DigitalBridge Group Inc

NYSE:DBRG

Earnings Call Transcript 2019-Q1

[Operator]

Greetings, and welcome to the Colony Capital, Inc. First Quarter 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Lasse Glassen, Managing Director of ADDO Investor Relations. Thank you. You may begin.

[Lasse Glassen]

Good morning, everyone, and welcome to Colony Capital Inc.'s First Quarter 2019 Earnings Conference Call. Speaking on the call today from the company is Tom Barrack, Chairman and CEO; and Mark Hedstrom, COO and CFO. Darren Tangen, the company's President, will also be available for the question-and-answer session.

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 those 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, 2019, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures, reported on both a consolidated and a segmented basis. The company's earnings release, which was issued 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. In addition, the company has prepared a table that reconciles certain non-GAAP financial measures to the appropriate GAAP measure by reportable segment, and this reconciliation is also available on the company's website.

And now, I'd like to turn the call over to Tom Barrack, Chairman and CEO of Colony Capital. Tom?

[Thomas Barrack, executive]

Thank you, Lasse, and good morning, and thank you to all the participants on this morning's earnings call.

As we surveyed the performance of our business line to the closing of 2018 fiscal year and the first quarter of the 2019 fiscal year, we are pleased with the underlying fundamentals of the assets and operating companies, which drive our cash flows, earnings and consequently our dividend.

First, a personal overview of the macro. We continue to be the beneficiaries of globally low interest rates, driven by concerned and empowered central banks with few arrows left in their quivers. As a result, we're keenly aware of the dramatic supply of liquidity in a very late stage of the real estate cycle, and the corresponding endless appetite for yield by both public and private investors. As always, the illusion of supply/demand balance in most asset classes and most geographies stimulates lower risk premiums and a foggy view of the lessons of the past. While debt and equity remains prolific for high yielding assets, a clear determination to investors of the differentiation between return of capital and return on capital is okay.

The pressure of increasing wages, physical obsolescence, real depreciation and accelerated capital expenditures are outweighed by the consistency of contractually obligated cash flows derived from rents and profits of slow-growing but mostly stable real estate assets. These mostly understandable cash flows managed by experienced professionals are an offset to the current investor fascination and public market stardom of high-growth companies such as Amazon, Google, Microsoft, Facebook and Apple. In the subsidy of understanding the brick-and-mortar impact driven by the new requirements of these tenants and their intended employees and customers is the current question.

Meanwhile, confusion on trade agreements and their unknown effects, a dramatic march from globalism to protectionism, volatility and emerging markets from Latin America to Asia, global unsettledness and brinkmanship, an increasing schism amongst the haves and have-nots, a contest between socialism and capitalism and geopolitical confusion spanning from Latin America to Asia will continue to cloud the steady appreciation of many at-risk assets. These bouts of confusion will benefit our real estate assets as many investors seek safety and predictability and as the still better-than-all-else economy of the USA dominates global investors' flows and appetite.

Going to where the ball is going, while keeping your eye on the ball coming over the plate in front of you will separate winners from losers in the real estate industry. The long lead time of entitlements, planning, architecture, construction, leasing and maintenance in the midst of the technological revolution makes hard assets adapting on the spot difficult or impossible, and necessitates a longer and more patient strategy. Along the never-ending road of value creation and adaptability, the opportunity for those who are fortunate enough to possess scale to arbitrage and values between varying and differing public and private markets and risk appetites.

Real estate income streams are certainly not static, and this kind of cash flows are confounded by the cost of necessity curating bricks, mortar, tenants, geographies and capital structure. This necessitates great people and great information, not simply financial alchemy. Pricing today is surgical and the investing market is constantly in search of transparency and simplicity at scale. The balance between current yield and total return for passive investors, gets frustrated by a value-added desert of no yield, along the yellow brick road to us. Further obstacles along this road are the need for liquidity, transparency and market pricing.

The creation of new real estate product in its early stages by nature is lower in yield during development and higher in risk in total return at maturation. Older assets have less risk at the front end, but higher risk in being financially, functionally or physically obsolescent.

