DigitalBridge Group Inc

NYSE:DBRG

Earnings Call Transcript 2019-Q2

[Operator]

Greetings, and welcome to Colony Capital Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Lasse Glassen, with ADDO Investor Relations. Thank you. You may begin.

[Lasse Glassen]

Good morning, everyone, and welcome to Colony Capital Inc.'s Second 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; and Neale Redington, Chief Accounting Officer, 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 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 9, 2019, and Colony Capital 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 segmented basis. The company's earnings release, which was issued this morning and is available in 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 reconcile 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]

Good morning, and thank you, Lasse. During the Colony Capital fourth quarter earnings call in the spring of 2018 as Executive Chairman, I outlined a series of near-term objectives which we would undertake. These objectives were: one, reducing G&A and realigning the incentives of our athletes on the field; two, finalizing the defensive positioning of our balance sheet assets acquired in the merger and calling and simplifying our business plans; three, extending debt term and reducing interest expense; fourth, transitioning the return profile of our balance sheet assets into an offensive total return in investment management-driven model while maintaining the dividend and REIT status; and lastly, focusing on new balance sheet originated acquisitions, vehicles and platforms in which Colony's balance sheet acts as the GP alongside fee and promote-bearing third-party capital, in Investment Management businesses in which we have an edge and can build to scale.

By the time I reassumed the active role of CEO at the end of 2018, we were well on our way to executing on these aforementioned initiatives, although we still had not clearly communicated the details of our offensive playbook for the future. We now have defined that offensive path of dramatically simplifying our businesses and pivoting into digital and investment management strategies in which Colony possesses an edge and which we can build a scale.

First, a review of the results of what we said we were going to do and how our results so far have measured against these goals and objectives. G&A reallocation and cultural enhancement. What we said, we would execute on a fully identified large-scale G&A net cost reduction program and enhance the culture. What we have done. We reduced G&A by $80 million to $90 million on a run-rate basis since the start of 2018, and in total, by $210 million since the completion of the merger. Further G&A reduction should be anticipated as we divest nonstrategic assets and businesses such as Industrial and NRE.

Next, monetizations. What we've said. We will generate substantial liquidity through the harvesting of nonstrategic assets and balance sheet-heavy real estate verticals. These asset dispositions align with our clear criteria for divestments which are to monetize all assets and businesses which: one, command higher private market values than the public values assigned to them; two, which do not demonstrate the characteristics necessary to form meaningful third-party capital, or which do not produce the total return of at least 12% annually.

Now let me review how we have applied the foregoing to our various business units. Other Equity and Debt. What we've said, we would accelerate the sale of nonstrategic OED and simplify the component of our balance sheet. What we have done. Since our first earnings call together, nonstrategic OED has been reduced by approximately 3/4 from $3.6 billion to $1 billion in net equity value, inclusive of $1.2 billion of asset monetizations and $1.2 billion of asset transfers to CLNC.

In Healthcare. What we said, we said we would successfully address the significant health care loan maturities in 2019, including the $1.725 billion GAHR loan and co-assets to better position our portfolio for strategically alignment. What we have done, we consummated an important partnership with Ventas, a leading health care REIT, and refinanced the $1.725 billion GAHR debt on attractive terms and significantly derisked our Healthcare vertical.

Four of six 2019 loan maturities have now been refinanced, and the remaining 2 are expected to be refinanced or otherwise resolved by the year-end. 2019 was the year of liability management for health care, which has gone extremely well.

Colony Industrial. What we've said, Colony's strategy to buy, build, grow and sell operating platforms was the architecture for the acquisition of Cobalt and the subsequent formation of Colony Industrial. Lew Friedland and his team have done a first-class job in accomplishing our goal to be the leading infill Light Industrial platform alongside fee-bearing capital. What we have done, Colony Industrial, led by Lew and our Dallas-based team, has been a poster child case for using our balance sheet to buy, build and grow Investment Management businesses and serves a clear case study in building platforms and delivering compelling results to our investors.

