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Northstar Realty Europe Corp.  (NYSE:NRE)
Q1 2019 Earnings Call
May. 08, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to the NorthStar Realty Europe's First Quarter Earnings Call. My name is Zar, and I will be your coordinator for today's event. For the duration of the call, you will be on listen-only. (Operator Instructions)

I am now handing you over to your host, Trevor Ross, to begin today's conference. Thank you.

Trevor Ross -- General Counsel & Secretary

Good morning and welcome to NorthStar Realty Europe's first quarter 2019 earnings conference call. Before the call begin, I would like to remind everyone that certain statements made during 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 GAAP, can be accessed through our filings with the SEC at www.sec.gov.

I will now turn the call over to our CEO, Mahbod Nia.

Mahbod Nia -- Chief Executive Officer and President

Thank you Trevor and thank you everyone for joining us today. In addition to Trevor, I'm joined by Keith Feldman our CFO. NorthStar Realty Europe, or NRE, is a New York Stock Exchange-listed REIT, focused on prime European office properties.

Following the recent sales activity, we've now owned 15 properties in London, Paris and key German cities. NRE has made significant progress over the past 12 months, completing another (ph) $1 billion of strategic asset sales, crystallizing an approximate 17% IRR for stockholders, while further simplifying our business.

During the quarter, we completed the sale of three assets, for a total consideration of $44 million, releasing $23 million of net equity and realizing an approximate 14% IRR. In April, we repaid the $81 million outstanding balance of the Cale Street preferred equity, reducing our overall leverage to 36%. We also continued to make progress with our expense saving initiatives that we anticipate being ahead of our stated targets.

Before discussing NRE's performance in detail, I'd like to make a few remarks regarding the macroeconomic environment and the European commercial real estate market. European economy continued to grow during the first quarter of 2019, albeit at a slower rate. Gross domestic product, grew by 0.4% and 0.5% in the eurozone and the European Union respectively. In April 2019, the International Monetary Fund, provides the 2019 GDP forecast down to 1.3% for the eurozone and 1.6% for the EU, citing weaker consumer and business confidence and softening investments, most notably in Italy.

However, the European Central Bank appears, willing to intervene to the extent required to sustain economic expansion in the region, including through the safeguarding and favorable financing conditions. Consequently, in April 2019, in response to weakening economic indicators, the ECB stated its intention to maintain interest rates at 0% through 2019 and then announced a new round of targeted long-term loans to eurozone banks. As of March, eurozone inflation stood at 1.4%, which is in-line with the European Commission's, latest 2019 projection that the low-term to medium-term target of 2%. Unemployment continues to decline reaching 7.7% in March, down from 8.5% a year earlier, and the lowest level recorded in the Eurozone, since September 2008. UK economic growth remains to 0.3% (ph) in the three months to February 2019, in-line with the previous rolling period. Ongoing uncertainty regarding the outcome of Brexit negotiations continued to weigh on sentiment and investment.

The IMF revised its GDP forecasts for the UK down by 0.3% to 1.2% for 2019. Inflation has fallen from its peak of 3.1% in November 2017 to 1.9% in February 2019, easing the pressure on the Bank of England to further increase interest rates at a potentially vulnerable time for the UK economy.

However, the Bank of England governor warned that future interest rate increases could be more frequent than current market expectations, if there is an adequate resolution to the Brexit impasse and economic growth and inflation continue to rise. European commercial real estate investment volume stood at EUR54 billion in the first quarter of 2019, 22% below the same period in 2018.

Office remains the most sought after asset class, representing approximately 38% of transaction volume. Prime property yields in some asset classes and markets soften slightly, but remained at/or close to historically low levels, reflecting a significant premium to sovereign yields. European office take-up grew 7% year-over-year in the first quarter of 2019, highlighting the continued strength in the European occupier market. The same tenant demands coupled with a subdued new supply pipeline, continues to supply downward pressure on historically low vacancy rates, which decreased by 10 basis points to 6% in the first quarter, the lowest level since 2002 and fuel rental growth, which stood at 5.1% well above the 10 year average of 2.1% (ph).

Driven primarily by limited supply of available stock. German real estate investment reached EUR14 billion in the first quarter, 30% below the same period last year. Office, first quarter of 2018, recorded the second highest transaction volume for more than a decade. Office remained the most sought after asset class representing approximately 40% of the total transaction volume.