And now an overview of CLNY within the context of this challenging microenvironment. Our stated 2019 goal is to simplify our business and balance sheet; monetize assets, which achieve higher private market values and public market values for our not strategic; own and build liquidity and deploy it wisely in assets and companies in which we create, buy, build, grow and harvest acceptable current and total returns in the businesses of the future; harvest and curate cash flows from the businesses of the past and investigate consolidation and merger opportunities in those business silos as they present themselves as we maintain and increase core FFO, stabilize earnings, extend the debt term and lower interest rate expense; take advantage of market opportunities when appropriate to buy back preferred and common stock; reduce G&A; and maintain our dividend and REIT status.

We navigate this yellow brick road with caution and focus. We will continue to grow our Investment Management business by using our balance sheet as evidenced by our most recent Digital Colony Partners, CIF, CLNC and Colony Lat Am initiatives. Our Board of Directors and the special asset review committee are doing a terrific job at helping us focus on the openness to market opportunities for those businesses, which we desire to grow and hold and to better understand and explore consolidation within the marketplace, which we believe will increase in upcoming quarters, i.e., the well-timed and brilliantly engineered Oaktree and Brookfield transaction. We will also evaluate monetization opportunities for those businesses that have reached optimal maturity if we believe we have a higher and better use for the allocation of that redeployed capital. More to come on this in the next quarter.

Next, a review of our Investment Management business. Digital Colony. Digital Colony Partners is the major achievement within our Investment Management segment. We successfully raised $4 billion of capital from global institutional investors ignited by our $250 million balance sheet commitment, alongside of Marc Ganzi's Digital Bridge expertise and tremendous track record. Nearly 50% committed despite being barely 1-year-old.

DCP and a partnership with EQT this week culminated the execution of a binding purchase and sale agreement of a landmark $15 billion take private transaction of Zayo, a major provider of bandwidth infrastructure in U.S.A., Canada and Europe. The transaction required $6.5 billion of sponsored equity and over $8 billion of debt. This is attributed to the power of great partners such as Digital Bridge and Marc Ganzi and CLNY's Institutional Investment Management model, which when combined, harvested significant investor co-investment appetite. This was done in record time against adverse circumstances dictated by confidentiality and other considerations and constrained fund-raising, and we anticipate substantial additional co-investment being raised now that the transaction's been announced.

CIF. CIF, led by Lew Friedland and our Dallas-based team, has been a poster boy example of our buy, build and grow strategy brilliantly executed. We started in this business 4 years ago with our acquisition of the $1.6 billion Cobalt portfolio, a 298 buildings totaling 30 million square feet. Similar to the thesis behind our usually successful investments in single-family home rentals and digital infrastructure. We identified a secular shift in demand and behavior in an asset class that was highly fragmented, which we could enter in scale with a SEAL Team Six management team and a well-engineered and funded third party open-end fund structure on the highest quality global institutional investors.

It was a few real estate asset classes that look to benefit from technology and its last-mile appetite rather than being disrupted by it. So we pursued it with conviction. Since our original acquisition, we doubled the footprint to 58 million square feet and more than tripled our basis to approximately $5 billion. Same-store NOI continued to grow year-over-year as our competitive advantage of leasing, marketing and servicing our national tenants gets better and better. All the while we have culled the portfolio, shedding lower quality assets to compile a highly desirable portfolio of assets.

In the first quarter, we completed the acquisition of a scaled portfolio of 54 industrial buildings encompassing 12 million square feet for $1.2 billion. Particularly attractive about the portfolio was the value-added upside to its 71% occupancy and geographic overlap with our existing markets and tenants, so we could employ the same playbook we successfully had with our existing portfolio, having leased it from 89% to 95%.

Colony Lat Am. Past quarter, we closed the acquisition of the Latin American business of Abraaj, and its proven management team led by Miguel Olea. Along with his superb team, we annexed $500 million of assets under management to our investments table and an active pipeline of proprietary transactions.

CDCF. This is a perfect complement to our public CLNC REIT and makes a dominant and significant player across the global credit industry, availing ourselves of a mature market and investors who seek lower risk and a lower part of the capital stack and yet acceptable risk base yields. Stewarding institutional third party capital as well as public shareholders is its formula. These successes clearly demonstrate the ability of Colony through pruning of its balance sheet, the power of our capital formation teams and attraction of great operating team such as Digital Bridge and CIF to form impressive amounts of third party capital by curating distinguished investment projects geared towards the future of real estate, here and abroad.

