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Greetings, and welcome to Colony Capital Second Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
I'd now like to turn the conference over to Lasse Glassen, ADDO Investor Relations. Please go ahead.
Good morning, everyone, and welcome to Colony Capital Inc.'s Second Quarter 2018 Earnings Conference Call. With us today from the company is Richard Saltzman, President and Chief Executive Officer; Darren Tangen, Chief Financial Officer; and Neale Redington, the company's Chief Accounting Officer.
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, August 8, 2018, 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, reported on both a consolidated and segmented basis. The company's earnings release which was released 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 Richard Saltzman, President and CEO of Colony Capital. Richard?
Thank you, Lasse. Good morning, everyone, and thanks for joining us today. We're very pleased with our second quarter and first half results. Fundraising and asset monetizations, in particular, are meaningfully ahead of plan. Furthermore, operating results are generally ahead for all of our verticals and Investment Management strategies. However, faster monetizations require incremental fundraising and/or deployment to replace lost earnings and therefore, full year 2018 core FFO is still only expected to be in line with our plan despite these positives.
Second quarter core FFO was $0.18 per share, following a first quarter core FFO result of $0.20 per share, which you'll recall included a number of onetime mainly positive, nonrecurring items. Contribution to core FFO this period was generally higher quarter-over-quarter in Investment Management and our real estate verticals, but lower in other equity and debt as nonstrategic assets continued to be monetized at an accelerated pace.
Let me provide more granular color on each of these areas. Starting with Investment Management. Fundraising was very strong again this quarter, with $1.8 billion of new closed or committed third-party capital. We're at $3.8 billion through the first 6 months of this year, with success across various platforms and new initiatives. Digital Colony Partners represents $882 million of that incremental second quarter total, with another $366 million closed subsequent to quarter end. Aggregate committed capital in Digital Colony is now $3.3 billion, inclusive of a hard cap limit of $250 million from CLNY itself.
Colony Industrial likewise added $175 million of new equity to its capital base this quarter, bringing total third-party equity to an excess of $1.4 billion in this platform. CLNY's percentage equity interest in this segment declined to 37% having started at 62% in late 2014 when we created the platform. We also raised $95 million of coinvestment capital this quarter for an existing other debt and equity investment that grew in size.
Most notably during the quarter, we formed a new entity to acquire an interest in AccorInvest, the newly formed property arm of AccorHotels, containing approximately 900 hotels and 130,000 rooms, with a gross asset value of approximately EUR 7.5 billion. The hotels are primarily located in Europe where hospitality demand fundamentals are improving against the backdrop of limited new supply. The properties will continue to be managed by Accor, a leading hotel operator in the market with significant scale advantages. Colony participated in the acquisition of a majority position in AccorInvest, alongside a consortium of global institutional investors. For our share, we raised EUR 650 million of fee-bearing third-party capital, inclusive of an additional EUR 250 million commitment received subsequent to quarter end that is expected to close later this month. A tremendous execution led by Nadra Moussalem in Paris and our European team, and a great demonstration of Colony's global reach in deal sourcing and fundraising.
Moving to our real estate verticals. Colony's healthcare business witnessed mixed results in the second quarter. While aggregate same-store NOI was down 0.9% quarter-over-quarter and virtually flat second quarter 2018 compared to 2017, results were ahead of budget and varied within the different subsegments of the diversified Healthcare Real Estate portfolio. The rate of deterioration in skilled nursing facility fundamentals appears to be decelerating. While concurrently, we are making good progress working through various lease restructurings, reflecting the current macro conditions confronting the sector.
Within the senior housing business, our shop, or RIDEA performance was largely flat quarter-over-quarter, but new supply and rising labor costs, which is consistent with operating results recently reported by other public health care REITs, are expected to put downward pressure on future results.
On the positive side, we are seeing good leasing activity in our medical office building portfolio due to both strong tenant demand and a more direct and active asset management approach to the business. The emphasis on in-house active asset management is a change from how NorthStar historically managed the healthcare business, which, generally speaking, relied more on an outsourced business model.
We have recently added experienced seasoned healthcare professionals to our investment and asset management teams under the leadership of Rich Welch, to undertake a more direct value-added asset management approach across the entire healthcare business and the early results are very encouraging.
Overall, the healthcare business has been performing ahead of plan year-to-date, but there is still much work to do including on the liability management front and we will continue to provide regular reports on these initiatives in the quarters ahead.