Given the significant appreciation and demand for industrial assets, we've decided that we are at an appropriate time to harvest our Industrial Real Estate business. We formally launched the sale process for our Industrial business. Should we receive offers at compelling levels, we anticipate a closing around year-end. In the meantime, we continue to build and expand the portfolio as evidenced by our recent Dermody acquisition of almost 12 million square feet at an acquisition cost of $1.2 billion.

Next, NRE. What we said, we said we would come to the resolution on NRE given the persistent discount at which the stock, including our 11% ownership interest traded relative to NAV. Last November, NRE and Colony entered into an agreement for a termination of the external management contract for NRE upon a sale of NRE or in connection with an internalization and exchange for payment of $70 million to Colony minus any incentive fees previously paid. What we have done, after a long process run by Goldman Sachs, the NRE Board of Directors approved a definitive merger agreement to be acquired by Axle, resulting in consideration to NRE stockholders including Colony of approximately $17.03 a share. As a result of the transaction, Colony should generate gross proceeds of $160 million from the sale of our 11% ownership position and the monetization of the management contract. And most importantly, shareholders in NRE should receive an approximate 16% realized IRR from inception, a great accolade for the London-based team.

Next, Hospitality. Our portfolio consists primarily of select service hotels which requires surgical engineering and monitoring the PIP cycles that are required by all major brands. In addition to our team's hands-on asset management and CapEx oversight at the property level, we continue to evaluate a number of strategic transactions including large-scale portfolio sales, joint ventures, consolidations and opportunistic acquisitions.

Next, the formation of the strategic asset review committee or SARC. What we said, in addition to this year's appointment of 3 great new directors, Dale Reiss, Craig Hatkoff, Ray Mikulich, we formed a special asset review committee comprised of 5 of our directors to evaluate strategic initiatives with Morgan Stanley. What we've done, the SARC has held formal meeting 6 times and an extraordinary number of informal discussions with management and advisers, and worked tirelessly to evaluate a myriad of financial and strategic alternatives for virtually every element of our business.

Now a review of our Investment Management businesses.

Digital Colony. What we've said. We told the market that we would use our balance sheet to originate and grow Investment Management platforms which we accomplish through our Digital Colony franchise. We also said that we would use our public currency and listed balance sheet as a tool to attract and retain other alternative investment managers who view the Colony brand and platform as strategic and synergistic. What we've done. This quarter, we closed on the unification of the Digital Colony franchise through our acquisition of Digital Bridge Holdings, or DBH, and are joining with a world-class team of investment professionals who steward DBH's extraordinary portfolio of communications infrastructure investments. This acquisition has been a natural evolution in our partnership with DBH which began with the successful formation of Digital Colony Partners, our flagship communications infrastructure which raised more than $4 billion in equity before coinvestment, making it one of the largest first-time funds and the first specialized digital infrastructure fund of its kind.

Since we began our partnership through Digital Colony, we have consummated a series of thoughtful acquisitions of great communications assets around the world, including Andean Telecom Partners, Digita, StrattoOpencell and Peer 1, and we've signed a definitive agreement to acquire Zayo in partnership with EQT at an enterprise value totaling more than $14 billion. The transaction with Zayo is progressing as a majority of the shareholders have now approved the deal. And in fact, Zayo is the largest to take private transaction and digital infrastructure for which we raised an additional $2.2 billion in coinvestment capital in 2 months. We continue to add new proprietary platform ideas to our investment pipeline, including a series of accretive tuck-in acquisitions that serve to increase our footprint and deepen our relationships with our valued tenants.

The macro demand for a connected planet is growing at an astounding pace that is no longer being fueled just by consumers and devices but also by the essential need for networks. This growth is evidenced by the fact that 3 of the top 5 REITs by market capitalization are tech-driven businesses, and they were not even in existence 10 years ago.