Now a review of our balance sheet assets and progress. Hospitality. We continue to cull and improve our mostly select service portfolio as the industry is dominated by seasonality, increasing the small gains at the top line and a relatively flat bottom line due to rising wages and capital expenditures required from the brands. We've extended term and lower interest rate costs in several portfolios. Compared to the same period last year, first quarter 2019 hospitality same store revenue increased 0.7%, and NOI before FF&E reserve increased 2.4%. The lower service quadrant select service positions it more safely to rising wages and costs than its full service breadth. Managing CapEx and the brands is the quest in this category.

Healthcare. We're far along and refinancing the upcoming GAHR debt maturity. We anticipate accelerated consolidation in this industry, and we're bettering our relationships with the proven professionals in the health care industry. Our underlying asset portfolios have been performing at budget and stabilizing in a marketplace, which is faced by recent headwinds that contains significant opportunities for the future as we continue to extend term and call assets within skilled nursing and medical office buildings. Consolidation in this industry is inevitable.

CLNC. Our mortgage REIT was off to a good start in 2019, highlighted by early success in portfolio rationalization and the expansion of core earnings. We made meaningful progress in recycling capital from noncore assets highlighted by the sale of 90% of our interest in real estate private equity funds. Restructuring of legacy loans is a key part of our overall portfolio rationalization strategy, and this is occurring at pace. We're utilizing our best efforts to ensure that by year-end, we will be able to generate core earnings that will cover our dividend.

Other Equity and Debt. We are on target for monetizations in 2019. As we previously communicated, we will continue to utilize our well-capitalized balance sheet to create engines of value in our Investment Management businesses around teams and themes in which we have confidence and trust. We will continue to rigorously execute our large-scaled G&A net cost-reduction program. We will make capital allocation decisions, which align with our total return Investment Management-driven business model, but which allow us to support a solid dividend and retain REIT status. We will continue to stabilize the balance sheet and work to mitigate underlying risks in the operations and portfolios, and in doing so, retain the fortress position from which we are poised for growth. As we monetize and favor liquidity, we will prepare for that unforeseen intervening event, which always materializes. We will continue to execute transactions, which elucidate the true divergence between spot price of our shares and our belief in a much higher NAV and establish to the market that difference in executions. And most importantly, in 2019, we will remain a REIT and judiciously focus on the production of our $0.44 dividend distribution.

Many thanks. And now I'd like to turn it over to our CFO and COO, Mark Hedstrom.

[Mark Hedstrom, executive]

Thank you, Tom, and good morning, everyone. As a reminder, in addition to the release of our first quarter earnings, we filed a corporate overview and supplemental financial report this morning. Both of these documents are available within the Public Shareholders section of our website.

On the call today, I will provide a review of first quarter results, business segment performance and provide an update on our previously announced cost-reduction program.

Turning to our financial results for the first quarter. GAAP net loss attributable to common stockholders in the first quarter was $102 million or $0.21 per share, while total core FFO earnings were $48 million or $0.09 per share. Excluding net investment losses of $28 million, core FFO would have been $75 million or $0.15 per share. Approximately half of our net investment losses related to our share investment losses realized by CLNC during the quarter, which I will discuss in more detail later. The other half primarily related to losses on sales of and loan loss provisions on certain other equity and debt investments, most of which we plan for as part of our strategic monetization program. If we continue to monetize noncore assets as planned, we anticipate recovering these losses on a net basis over the balance of the year.

During the first quarter, we had solid outperformance across all of our 6 reportable business segments on a quarter-over-quarter basis, and we also achieved significant G&A cost savings, which I will touch on later.

Starting with the Healthcare Real Estate segment. Same-store portfolio NOI increased 2.7% compared to fourth quarter 2018, primarily due to higher onetime expenses experienced in that fourth quarter. On the financing front, we've made significant progress on our near-term loan maturities in the Healthcare segment. Three such loans have been refinanced since the beginning of the year and aggregate consolidated balance of $210 million fully extending maturity dates to 2024. Additionally, we continue to make significant progress towards addressing the December 2019 maturity of the $1.7 billion consolidated mortgage debt on Griffin U.S. health care portfolio. We expect to be in a position to provide a more detailed update on that refinancing during the next quarter.

Moving on to the Industrial Real Estate segment. Light industrial same-store portfolio NOI increased at just under 1% compared to fourth quarter 2018, primarily due to contractual rent escalations, which were partially offset by slight anticipated decreases in occupancy, together with increased real estate tax and insurance expenses. On the capital front, the company raised $141 million of new third-party capital during the first quarter of 2019 in its Light Industrial open-end fund for a combined $1.7 billion of third party capital in that strategy.