Vacancy across the top six German cities, fell by further 10 basis points to 3.6% during the first quarter, fueling growth in prime rents which increased by 2%. LTV transaction volumes stood at GBP11 billion in the first quarter, 16% below the same period last year. Central London office investment volume fell to GBP1.5 billion, a 35% decline compared to the same period last year, driven primarily by continued uncertainties surrounding Brexit.

Take-up in central London slowed in the beginning of 2019. However the amount of space under offer rose and was 24% above the 10 year average. Prime rents in both the city and West End increased by 2% quarter-over-quarter. French investment volume was EUR4 billion in the first quarter and 4% below the same period last year, with office representing 50% of total transaction volume. The Paris occupational market remains robust, with a vacancy rate of 1.6%.

Turning the discussion back to NRE. I'm pleased to report another positive quarter in which, we continued to make significant progress of our stated operational initiatives. As of March 31st, 2019, our 193,000 square meter portfolio comprised of 15 properties, with the blue-chip and other high-quality tenants in key cities across Europe.

The portfolio was 84% occupied and had a weighted average remaining lease term of 6.2 years. Our portfolio -- our office portfolio comprised of 12 properties, generated approximately 93% of our net operating income was 97% occupied on a pro forma basis, with the remaining average lease term around 5.9 years.

Our overall portfolio is valued at $1.2 billion based on the year-end 2018 independent valuation by Cushman & Wakefield. During the first quarter, we completed the sale of Uhlandstrasse in Frankfurt for $40 million, 65% above our allocated purchase price including CapEx.

We also completed the sale of our two retail assets in Germany, Werl and Kirchheide. Together these three assets released approximately $23 million of net equity to NRE, after repayment of financing and transaction costs and crystallizing an approximate 14% IRR for stockholders. Over the last 12 months, we've realized an aggregate of 17% IRR, through 10 strategic asset sales for consideration of over $1 billion, demonstrating our continued focus on generating value for stockholders, through our deep knowledge of the market we operate in, focus on tenants and commitment through active asset management.

We also continues to make further progress with our cost-saving initiatives, ahead of our stated targets. Keith will discuss this in further detail.

Finally on April 23, NRE entered into Amendment No. 2, the amended and restated management agreement

dated November 9, 2017, with an affiliate of Colony Capital, extending the triggering date from April 30th to June 30th, 2019. The strategic reviews for (ph) NREs remains actively engaged and committed to working with our advisors to conclude its review of the strategic alternatives, as expeditiously as possible and we look forward to providing an update in due course.

With that I'm pleased to announce that NRE delivered another quarter of solid operating results and I will now hand over to Keith Feldman our CFO, to further discuss the financial results.

Keith Feldman -- Chief Financial Officer and Treasurer

Thank you Mahbod. Good morning everyone and welcome to our first quarter 2019 earnings call. During the first quarter of 2019, NRE reported net operating income or NOI of $15.2 million. Looking at our same store sequential, quarter-over-quarter operating performance, on an FX adjusted basis and excluding the held for sale industrial assets (ph) in Paris. Rental income increased by $100,000 or 0.9% reflecting indexation uplifts, offset by a partial vacancy in two assets; one in Paris and one in Hamburg, which is now fully leased.

Same store, quarter-over-quarter, NOI decreased by $200,000 or 1.5% due to the timing of certain non-recoverable repairs and maintenance expenses, incurred in the first quarter of 2019. Specifically in two assets, the IC hotel in Berlin, and our office property in Cologne. Same-store, year-over-year rental income decreased by $100,000 or 0.7%. Year-over-year rental income included indexation uplifts, offset by the previously mentioned vacancies and the execution of certain value enhancing leases, including a nine year lease extension with BNP at Boulevard Macdonald and a ten year lease extension with Baker Tilly at Valentinskamp. Same store year-over-year, NOI decreased by $260,000 or 1.8% driven by the previously mentioned non-recoverable repairs and maintenance expenses incurred in the first quarter of 2019.

For the first quarter of 2019, NRE reported cash available for distribution or CAD, of $7.4 million or $0.15 per share, a decline over last quarter, predominantly due to the sales of Trianon. During the first quarter of 2019, we continued to make progress with our initiatives to reduce direct corporate expenses.