Next, hospitality. The hospitality segment posted a good second quarter, with positive trends accelerating during the period. Compared to last year, second quarter same-store portfolio revenue increased 3.5% on higher occupancy and rate, and EBITDA increased 5.2%. We witnessed stronger corporate business demand in the second quarter and we began to see the positive effects from our renovation work across the portfolio. We also observed increased activity in energy-centric markets that led to new unbudgeted business at certain properties.
Finally, we completed a $550 million refinancing in the second quarter, which was our last near-term hospitality mortgage maturity that needed to be addressed, extended -- extending the fully extended maturity date from 2019 to 2025. In fact, since the closing of the NorthStar merger back in January last year, we've now completed 3 portfolio financings for more than $2.1 billion in this segment, where the average remaining term of our loans has increased from 2.7 years to 4.3 years.
Next, industrial. Colony's light industrial platform continued to experience strong performance in the second quarter as a result of limited new supply and strong demand, led by a variety of factors including accelerating e-commerce trends and positive GDP growth.
Rental rates and same-store net operating income continue to increase as a result of these positive fundamentals. For the second quarter, we experienced rental rate growth on new and renewal leases of 5.7% and same-store NOI growth of 1% quarter-over-quarter and 3.8% over the same quarter of the prior year. We experienced this positive growth despite same-store quarter-over-quarter occupancy ticking down, predominantly due to 3 large vacancies, the largest of which is already backfilled subsequent to quarter end at a starting rent 5% higher than the prior rent. The other 2 vacancies are experiencing strong tenant interest as well, and we expect to backfill soon.
Given these positive trends, we continue to acquire more vacancy in markets where we have a sizable presence in order to generate enhanced stabilized yields. These value-added deals are leasing up faster than planned and with rents at above underwriting.
In regards to capitalization, we've now raised $245 million of additional third-party equity through the first half of this year. We also continued to execute our long-term fixed rate debt strategy by closing a $60 million 15-year fixed rate loan secured by a portfolio of assets in the San Francisco Bay Area. Our total debt portfolio in this segment now stands at $1.07 billion and 15 separate loans fixed at an average interest rate of 3.83% and a remaining term of 11 years.
Next, I'd like to talk about CLNC. CLNC reported earnings yesterday and it was a productive quarter for the company overall, particularly on the capital deployment front across its key investment target areas of senior and subordinated loan originations, preferred equity investments, CMBS securities and triple net lease investments.
During the second quarter, CLNC invested $460 million of capital and has already invested $380 million of additional capital in the third quarter, with another $475 million allocated but not yet funded through existing and identified investments. Together, these investments have an underwritten weighted average expected initial levered return of approximately 11% and an expected internal rate of return of 13%. The recent and significant capital deployment activity provides the company a run rate earnings level that is approximately $0.05 per share per quarter, above the second quarter reported core earnings per share result.
Year-to-date, CLNC has allocated $1.6 billion of capital for investments that have closed or in advanced stages of execution, including its first allocation to European investments, which totaled approximately 25% of this figure.
The shareholder base has been expanding to include more institutional ownership, leading to an approximately 7.5% movement in the price of the shares from the end of Q1 through yesterday.
Liquidity remains significant as CLNC is only about 35% levered today, substantially below industry peers. All in all, we remain very sanguine about CLNC's prospects as it continues its earnings ramp from increased capital deployment and a more optimal capital structure.
As to our balance sheet, we also had a very active and successful quarter monetizing nonstrategic assets and businesses. Asset monetizations accelerated in the second quarter and returned net equity proceeds of $295 million. This pace has continued into the third quarter and we have now generated approximately $651 million of net equity proceeds year-to-date including sales contracted to close in the third quarter versus a budget of a little over $500 million of net equity proceeds expected for all of 2018 at the beginning of the year. Most of this liquidity is coming from our Other Equity and Debt, or OED, segment, which had gross asset and net book value of $5.7 billion and $4 billion, respectively at the end of 2017 and was $3.8 billion and $2.4 billion, respectively as of June 30, a 33% and 40% decrease, respectively over the first 6 months of the year.
The formation of Colony Credit Real Estate, or CLNC, in the first quarter was a meaningful contributor to this overall reduction. The liquidation and, in certain cases, the restructuring of the assets in this segment, are evidence of the business simplification and streamlining that we highlighted as priorities at the start of the year. I'd also like to highlight that the combined aggregate exit proceeds from these various asset monetizations was above carrying value and totaled approximately $1 billion across 23 discrete investments.