The industrial platform also invested significant capital, including the acquisition of a $1.2 billion value-add national portfolio of 54 light and bulk industrial buildings, representing almost 12 million square feet of warehouse space. 48 buildings in the acquired portfolio are light industrial, which were acquired in the company's existing Light Industrial Platform for approximately $800 million. The remaining 6 bulk industrial buildings, representing approximately 35% of the total acquired portfolio's square footage, were acquired for approximately $400 million through a new investment vehicle, which was capitalized by the company and a third party fee-paying investor, which contributed $72 million for 49% interest in the bulk portfolio. The acquisition of these bulk industrial warehouse assets will serve as the seed portfolio for our new bulk industrial strategy.

Turning to our Hospitality Real Estate segment. Compared to the same period last year, first quarter 2019 same-store portfolio NOI before FF&E reserves increased 2.4%, primarily due to an increase in ancillary revenues. The company's hotels typically experienced seasonal variations in occupancy, which may cause quarterly fluctuations in revenues, and therefore, make sequential quarter-to-quarter revenue and NOI result comparisons less meaningful.

Earlier this week, CLNC reported first quarter core earnings of $12 million or $0.09 per share compared to a core earnings loss of $37 million or $0.29 per share in the fourth quarter of 2018. These core earnings include realized net losses in the first quarter, of which our 36% share was $14 million. These losses resulted from the first quarter foreclosure of a single borrower mezzanine loan collateralized by diversified portfolio of U.S. properties. As a reminder, this loss was anticipated in the fourth quarter of 2018 when CLNC had recorded a related loan loss provision in their GAAP earnings. Adjusting for these anticipated foreclosure events and other onetime items, CLNC run rate core earnings were $0.36 per share in the first quarter, and the company continues to make significant progress towards its stated objective to cover its dividend on a run rate basis by year-end.

Next, we will touch on our Other Equity and Debt, or OED business, which is a $2 billion segment that is bifurcated into strategic OED and non-strategic OED. Strategic OED includes our investments alongside third party capital where we earned Investment Management economics and which represents a growth segment for the overall business. During the first quarter, the unappreciated carrying value in strategic OED increased by $40 million or 5% to $812 million. On the other hand, we were actively liquidating non-strategic OED, which includes legacy investments that are at the end of their investment life and/or do not fit under the Investment Management strategy.

During the first quarter, unappreciated carrying value in nonstrategic OED declined by $73 million or 6% from $1.2 billion to $1.1 billion. Including OED asset monetizations realized subsequent to the end of the quarter, approximately $200 million in net equity proceeds has been realized year-to-date and we expect to exceed the $500 million plan for the year that Darren mentioned on the last earnings call. We will continue to allocate this liquidity into the most compelling opportunities with a bias towards new strategic realigned investments where we have a unique or competitive edge, and where we can employ a third party capital model. We expect the strategic OED will soon outweigh nonstrategic OED by carrying value, consistent with the plan we have been communicating and executing over the past year.

Our Investment Management business segment continues to increase in its significance as the strategic component of overall revenues and operations of the company. Colony ended the first quarter with third party AUM of $28.8 billion and Fee-Earning Equity Under Management of $17.8 billion, representing impressive year-over-year increases from the same period a year ago of 5% and 10%, respectively. During the first quarter of 2019, the company closed on $310 million of third party capital commitments, which was well ahead of plan. Additionally, and just subsequent to quarter end, Colony closed its acquisition of Abraaj Group's private equity platform in Latin America, whose operations we are now integrating and which will add more than $500 million to our existing Fee-Earning Equity Under Management.

Turning to our corporate capital structure. We amended the terms of our corporate credit facility agreement, including reduction of aggregate from revolving commitments from $1 billion to $750 million, and the modification of certain terms and financial covenants, including the asset borrowing-based formula and the easing of a cash flow coverage test. This gives us more flexibility to maneuver as we monetize assets without sacrificing substantial liquidity reserves.

Finally, I will provide an update on the corporate restructuring and reorganization plan announced during the fourth quarter of 2018. During its first 5 months since implementation, the company has achieved over $30 million of annualized run rate total cost savings or more than 60% from its stated objectives. We continue to expect to meet or exceed the original target of $50 million to $55 million of annual run rate compensation and administrative cost savings over the coming 6 to 9 months. Although most of the savings will come from reductions in our workforce and, in some cases, involving businesses or assets being divested, we're committed to retaining our best people to support those businesses that are long term and strategic in nature, allowing us to be well positioned for continued growth. And as we speak, we are implementing employee retention strategies to do just that.

