Lasse Glassen - IR, Addo Communications Richard Saltzman - CEO & President Darren Tangen - Executive Director & CFO.

Eric Beardsley - Goldman Sachs Jade Rahmani - KBW.

Welcome to the Colony Capital First Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Lasse Glassen with Addo Communications. Thank you, you may now begin..

Good morning, everyone and welcome to Colony Capital, Inc.'s 2016 first quarter earnings conference call. With us today are the Company's Chief Executive Officer Richard Saltzman and Chief Financial Officer Darren Tangen.

Kevin Traenkle, the Company's Chief Investment Officer and Neale Redington, the Company's Chief Accounting Officer, are also on hand to answer questions. Before I turn the call over to them, please note that on this call certain information presented contains forward-looking statements.

These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions.

Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time.

All information discussed on this call is as of today, May 9, 2016 and Colony Capital does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures.

The Company's earnings release which was released earlier this morning and is available on the Company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to investors.

And now I would like to turn the call over to Richard Saltzman, Chief Executive Officer of Colony Capital.

Richard?.

Thank you, Lasse and welcome, everyone, to our first quarter 2016 earnings call. Before describing and commenting on our first quarter results and plans for the remainder of the year, I want to speak briefly about the joint press release that we, along with NorthStar Asset Management and NorthStar Realty Finance issued late on Friday.

As a result of a press leak regarding discussions among the three parties to consummate a tri-party all stock merger based upon historical market prices, we felt compelled to announce that we're in exclusive negotiations, notwithstanding the fact that it would normally be premature at this stage to make such an announcement.

As stated in the release, quote, the three companies believe that the combination would create a world-class diversified real estate and investment management equity REIT with significant scale, deep management talent and the opportunity to generate substantial revenue and expense synergies.

Unfortunately, at this time we're not at liberty to say anything more and, of course, there is no assurance that a transaction between the parties will occur. So with that said, let me get back to Q1 and our current results and hopefully all of you will stay with us.

Following an exceptional and transformative year in 2015, we're off to a promising start in 2016.

First quarter core FFO was $0.41 per share which reflects significant ongoing same-store operating improvement within our real estate equity platforms, namely Colony Light Industrial and Colony Starwood Homes and continued strong results across our other legacy equity and debt investments.

What the first quarter results do not yet reflect is productivity from our expected capital raising targets in 2016, nor did the first quarter benefit from anticipated net gain contributions more consistent with our historical averages. To this last point, first quarter results included only a de minimis amount of net gain contribution.

Whereas our average net gain contribution over the past few years has been approximately $0.10 per quarter or $0.40 per year.

Despite this lack of net gains recognized in the first quarter, overall investment portfolio performance remains on track or ahead of underwriting which should translate into a more normalized level of gains to be recognized for the full year 2016 consistent with annual levels for prior years.

Finally, first quarter results were impacted by reduced fees from two pre-financial crisis funds without any meaningful replacement from new fundraising initiatives currently underway and expected to be in place by year end. We have set as a goal and expect to achieve, raising a minimum $2 billion plus of third-party equity capital during 2016.

The contributive impact of incremental fees from these initiatives, however, are unlikely to materialize in any meaningful way until the end of 2016. Now, last quarter we outlined our top management priorities for 2016 and I will take the next few minutes to report on our progress for each.

The first priority relates to our latest iteration global credit fund offering which opportunistically focuses on generating equity returns for debt like risk.

In these investments we target mid-teens investment returns by generally investing higher in the capital stack via loan acquisitions from financial institutions at a discount to par or rescue capital new loan originations.

On occasion we also buy property assets directly at a discount to intrinsic value, such as buying REO portfolios from banks that became unnatural owners of real estate through defaulted loan positions.

The residual distress in Europe and rapidly changing regulatory environment for banks in sectors like CMBS, among other factors, have created extraordinarily attractive opportunities in this regard and as a reminder, the current global credit fund had an initial closing of $700 million this past December and the final closing is scheduled for the end of 2016.

This initial closing figure includes a 20% commitment from the balance sheet, a co-investment commitment that caps out at $500 million or, in other words, a fund size of $2.5 billion.

The second priority involves working with the management team at Colony Starwood Homes or SFR, to close the current gap between its trading price and net asset value per share.