2019, there will be close to $105 billion of capital expenditures spent by our digital customers on expanding communication networks in our target markets. Data creation and usage is accelerating, as a consequence, so too will the spend. Today, our Digital Colony businesses touches every text, every e-mail and every phone call across North America, Latin America and Europe. And over time, Digital Colony is going to mark into a top-tier global investment platform with a unique focus on next-generation mobile and Internet infrastructure.

In an effort to strengthen the great management bench we have to aid in the digitalization of our operations and to allow our senior executives to focus on their various businesses with surgical precision, we have designated Marc Ganzi as my successor as CEO after 18 to 24 months of the transition period. After the conclusion of that timeframe and transition, I will return to the role of Executive Chairman. Marc is a tremendous leader to orient Colony operations for the digital future and a perfect complement to the existing Colony leadership team, who together will work hand-in-hand on the growth of our Investment Management businesses, come in the streamlining of our balance sheet and then launching this into the digital age.

Next, energy. What we've said. Building on strength and energy and energy infrastructure has always been the natural progression of growth of our real estate asset businesses and has similar characteristics to certain of our real estate credit silos as we continue to maintain a focus on credit opportunities between Main Street and Wall Street. What we have done. In order to avail ourselves of what we believe is a compelling arbitrage opportunity, we formed a strategic $320 million joint venture with best-in-class E&P operator, California Resources Corporation, in which Colony has committed to fund $320 million for the development of CRC's flagship Elk Hills field located in the San Joaquin basis (sic) [ San Joaquin Basin ] in a format which is called a drillco financing.

Our thesis is that energy finance has failed to keep pace with technological innovations in the field. And despite empirical step changes in the risk profile of the oil and gas development, which has driven substantial production growth, these legacy financing channels have starved production platforms of the capital necessary to develop great assets.

Next, emerging markets. We said that we would expand our private equity businesses into emerging markets. We believe that emerging markets are compelling long-term opportunities and investing in the emerging markets will drive 3/4 of global GDP growth through 2030. The underlying fuel to this EM growth engine will be robust population growth, rapid urbanization, dramatic expansion of mobile and Internet infrastructure and an emerging middle class. Telecommunications, infrastructure, power and energy and the attendant real estate and real estate services used by those industries will explode at the same pace at the expansion of the urban population.

What we have done. As our first acquisition in the EM field, we closed on our acquisition of the Latin America business of Abraaj. As a part of the transaction and in addition to world-class management team, we annexed over $500 million of assets under management to our investments' table in an active pipeline of proprietary transactions.

Next, CDCF. What we said on the real estate credit, we view the CDCF's series of credit funds as a strong Colony legacy product and a perfect complement to our listed mortgage REIT, CLNC. What we have done. We just held the initial closing of our latest opportunistic credit fund with the initial capital commitments of approximately $428 million, which included the successful syndication of 3 European credit investments which were originated over the past year.

Next, CLNC. For CLNC, we will continue to work through the lower yielding and equity assets in the portfolio as we rotate in a more simple and definable first mortgage origination machine with sustainable earnings and dividend coverage. More detail on CLNC is, of course, available through the CLNC press release and earnings call itself.

Listed securities. For decades, we have compiled many terabytes of information on private treaty transactions from almost every asset class of more than 30 countries. Until recently, the utilization of this information has been only for private treaty transactions, and we have not had a data-driven public market investment theme to avail ourselves of the private market information in the public markets. Our listed securities platform and a data-driven quantitative approach driven by Bill Hughes will now afford a transparent, liquid and public currency in which institutional investors can participate.

Now to conclude, I'd like to share a few of my personal perspectives on investment on global landscape without burdening you with too much detail. First, returns are falling dramatically while counter-party risk and liquidity risk are rising dramatically. Next, the economy is in good shape as we continue to be beneficiaries of globally low interest rates and the Japanization of most central banks driven by concern in the powered central banks with few arrows left in their quivers. And the continuing flight of the fed dove may produce a historic low in the 10-year bond yield in the future.