We are also continuing to drive noncompensation-related administrative cost savings and efficiencies through expense policy changes, the leveraging of technology and the utilization of offshore resources where possible. You will increasingly see the impact of these G&A savings in our financial statements and core FFO results. While first quarter 2019 GAAP revenues declined 5% from the same period a year ago, principally related to asset monetizations, first quarter 2019 GAAP G&A costs declined 22% to $58 million during the same period. G&A costs reported on a core FFO basis, which adjust for onetime and noncash cost, declined 12% on the same year-over-year comparison.

In summary, we are very pleased with our strategic progress and operating results for the first quarter, and we are on track to meet or exceed the 2019 goals that Tom and Darren communicated on the fourth quarter earnings call.

With that, I'd like to turn the call over to the operator to begin Q&A. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Randy Binner with B. Riley FBR.

[Randolph Binner, analyst]

I have a couple. I guess I'll start on expenses. As you wrapped up the comments there, is what we saw on the second quarter with the, I guess, $58 million of G&A, is that to a level that's run rateable going forward, because that was better than we expected or was there kind of onetime items or seasonal spending patterns that make that number a little bit higher as we get through the year?

[Mark Hedstrom, executive]

Hi, Randy. This is Mark Hedstrom. That number is slightly lower due to some onetime adjustment of accruals for year-end bonuses in 2018 that we estimated, but didn't incur. That's $3 million to $4 million after other charges against it. But I think what we're going to see is the ongoing benefits and continued reductions of costs that haven't had -- they're in place and actions have been taken to realize those costs, but they're not yet being realized. So I think that's going to be an offset to that, and we are going to see declining cost, we believe, through the remainder of the year.

[Randolph Binner, analyst]

Okay. Great. And then with the comments around the GAHR portfolio, a couple of questions. One, I think you mentioned that there is 3 refinancings that were health care related. I just want to clarify if those were part of that portfolio or outside of it. And then the follow-up question, obviously, get to you now is, you said you're moving forward with that strategy, and I understand that you said there'd be more comments in the next quarter's call. But is this -- should we expect that you'd be putting capital into those refis and just want to square that with kind of the overall strategy, which I thought was deemphasizing the health care?

[Darren Tangen, executive]

Hey, Randy, it's Darren here. So there actually was 5 health care loans with maturity dates in 2019. The 3 that have been refinanced to date are all smaller loans, and those have all now been completed per Mark's comments at, I think, slightly higher interest rate on average, but pushing up maturity date there to 2024. The 2 loans that remain to be refinanced in the Healthcare segment, one is the Griffin portfolio that you're mentioning. That's the larger loan for the U.S. portfolio, and that's what we mentioned. We've made great progress on this quarter and expect by next quarter we'll have a good news to report there. The final health care loan involved our United Kingdom senior housing portfolio, and that's a refinancing that we've also now began to process on and hopefully, we'll be in a position to report on the successful refinancing there come the next earnings call as well. As to your question regarding equity contribution, I mean, there could be some additional equity that we're going to need to put into the larger U.S. refinancing, the GAHR refinancing, and we'll report on where we ended up on that on the next call.

[Randolph Binner, analyst]

So can I take from that, that if we're thinking about what Colony is going to look like over the next 12 to 24 months, the health care will continue to be a part of that mix?

[Darren Tangen, executive]

That's the right assumption for now. Correct.

[Randolph Binner, analyst]

Okay. I'm just going to ask one more, if you don't mind. On the gains relative to -- before the book value in the OED sales, can you give a little more dimension to that? That's welcomed. I mean, as we look to further OED divestitures, would we expect to kind of continue to have a good result versus where carried book is? Trying to understand that better would be helpful.

[Mark Hedstrom, executive]

Sure, Randy. This is Mark again, and I'll try to address that. I think what we said was during the quarter, we had $28 million in net investment losses that were related to OED sales, and that's a mix of probably more than 20 transactions, netting some gains and some losses. What I do think is important and what my comments addressed was that based on our plan for the rest of the year and the aggressive monetization of assets we have in that plan, we expect, on a net basis, to exit those assets at gains that will more than recover the net investment losses we incurred in the first quarter.