As a reminder, CLNY owns 15.1 million shares or 14%, of SFR as a result of merger of Colony American Homes and Starwood Waypoint Homes which closed during the first quarter of this year on January 5. SFR just held their inaugural quarterly earnings call as a combined company this morning and I will quickly recap some of the first quarter highlights.

At the end of the quarter the SFR portfolio included more than 30,000 homes and overall occupancy was 95%. Operationally, SFR produced robust same-store performance over the same period last year with revenue growth of 6.1% and net operating income growth of 9.9% and core net operating income margin of 65.1%.

In addition to the strong portfolio performance, SFR has already achieved 85% of the $50 million in annual synergies identified premerger.

By executing on the publicly communicated business plan SFR management should be successful in closing or eliminating the gap between SFR's reported net asset value of $33.40 per share and SFR's closing price on Friday of $25.77 per share, currently a 21% discount and already up quite meaningfully from $22.55 per share which was the closing price on the merger date back in January.

For sure there is a lot more work to do, but we're quite pleased with the early results from the merger and current direction of the Company. The next priority is terming out more of the floating rate mortgage debt within the Colony Light Industrial Platform or CLIP and growing the business through additional capital raises.

CLIP continues to benefit from very favorable market fundamentals and is generating attractive returns with a positive outlook. As of March 31, the CLIP portfolio consisted of 325 primarily light industrial assets totaling 35 million square feet.

The CLIP team has been successful in leasing up the portfolio at net effective rents well above underwriting and the portfolio was 94% leased at quarter end, up from 90% just one year ago.

During the first quarter CLIP's same-store portfolio produced robust revenue growth of 6.8% and net operating income growth of 12.6% over the same period last year and achieved a net operating margin of 68%. The CLIP team also continues to grow and improve the overall quality of the portfolio through both acquisitions and dispositions activity.

Since our initial acquisition at the end of 2014, CLIP has acquired, net of dispositions, approximately 5.3 million square feet of space for approximately $380 million.

There is approximately $160 million of uncalled equity commitments at CLIP, 38% from third-party investors and 62% from the balance sheet and beyond this liquidity we expect to raise additional third-party capital to grow the business and for CLIP to be a very meaningful contributor to our overall fund-raising targets for the year.

The fourth priority involves creating new fee generating funds and vehicles. For example, in the first quarter we formed a real estate securities investment vehicle with total callable capital commitments of approximately [Technical Difficulty] including a $5 million investment from the balance sheet.

The new vehicle has a long only strategy and targets the common stock and preferred stock of publicly traded U.S. REITs and includes a holding of CLNY preferreds.

Going forward new investment strategies that do not fit this investment management model will be deemphasized and existing wholly owned balance sheet investments that do not fit this investment management model are likely to be sold. Finally, we set a number of corporate strategic priorities for 2016.

First, off we continue to transition the balance sheet towards a more simplified model around strategies involving a third-party capital model. Second, we recently refinanced our corporate revolver for a new four-year term and at a lower cost which Darren will shortly provide more details on.

Lastly, we have begun to implement a series of corporate expense reductions including some rightsizing of the organization which has thus far created approximately $15 million in annual run rate savings. So in conclusion, we remain on track to meet or exceed all of the 2016 top management priorities and we're off to a very positive start to the year.

In a macroeconomic and interest rate environment that is incredibly fragile, we're highly confident about our current portfolio orientation and strategy.

Equity investments concentrated in sectors with favorable supply/demand fundamentals like industrial, single- and multi-family residential rentals and global net lease and credit investments based on a global opportunistic credit strategy targeting equity returns to debt like risks.

In the short term we're well-positioned to increase earnings over the balance of 2016 by harvesting gains and taking advantage of further operating improvements within our legacy investment portfolio and equity platforms while building additional fee earning equity under management from fund raising initiatives currently in progress.

Longer term we remain focused and belief we're making good progress towards our goal to transition into a diversified equity REIT with an embedded investment management business.

With 25 years of history and one of the pioneers in the modern real estate investment management industry, Colony brings to bear a unique business model that combines the safety and stability of a high quality real estate portfolio focused on sectors, attractive fundamentals and producing foundational returns coupled with an investment management business to turbocharge our growth.

I would like to thank all of you again for your continued support and we look forward to reporting our continued progress, including that of the potential deal with NorthStar, in the quarters ahead. And now I will turn the call over to Darren Tangen, our CFO..

