth quarter, we continue to make strategic investments across
multiple asset classes. Our fourth quarter investments included the $4
billion acquisition of Griffin-American Healthcare REIT II and a $1.1 billion
limited service hotel portfolio from Inland America.
In addition to these large transactions, we successfully completed several
opportunistic real estate investments including a $152 million acquisition of
limited partnership interests in real estate private equity funds.
As David discussed, we're excited about our European expansion and the
spin-off of NorthStar Realty Europe. We've recently announced two separate
agreements to acquire high quality PAN European predominantly office
portfolios.
The first portfolio, which we announced in December is a 1.1 billion office
portfolio comprised of 11 Class A office properties across gateway cities in
seven of Europe's top markets, for approximately 50% of the portfolio NOI
derived from properties in London and Paris.
The second transactions contract was also executed in December is an
approximately 500 million portfolio of 38 properties, of which half are in
Germany and 30 of which are office properties located across eight European
countries. These two portfolios combined with a $100 million office property
outside of London we acquired in the third quarter of 2014, positions us with
an approximately $2 billion portfolio of high quality, predominantly European
office real estate assets that have been amassed in a short period of time.
Our portfolio has a well diversified mix of market leading tenants, includes
properties located in the top KY European markets and feature several trophy
office buildings, such as the Condor House and the Portland Square House in
London.
In addition to our European business, we continue to see a robust pipeline of
investments in U.S commercial real estate. While the U.S real estate market
is further along its cycles than the European market, solid U.S growth,
moderate new supply, and historically low interest rates continue to create a
favorable drop -- back drop for commercial real estate.
Our current pipeline is very strong and includes opportunities to continue
building substantial scale in our healthcare and hospitality businesses. In
addition, we continue to see opportunities to capitalize on private equity
investments, which we feel should generate some of the most compelling risk
adjusted returns in the U.S commercial real estate available today.
As you may have seen, RXR Realty recently announced a transaction to sell an
approximately 50% interest in a $4 billion portfolio to Blackstone. This
transaction allows RXR to realize value created since acquiring these
properties between 2009 and 2011, while remaining invested in these assets
and continuing to participate in future value creation in ongoing management.
As a result of this transaction, we expect a substantial portion of our $250
million loan to RXR to be repaid, which we would then likely redeploy into
direct ownership and real estate. RXR is proven to be an excellent partner,
continuing to create significant value which we benefit from through our
ownership interest in their business.
Before turning the call over to Debra, many investors have been asking us
that the potential inclusion in the MSCI U.S. REIT Index, or RMZ Index. While
we were disappointed not to be included in the index earlier this month, MSCI
indicated they will evaluate our inclusion following the filing of our 10-K.
There is no assurance it will be included in the index at the next
rebalancing period in May, but we certainly believe that we check all of the
quantitative and qualitative boxes that are necessary for inclusion.
Additionally, while not a decisive factor behind our decision to spin-off a
European business, our potential RMZ inclusion was a consideration when
reviewing our diverse commercial real estate portfolio and strategically
deciding which business was appropriate to spin-off at this time.
Since many of our European assets were not reflected in our 2014 10-K
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financial statements, this should make the review process clear of MSCI to
evaluate our business in a percentage of revenue generated from our own real
estate.
In conclusion, we believe there is a tremendous amount of value in our $18.5
billion commercial real estate portfolio and we intend to maximize the value
of these assets. Our focus remains on seeking out strategic investments and
transactions that will create long-term value for NorthStar Realty
shareholders.
I'd like to now turn the call over to Debra, who will review our financial
results for the fourth quarter of 2014. Debra?
Debra Hess:
Thanks Al, and good morning, everyone. As you saw in today's press release,
we reported strong results for the fourth quarter 2014 including CAD of $110
million or $0.44 per share. As we've previously discussed, we believe CAD is
a very good indicator of our operating performance and is an important factor
when evaluating our dividend. As Al mentioned, our limited service hotel
portfolio had a fair amount of seasonality and CAD for these investments is
typically low as in the fourth and first quarters of the year.