[Operator]

Our next question comes from the line of Jade Rahmani with KBW.

[Jade Rahmani, analyst]

And I appreciate the clarity that you scripted about top priorities and going through the major businesses. In terms of consolidation opportunities, what areas would you identify as presenting the best outcome for potential value-creation to shareholders, is it on the Investment Management side, a combination with like-sized player to create greater scale? Or would it be within each of the investment silos, for example, would you consider taking the industrial platform public as a REIT? Would you consider combining the health care operating businesses with the nontraded REIT? Is there synergistic value there? What would you say has the most potential opportunity?

[Thomas Barrack, executive]

Jade, it's Tom, and the answer is yes to all of the above. Let me give you some specificity. As you know, we've been undergoing kind of an intensive examination at 50,000 feet with special asset community, which has really been fruitful. And what's clear is kind of an Acres of Diamonds philosophy. Even the businesses that we would look at and say, eventually, are we health care experts, do we want to singularly be in the health care business? Probably not. A clear opportunity for consolidation is someone else. Who is that someone else? How does it play? Do you dissect those businesses from skilled nursing, medical office buildings, senior housing and consolidate them with other assets of like kind? Are those better in a private structure, are they better in a public structure? And we're undertaking all of those analyses. I think the bottom line, even in health care, as you look at the pieces and the fragments as we start extending term, reducing interest cost, stabilizing those portfolios, the opportunities are prolific because the only way that any of us can grow decisively at the moment is consolidation. Surgically buying individual assets and any of these silos is very difficult, very competitive and your competitive advantage is just being the lowest cost of capital and to leverage ratios we're talking -- hospitality is the same thing.

So if you look at select service portfolios and you look at public and private companies in portfolios, we all have same opportunities and all have the same detriments. This stabilized line with less operating costs than full service in an environment in which you don't have gigantic inflationary pressure on rates or occupancy. But at the same time, if you look at just what's happening in supply chain of building new hotels, the costs have increased so substantially and in the midst of these trade gear switch, theoretically, you look at and say, what does that have to do with our businesses? It has a substantial effect on our businesses. Because the importation of all of this stuff that goes into that is 15% to 20% more expensive, and 30% longer to get. So we've been at the benefit of credit cycle that really went in and very good in hospitality. We need to manage the brands better, right? In select service, more scale helps you better negotiate power with big brands, with Marriott and Hilton, who are constantly trying to get owners just to pay more money and capital expenditures for less return on equity because it's better for their brand, not necessarily better for the asset.

As you move across to industrial, industrial is the darling. We've got a great team, Lew Friedland's done a superb job. The assets are easily understandable. It's concrete in terms of construction with analyzed risk systems and we're all in this flurry of last-mile euphoria. That, again, at scale, the Dermody portfolio, which we just acquired, was the second tier of an investment from a great development to core growth, Germany, and what we did is finish the leasing cycle at a time where that fulfilled Germany's objectives of getting finished with that fund so they could raise another core development fund but none of us can grow by single asset acquisition. So everybody in the marketplace where their stock is lingering and our investor base is primarily dividend-based, right, all of us, all of you want the same thing. We want the highest dividend we can get with the lowest risk with moderate leverage and give us a pop of total return someplace else. So the only way we're going to get there and in an environment, which is so surgically priced at an individual basis is really consolidation. So at every sphere that we have, including in Investment Management, so our Investment Management toggles. If you look at the CLNC environment, we have a very significant mortgage REIT. We knew that we had to redigest and recycle some of the equity assets we took on the balance sheet at the beginning, which is kind of 55% mortgages. You need to move from 55% mortgages to 65% mortgages. But as you do that, it's a commodity. So as you're originating senior loans and you move up the risk curve, the ability to originate service to maintain at reasonable loan-to-value ratios on a risk-adjusted basis is scaled. So as we've stabilized and the team's done a great job and hopefully we're delivering to you more transparency in each of these silos, some of them you look long term and say, I get it, I want to be there forever, digital. It's the industrial and infrastructure of the future. It's competitively more difficult to enter, but it's the same exact kinds of customers as clients and customers in the industry. And actually, people who are servicing both industrial and digital are staying in hotels. Hospitality is something else, right? Senior housing, skilled nursing and looking at consolidation might be the outsourcing of medical services. It's the last mile opportunity in the health care business, but somebody has to do that. We as a REIT don't have the chops. We don't have the arrows in our quiver to be able to do it, but somebody's going to do it. So we're just now getting to the point of being able to think through those things, and I think what you're going to see is us looking at those major opportunities in each of our silos. To grow, to blend some of our assets with better assets, to call what we're good at and we're not so good at and focus on Investment Management business to lower our balance sheet exposure in some of the great businesses, but saying we don't need to be with you. We don't need to have $1 billion of our own capital silos when your private market is outrageous. And as we proved it out in the last year, co-investment ability, the ability to harvest third party capital on good assets is better and better all the time. So long-winded answer, but yes, we're looking at all of it.