At Colony, we are keenly aware that dramatic supply of liquidity in a very late stage at the very mature real estate market. Risk premiums are diminishing, and debt levels in the private market are increasing as greater returns always present themselves in a go-forward basis. One of the greatest threats. The dramatic march from globalization to protectionism which is causing volatility and underperformance in emerging markets from Latin America and Asia, a global unsettledness and brinkmanship, and increasing schism amongst the have and have-nots, a contest between socialism and capitalism and geopolitical confusion spanning from Latin America to Asia.

Next. What I call slobalization may result in divergence and convergence and trade wars will put the dollar in increasing pressure to appreciate in value and cause stock market disruptions such as we've seen in the past week. The real risk in an unforeseen and unexpected global military or political intervention. A shared utilization of everything is changing the basic framework of real estate and offices, multifamily, hotels, homes, retail, restaurants and industrial. Long-term credit tenants with stable cash flows are giving way to shared utilization tenants, leasing at a new development menu of spot rates in most asset classes and markets. Our goal is to become the most trusted provider of integrated real estate digital and capital solutions to the world's leading technology companies. We will follow the logos.

Thank you, and now I'll turn it over to Mark Hedstrom.

[Mark Hedstrom, executive]

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

On the call today, I will provide a review of second quarter results, business segment performance, status of our cost reduction initiatives and several important transactions which occurred during and just after the end of the quarter.

Turning to our financial results for the second quarter. GAAP net loss attributable to common stockholders in the second quarter was $469 million or $0.98 per share, largely a result of impairments and provisions for loan losses totaling $353 million for the company share. That amount included a $228 million noncash GAAP accounting write-down of the carrying value of the company's 48 million common share interest in CLNC to a value based on CLNC's closing stock price of $15.50 on June 28, the last trading day of the second quarter. While we continue to believe strongly in the long-term value of CLNC shares, we made this accounting write-down due to uncertainty over the timing of recovery of CLNC stock price in the near term.

Core FFO in the second quarter was $57 million or $0.11 per share. Excluding net investment losses of $17 million, core FFO would have been $74 million or $0.14 per share. Approximately 1/3 of our net investment losses related to our share of investment losses realized by CLNC during the quarter with the remainder related primarily to losses on sales of and loan loss provisions on Other Equity and Debt investments, most of which we had planned for as part of our strategic monetization program.

During the second quarter, we made significant progress towards our strategic objectives, which Tom just discussed, and we also had a strong operational quarter across most of our existing 6 reportable business segments as well as continued positive progress against our cost reduction initiatives.

Starting with the Healthcare Real Estate segment. Same-store portfolio NOI increased 1% compared to first quarter 2019. On the financing front, we refinanced on very favorable terms, $1.7 billion in health care debt which was scheduled to mature in December 2019. We contributed $175 million of equity primarily to reduce the loan balance, and we expect that amount to decrease to approximately $90 million on a net basis following the sale of certain assets that were previously encumbered by the original debt and are presently under contract to be sold. This refinancing, along with previously completed refinancing transactions earlier this year, addresses 4 of the 6 health care loans maturing in 2019 or 87% of the consolidated outstanding principal balances. The remaining 2 health care loans are expected to be refinanced or repaid by year-end. And with these health care maturities addressed, we can dedicate our focus entirely to operations and strategy to maximize value within our portfolio.

Turning to the Industrial Real Estate segment. Light Industrial same-store portfolio NOI increased 1% compared to first quarter 2019 primarily due to an increase in rental revenue, partially offset by higher repair and maintenance costs. As part of our ongoing strategic review, the company engaged advisers to market its industrial portfolio for sale resulting in a change in accounting presentation in our quarterly financial reporting. Accordingly, for the second quarter and all prior periods presented, the related industrial segment assets and liabilities were reclassified as assets and liabilities held for sale on the consolidated balance sheet. And the related operating results from all items of income and expense are reported in a single line item as income from discontinued operations on the consolidated statement of operations. We hope to be in a position to provide additional information on the results of the sale process next quarter.

