Lasse Glassen - Addo Investor Relations Richard Saltzman - Chief Executive Officer Darren Tangen - Chief Financial Officer Kevin Traenkle - Chief Investment Officer Neale Redington - Chief Accounting Officer Keith Feldman - Managing Director, Capital Markets.
Jade Rahmani - KBW Jessica Levi-Ribner - FBR Jason Weaver - Wedbush Securities Mitch Germain - JMP Securities.
Greetings and welcome to the Colony NorthStar First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Lasse Glassen of Addo Investor Relations. Please go ahead..
Good morning, everyone and welcome to Colony NorthStar Inc.’s First Quarter 2017 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 the line to answer questions. Before I hand 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 10, 2017 and Colony NorthStar does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented on this call represents non-GAAP financial measures reported on both a consolidated and segmented basis.
The company’s earnings release, which was released yesterday afternoon 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.
In addition, the company has prepared a table that reconciles certain non-GAAP financial measures to the appropriate GAAP measure by reportable segments and this reconciliation is also available on the company’s website. And now, I would like to turn the call over to Richard Saltzman, Chief Executive Officer of Colony NorthStar.
Richard?.
Thank you, Lasse and welcome everyone to our 2017 first quarter conference call. Following a milestone set of events in 2016 where the shareholders of Colony Capital, NorthStar Asset Management Group and NorthStar Realty Finance approved the tri-party merger to create Colony NorthStar. Our new company is off to a very promising start in 2017.
With the closing of the transaction on January 10, the results we are presenting for the first quarter represent, for the first 10 days of January, the pre-merger results of Colony Capital as the accounting acquirer combined with the results of Colony NorthStar for the remainder of the quarter.
Thus, this report represents only a partial quarter for Colony NorthStar. And generally speaking in the full year 2017 should be viewed as transitional for the company.
As amongst other priorities, we simplify by rotating out of non-core businesses and into strategic property verticals, which compliment and also are enhanced by our investment management business. Starting with our achievements for the quarter, I am pleased to report that Colony NorthStar made substantial progress on many different fronts.
Since the January merger closing, we have focused on the top strategic priorities highlighted during our last call and profiled in our publicly filed management presentation. The initiatives that we expect will deliver meaningful value to our shareholders over the next few years.
These priorities include cost rationalization in synergies; simplification of our business into a handful of strategic property verticals; investment management fundraising across both our institutional and retail platforms and optimization of our capital structure.
Our core FFO for the quarter was $0.31 per share, which Darren will discuss in greater detail on this call. This result reflects the seasonality of our hospitality segment as well as other timing differences and we remain on track to achieve our 2017 full year goals for core FFO.
For example, the first quarter did not reflect the full impact of capital raising and investments that occurred during the quarter, including our common stock repurchases, which generally happened later in the quarter or subsequent to quarter end.
Turning to cost rationalization efforts, to-date, we have achieved approximately 90% of the previously announced $115 million of identified cost synergies, which is inclusive of 80% of the $80 million of annualized cash synergies. We remain confident of achieving the balance on a run-rate basis by year end perhaps within the third quarter.
Furthermore, we expect to identify additional cost savings through overall business simplification and improved operational efficiencies from being a more scaled company. Last night, we announced that our Board of Directors declared a second quarter dividend of $0.27 per Colony NorthStar common share.
This is in line with the first quarter dividend, which was prorated to account for the timing of the merger closing on January 10.
We expect an annualized dividend of $1.08 per share in 2017 and consistent with the updated earnings guidance range from last quarter, we anticipate that 2017 core FFO will cover the annual dividend by a meaningful cushion. Last quarter, we also announced the $300 million common stock repurchase program.
At current trading levels, allocating some of our capital towards repurchasing Colony NorthStar’s stock is a compelling investment opportunity. We have now completed $168 million of such repurchases or 12.9 million shares of common stock.
10.8 million shares were acquired through market purchases at an average price of $12.81 per diluted share and 2.1 million shares were acquired in connection with the unwind of a legacy call spread option. Turning back to our near-term priorities.
A critical part of our strategic plan is accelerating the migration of legacy non-core investments, which primarily reside in our other equity and debt segment to either cash to be redeployed in our various sector-specific verticals or alternatively to shift those assets through a third-party capital model under our investment management umbrella.