[Jade Rahmani, analyst]

Within the Healthcare portfolio, I think there's -- Ventas has a position in the junior mezz, I believe. Is there an opportunity to expand the relationship with them to partner or sell them some assets with the portfolio?

[Thomas Barrack, executive]

I mean, yes. I think Ventas is certainly, if not the best, one of the best in the business. And Debbie Cafaro and her team are skilled, experienced, focused, prophetic. And any opportunity for us to align ourselves with that kind of expertise would be valued.

[Jade Rahmani, analyst]

The hotel foreclosure, I think it's New York Nomad Hotel, was that within CLNY or was it on CLNC's balance sheet?

[Thomas Barrack, executive]

That's on CLNC's balance sheet.

[Jade Rahmani, analyst]

Was that the asset that is cross-collateralized with lots of other properties, or is that something else?

[Thomas Barrack, executive]

No. It's an individual loan investment, Jade.

[Jade Rahmani, analyst]

Okay. In terms of the outlook for industrial, it seems that the growth was somewhat muted. What would you attribute that to? At least for NOI growth.

[Thomas Barrack, executive]

Yes. So it's -- as you recycle remember, the arena that we're in, in industrial, the small last mile delivery is very labor-intensive in marketing, servicing, recycling, tenant mix. So I think just the cycle of where we were in trying to fix same-store sales and moving up and moving out is longer than 12-month cycle. So I think our teams feel that the upward pressure on rents is significant. There's not too much CapEx, but the recycling of the tenant mix, of lease mix and in fact, our team was so immersed in the last quarter of closing Germany, and that was really the intense focus. So I think our feeling is that industrial rents, in general, are going to continue to increase and that the bottom line will also continue to increase because the operating expenses that are applicable at the top line, are really minimal. So it's why everybody is fascinated with industry, right? It's simple. The CapEx is simple. The tenant base are the big 5 primarily tenants. It's easy to understand. We're still very bullish, although prices are surgical. We invest to our market is so keen because the yield is identifiable and the future is pretty stable. So these assets trading at below 5 cap our pricing.

[Jade Rahmani, analyst]

And in terms of the strategic investments, is the RXR stake, is that a long-term stake? Is that an area of potential monetization to create equity to redeploy elsewhere?

[Thomas Barrack, executive]

It's a great partner. Scott Rechler is one of the best in the business. We annex with him and kind of our find, buy, build and grow philosophy, and we will align ourselves with what's best for he and that thing. And it may be a monetization depending on what he wants to do and where he wants to go. The next step for him may be a strategic partner that differs from us. So I think in the next 6 months that will clarify itself.

[Jade Rahmani, analyst]

Okay. And then lastly on NRE, can you give an update?

[Darren Tangen, executive]

Sure, Jade. I mean, that is an ongoing process. So we really, because of that, can't say anything more at this time. But as soon as there's news to report, we'll make sure about -- and the company itself, NRE, will be disclosing an update once there's something to report on.

[Operator]

Our next question comes from the line of Mitch Germain with JMP Securities.

[Mitch Germain, analyst]

So was all the capital raised this quarter targeted to industrial?

[Darren Tangen, executive]

Most of it was, yes, Mitch, but not all. There was a little bit in digital, too.

[Mitch Germain, analyst]

Got you. You referenced a bulk strategy that seems to be obviously, you're carving out that segment of industrial now. Maybe if you can provide some detail there would be grateful.

[Mark Hedstrom, executive]

Sure. Well, about 1/3 by purchase price and square footage in the Dermody acquisition was bulk distribution warehouse as opposed to light industrial, which is the first foray into that subsegment of the industrial sector. And the objective or the initiative there is to ultimately expand that strategy and add more bulk industrial acquisitions to that portfolio over time. So more to come on that, but that's really what was mentioned there.