Our investments as of December 31, 2014 was approximately $18.5 billion,
including assets of deconsolidated CDOs and investments that NorthStar Realty
acquired or committed to acquire subsequent to fourth quarter 2014. Excluding
the $2 billion portfolio expected to be contributed to the European spin-off,
total investments are approximately $16.5 billion.
In terms of mitigating potential currency exposure to NorthStar Realty
Europe, we intent to finance our assets with local currency denominated
mortgages, as well as hedge our net cash earning to minimize volatility for
many fluctuations in foreign currency exchange rate.
In terms of liquidity, currently we've approximately $750 million of
potential liquidity taking into consideration availability under our
corporate facilities. A portion of this liquidity is earmarked for the two
PAN European portfolios under contract. And as we mentioned, when discussing
the spin-off, the target levels of these investments was approximately 40% to
50%.
As a reminder, the tables in our quarterly financial supplement, which we
introduced last quarter, provide additional details regarding these
investments and the underlying real estate assets. The supplemental package
is available on our Web site at www.nrfc.com.
This concludes our prepared remarks today. Now, let's open-up the call for
questions. Operator?

Q&A
Operator:
Thank you. [Operator Instructions] And we'll go to Steve DeLaney with JMP
Securities.
<Q - Steven DeLaney>: Thanks. Good morning everyone and thank you for keeping
it exciting for us here. I'm going to start with the most boring part of the
portfolio, the debt portfolio. So about $2 billion, if we take out the
corporate stuff including the RXR that Al just mentioned, I think were down
to about $1.6 billion in true CRE debt. I was not at all surprised to see no
activity there other than the small legacy fix CDO purchase. So my question
is in communicating with investors, would you be wrong to characterize this
portfolio is being in run-off mode? And if that is an accurate description,
just wondering Al, if you could give us based on maturities and all some sort
of estimate of how the $1.6 billion might pay down over the next couple of
years? Thanks.
<A - David Hamamoto>: Yes. Hey, Steve, it's David.
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<Q - Steven DeLaney>: Oh, hi David.
<A - David Hamamoto>: Hey, one of the things that we've always said about our
model was being diversified both in terms of product type and where we play
in the capital stack is that we can participate in the risk of return is
best. And I think as we've demonstrated over the last couple of years, we've
seen a lot more value in the equity part of the business than in the debt
business. And I think near-term that's what you could expect. But obviously
markets change and clearly there were periods of time where we're buying debt
was -- one of our best investments and so. I think we will continue to move
around and be optimistic. But I think in the current market you are more
likely to see us continue to be very equity dominated.
<Q - Steven DeLaney>: That's helpful. Yes, hi Debra.
<A - Debra Hess>: Hey Steve, I just I thought I'd add, in our 10-K, in our
debt footnote, we actually do provide some further information on that. So
when you get the K, which is due on Monday, you can take a look at that as
well.
<Q - Steven DeLaney>: That would be helpful. And then, let me just switch to
another topic and not about -- this is not about NRF, this is about the
people who work in my business, but it affects NRF. So just as far as
research coverage, its obvious to everybody you guys have made incredibly
rapid transformation into an equity REIT model, I don't think any one
disputes that NRF is an equity REIT. But the street seems to me is way behind
the curve here. And I say, because if you were to go to Bloomberg right now,
and look at the research coverage on NorthStar, I don't see a single equity
REIT analyst that has picked up coverage. And I'm curious, I think that's a
pretty important development that needs to happen for us to get the -- tap
the value that is obvious in the portfolio that the market is not
recognizing. And I'm just curious if you are hearing from the equity REIT
sales side guys that they're working on picking up coverage in NRF.
<A - Albert Tylis>: Hey Steve, it's Al. It's a good question. We -- as we've
had this transformation, I think one of the next important steps for us in
that I think would be an important step both for the Company and diversifying
the shareholder base as well as the analysts coverage in the equity REIT
space is inclusion in the RMZ.