And in the process of doing so, we expect the Colony NorthStar portfolio will continue to generate meaningful capital gains over the next couple of years. During the quarter, we completed several strategic asset monetizations that together generated net proceeds in excess of $1.2 billion.
These included the sale of a 19% preferred joint venture interest in the company’s healthcare portfolio; the sale of the manufacturing housing portfolio, and the sale of 50% of the company’s interest in Colony Starwood Homes.
Furthermore and subsequent to the first quarter, we are now in the advanced stages of monetizing more than $1 billion of other non-core investments.
Last but not least, we are exploring a potential third-party permanent capital plan for substantially most of Colony NorthStar’s conventional debt investment business and certain complimentary equity investments.
This has been a core competency for both legacy Colony and NorthStar management teams, but as stated previously, should be appropriately situated in a more balance sheet light investment management oriented vehicle. Alternatives under review include structures similar to recent transactions in mortgage REIT space.
Overall, we are very pleased with the progress we have made on these strategic initiatives and we look forward to updating you in the coming months. Finally, moving to our investment management business and fundraising priorities. We are witnessing strong momentum in both the institutional and the retail channels.
As mentioned during our last call, we are targeting total institutional and retail fundraising of $2 billion in 2017, double our fundraising performance in 2016. I am pleased to report that we are already approximately halfway through our target or $980 million of third-party capital raised in the first quarter.
Institutional capital raising during the quarter was particularly robust at approximately $940 million. We held our final closing for our latest Global Credit Fund bringing total callable capital commitments to $1.2 billion, inclusive of the 20% commitment by the company.
We also had additional commitments of $355 million to our open end fund, which invests in the U.S. light industrial market. As a result, total third-party capital commitments in the U.S. industrial portfolio are now in excess of $1 billion. Although our own commitment to U.S.
industrial increased by $65 million to a total of $684 million during the quarter, our share of equity in this vertical declined to 43% based upon these incremental outside commitments.
Turning to our retail platform, after an extended period of extraordinary market disruption mainly driven by significant regulatory changes, we are finally seeing positive momentum in the overall retail marketplace as well as in our own fundraising.
We positioned our retail platform and product lineup to take full advantage of the evolving market environment and to support our goals of broadening the pool and channels of capital we access, which now includes registered investment advisors and traditional Wall Street firms in addition to the historical network of independent broker dealers, all with an objective of bringing Colony NorthStar’s institutional asset management acumen and best practices to the retail investor clients.
And post merger, this includes using our balance sheet to foster better alignment of interest with investors. Our offerings include non-traded REITs and 40 Act Funds allowing us to serve both long-term existing relationships and targeted new pools of capital.
Product structures are innovative and best-in-class, well suited to the new market environment and reflect our drive to be a visionary value producing leader in the marketplace. In connection therewith, we have seen strong progress in building selling groups in our current offerings and a commensurate acceleration in the pace of fundraising.
More than $6 billion of targeted capital was anticipated to be raised in products that are generally early in their life cycles and just starting the capital raising process, including our two effective programs, the $2 billion NorthStar RXr New York Metro Real Estate non-traded REIT and a $3.2 billion NorthStar real estate capital income, 40 Act Closed End Fund as well as our soon to be effective $1 billion NorthStar Townsend Institutional Real Estate 40 Act Interval Fund.
Privately placed retail products are institutional funds that have a retail sleeve are also in various stages of development. All of these are structured to be highly attractive to a very broad group of financial advisors and their clients.
With the Colony NorthStar merger headwinds now behind us, the market is settling into the new regulatory framework and our recent increase in sales velocity, we are very optimistic about our ability to build momentum in the second quarter and throughout 2017.
Overall, we are well on our way to achieving our 2017 guidance of $2 billion of new institutional and retail fundraising. In fact, we should comfortably exceed this target, if current market conditions persist.
So in summary, although we have just started our journey, I am convinced now more than ever the tremendous benefits of the Colony NorthStar merger and the opportunity to unlock significant value for our shareholders.
On day 1, we achieved tremendous critical mass both in balance sheet scale as well as assets under management, broad diversification and an all-star breadth and depth of talent. It came, however, with the liabilities of increased complexity and integration challenges.