Now the counterpart to asset monetizations is capital deployment where we have also been busy. Consistent with earlier communications, we have actively repurchased equity securities and have marginally reduced the size of our balance sheet through these activities. Securities repurchases include $319 million of common stock bought back thus far in 2018 at an average price of $5.82 per share. This equates to 54.8 million shares or approximately 10% of the outstanding stock prior to the initiation of the 2018 repurchase program. As previously announced, we also redeemed $200 million of preferred stock in July. All told, we have now bought back $519 million of equity securities, both common and preferred since the beginning of the year. In addition to common and preferred stock repurchases, we deployed $81 million in the second quarter and $196 million year-to-date into new investments, primarily in constructs with third-party capital where we earn Investment Management economics.
In summary, it's been a very busy and productive 2018 for Colony thus far, and we are focused on maintaining this momentum. This includes achieving the strategic goals we set forth earlier this year: simplify, streamline and grow our Investment Management business where we have a competitive edge. Furthermore, we will continue to be a net seller of nonstrategic real estate assets and we will remain focused on redeploying this capital into the most compelling investment opportunities around the globe.
At the margin, we have become a more balance sheet-light company while putting ourselves in a position to generate a higher return on equity and our broader goal to restore and maximize shareholder value.
And with that, I'll turn the call over to Darren, who will take you through a more detailed summary of our quarterly results.
Thank you, Richard, and good morning, everyone. As a reminder, in addition to the release of our second quarter earnings, we filed a supplemental financial report this morning. Both of these documents are available within the public shareholders' section of our website.
I will start with an overall review of second quarter results, then provide a few additional details on the performance of each of our 6 reportable business segments that Richard didn't otherwise cover.
Turning to our overall second quarter results. Net loss attributable to common stockholders was $92.8 million or $0.19 per share. Notably, a large component of the loss was a $60 million write-off of the remaining value in the NorthStar trade name, which was an intangible asset created at the closing of the Colony NorthStar merger in January 2017. The elimination of this intangible asset was triggered by the decision to rename the company to Colony Capital Inc., which took effect June 25, 2018. Additionally, we had $13 million of impairments within our non-wholly-owned real estate Investment Management platform holdings. Because these were all noncash charges, these items were added back for the calculation of core FFO.
Second quarter core FFO was $92.5 million or $0.18 per share, which included net gains of approximately $1 million. First quarter core FFO was $0.20 per share, which included $0.02 per share of net gains and another $0.02 per share of positive nonrecurring items. Excluding the impact of net gains and nonrecurring items, second quarter core FFO exceeded first quarter core FFO by $0.02 per share. There were multiple reasons for the positive sequential quarter-over-quarter variance but the largest contributor was the expected seasonal improvement in our hospitality segment.
Our first half earnings performance sets us up well for the balance of the year to meet and possibly even beat our budget established at the beginning of the year. As Richard mentioned earlier, our challenge is to redeploy the capital from accelerated sales of nonstrategic assets and businesses to minimize the earnings gap during this capital recycling process. Year-to-date, we have redeployed over $700 million into the repurchase of common and preferred stock and new investments, which should offset most, if not all, of the earnings loss from asset monetizations year-to-date. While there may be some timing differences between sales and redeployment, we have been actively using our corporate revolver as a temporary funding bridge to minimize any earnings disruption.
Now I'll provide a summary of the financial results for each of our 6 reportable segments, starting with the Healthcare Real Estate segment. Richard provided commentary earlier on the mixed operating results we continued to observe in our Healthcare Real Estate business. Relative to prior quarter, our property count and ownership interest remained the same and second quarter core FFO was $18.6 million, a $4.5 million decrease from the prior quarter, primarily related to approximately $3 million of bad debt expenses recognized in connection with lease restructurings this period.
Moving on to the Industrial Real Estate segment. The portfolio consisted of 392 properties totaling approximately 47.5 million rentable square feet across 20 major U.S. markets and was 93% leased as of June 30, 2018. This represents a net increase of 14 properties and 1.9 million square feet over the prior quarter. Given continued growth in our open-end funds, we remain acquisitive in this sector given strong e-commerce fueled demand fundamentals and limited new supply.
To this point, we raised an additional $175 million of third-party capital in the open-end fund at the end of second quarter, which decreased our ownership interest in the business from 40% to approximately 37%. Core FFO contribution in the second quarter was $14.2 million compared to $12.5 million in the prior quarter, with the increase primarily related to same-store operating improvement and earnings contribution from new acquisitions.