Thank you, Richard. Before my remarks on our first quarter results I'd like to remind our listeners that we filed a supplemental financial package concurrently with our earnings release this morning and both of these documents are available on our website.

Now moving on to a summary of our financial results for the first quarter of 2016, Colony Capital reported core FFO of $56 million or $0.41 per basic share and FFO of $36.7 million or $0.27 per basic share.

As Richard mentioned, we have a negligible amount of net gain contribution in our first quarter earnings, but still expect to track to a more normalized annualized level of approximately $0.40 per share for 2016.

We're maintaining our quarterly dividend of $0.40 per share, still more than fully covered by recurring core FFO, with additional earnings upside potential from these incremental gains anticipated through the balance of the year.

First quarter investment activity was lower than last year partly due to the market volatility experienced in the first six weeks of the year. More recently, overall market conditions have improved and as a result new deal activity has accelerated and capital deployment is expected to increase.

At the same time we have prioritized capital deployment from our balance sheet towards investment management focused funds and platforms and away from direct real estate equity and debt investments.

By focusing on the former and investing on average approximately 20% of the equity in these funds and platforms from our balance sheet, we will maintain exposure to attractive real estate investments while simultaneously reducing reliance on balance sheet capital and turbocharging our equity returns through the overlay of investment management economics.

Notwithstanding the choppy market to start the year, we did find some compelling investment opportunities and invested and agree to invest approximately $276 million year to date across three of our segments including CLIP, other real estate equity and real estate debt.

Turning to asset management for the first quarter, a few highlights for each of our five reportable segments, Richard touched on the strong same-store operating results for our CLIP business relative to first quarter last year.

First quarter 2016 core FFO contribution from CLIP was $13.8 million or $0.10 per share representing an annualized core FFO yield of approximately 10% against our average equity investment for the period.

Richard also touched on some of the very positive first quarter same-store results at Colony Starwood Homes or SFR, the first report as a newly combined Company following the merger closing between Colony American Homes and SWAY in early January.

CLNY holds a 14% interest in SFR and the segment also includes a 19% interest in colony American finance which is now separate from SFR. First quarter core FFO contribution from the single-family rental segment was $0.05 per share including modest positive core FFO contribution from Colony American Finance.

On a net book value basis our other real estate equity segment is composed of approximately 50% opportunistic real estate investments generally made through joint ventures with funds managed by the Company, 40% in triple net lease investments and the balance in the Albertson's Safeway investment.

First quarter core FFO of $20.2 million or $0.15 per share yields an annualized 7.3%, excluding gains on the segment's average equity investment.

This is an impressive result especially considering 20% of this segment includes various non-or low current yielding assets such as our Albertson's Safeway investment and certain land parcels acquired opportunistically during the financial crisis.

The real estate debt segment ended with a net book value of $2 billion and contributed $48.6 million of core FFO in the first quarter. Our book of originations made up 75% of this segment. Of this 25% was composed of first mortgages and 75% was composed of leveraged first mortgages, B-notes, mezzanine loans and other subordinate debt.

The total originations book sat between a weighted average first dollar loan to value of 36% and a weighted average last dollar loan to value of 74%. With a blended yield of 11% we think this earnings profile is highly attractive for the associated risk profile. The 25% balance of our real estate debt segment is composed of loan acquisitions.

Overall annualized first quarter core FFO yields on average net book value of loan acquisitions was 9% excluding loan-loss provisions.

And finally, within the investment management segment we ended the first quarter with assets under management of $18.2 billion and CE earning equity under management of $7.9 billion, both down from prior quarter primarily as a result of reductions within two 2006 vintage funds.

During the quarter we formed an investment vehicle with total callable capital commitments of approximately $115 million including $5 million from our balance sheet. This new vehicle is pursuing a long only strategy to invest in the common and preferred stock of publicly traded U.S. REITs including preferred stock securities of CLNY.

As Richard mentioned earlier, we have several other fund raising initiatives currently underway that we expect to have in place by year end.

In the meantime we've undertaken significant expense reduction initiatives within our organization that have so far yielded approximately $15 million in annual run rate cost savings that will start to become visible in the second quarter. I will conclude my remarks with an update on leverage and liquidity.

At the end of the first quarter we refinanced our corporate credit facility on highly favorable terms.

Several key highlights include an increase in aggregate commitments to $850 million, a decrease in interest rate by 50 basis points to LIBOR plus 225 basis points and an extension of the initial maturity to March 2020 and fully extended maturity to March 2021 which can be extended at our election.