The good news is that every day has been a step forward into this process of completing tasks and the checking boxes that get us closer to our objectives of being a streamlined, efficient and much easier to understand real estate and investment management giant.
We still have ways to go, but the momentum is there and our team is working in unison to accomplish this mission. Although I covered numerous topics and initiatives that we have underway, many others haven’t been mentioned either because they are of the smaller scale or proprietary at this juncture.
Needless to say, it’s a very exciting time for our company and employees. Everyone is working harder than ever and the best is yet to come. In fact, we feel blessed to have the tools and weapons that our shareholders have bestowed upon us to further this mission.
Consistent with this message, at this time, I would like to say many thanks and kudos to all Colony NorthStar employees for their extraordinary dedication, efforts and professionalism.
On behalf of our shareholders during this transition and integration period, over the first four months of the year and continuing today and going forward, we are all extremely appreciative. And now, I will turn the call over to Darren Tangen for a more detailed explanation of our first quarter operational and financial results..
Thank you, Richard and good morning everyone.
As Richard noted, 2017 is a transitional year for Colony NorthStar with significant work underway to achieve merger related cost savings, to sell non-core assets and businesses and to reallocate capital towards core property verticals and investment management businesses, de-leveraging and stock repurchases.
While these activities create some near-term noise in our financial results, including during this first quarter, we expect that the company will end the year with a significantly improved and simpler balance sheet and earnings profile. With that preamble, I have a few housekeeping matters to mention prior to a discussion of our results.
Since the merger of Colony Capital, NorthStar Asset Management and NorthStar Realty Finance closed on January 10, first quarter results reflect the pre-merger standalone earnings of the accounting acquirer Colony Capital or CLNY, for the first 10 days of the quarter and the combined earnings of Colony NorthStar or CLNS for the balance of the quarter.
As a result, you will notice that our per share results take into account the weighted average share count of standalone Colony Capital for the first 10 days of the quarter and as combined Colony NorthStar for the remainder of the quarter. The first full quarter of operations for Colony NorthStar will be in the quarter ending June 30, 2017.
I also want to draw your attention to our first combined company supplemental financial report, which we filed last night and is also available on our website.
We believe it will help investors understand our company better given the granular data it provides on each of our business segments and we will endeavor to improve on this new disclosure in future periods.
Also available on our website is our updated corporate investor presentation, which provides a great overview of Colony NorthStar and our short-term and long-term strategic objectives. With that, I will turn to our results for the first quarter.
Net loss attributable to common stockholders was $5.2 million or a loss of $0.01 per share and core FFO was $173.1 million or $0.31 per share. Various seasonal and timing differences impacted our first quarter results. Results, which we do not consider as representative of the company’s stabilized earnings potential.
Notably, the seasonal impact of our hospitality business in the first quarter was approximately $0.02 per share, which is the difference between actual Q1 results and the simple quarterly average based on expected results in this segment over the calendar year.
Furthermore, if we applied the forecast $80 million cash G&A synergy benefit and the stock repurchases, which happened in the past two months, core FFO would have been a further [Technical Difficulty] per share higher.
Additional core FFO upside exists from reaching full capital deployment and expected ramp up over the close of the year from other investments and businesses, including retail investment management. For these reasons, we believe we remain on track to achieve the full year 2017 core FFO guidance range presented on our last call.
Now I will turn to results within each of the five reportable segments starting with health care real estate. As of March 31, 2017, the healthcare portfolio consisted of 425 properties composed of senior housing, medical office buildings, skilled nursing facilities and hospitals.
The company’s ownership interest was approximately 71.3%, which accounts for the third-party capital raised in the first quarter from a leading global financial institution.
Compared to the fourth quarter 2016, first quarter 2017 same-store consolidated net operating income decreased slightly from $80.4 million to $79.3 million, primarily due to a one-time termination fee received in the fourth quarter 2016 in our medical office building portfolio.
Otherwise, triple net properties and senior housing operating assets were generally flat on a sequential quarter basis and our teams are working diligently to drive growth in the coming quarters. Core FFO contribution was $21.4 million for the quarter.
But keep in mind this reflects 80 days of operations instead of the full 90 days in the quarter, because this was a legacy NorthStar business. Moving on to the industrial real estate segment, as of March 31, 2017, the industrial portfolio consisted of 353 light industrial properties, totaling 39 million square feet, which was 96% leased.