Turning to our Hospitality Real Estate segment. Again, Richard highlighted the strong 5.2% EBITDA growth from the second quarter of last year to the same period this year. Core FFO growth was more muted, however, primarily due to higher interest rates. Second quarter 2018 core FFO increased to $43.2 million compared to $42.7 million during the second quarter of 2017, reflecting a higher LIBOR environment on the business finance with floating rate debt.
With the completion of the merger and listing of our externally managed credit REIT, Colony Credit Real Estate, Inc., or CLNC, in the first quarter, we categorized our 37% ownership interest in CLNC in a new stand-alone reportable segment. CLNC just reported earnings yesterday and continues to ramp up its deployment, having started the year under-levered and with excess liquidity. We believe the long-term fundamentals and prospects for CLNC remain strong and we are committed to the strategy and our team.
CLNC contributed $14.8 million of core FFO in the second quarter and given recent deployment and their current earnings run rate that Richard highlighted earlier, we expect this figure will grow significantly in the quarters ahead.
Switching to Other Equity and Debt, or OED. This segment has 2 subcategories: Strategic OED and nonstrategic OED. Strategic OED includes our investments alongside third-party capital where Colony earns Investment Management economics. Examples include our 11% ownership interest in NorthStar Realty Europe, or NRE, and our 20% coinvestment alongside our latest global opportunistic credit fund, CDCF IV. Undepreciated equity value in strategic OED increased to $497 million during the quarter, primarily due to $81 million of balance sheet capital being invested alongside approximately $560 million of third-party capital across a number of different transactions.
Nonstrategic OED includes legacy investments which we do not expect to hold for the long term and are not under a third-party capital construct. Undepreciated equity value in nonstrategic OED decreased from $2.3 billion on March 31 to $1.9 billion on June 30, primarily due to asset monetizations. Since the end of the first quarter, we have sold $75 million in CMBS and CDO securities, and we sold or are under contract to sell approximately $150 million, which represents the vast majority of our private equity fund secondary positions. If you recall, CDO securities and private equity fund secondary interest were a significant reason for our earnings volatility last year, so we are pleased to reduce exposure in those 2 areas.
As Richard mentioned, we have monetized a significant portion of our OED portfolio in 2018 with year-to-date monetizations of approximately $1 billion in asset value, which in turn has or will repatriate approximately $650 million of net equity proceeds to the CLNY balance sheet. Monetizing the remainder of our nonstrategic OED portfolio remains a key strategic initiative to simplify our balance sheet, streamline our operations and free up capital for redeployment into more attractive areas.
Operationally, second quarter 2018 core FFO contribution from OED was $47.8 million compared to $77.8 million in the first quarter. The decrease is primarily attributable to: one, the formation and reclassification of CLNC in the first quarter; and two, decreased earnings due to monetizations.
In the first case, first quarter core FFO included 1 month of earnings from investments contributed to CLNC, which was approximately $9 million, and a $10 million CLNC fair value step-up gain. The remainder of the decrease primarily results from asset sales and thus a smaller asset base.
As we have communicated, we will continue to record lower core FFO from the nonstrategic OED segment as we continue our asset sale program. However, core FFO from strategic OED investments should grow as we continue to put balance sheet capital to work alongside third-party capital in various Investment Management constructs, which is a perfect segue to our Investment Management business, which ended the quarter with $28.2 billion of third-party AUM compared to $27.5 billion as of the prior quarter.
Fee-Earning Equity Under Management, or FEEUM, increased from $16.2 billion as of March 31, 2018, to $17.1 billion as of June 30. The majority of the increase is attributable to capital raised in the Digital Colony vehicle, our industrial open-end fund and other co-investments including our share of the AccorInvest transaction.
Second quarter core FFO contribution was $34.1 million, up from $31.4 million in the prior quarter, primarily due to fees associated with the AccorInvest capital raise and a full quarter management fee from CLNC, offset by lower nontraded REIT fees and lower earnings pick up from holdings in non-wholly-owned real estate Investment Management companies.
Finally, from a capital structure standpoint, our balance sheet modestly decreased during the quarter due to debt pay-downs on asset sales, common stock repurchases and pro forma for the $200 million preferred stock redemption that happened shortly after quarter end. From a liquidity perspective, we continue to be in excellent shape with approximately $1.1 billion between cash on hand and availability under our corporate credit facility, and we have good visibility on additional liquidity coming from ongoing asset sales.