Moving on to the Hospitality Real Estate segment. Compared to the same period last year, second quarter 2019 same-store portfolio NOI before FF&E reserves decreased 3% primarily due to a combination of weaker corporate travel demand, the presence of new supply in certain markets and increased labor and property tax expenses. We continue to call lower quality assets in this segment, and we are also in the process of refinancing debt related to a couple of our portfolios to provide more term at more attractive interest rates.

Yesterday, CLNC reported second quarter core earnings of $36 million or $0.28 per share compared to core earnings of $12 million or $0.09 per share in the first quarter of 2019. These core earnings included realized net losses in the second quarter of which our 36% share was $5 million. These losses resulted from the foreclosure of a loan collateralized by a U.S. retail property. 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 this anticipated foreclosure event, CLNC's core earnings would have been $0.39 per share in the second quarter.

Next is our Other Equity and Debt, or OED segment, a $1.8 billion equity value portfolio separated into strategic OED and nonstrategic OED. Strategic OED includes our investments alongside third-party capital where we earn Investment Management economics and which we plan to grow over time. During the second quarter, the underappreciated carrying value in strategic OED decreased by 2%. Additionally, subsequent to the end of the second quarter, NorthStar Realty Europe, or NRE, which we manage and which we have an 11% equity stake, entered into a definitive agreement to be acquired for an estimated $17.03 per share.

Upon closing, which we anticipate to be around September 30, 2019, assuming receipt of shareholder approval, the company is expected to receive proceeds of approximately $96 million for its 11% equity interest in NRE and approximately $65 million for the termination of its management agreement. We are also actively managing and liquidating nonstrategic OED, which includes legacy investments that are at the end of their investment life and/or are not in line with our strategic Investment Management strategy. During the second quarter, underappreciated equity carrying value in nonstrategic OED declined by $124 million or 11% from $1.1 billion to $1 billion.

Our Investment Management business segment continues to increase in its significance as a strategic component of overall revenues and operations of the company. Colony ended the second quarter with third-party AUM of $28.6 billion compared to $28.8 billion last quarter and Fee-Earning Equity Under Management up slightly to $18 billion compared to $17.8 billion last quarter. The increase in Fee-Earning Equity Under Management was primarily attributable to the acquisition of the Latin American investment management arm of Abraaj Holdings, now called Colony Latam Partners, which was partially offset by the sale of a noncore real estate Investment Management business and other asset sales.

We opened several new international offices during the second quarter to support Investment Management growth, including a Singapore office which will serve as another base for future capital raising in Asia, as well as offices in Mexico City and Lima, Peru, both of which support the operations of Colony Latam Partners.

Tom discussed the exciting recent developments in our Investment Management business subsequent to the end of the second quarter, including the acquisition of Digital Bridge Holdings, the growth of our energy platform and the first closing of Colony's fifth global real estate credit fund. Together with planned sales of certain assets and business units, this is anticipated to be a transformative year for Colony as we continue to execute on our strategic plan to focus resources on high-growth and less capital-intensive Investment Management businesses.

Finally, I will provide an update on the corporate restructuring and reorganization plan announced during the fourth quarter of 2018. During its first 8 months since implementation, the company has achieved approximately 2/3 of the expected $50 million to $55 million cost savings on a run-rate basis through various initiatives, including the reduction of more than 10% of the company's workforce existing at the time the restructuring was announced. We expect to meet or exceed the original cost savings targets over the coming 6 to 9 months. In addition to cost reductions including those related to the anticipated sale of assets, we are also continuing to drive noncompensation-related administrative cost savings and efficiencies through expense policy changes by leveraging of technology and the utilization of offshore resources where possible.

In summary, we are very pleased with our strategic progress and operating results during the first half of 2019, and we remain focused on achieving our full year goals and objectives during the second half of 2019.