The company’s ownership interest was approximately 43%, which decreased from the prior quarter due to increased third-party capital commitments during the first quarter.
Compared to the fourth quarter 2016, first quarter 2017 same-store consolidated net operating income was essentially flat at $35.5 million as higher expenses notably property taxes offset a 3.5% increase in revenues.
Year-over-year, same-store revenues and net operating income increased approximately 5% and we continue to see tremendous momentum in the operating fundamentals of this sector driven by strong e-commerce growth, among other things.
Core FFO contribution was $13.4 million reflecting earnings for a full 90-day quarter as this was a legacy Colony Capital investment. Turning to the hospitality real estate segment. As of March 31, 2017, the hospitality portfolio consisted of 167 primarily deluxe service and extended stay properties.
The company’s ownership interest was approximately 94.3%, which was unchanged from the prior quarter. Compared to the first quarter 2016, first quarter 2017 same-store consolidated EBITDA decreased approximately 3% from $63.3 million to $61.2 million.
This was partially due to rooms being removed from inventory for renovations in the most recent periods, which should help drive future RevPAR growth. Core FFO contribution was $27.4 million for the quarter, which reflects 80 days of operations because this also was a legacy NorthStar business.
Our other equity and debt segment includes our opportunistic and non-core investments, which totaled $5.9 billion of undepreciated asset carrying value and $4 billion of undepreciated equity carrying value as of March 31, 2017.
Richard touched on this subject earlier and I want to reiterate that we think this segment includes a highly desirable investment portfolio with attractive risk adjusted return characteristics.
However, given our aim to transition our debt investment business to a third-party capital model and our related goal to simplify the Colony NorthStar balance sheet, we are exploring various strategic alternatives, including contributing a significant portion of the assets in this segment to a separate permanent capital vehicle.
This initiative, if implemented would allow the company to continue to pursue this investment strategy in a new balance sheet-light and investment management format, while continuing to take advantage of the entrepreneurial and opportunistic D&A of both Colony and NorthStar. We will report back on this initiative as appropriate in the future.
Coming back to the performance of the other equity and debt segment, during the first quarter 2017, core FFO contribution was $135.6 million, which included $32 million of gain from the sale of 50% of our Colony Starwood Homes stake, net of other provisions for loan losses.
Again, these results will only reflect 80 days of operations for those investments that were legacy NorthStar. Lastly, our investment management business ended the quarter with $41 billion of third-party assets under management consistent with prior quarter.
As Richard noted, we experienced solid momentum in fundraising having achieved approximately half of our annual fundraising goal of $2 billion in the first quarter. For the full 90-day period in the quarter, total fees and revenues were $61 million and this does not reflect the full benefit of the capital raising we did near the end of the quarter.
Core FFO contribution was $31.4 million for the quarter, which reflects 80 days of operations for retail investment management, Townsend and other legacy NorthStar investment management businesses, including our NorthStar Realty Europe. Now, I will touch on our capital structure.
Total capitalization, excluding minority interest, was $17.3 billion based on debt balances as of March 31, 2017 and our share price as of May 5, 2017. Of this, total pro rata debt was $8 billion, representing a 46% debt-to-capitalization, which is in line with our previously stated target to keep the leverage at or below 50%.
In addition to managing our overall leverage levels, we are focused on extending and staggering our remaining near-term debt maturities. To that end, we closed yesterday on an $850 million financing and recently executed a commitment letter to refinance another $780 million of mortgage debt within our hospitality segment.
This $1.6 billion of mortgage debt was otherwise scheduled to mature in 2019, but these refinancings will push out the fully extended maturity dates to 2022 at moderately reduced interest rates from prior levels.
An another example of liability management, we recently locked rate on the final tranche of mortgage financing within our industrial portfolio, which completes the refinancing of the $1 billion plus floating rate acquisition debt facility put in place when we acquired the cobalt industrial portfolio in 2014.
This latest mortgage financing consists of $264 million of proceeds at an average term of 11 years and a fixed rate of 3.9%, tremendous long-term fixed rate debt for long-term strategic assets.
As I mentioned on the last call, real estate debt markets remained highly liquid and we will continue to focus on refinancing our corporate and investment level debt at lower rates and longer terms.