In summary, we are very pleased with our financial results and strategic progress during the first half of 2018, particularly in the areas of fundraising, asset monetizations and capital deployment and remain focused on meeting or beating our full year goals and objectives by year-end.
With that, I'd like to turn the call to the operator to begin Q&A. Operator?
[Operator Instructions] The first question is from the line of Jade Rahmani with KBW.
This is Ryan on for Jade. Just first, can you give some color on the assets that were sold during the quarter? I know in your prepared remarks, you gave some color on the post 2Q monetizations, but just any particular themes of assets that were sold and the impact from an earnings perspective on run rate earnings?
And as a follow-up, what are the post 2Q monetizations of the CDOs and secondary PE fund investments? Do you expect those to be at or above book value and generate any gains?
Sure Ryan, it's Darren. So why don't I try to take that. I mean we had a lot of different sales and monetizations in the quarter and subsequent to quarter end. I did mention in my remarks that CDO and CMBS securities as well as the private equity fund secondary interest were a pretty big component of the asset monetizations we completed both in the quarter and post quarter. But we also had some loan payoffs. We had also a preferred equity investment as well as a European triple net lease investment that we sold as well. So it was a little bit of a number of different subcomponents of our nonstrategic Other Equity and Debt that we sold. And as to your question as to how that should impact earnings going forward, again, I mentioned this in my remarks, that given how we've redeployed a lot of this capital in terms of either common stock repurchases, preferred redemptions or into new investments, our expectations is that we should be replacing any of the earnings. I mean, again, there could be a little bit of a timing gap between when proceeds came in and when proceeds got redeployed, but generally speaking, we should be replacing all of the earnings that have gone away through the various asset monetizations. So hopefully I answered all your questions. If it didn't, just please repeat.
Sure. Yes, that was helpful. And then just I guess on the Investment Management business and the strategies there, where are you seeing the most traction? You've clearly had success in raising capital in the digital infrastructure fund, but are there any other themes which you think Colony could capitalize on and raise third-party capital vehicles?
Yes, Ryan. It's Richard. Look, I think the theme that we're seeing is most of the success that the groups are having in fundraising tend to be more sector-specific strategies within the property world, typically, with dedicated management teams that are kind of doing this full-time as opposed to one-size-fits-all, broader, more diversified funds. There are some exceptions, but -- so when you think about Digital Colony, focusing on real estate digital infrastructure or you think about our industrial fund or the success that we just enjoyed with AccorInvest, these are all sector-specific in certain geographies. Sometimes the geographies are quite broad. And I think there's more behind that in terms of what we hope to be able to do in terms of either new programs that we're looking at, in particular in hospitality as we speak and/or successor funds in terms of legacy Colony programs where funds may have exhausted their capital and we're now going to do the next series. And then there's even some things away from real estate that we've been looking at where we hope to get some traction here. And so I think we're quite positive in terms of the ability to fund raise in this market, albeit you've got to be a little bit more narrowly focused in niches that are compelling from a supply-demand standpoint and typically, with a dedicated team.
And Darren, just a follow-up to my initial question. The post 2Q monetizations of $500 million under contract, can you give us any color if those sales were at carrying value?
Oh yes, sorry, that -- you're right, you did ask that as well. So on average, the sales that we completed since the end of the first quarter have been above carrying value. So there is a small gain that will -- either has been picked up in Q2 or will be picked up in Q3 from all of these sales in the aggregate. Now there were some a little bit above carrying value and there were some that were below carrying value within that, but on average, or in the aggregate, it was above carrying value.
Okay, great. And just last one and then I'll jump back in the queue. I guess valuation, do you have any range of estimated NAV as Colony stands today that you would be willing to share? Or I guess otherwise, how you think the investor community should be valuing Colony in its current state?
Well, we moved away from providing any kind of a NAV or fair value per share when we -- several years ago, when we started becoming more of an equity oriented REIT as opposed to a mortgage REIT. But I would -- but what we've tried to do through the supplemental financial package, which we do put out quarterly, and an updated version was put on our website this morning, give people the components to do a sum of the parts or an NAV buildup of the various aspects of our business, if they wish. But I think certainly, one of the parts of the business that I know has been challenging for the market to try to underwrite or value has been the Other Equity and Debt segment. And so I think your question is a good one relating to the asset sales that we've been completing here thus far this year within the OED segment and how have we been doing relative to carrying value. And I think we're pleased to report that the sales we've been executing thus far this year have been at or above carrying value on average. So in other words, I think the carrying value that we have in that segment has been a good reflection of the value we're actually seeing as we execute these asset sales.