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 Randy Binner with B. Riley.

[Ryan Aceto, analyst]

This is actually Ryan Aceto on for Randy. Turning to the Industrial portfolio. Press release is a little vague. Are you looking to sell the entire portfolio or just the Light section of it?

[Thomas Barrack, executive]

Ryan, it's Tom. What we did is actually asked for the best initiative and inform of a request for proposals for all of it. So you could bid on the manager, you can bid on the assets, you can bid on both. And we'll see in the next 30 days how it rolls out. There's complications and opportunities in all of those. And the interest has been, as you know, in the industrial market, has been believably good. So we'll have to evaluate what comes back in. But there's buyers and desire for all the components. The bulk is not part of what we put into the Light format.

[Ryan Aceto, analyst]

Got it. And then on that portfolio, are you guys able to mention any kind of basis for it? Just trying to figure out any tax implications that will come down with the sale.

[Thomas Barrack, executive]

Mark, I'll let you answer that. But we have not. It's a little premature to start giving forecasting. We anticipate that if we get the bids we expect that we'll respond to, we'll have a closing by year-end and it will become evident then. Mark, any more information you want to share on that?

[Darren Tangen, executive]

Sure. We are actually -- this is Darren, why wouldn't I take that. Given what our cost basis is in that portfolio, we -- and given where market values have gone, we would expect to realize a meaningful, both accounting as well as taxable gain if we sort of sell where we're seeing other trades occur in the marketplace. So as Tom said, more to come on that. We're mid-sale process. So it's a little early to give guidance on that. But we would expect that there will be a pretty meaningful gain at the end of the day.

[Ryan Aceto, analyst]

Great. That's very appreciated. If I could do one more. The proceeds from industrial, assuming that sale does go through, I guess how do you guys think about share repurchase versus paying down preferreds versus convertible? Just any thoughts there would be great.

[Thomas Barrack, executive]

Ryan, it's a great question. We've got lots of liquidity coming up. So one of our big strategic initiatives is pruning and calling and delevering the balance sheet as we look at capital allocation opportunities going forward for the new businesses, especially digital. So we're in the process of knowing that we need to strengthen that balance sheet, which we're going to do. And that we have a gracious appetite for new capital to pin third-party capital especially within the digital arena. And by year-end, we'll have an arithmetic answer to that question.

[Operator]

Our next question comes from Jade Rahmani with KBW.

[Jade Rahmani, analyst]

To start with Digital Bridge, how much operating income should we expect Digital Bridge to initially add on an annualized basis? I think there's about $7.3 billion of equity under management. Should we assume a 1% fee and 40% operating margin on that?

[Thomas Barrack, executive]

Mark?

[Mark Hedstrom, executive]

I think that's a little light on the management company economics. And we think margins in the combination are going to be slightly better over time as we go. It was a $325 million acquisition so its contribution to earnings will be meaningful. But kept in context of the assets under management, we view it as incredibly important strategic transaction and not one that's entirely financially-driven, although we're very optimistic and pleased with the acquisition that we made on a financial basis.

[Jade Rahmani, analyst]

On the Digital Colony side, can you quantify what Colony's expected equity contribution to the Zayo acquisition will be? You mentioned there's a spend of capital that raised from third parties. So I'm wondering what CLNY's coinvestment will be.

[Thomas Barrack, executive]

Yes, it's Tom. So if you remember, most of this lies within the fund. And the $6.5 billion of equity is split between EQT and Digital Colony. By the time that we're done with coinvestment, which has been unbelievably strong and a great demand, we'll probably have about $760 million from the fund that stays invested. So we continue to coinvest down on what was a $15 billion total enterprise value acquisition, but that is where we think we are going to end up.

[Jade Rahmani, analyst]

And so the $750 million, is that CLNY's coinvestment? Or is CLNY's coinvestment a subset of that?

[Thomas Barrack, executive]

Well, that's DCP, that's the fund.