I'm pleased to say that, in addition to the $3 million of savings in other expenses and G&A expenses in 2018, we remain on track to achieve an additional $2 million to $3 million of expense savings in 2019, which is ahead of the overall target of $5 million on a run rate basis. After deducting mortgage debt and adjusting for cash and other balance sheet working capital items, EPRA NAV, based on the year-end 2018 independent valuation by Cushman & Wakefield, adjusted for currency movements, was $20.48 per share as of March 31st, 2019, which was down from the prior quarter largely due to the decline in the europe.

As of March 31, 2019, NRE's overall leverage was 39%, down from 53% a year earlier and our weighted average debt maturity was approximately 4.5 years. In April, we repaid the $81 million of SEB preferred debt financing, further reducing leverage to 36%. As of April 24th, we had $433 million of corporate liquidity, including $70 million of availability under our credit facility and $363 million of unrestricted cash, of which approximately $196 million was held in US dollars. On May 1st, we declared a cash dividend of $0.15 per share of common stock. This dividend is expected to be paid on May 17, to stockholders of record as of the close of business on May 13. Overall, we are pleased with the company's financial and operational performance in 2019 and look forward to updating you further in the quarters ahead.

Operator, please open up the call for questions.

Questions and Answers:

Operator

(Operator Instructions) The first question comes from the line of Bryan Maher. Bryan, you are now unmuted. You can go ahead with your question.

Bryan Maher -- B. Riley FBR -- Analyst

Yes, good morning guys. Question and it's kind of like a two part related question, as it relates to the strategic review process. And can you give us any parts of the kind of how far along you are I mean, it's been going on since November.

In your mind, is it something that we're getting close to conclusion on, it has one or two more quarters to go. And the second part of that is, you're sitting on over $360 million of cash, which weighs on your ability to generate CAD and thus the dividends pushing up against earnings. And how should we think about the dividend, as we continue through this process if that cash is not redeployed.

Mahbod Nia -- Chief Executive Officer and President

Bryan, It's Mahbod here. Thank you for the question. We're in the midst of a process that is very live and an ongoing, so I think, it would be inappropriate for us, if we provide any comment on that at this stage.

So apologies that we won't be able to comment on that, but the board, the SRC remains very focused and engaged and working with our advisors, and as soon as that process is drawing to a conclusion, we'll provide an update to the market. With regards to the cash, we are in a holding pattern, we're waiting for the conclusions of the strategic review.

So for now, we are sitting on that cash, obviously you're right, you'll see CAD for the quarter over $0.15, which is in-line with the dividend. We are utilizing that cash or holding that cash as efficiently as we possibly can, for the time being and there's no intention really to -- at this stage, adjust the dividend in any way until we have further -- until the process is completed.

Bryan Maher -- B. Riley FBR -- Analyst

Okay. And let's just -- to play devil's advocate here, let's just say that nothing happens with a strategic review and you continue on due course. So, can you give us a little bit more color on what's going on in supply and demand metrics in your key markets. And if there's been any real changes to the bid-ask spreads between assets which would slow your ability to redeploy the cash, should you end-up going that route.

Mahbod Nia -- Chief Executive Officer and President

Yeah, again, I'm not going to speculate on the direction of the outcome of the process, but if you're asking, where do we see opportunities generally across Europe from an investment standpoint. I think, it probably, won't surprise you that in the UK particularly, we're starting to see some interesting opportunities, arise given the uncertainty around Brexit, is certainly impacting sentiment, if not yet the fundamentals.

And so, some of the capital that would typically be directed toward the UK, has been more patient and waiting for resolution and that means that there are increasingly interesting opportunities that we're seeing here. So of all three markets, I would say that's the one that looks the most interesting today.

Bryan Maher -- B. Riley FBR -- Analyst

Okay,thank you.

Mahbod Nia -- Chief Executive Officer and President

Thanks, Bryan.

Operator

(Operator Instructions) There is no -- there is one more question coming through -- and there are no further questions coming through. Sorry. We'll hand over to Mahbod Nia.

Mahbod Nia -- Chief Executive Officer and President

Okay, thank you. Well, thank you everyone for joining us today. And we look forward to updating you again in due course.

Operator

Thank you for joining today's call. You may now disconnect your handsets, house please stay on the line.

Duration: 39 minutes

Call participants:

Trevor Ross -- General Counsel & Secretary

Mahbod Nia -- Chief Executive Officer and President

Keith Feldman -- Chief Financial Officer and Treasurer

Bryan Maher -- B. Riley FBR -- Analyst

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