And Ryan, I would just add the following, which is look, as we streamline and kind of refine what we're doing, arguably, the quality of our earnings from a core FFO standpoint is improving and we would hope that, at some point, the market begins to recognize that and re-rates us in terms of a multiple of that improved quality of earnings.
The next question is from the line of Randy Binner with B. Riley.
I just have one follow-up on the asset sales. So saying it's above carrying value for that block of, it's just you had CDOs and other CRE investments in there, would be a good result. So I'm curious how did you execute those sales? Was it a competitive process? Or were there private negotiations? Can you share just a little bit of how those were executed and kind of could you characterize how active the market is for those types of assets?
Sure, Randy. Why don't I try to take that on? I mean, it varied from asset to asset in terms of the type of sale program that we executed. But generally speaking, you were going into some kind of an auction process with some kind of intermediary who helped broker that transaction for us. So certainly, I think that was the case in terms of some of the CDO securities where we had an investment bank intermediating. We hired a separate and a different financial adviser for the private equity fund secondary interest, which is a little bit of a specialized area and asset class. But in all these cases, I mean, to the extent that you can, you want to certainly try to create a competitive environment to sell. We did -- I mean, to be fair, in terms of the carrying values in the CDO securities and private equity fund secondary interest, I mean, we did have impairments in those areas last year, which is why I mentioned that we had quite a bit of earnings volatility from those 2 types of assets in 2017. And I'm happy that ultimately, I think that the carrying value is right going into this year given where we ultimately are selling those positions. And the fact that we've got lower exposure to those asset classes now going forward, I think speaks to Richard's comment about quality of earnings and the fact that we feel we shouldn't have that type of volatility going forward as we exit some of these riskier type assets.
Great. And then jumping in to your comments on liquidity. I think you were positive on the ability to generate liquidity. Can you quantify that, how that's going to look in the back half of '18, how the cash builds up? In addition, the revolver is what it is, and my sense is the revolver is not there to be used for a lot of everyday activities. So that cash balance, I'm just interested how you see that building up in the back half of '18.
Sure. Well, I think it really depends on what we're doing on the deployment side, right. I mean, as we highlighted on the call, year-to-date, we've had roughly $650 million of capital returned from asset sales and, of course, there's been operating cash flow on top of that and use of proceeds after paying corporate debt and preferred, and paying out the common dividend, we've been redeploying. And that's why we mentioned the $519 million of equity securities that we bought back, that's both common and preferred, and it's been roughly $200 million has gone into new investments. So as we continue to monetize this nonstrategic OED segment, which still had $1.9 billion of equity value as of the end of the second quarter, that capital will ultimately get freed up and we're going to redeploy that, presumably into -- to be more equity repurchases, common and preferred over time and/or into new investments. And new investments, ideally in a third-party capital construct, where the balance sheet capital gets invested alongside third-party capital. And in addition to the underlying investment returns, we're getting fees and promote.
Very good. And then I guess -- I mean, is it fair to say that given the fact that you had good price discovery in this process so far and you're ahead of plan, is that -- does that mean we should expect for you to continue to be ahead of plan and kind of take advantage of where the market is? I mean should we expect this kind of continued good progress in OED dispositions?
I mean, certainly it's our goal to monetize as quickly as we can that nonstrategic OED segment. There are certain investments within that segment, however, that are in the process of a value-add business plan execution and there's a hotel portfolio as an example, which we ended up taking ownership in. It began as a loan or a debt investment, so it's sort of loan-to-own business plan strategy and we just refinanced that portfolio. It was the THL Hotel Portfolio. We refinanced it at the end of last year and we're completing some asset sales but also spending some CapEx in that portfolio to ultimately stabilize and then sell it. And I just highlight that because that whole process is going to take some time. That's not a 2018 sale prospect. It may not even -- we won't fully exit that potentially until late 2019 or it could even be 2020. But generally speaking, we are looking to create monetizations within the OED segment as quickly as we can so that we can redeploy that capital.