[Mitch Germain, analyst]

And is that a value add? Obviously, those are under leased assets, so is that going to be a value-add focus?

[Thomas Barrack, executive]

If you think of value add, value-added is the ability to give your customer something that they can't buy in the retail market. So our bulk strategy is really just an extension of our last mile strategies. We're dealing with those tenants every day. So we know by delivery of the inventory that they're putting in our small industrial buildings that are coming from someplace else. And as we all know, we assume delivery of everything in a store is going to be looking 4 or 5 samples and will be delivered to you that afternoon. So if you deliver that afternoon, the supply chain comes from bulk someplace to last mile delivery someplace else, to your house in that afternoon. So we looked and said, the most valuable thing we have isn't really the bricks-and-mortar. It's the consistent relationship between our company and our teams and the customers. And what the customers need is more bulk, the bulk business used to be you would never even think of building 1 million square foot building, unless you had a pre-leased 5 years ahead of time. Today, expect 1 million square foot buildings are flying off the shelf as soon as they're complete because that's -- it's the marketplace. The marketplace is based on reputational, character and integrity of the bulk owners, and we need to be there to service the customers and clients we have across the spectrum, which is tremendously diverse in our portfolio of small industrial. We need to be in the bulk business. We have an impediment in that we can't be development the core structure that we've got, but servicing that tenant is key and that value add component and will continue to be a part of our continued go-forward focus. We have a joint venture with [ Hoop Upon ] that portfolio is very strange in that it carries all sorts of investments. So yes. That will be a continued focus for us.

[Mitch Germain, analyst]

Got you. I'm trying to understand the structure of the big acquisition you made in the digital sector. Obviously, you're partners with Digital Bridge in a venture and now you're partnering with EQT, I believe, to buy the Zayo. So is there -- is that going to be a fee stream for you? How is that working? And is there any sort of payment that you guys are making, or is that all being funded just through the venture that you got already?

[Thomas Barrack, executive]

Yes. So let me tell you the part that we can talk about because everybody's still in their own proxy and disclosure silos. So Zayo is one of the largest owners of fiber distribution in U.S., Canada and Europe. As you know, we started fund with Marc Ganzi and Digital Bridge called DCP with $250 million GP commitment from ourselves. The EQT partnership is essentially continuous and is tremendously confident in this arena, well-capitalized, credible professionals and of course, a $15 billion transaction was batting way above our weight as a fund.

So the EQT partnership as strategics is straight up. But the amazing thing about this transaction and tremendous complement to Marc and the EQT and to the Colony brand was the ability to raise substantial third party co-investment very quickly. So we're talking about $8 billion or so of equity. A portion of that from us, a portion of that from EQT and a portion of that equity being third party fee bearing capital to us on top of our allocable $50 million-or-so specific commitment on this transaction in the DCP fund.

In addition to all the characteristics that we talked about in kind of our buy, build, grow with great operating partner strategy, I think what's interesting about this is the voracious appetite of third party fee bearing capital around concepts and strategies that require value-added component is intense. So this transaction will take several months to close as the component of the digital strategy coming out of this particular fund, which we think has tremendous legs. And we're looking at all this and our partnership with Digital Bridge as being the engine for what the future infrastructure business is going forward. But instead of delivering high single-digit returns over a 10-year period, we think this is significant double-digit returns over a 5-year period.

So it had all the characteristics of Investment Management that we wanted and we proved it up that co-investing hard commitments really in a 30-day period, EQT is a great strategic partner, straight up with us so we have another set of very smart brains with the global distribution capability. And the idea here is that the consolidation of these various fiber optic networks is similar to what railroad consolidations were 100 years ago. And the question is, how do you sell the dark fiber, right? That's always been the question and in the industry, it's like selling empty floors in an office building. Somebody went through all of the agony in building the first class downtown office building that has 30 floors left to lease, who do you lease them to? What's the rate? And what CapEx left to lease up? Digital Bridge and EQT together I think will be a great combination.

[Operator]

Thank you. Ladies and gentlemen, we have come to the end of our time allowed for questions. I'll turn the floor back to management for any final comments.

[Thomas Barrack, executive]

It's Tom. Thank you all for being on the line. We're happy and pleased by the success that we're having in baby steps week-by-week, month-by-month, and we wish you all a great weekend. Thanks for being with us.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.