[Jade Rahmani, analyst]

Okay. So what was CLNY's coinvestment in the fund be?

[Mark Hedstrom, executive]

We have about 8% of that.

[Jade Rahmani, analyst]

Okay. On the health care side -- say it again?

[Mark Hedstrom, executive]

About $70 million.

[Jade Rahmani, analyst]

Okay. Got it. That's what I was thinking, thereabout. On the health care side with the bulk of refinancings now behind you guys, and the VTR relationship expanded, what would you say the outlook for the businesses do you intend to shift your focus toward strategic alternatives?

[Darren Tangen, executive]

Jade, it's Darren here.

[Thomas Barrack, executive]

Let me take it. So -- absolutely. Look, the Healthcare business is complicated, and the skilled nursing business component of that is even more complicated. So it's taken us 18 months to get our arms around where the opportunities are and to really understand the flow of CapEx that's needed just to maintain where we are.

Our strategic alignment with [ Debi ] has been terrific. They're a first-class organization, they have been in this business for a long time and GAHR was a step into looking at asset combinations and a future which makes a lot of sense. So Healthcare eventually, for us, has to go someplace. So whether it's a consolidation, whether it's a spin, whether it's an independent unification and part of that asset class is where we're going to go. So our team has done a great job. And as you've seen in the marketplace, a lot of people are enthusiastic and investing in the health care place. We need to clean it up. We need to get it understandable and then we needed to get it into its own silo. We are not sure what that own silo is yet, but that's the direction we'll go.

[Jade Rahmani, analyst]

Turning to the industrial potential sale. Is it fair to say that your digital strategy going forward does not include industrial? Because I know e-commerce has been a significant driver of the fervency that we've seen in the industrial sector.

[Thomas Barrack, executive]

No. It absolutely, absolutely includes industrial. So our industrial -- Lew Friedland and his team, if you remember, we acquired Cobalt. And we acquired Cobalt kind of like we're selling CIF. So we acquired the assets and then separately, we acquired the management team. And then those assets, those last mile logistical assets, the type and quality and breed are irreplicable for what the team has done. But the adjunct of industrial going forward in the next wave. So we've looked at this and said okay, the portfolio that we collected during that period of time was not really oriented entirely to following the logos. It ends up amazingly, that Lew's tenants and customers are very much Marc's tenants and customers but with different operating bandwidth.

So on a go-forward basis of what we do with Digital, when you look at the various businesses, we are certainly going to be industrial and we're certainly going to be in infrastructure. But our goal has always been to identify, execute, buy, build and sell for value, and that's what we are doing. The way we formed CIF was an open-end fund. It's an open-end fund with foundational investors before the merger and right at the verge of going public.

So as we simplify our balance sheet and trying to look at long-term value over time, part of it is certainly the asset class and type of assets, and the other part is how do we simplify our balance sheet going forward. So that we've got consistency. So industrial will be a part of the digital story. And the part of that is to continue on by following those logos. Again [ Tekken ] is what the name of the game is.

[Jade Rahmani, analyst]

On the OED segment, is there the possibility for bulk portfolio sales to accelerate dispositions? I mean if you want to simplify the balance sheet, that's probably the most obvious place to start. There's already been significant amount of calling but it seems like it does have quite a long life ahead.

[Thomas Barrack, executive]

Yes. It's Tom again. There's no need to because it's not that kind of OED. We don't need to take a discount to another wholesaler who's just going to take a 30% discount to us so that they can sell to the same buyers that we know. It's a matter of distribution of that product over time, and the markets are going our way. Some of it is a little more complicated, but the private market is understanding value where the public market doesn't. We're doing a good job. We're a little bit off this quarter but the third quarter, we're going to be even better. So we're going to continue to do what we're doing. We don't need to take a discount for bulk sales.

[Operator]

Our next question comes from Mitch Germain with JMP Securities.

[Mitch Germain, analyst]

Just maybe talk about the CEO transition and the rationale behind the 18 months -- or at least 18 months transition?