With this refinancing we now have approximately $150 million of debt maturing in the next two years, a very comfortable level to manage. Further, none of our debt is subject to interest rate or overnight mark-to-market risk. Leverage for the quarter held largely constant at 48% debt to assets as of March 31, 2016.

For liquidity we currently have approximately $400 million drawn on our $850 million corporate credit facility and, inclusive of other warehouse facilities, cash on hand and near term expected repayments we have approximately $800 million of liquidity available. Overall, 2016 is off to a promising start.

We have an attractive real estate investment portfolio that continues to deliver solid recurring earnings and is well-positioned to generate additional earnings growth from improving fundamentals and operations in our investment focused areas in addition to incremental gains anticipated from legacy investment realizations.

So with that, I would like to turn the call over to the operator to begin Q&A..

[Operator Instructions]. Our first question is from the line of Eric Beardsley with Goldman Sachs. Please go ahead with your question..

I was wondering if you could touch upon how we should expect the fee earning EUM to develop over the course of the year, understanding that you are coming to the end of some of the legacy fund lives, but that you do control the exits of some of the investments..

Well, good morning, Eric. We just said on this call that we expect to raise incrementally another $2 billion plus of capital by the time we get to yearend. Very little of that has taken place year to date. I think for this year most of the reduction in the legacy funds is already behind us.

So, I think just coupling the two concepts together, I think you can get to where we're likely to finish the year..

So, we should probably look at you ending the year flat to where you ended 2015, is that a fair assumption?.

Well, I mean plus or minus -- I mean again, because we don't know everything for sure that is going to fall into place either with respect to the new initiatives or alternatively other burn off of some of the legacy fee paying equity under management. But plus or minus in that general vicinity..

I guess just as we think about, at a higher level, the strategy of moving more towards equity investments and also to comment of simplifying the business model. It doesn't look like there is a lot that is held for sale today at the end of the first quarter.

I guess how should we think about the pace of those monetizations over the course of the year? And I guess are we going to see I guess any more aggressive I guess repositioning of the investment portfolio from the debt book into equity this year?.

Yes.

So, a lot of the debt book, as I think you are aware, consists of legacy positions that were opportunistic debt acquisitions and originations that were done previously in conjunction with our global credit fund whereas the model has now shifted for this current global credit fund offering that I mentioned where we're now investing basically in the fund and so that is a primary shift.

And so, I think you will continue to see -- as those assets are successfully resolved and come to a conclusion you will continue to see that part of our balance sheet decline, whereas we will have equity in the fund up to a cap of $500 million, as we stated, alongside our LPs.

In terms of other things on the balance sheet currently, it is a little bit of a dynamic process in the sense that we're actually interested, if we can, to take substantially most of what we have on our balance sheet and try to create third-party capital models and platforms around them.

On the other hand, I mean just depending on the near term feasibility and viability of doing that, that is what is really going to determine what else we might sell as versus what is going to be a long term keeper.

I mean as we stated, we're very copacetic and happy with the strategies that we're in, just in terms of the general investment climate and returns that we're generating. I mean again, we continue to think, just from a macroeconomic perspective, this is kind of a glass half empty environment, very fragile with still very significant backdrop risks.

So therefore what do we want to invest in? Global opportunistic credit, higher in the cap stack for equity returns and/or equity investments where the supply/demand fundamentals are really just extraordinarily compelling which is not in a lot of places today.

But the good news is things like industrial here in the U.S., residential rental here in the U.S., global net lease credit which, again, has more defensive characteristics -- all of these things are doing extraordinarily well..

And a really quick follow up just on Darren's comments about the $0.40 per share of gains in terms of the run rate, should we think about you I guess recouping to that full $0.40 for the year or just you are talking about picking up $0.10 a quarter over the remainder of the year from 2Q to 4Q?.

We think it will be at least that for the year..

Our next question is coming from the line of Jade Rahmani with Keith Bruyette & Woods. Please go ahead with your question. .

I was wondering if we could just go through maybe quickly the top part of the income statement and just comment on what drove the sequential declines. I mean, I think given the nature of your investments it is sometimes difficult to track what is really moving the needle in terms of earnings.

So for example, interest income, equity and income on consolidated joint ventures, fee income which you already touched on. But maybe those two items. And then if you could just clarify the gain on sale of real estate, if the offset to that is the non-controlling interest loss. I wanted to see if you could clarify that..