<Q - Steven DeLaney>: Right.
<A - Albert Tylis>: And I think once we're included, and then the demand sort
of follows from the traditional dedicated equity investor base, that -- those
are the types of things that help with the picking up coverage from those
specific analysts. And we're already seeing the interest from that dedicated
group. David and I are going to be at a global REIT conference, and we are
speaking at on Monday and Tuesday and we've two full days of meetings with
predominantly dedicated equity REIT investors. And so, the interest is there,
the coverage will undoubtedly follow that as well, and part of that interest
lies for the fact I think there is an expectation that we would included in
the RMZ and we won't be in significant component of that, and I think some of
the benefits now will follow.
<Q - Steven DeLaney>: And that would be the Citi Global Property CEO
conference that you're referring to coming up here?
<A - Albert Tylis>: Yes.
<Q - Steven DeLaney>: Okay, great. And just for what its worth, I just want
you guys to know that at JMP we are already in the process of assigning
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co-coverage to one of our senior equity REIT panels and I hope that other
firms, I think everybody that's enjoyed working with you, the specialty
finance, mortgage guys about six of us something everybody would like to stay
involved, but I think we all realize we need some more expertise from the
other side of the table. So, you'll be seeing that from us shortly. Thanks
for the comments this morning.
<A - Albert Tylis>: Okay. Thanks, Steve.
Operator:
And we'll go to Dan Altscher with FBR Capital Markets.
<Q - Daniel Altscher>: Thanks, good morning everyone. I'm referencing Debra's
remarks about a portion of the liquidity that's presented in the press
release being year marked for the two year being proposed. Can you just maybe
just give us a sense, have any portions of those portfolio is already closed
or is that all still to come and we still need to fund really all of that
from that liquidity pool?
<A - Albert Tylis>: There has been some deposits made on the two large
portfolios, and as we mentioned the range of capital that we can use for
those, there is a sizable range in terms of how much we would need to close
those. So, I mean if we wanted to we could close those today with less than
$500 million of equity or ultimately get to our targeted leverage level in
that 40% to 50% which would be closer to a $1 billion of equity. So we have
flexibility and time on our side in terms of how much capital and when we
deploy that capital into those assets.
<Q - Daniel Altscher>: Okay. That's helpful. I was wondering if maybe we
could do a little bit about reverse engineering for NRE. We also have a slide
deck $0.20 a CAD. We got the share count kind of translates into about $70
million I guess perceived CAD. We have $10 million management fees, $5
million kind of incremental G&A there. Can you just help fill in the gaps on
maybe some of the expected NOI, and then some leverage, cost of debt and then
maybe some tax as well?
<A - Albert Tylis>: Sure. I mean it's probably a better conversation
one-on-one we can go through some details. I'll give you some high level
numbers. The NOI is roughly 110. Our cost of debt expectation is low mid 2%
range at that 50% level, and then that's going to get you to a yield. When
you do the math you'll see it's a bit higher than what the CAD would
translate into and the difference between the two is CapEx as well as a
little bit of tax friction in Europe.
<Q - Daniel Altscher>: Okay. Now that's perfect, I think we can fill in the
rest of the gaps there. So thanks for that Al. And just also sticking on NRE
is, the portfolio that kind of stands today is all predominantly office
focus, but is that the strategy of NRE going forward, is it going to be
primarily office or is it kind of do all, take all approach to whatever you
kind of see as it comes about?
<A - Albert Tylis>: Yes, I think we'll be opportunistic and look at other
asset classes. But I think starting out we're very proud of the quality of
the portfolio and the pricing that we purchased it out, because these are
super high quality assets where that half of the value is in London and
Paris. And so, the profile and asset quality and sort of where the REIT
should trade should be reflective of that and, but as we grow the business
we'll be opportunistic and look into other asset classes.