All right. And just one more, if I can. Going to the operating side with the comments you made around run rate FFO. I guess I just want to make sure that I took -- heard you correctly that you were planning on good seasonality of around $0.02 in the second quarter, and that came in basically as expected, so is that, right? And any kind of sense of expectation on 3Q seasonality as we're kind of well into the third quarter?
Sure. Well, generally speaking, for hospitality, as it relates to our portfolio, Q2 and Q3 are our strong quarters, and Q1 and Q4 are our weaker quarters from a seasonality perspective. So I would hope -- and we did see good accelerating fundamentals in performance in our hospitality portfolio in the latter part of the quarter, i.e., June versus April and May. So hopefully, that continues here into the third quarter and I would hope that we'd see another good performance, Q3 like we did in Q2 for the hospitality segment. So hopefully, that sets us up well for this quarter. And just from an earnings perspective, I think at the beginning of the year, we -- based on the first quarter performance, we talked about sort of a good run rate being kind of on average, over the whole year sort of in the $0.16 range, was I think it's sort of how we walked people through it. And if you look at how we performed in the first half, we had a $0.20 core FFO result in Q1 and $0.18 here in Q2, so $0.38, or $0.19 average, right, for the first half of the year, which is tracking ahead of where we thought we would be earlier in the year. But I think as Richard commented on and I commented on, I think we will hopefully end up doing better than we expected at the beginning of the year but I don't -- well, I guess I'm saying I don't think we think the first half is a good run rate number for the second half.
[Operator Instructions] The next question is from the line of Mitch Germain with JMP Securities.
Darren, can I ask that last question about earnings, maybe in a different way? Just if you can just remind and refresh me, I guess we were at $0.20 last quarter, and I know you had some one-timers, so I'm trying to understand, kind of where the core number was last quarter, then maybe fast forward to what the core number was this quarter and kind of what the big difference is in terms of gains or nonrecurring items that impacted the earnings each quarter.
Sure. Well -- and I think I mentioned this to some degree in my remarks, which is...
You did, it was just a lot of information.
Yes. No, no, no. I just did, I know. For sure. Okay. So $0.20 core FFO result in Q1, and there was $0.02 of gains and $0.02 of positive nonrecurring items in Q1. So if you adjust for those, we were really more at a $0.16, call it, run rate level of core FFO. And then for Q2, we came in at $0.18 and we really had very negligible gain contribution or at least net gain, because we had some positives, we had some negatives, but when you added them all up, it was about a net positive $1 million or pretty much flat. So I think that's why I made the remarks that I did that we really kind of saw $0.02 per share of positive variance when you adjust out for that -- those sort of onetime or nonrecurring items from Q1 to Q2, and the primary contributor to that was just the seasonality in our hospitality business.
So you had -- but you had -- I just want to make sure I get this right. You had said $0.02 of nonrecurring items in the second quarter as well though, correct? Or was that in reference...
No, that was Q1. That was in reference to Q1.
Oh okay. So okay. So basically -- got you. So basically, $0.16 Q1, $0.18 Q2, is a fairly clean number in 2Q, got you.
Correct.
Okay. Question about the Accor deal. Do you guys have any economics in that? Or is it just a third-party construct for you?
No, no. We have some capital invested there, too.
So what is your percentage interest in terms of the entirety? Because I know that there are a number of other parties that have also -- that co-invested with you separately from the capital you raised.
Yes, I don't think we're, at least yet, in a position to disclose that, Mitch, unfortunately.
Okay. No problem. Richard, I know that you had mentioned you were expecting around $500 million, I believe, in equity monetizations. You're running ahead I think $650 million, I could be a little off of on that number. Is there kind of like a target now that you're looking at for the full year or you believe you're trending toward for the full year?
Well, we said $500 million for this full year so -- and we're already at $650 million. And for sure, we're going to do some more before year-end and we're trying to do, as Darren was saying us earlier, as much as possible, right. I mean, the goal is on the nonstrategic Other Equity and Debt to be down to 0. So the more we can do there, the better in terms of simplification, quality of earnings, as I mentioned before, et cetera. And there may be some operating constraints and/or other constraints around our ability to literally do it all. Darren described, for instance, what's going on in the THL portfolio. But we're trying to get it monetized as quickly as we can. So there'll be more this year and hopefully, we can be out of this category within the next couple of years on the nonstrategic side.
And Darren, do you -- I know that you changed the classification from -- of the OED from strategic to nonstrategic, I believe it was last quarter. Do you know like where does that nonstrategic balance sit, not in March 2018, but maybe in June of 2017?