Turning to our liquidity position, we currently have over $1 billion of liquidity between availability under our new $1 billion corporate credit facility and cash on hand with more liquidity expected from near-term asset monetizations.
This provides us with ample liquidity to play offense and defense to renew investments, de-leveraging and/or stock repurchases. In summary, we are pleased with our first quarter results and the substantial progress we have made in the 4 short months since the merger closing.
Again, 2017 is a transitional year for the company focused on achieving our synergies and simplifying our business. As we have said before, our vision is to transform Colony NorthStar into a must-own, large cap, diversified equity REIT with a synergistic embedded investment management business.
We look forward to reporting on our progress towards this end in the quarters and years ahead. With that, I would like to turn the call over to the operator to begin Q&A.
Operator?.
Thank you. [Operator Instructions] Our first question is coming from Jade Rahmani of KBW. Please go ahead..
Thank you very much.
I was wondering if you could repeat what core FFO per share would have been incorporating the full run-rate synergies you mentioned and the effect of the purchase assuming the merger closed December 31?.
So, Jade, the two numbers I gave were seasonality of hospitality that the first quarter was about $0.02 a share lower in the first quarter and then otherwise would be sort of run-rate simple average over the course of the year.
And then the other was, if we were to apply the full expected synergies as well as some of the stock repurchases that, that would be another $0.01 a share. So those two things will be $0.03.
I didn’t give a number, but we do expect further core FFO upside from achieving full capital deployment, which we certainly didn’t have in the first quarter as well as there are certain businesses and even other assets that we expect will have improved operating performance over the course of the year.
And retail investment management is certainly one example of that for some of the reasons that Richard mentioned during his remarks..
And what was the impact from the $0.10 – or the 10 days that you didn’t have the combined operations?.
So to clarify on that, anytime we are talking about nominal dollar core FFO results for the first quarter, to the extent we are talking about legacy NorthStar assets or businesses, that’s 80 days.
But for the per share results that have been reported, the way that, that works is it’s sort of 10 days of Colony Capital’s results from January 1 to January 10, divided by and you can think of the average share count for Colony during that period and then it’s 80 days of Colony NorthStar results divided by the share count for Colony NorthStar for those 80 days.
So the per share results do adjust for the full 90 days, although you have got two different companies in that time period..
Okay.
In terms of the core earnings that’s coming from other equity and debt, I guess, what’s the remaining duration of those earnings? And given the high returns on those post-financial crisis investments, do you think you could redeploy that capital accretively?.
So, first of all, I mean, the high core FFO result in the first quarter from other equity and debt was partly because that included the sale of our 50% stake in Colony Starwood Homes during the period.
So, I think if you sort of adjust out for that, the segment has been historically or recently delivering about a 10% to 11% return on equity and that’s really what has to get replaced as we recycle that capital equity out of other equity and debt and reinvest into either property verticals or investment management businesses.
And I think for the asset verticals that we are going to be investing in to when you combine that with the expected investment management economics in terms of the business that we are pursuing in those verticals, it may not be immediately replaceable about 10% to 11%, but we think within a short period of time, 1 to 2 years that we can more than – not just make up the 10% to 11%, but hopefully exceed that over time..
Yes. The other comment I would make, Jade, is that if we are successful in executing this plan that both Darren and I spoke about in terms of our conventional debt business as well as some complementary equity investments that it’s possible we may keep a very significant stake in a construct like that.
And therefore with respect to at least that part of the portfolio, we would just continue to earn the returns that Darren just mentioned.
So part of the portfolio is going to turn over for sure, but part of the portfolio in effect may stay in place to the extent that we just create a third-party investment management construct around our balance sheet position..
In terms of the investment management business, can you comment on the environment for capital raising, your sense of how things are going in discussions with LPs and also what investment strategies are gaining the most traction?.
Sure. Look, I think institutional and retail are a little bit different. I think on the institutional side, I think generally speaking there is more caution today, notwithstanding our success in Q1.
So, I think as a general matter, people are taking more time and their diligence, they are concerned about where asset pricing is generally speaking and they are therefore more focused on those niches, which remain inefficient and are going to be value-add from the standpoint of supply demand imbalance meaning limited supply and improving demand fundamentals like we have had in both the single-family for rent space as well as our light industrial business as examples.