When you are making the comparisons I assume -- are you comparing to the fourth quarter of last year or are you looking at the first quarter 2016?.

Yes, I was just looking sequentially from -- yes, fourth quarter of 2015 to first quarter of 2016, like interest income on the income statement declined to $89.4 million from $128 million..

Right. So the biggest component of that relative to last quarter was, if you recall, we had a large NPL revolution in the fourth quarter relating to a loan that was secured by some land down in Orlando. And so, when that resolution occurred that created a fairly significant amount of interest income pickup in the fourth quarter.

And again, it was actually the entire consolidated interest of that loan position that came to our income statement in the fourth quarter of which there is a reasonably large non-controlling interest as a part of that. So, that is the reason why interest income stepped down somewhat here in the first quarter of this year.

We talked about the fee income and what was your other question?.

On the gain on the sale of real estate assets, if that was $51 million, that is a consolidated number, if the offset to that is in non-controlling interest?.

Right, okay, so that relates to an asset resolution we had in a previously acquired German loan portfolio acquisition and we ended up selling an office building that was in that portfolio at a gain. Again, there was about a 30% interest in that deal that was owned by the balance sheet, the other 70% was owned by non-controlling interest.

And then there was also some FX adjustments that came out of that that actually reduced the amount of that gain. But that was an event that happened in the first quarter..

So, the gain that you achieved in the first quarter was 30% of the $51 million less the FX?.

Correct..

Okay and so do you know what the per share core FFO contribution of that was?.

It was about $0.06, but then we had some -- and that is net of some of the FX adjustments. But then we had some other impairments and some transaction expenses that happened in the quarter that really netted that the $0.06 gain down to zero.

So, when Richard and I made the comment that there was negligible net gain contribution that is taking that $0.06 net gain from the German resolution less some of these other one-time expenses which sort of brought that $0.06 down to essentially zero..

Okay.

And just on the overall lower pace of net gains, was that lower than your expectation going into the year and reflected potentially the 1Q volatility that played out? Or had you anticipated this?.

Well, I think the timing of gains is always a little bit uncertain. It is probably easier to measure gain contributions over the course of the year as opposed to over the course of three months and so, going into the first quarter I am not sure we knew exactly how the quarter was going to play out.

But I think we're confident, as you heard Richard's remarks and my remarks, that by the time we get to the end of 2016 we should have a normalized level of gain contribution..

Okay. In terms of the legacy funds, can you quantify -- you said basically the bulk of anticipated run off has already taken place for 2016.

Could you quantify what you expect just on the legacy fund side for 2017?.

There will be continued burn off, Jade, but I don't think we're prepared to give a precise quantification of that right now..

Okay. And just in terms of the overall environment, I mean Starwood Property Trust on its call said that they are now seeing extremely attractive lending opportunities, that there is less competition in that space.

Would you make similar remarks? Is lending, making new loans, are those the bulk of the most attractive investments you are seeing? Or is it more acquisitions directly from banks, Europe and some of the equity that you have been recently doing?.

Yes, I mean, we like both. In particular I think on the credit side we like Europe. Europe still to us is kind of four to five years behind the U.S. with banks still dealing with legacy issues, having to re-equitize basically selling assets, not necessarily being in a position to provide credit.

Here at the end of the year and beginning of this year of course you did see a lot of market volatility in credit markets.

And that has meant, along with anticipation of changing regulatory rules regarding CMBS and other things, that the credit markets are a little choppier and that there may be opportunities to be a lender through these niches more aggressively here on a go-forward basis.

But that is something, again, that for us that is something we want to do through this third-party capital model whereas historically we have done it more directly through our balance sheet, that is not what we're going to do on a go-forward basis..

[Operator Instructions]. Thank you. I will now turn back to management for additional comments..

Okay, thanks again everyone for joining us today. We know we had a lot to report on including the announcement that came out on Friday and more to come on that here in the near term, but unfortunately we're not at liberty to say much more than what was in the press release.

So, we're off to a good start here in 2016, otherwise a lot more to come just in terms of continued progress in our various portfolios and also achieving some of the other things that are going to be more contributive to our earnings on a go-forward basis. So, we look forward to speaking to you about that again in ensuing quarters.

Thanks again for all of your support and have a good rest of the day..

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time, thank you for your participation..