So you're saying how much has it declined over the last 12 months?
Yes, like what was your equity value a year ago versus that $1.8 billion today?
Well, I know about a year ago, all of OED was around $4 billion of equity value. Now, some of that, admittedly, included strategic positions, but we're probably down almost by half from where we kind of started.
Got you. That's helpful. Last one for me. I know it's really, really short period of time since the STK (sic) [ S2K ] deal closed, but, Richard, maybe just in terms of what you've seen from your discussions and what you believe the outlook will be going forward?
Sure, Mitch. So look, I mean, it's still a work in progress as you kind of inferred in your question. But the focus is really on the retail distribution side on trying to figure out how we can bring retail capital, whether it's high net worth and private placements or perhaps broader retail through public distribution, into otherwise institutional products that we're already sponsoring and where we already have significant critical mass. So taking something like industrial as an example, where it's 100% institutional capital today, we're working on trying to figure out what's the right way to create retail sleeves that can be invested alongside the institutional capital. And in our opinion, the better paradigm is not necessarily creating products just for retail consumption, right. I think part of the reason why it's been a slippery slope in some of those spaces in the past is exactly that. And better to create products where there's alignment of interest across the entire platform, in terms of the sponsorship and what their skin in the game is alongside the institutional investors and the retail investors. So not to say that there won't be any products that are kind of more oriented to retail, but I think the preponderance of what we're trying to emphasize is where retail can invest alongside the institutions.
The next question is a follow-up from the line of Jade Rahmani with KBW.
You gave some color in your prepared remarks, but can you give us a bit more detail on your plans for the healthcare portfolio, particularly in skilled nursing? You mentioned various lease restructuring and the shift towards in-house management, so I was just wondering how long you think that repositioning will take?
Yes, look, I think in the past, we've indicated a couple of years and, of course, that goes back to, let's call it, 6-plus months ago. So I think we have a ways to go still in terms of certainly through the end of next year. It's pretty complicated. I think we're pleased with the progress that we're making. We're ahead of plan as we stated. And some of these headwinds that we're experiencing appear to be abating. So directionally, all good. But there's not going to be instant gratification there. It's still going to take us a little bit more time.
Okay. And in the past, you've mentioned -- I think you've mentioned multifamily as an area of interest. I was wondering if that's still a vertical that you are looking to add in some way?
Perhaps. I mean, I think we like the fundamentals in rental housing. Candidly, we wish we were still in the single-family for rent. That was a great business, great space, that we had a lot of success with. And just given the nature of the construct that we had, we had to round trip it and exit. But throughout the spectrum of residential rental housing, it's still very strong from a fundamental supply-demand standpoint and you have to be careful about new supply in certain pockets. But assuming that you're in a good position to underwrite that, I think rent growth should remain pretty strong. And we like the sector, the space.
Okay. And just lastly, at a high level, Richard, what's your take on the overall fundamental outlook for the investment environment in CRE? I know a couple of the larger commercial mortgage REITs that have reported earnings have given us some one-off delinquencies that they've seen. So was wondering, if you are seeing or expect -- expecting to see any deterioration?
Well, it's not one-size-fits-all. So this is a time in our view and one of the reasons why we have conservative deployment away from our securities repurchases, is just it's later in the cycle. Certainly, here in the U.S., perhaps not as late in other places like Europe where it's earlier. And you got to pick your spots accordingly, very carefully. So there are certain segments that either are experiencing adverse headwinds from technological change and/or pockets of new supply as pricing has now, in some cases, moved ahead of replacement cost and you can justify new development. And you just have to be very focused on those risks as you underwrite kind of the niches where you can really feel comfortable that it's good credit and/or good growth. So right, even in the healthcare space, where we talked about some of the headwinds in the senior housing, senior housing is part of that multifamily spectrum and a good business and will be a good business longer term. It's just going through some short-term pockets of oversupply in certain markets, which is providing some headwinds in terms of growth. And that's how we look at the business. It's not one-size-fits-all. You've really got to analyze it by sector, by geography and really understand what's going on from the new supply, new product standpoint.
We've come to the end of our question-and-answer session. I'd like to turn the floor back over to Richard Saltzman for closing remarks.
Okay. Thanks again, everyone, for joining us for this quarterly call. We're really pleased with the progress we're making on our various initiatives and objectives and look forward to reporting more on that in ensuing quarters. Have a good rest of the day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.