So, I think the institutional market is a little bit more cautious, definitely rigorous in their scrutiny of kind of what they like versus what they are more cautious about today, but I think we are in the right place is number one. And then I think the retail environment, as I suggested in my remarks I think is improving.
And now that we have got these regulatory headwinds behind us, I think is more open-minded about getting invested again in the space. And I think the variety of offerings that we have before them represent a very attractive menu of choices that hopefully they will participate in..
Thanks. I am going to get back in queue..
Okay. Thanks, Jade..
Thank you. Our next question is coming from Jessica Levi-Ribner of FBR. Please go ahead..
Good morning, guys. Thanks for taking my questions.
Just to piggyback off of Jade’s questions on the capital raising, can you talk about how much of the capital was raised towards the back end of the quarter and maybe how much of that could benefit earnings next quarter?.
Darren, do you want to take that?.
Sure, yes, I will take that, Jessica. I mean, so for the industrial funds that came in at the very end of the quarter. So there was really no first quarter benefit from that incremental capital that was raised and also it would be true for the final closing of the closed ends opportunistic credit funds.
Now, the fee construct for that is a little bit different in the sense that the fees don’t start to be earned in that closed end credit funds until deployed. We would expect that, that fund is probably going to get deployed here over the next 9 to 12 months would be my guess. So you will see those fees sort of show up over the course of the year..
Right. There was very little revenue production from the incremental institutional capital raising during the quarter..
Okay. And then on the retail side, you just commented that there is an improving environment.
Can you kind of size maybe the pipeline for the second quarter and beyond or is it kind of remains to be seen?.
Well, not all of the products that we have lined up, some of which I referenced in my comments are actually in the market and offering securities. So, it’s going to be incremental, I think here in Q2 and more likely to be robust on our behalf during the second half of the year and then going into 2018.
And it’s just a question of sequencing and crossing the Ts and dotting the Is just with respect to the various things that you do in order to have those offerings in the market. So, we now have two that are live, but with a little bit of luck, we are going to have a lot more before year end..
Okay. Thanks for that.
Just turning to the hospitality portfolio, can you give us an idea of maybe the cap rate we should be using on the overall portfolio and any remaining CapEx that you might have?.
Well, in terms of cap rates, I mean, I think you can look to some of the other hotel REITs that have select service exposure or I think there has been some other capital transactions in terms of portfolios that brought in co-investors and whatnot.
I mean, I think generally, that’s probably been in the low to mid 7s in terms of where some of those other comps have traded. But look, you should do obviously your own diligence on that. As far as CapEx go, I think that was a question that came up last quarter and we generally reserve and budget for 4% to 5% sort of FF&E type reserve.
Now, our portfolio also has some incremental CapEx, acquisition type CapEx that has already been reserved for. And I think we have talked about that last quarter as well. So that would be incremental to the sort of 4% to 5% FF&E type reserves that we generally budget for.
The actual spend in the first quarter across really all three segments, healthcare, industrial and hospitality was a little bit lower than what I think we have talked about on the call last quarter.
But we do expect that there will probably be some catch up on that and that we will end up the year pretty much in line with those CapEx reserve numbers we discussed 3 months ago..
Okay. That’s it for me for now. Thank you..
Yes, thank you, Jessica..
Thank you, Jessica..
Thank you. Our next question is coming from Jason Weaver of Wedbush Securities. Please go ahead..
Hi, good morning. Thanks for taking my questions. So the pace of share repurchase was a lot quicker than what we have seen you do in the past.
Can you comment on how you feel about that as maybe the best use of capital right now versus other investment opportunities?.
Sure. Thanks for that question Jason. So look, I think there is a balance. We have a lot of good uses for our capital in terms of investing in our verticals as well as even some investment management ideas that were kind of more in the formation stages.
On the other hand, I mean I think with our stock trading where it was during Q1 and getting to Q2, we think that was a compelling opportunity to acquire on an accretive basis on behalf of our shareholders and we did so.
So I think there is going to be a balancing act here, just between our various needs and uses, including perhaps even some further de-leveraging depending on the particular portfolio and the particular maturity that we may be dealing with. So I think it’s a combination. I mean I think there is a balancing act here, if you will that we are managing..