<Q - Daniel Altscher>: Okay. And then just one more in NRE and then I'll drop
off. Just from a timing standpoint referenced second half of the year, press
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release kind of that third quarter, are we thinking kind of like early third
quarter or late third quarter and then just from a, I guess procedural
standpoint obviously what needs to happen from filing with the SEC, any
lender approval or anything like that to make it all work?
<A - Albert Tylis>: Yes, the process is not too dissimilar from when we spun
off NSAM in terms of filing the Form 10 and filing necessary financial
statements and so on. And as we learned last time around, we can move fast
but sometimes there are things that are out of our hands that cause the
timing to change. Right now we're going to kind of leave it at second half of
the year, and we're excited to get the company up and running and we'll do
what we can to do that. In terms of consents, there's no real consent issues
of any significance for us to be able to do those.
<Q - Daniel Altscher>: All right. Thanks for the comments. I'll drop back in
the queue.
<A - Albert Tylis>: Thanks, Dan.
Operator:
We'll next go to Bose George with Keefe, Bruyette & Woods.
<Q - Charles Tyson>: Hey, this is actually Charles Tyson on for Bose. You
guys highlighted in the release that you're unlocking value with this NRF
Europe spin-off and in 2015 you'll be looking to unlock value in additional
ways. I'm just curious how you guys are thinking about kind of the MSCI add
in relation to possibly spinning other portfolios. Is that a case of you're
waiting to see whether or not you'll get included in the RMZ in May before
making any decisions on that or would you consider kind of additional ways to
unlock value before that inclusion?
<A - Albert Tylis>: As I mentioned in the prepared remarks the MSCI inclusion
was certainly a consideration in the European spin-off. In fact our
expectation although again far from certain, because its out of our control
but our expectation is that Northstar Realty Europe would ultimately be
included in the index as well based on what we can glean the rules are of the
MSCI. And then it's a consideration. Our board and our team here, we factored
in a lot of things when we decided to make investment, we decided to do
things strategically, make some strategic decisions and the index is a
consideration and we view the importance of that critically in terms of the
investor base, what Steve mentioned earlier about at the analyst coverage,
his overall interest and reflection of what the company is today which is
predominantly in equity REIT. So it's a consideration, not necessarily
dispositive of anything, but it's a factor that we consider.
<Q - Charles Tyson>: Okay. And then the leverage
Europe the 40% to 50%, I mean is that the way if
spin-offs, I mean, just wondering if that's kind
that equity investors are more amendable to. And
that secured or unsecured leverage?

target that you had for NRF

you were to do additional
of what you've been hearing
if that, that 40% to 50% is

<A - Albert Tylis>: I think it will be case by case. We're looking at that on
an overall leverage basis. We continue to believe very strongly that
non-recourse, non-cross collateralize, non mark-to-market mortgages are a
better approach than accessing the unsecured market. That's been the hallmark
of our business for 10 years now. We've proven that successfully with
leverage levels that have been higher than what traditional equity REITs have
deployed, and we've been able to outperform traditional equity REITs by
somewhere in the neighborhood of 1200 basis points a year in total returns.
So, we'll continue to be thoughtful about our financing approach and our
strategies, and will remain focused on things that have kind of gotten us to
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where we are today.
<Q - Charles Tyson>: Okay. That's helpful. And then the last one, just on
rental growth that you're thinking about on the different equity portfolios
that you've got from Healthcare and [indiscernible] it's a hotel and then and
net lease in the other portfolio is manufacture housing. Can you just kind of
maybe go through and talk about what we could be seeing in 2015 for those
portfolios?
<A - Albert Tylis>: Yes, we'll be posting our financial supplement likely
aftermarket today, and that has some numbers and thoughts around the various
portfolios and what 2015 NOI can look like. You'll see that on our website
aftermarket today.
<Q - Charles Tyson>: Okay. I'll look for it there then. Thank you.
<A - Albert Tylis>: Thank you.
End of Q&A
Operator:
And that concludes the question-and-answer session and today's conference. We
appreciate your participation. You may now disconnect.

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