Got it, okay. Thank you.
And can you talk a little bit more about the comments you made about third-party capital for your legacy debt and equity investments, am I getting this right, would this mean raising a new separate mortgage REIT of which Colony NorthStar would be the external manager?.
Well, I mean it could be something like that. I mean I don’t think we can say terribly much at this point, just because there are limits and restrictions from a legal standpoint around as we are kind of thinking through the different alternatives, what we can really say publicly.
But certainly, as you know and based on our history, we are very interested in creating for investment management third-party, hopefully permanent capital type constructs that just like we did with our industrial where that happens to be an institutional open end fund, so there are a variety of different constructs, which kind of fit that description and I can’t be more specific than that.
But it’s something where we would have alignment of interest with the third-party capital investors, hopefully in a permanent capital type construct, although it could be a more closed in limited duration thought construct too.
And yes, we would be getting investment management economics as well as potentially having a significant stake and therefore, earning very healthy returns on that stake as well as those returns then being enhanced by the investment management economics.
So it’s very consistent with the model that we keep describing, that we have in terms of how we want to run our business..
Okay. Thanks for that.
And just one more for me, you might have mentioned this during your comments, but can you tell me any more about the expected $1 billion in asset monetizations you are looking at post quarter end where that’s coming from, what verticals it’s coming from?.
Yes. We can’t, I mean that’s about all we can say is that it’s in process and we can’t be more specific on that unfortunately..
Okay. Thanks a lot..
Thank you, Jason..
[Operator Instructions] Our next question is coming from Mitch Germain of JMP Securities. Please go ahead..
Good morning everyone.
So just curious, some of the healthcare REITs have been talking about interest from foreign capital, particularly doing some larger transactions, so are you seeing – are you having those same type of conversations?.
Well. Hi Mitch, good morning. Yes, I mean look, we did that, right. I mean the 19% preferred JV interest that we closed on during the quarter is an example of that. And certainly, that group had that type of interest. We are aware of other groups that have similar interest.
And so that’s certainly a possibility on a go-forward basis in terms of what could happen within healthcare..
There are big portfolios in the healthcare sector that you guys are looking at right now or is that not a appropriate use of capital given where pricing is?.
Yes. Look, I think we are pretty measured about growing healthcare at the moment. I think we are more focused in other areas. I think in healthcare at the margin, we are more inwardly focused and just making sure that this is working in line in a way that we feel is appropriate for how we want to manage the business.
And I think I have commented in prior calls that there is a little bit more just based on how the business evolved historically, a hodgepodge of different arrangements with different partners, some things are outsourced, some things are managed internally and we are just trying to reconcile all of that and kind of bring it to a more simplified consistent format.
And I think on balance that’s where we are focused management wise today. If the right opportunity came along, of course in terms of an acquisition, we would be opportunistic about that. But for the most part, we are more inwardly focused as I just described..
Got it.
Big transaction announced a couple of weeks ago between Kennedy-Wilson and their Europe entity, obviously we have got NRE trading at a pretty sizable discount to NAV, what are your thoughts there in terms of trying to narrow that gap in your mind?.
Sure, we are working hard on a program that hopefully will accomplish that, albeit it’s going to take some time. It’s got a number of different elements to it and I can’t be terribly more specific than that.
But we certainly suggested in other calls that we like the NRE business, we like the NRE platform and format, albeit we think we need to do some things that hopefully would be a precursor to narrowing that trading gap and getting it positioned once again to be a growth company..
And do you expect Europe to be a core vertical moving forward, like we see with regards to industrial and healthcare and lodging?.
Well, it could be. I mean certainly not today, but it could be..
Okay.
Just two more quick ones for me, I asked a last of question, but just curious now that you have gotten some of the monetizations done and you are sitting on $1 billion of capital, with regards to the converts, any interest in redeeming of some of them?.
Mitch, I will take that. I mean there is a couple of legacy very small remaining outstandings of NorthStar legacy converts that we maybe that’s something gets cleaned up, but I think the two legacy Colony converts are I think first of all, I am not even sure that they are necessarily at this point are callable at this point in time.
So that’s probably not the biggest area of focus in the capital structure. Let’s say a bigger area of focus would be our preferreds. We have got $1.6 billion, probably [ph] we talked about this in the last call that there is $1.6 billion of outstanding preferred, some of those are legacy NorthStar preferred and some of those legacy Colony preferred.
But all of those have existing coupons or dividends yields rates that are above what we could get done in the market today. And approximately half of that $1.6 billion is callable. So that’s probably a bigger priority for us in terms of thinking about refinancing activity..
Great.
And then last for me Darren, what was the same-store growth if we exclude the rooms that were impacted by the refresh?.
Not sure I have got those numbers handy, Mitch. I may need to get back to you on that..
No worries. Thank you..
Okay. Thanks Mitch..
Thank you. Our next question is coming from Jade Rahmani of KBW. Please go ahead..
Thank you.
Just the seasonality headwind of $0.02, I mean that’s a normal recurring annual 1Q feature of the hospitality space, is it not?.
I think that’s a fair comment..
Okay.
Just looking at the healthcare supplemental, I see two operators that have lease coverage below 1x, one is Grace and other is Symphony NuCare, can you just comment on if you have any sense for what drove that?.
I am not sure I have got any particular insights into the operating performance of those operators, Jade. But I know that within this portfolio, there have been instances historically where some of the operators have run into troubles and you typically got two situations.
You either have to look and say, is this an operator specific situation, in which case you may have to do an operator replacement or is that really not the fault of the operator, it’s just market conditions, in which case sometimes you have either got to look at the lease itself or the management agreement and do some modifications and restructuring that.
But maybe I will let Keith Feldman who is also on the line with us here today.
I am not sure Keith if you have any particular insights into these two operators?.
Nothing to add right now, we can get back to you with some more detail..
Yes. But I think look, I do think where there is the most pressure within the healthcare just broadly Jade, is in skilled nursing. And I think our portfolio has some of that consistent with market conditions for everyone who is in that business, who is in that space. So you are citing two of the data points where that’s certainly true today..
And is there any impact from a repeal of Obama Care as proposed that you would expect?.
Well, I think it’s pretty hard to handicap still, right. I mean you certainly have the house version on the one hand, but on the other hand, I men what Senate is ultimately going to come up with, what might occur and some kind of compromise bill that ultimately gets passed, if anything gets passed. It’s still a lot of speculation.
So it’s a little premature I think. They are really handicap right now..
Okay.
Just wanted to ask about Townsend if you view this as a core part of the investment management platform?.
No, we have never said Townsend is a core part of the investment management platform. It’s run as a separate autonomous business unit, it’s a great business, but it’s certainly not core..
Okay.
And was wondering if you could provide the pro forma diluted share count for the stock repurchases?.
So we were now at 584 million shares, if you count both common shares outstanding as well as OP units, Jade. So that number incidentally you can find in our earnings release..
Okay.
And just lastly on G&A, it looked somewhat elevated, wanted to see if you could give an expectation for full year run rate G&A and also just touch on the 1Q stock computation?.
So there was two elements of G&A in the first quarter, which we deem as being non-recurring. One was a $26 million share replacement award, which relates to some of the change in control awards related to the merger that were discussed during the time of the merger.
There also was about $20 million of other merger related G&A costs, which we don’t view as recurring. So I think if you take that $46 million that I just mentioned of G&A and deduct that from the first quarter results, which were elevated, that’s fair.
And you look at that against the first quarter of 2016 by combining the three individual companies, G&A expenses were down about 34%. So I think that’s consistent with what we talked about even in last summer when we announced the merger.
I think we have mentioned at that time that we expected G&A savings of between 25% to 30% and in fact we are closer to 34% with the adjustments that I just mentioned for the first quarter and that doesn’t even reflect the full achievement of our synergy targets that we have announced, which is the $80 million of cash G&A savings and $115 million if you include the stock compensation savings that we expect to achieve.
So that’s probably the best place to look Jade, but there are other two adjustments that I think you got to look to and some of those are detailed in our core FFO reconciliations schedule that’s in our earnings release..
Okay. Thanks very much..
Thank you, Jade..
Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments..
Sure. Thanks again everyone for joining us this morning. We really appreciate your participation and support. And we look forward to reporting on our continued progress next quarter. Have a great rest of the day..
Ladies and gentlemen, thank you for your participation. This concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day..