[Thomas Barrack, executive]

Yes, so Marc currently has keyman language in our fund, and that keyman language has limitations based on kind of a stairstep basis of funds committed and funds spent.

So as we looked at this, in addition to figuring out how we synchronize all the other moving parts of the business, what we envision was an 18 to 24 month period to transition both sides, for us to transition our balance sheet away from some of the businesses that we don't see the meteoric opportunities or elements that we talked about before that I talked about it in the beginning of the earnings call, transition that into the other digital businesses as well as allow him the opportunity of understanding the components of those businesses and fulfill his obligations under the Digital Colony fund. So tower assets, small cell and fiber assets, data center, hosting fiber enterprise data centers, hyperscale data centers as we move through it will be the focus of what we have, and it's going to take us a couple of years to get there.

[Mitch Germain, analyst]

So is this arrival signaling a shift from traditional real estate toward digital real estate?

[Thomas Barrack, executive]

Absolutely. But the shift from traditional real estate is a way -- just a personal view. The way I look at it is we're dealing in obsolescence on a constant basis. So just the cycle of traditional real estate, of the planning and entitlement process, the architecture and construction process, the leasing and sale process. By the time you envision a piece of land and get it incubated with the income in place, it's already obsolescent. And the users of that real estate historically, right, we are all looking for a triple net incomes from credit tenants, and there's very few of those left. And the kind of things in every asset class that people wanted are changing at an unbelievable pace.

So to follow the money, the big spenders of capital expenditures in bricks and mortar stuff are the technology companies. So $165 billion in the next year. And that servicing of all things digital, the supplying those capital solutions with brick-and-mortar solutions and just looking at the big digital REITs that have been split between tower assets and fiber has been amazingly interesting. So it's -- a balance is the same. We are going to hold the dividend. We've said we will hold the dividend from 2019 and stay at REIT. We are, there's no change. But along that road, the illusion between return of capital and return on capital is you had to have growth and you had to have total return. And we see more growth and more total return in the data and digital business, and our acquisition of Digital Bridge, and Ganzi and his team we think is best-in-class. And that's what we're going to point all of our silos towards as we move out of those businesses in which we don't have an edge and which we can't scale. We want to be the top 3 or 4 in every businesses that we're in.

[Mitch Germain, analyst]

That's helpful. Liquidity is kind of about $400 million or so or, I think, expanded more than that quarter-over-quarter. It seems like subsequent to the quarter, there's a lot of different commitments, energy, to fund Digital Bridge. I'm just trying to understand the ability to fund those investments. And what's the plan there?

[Thomas Barrack, executive]

Mark, you want to take that?

[Mark Hedstrom, executive]

Sure. Yes, our liquidity was down period-over-period due significantly to the Digital Bridge acquisition and the refinancing transaction. We think though that cash flow during the third quarter and the rest of the year puts us in very good stead to recover that and in the year with a very significant surplus. We still have $750 million line of credit available to us that is -- that's still in place, and we think our liquidity is good in the interim and good in the long-term. We see no issues there to fund any of the commitments that we currently make.

[Mitch Germain, analyst]

All right. But what have you -- I think you mentioned during the call a bunch of the impairments were somewhat aligned with expectations. It seems like some of these impairments may be in line with your expectations but just not the investors and us. So how much more of this can we expect? It seems like every quarter or every couple of quarters, pretty significant amount of impairments are realized. How much more is out there?

[Mark Hedstrom, executive]

I'll take that one. Look, as we realize small assets and as we call portfolios in our Healthcare and hospitality segments that aren't held for sale, there is going to be noise and there's going to be gains and losses in those transactions as we go. I don't think that in -- for the year, we don't think that those gains and losses are that material to the operations of the business. We've got significant gain coming through OED in the sale of our NRE assets and bid management agreement. Those we hoped to get done in the second quarter. They came -- they will come in the third quarter with shareholder approval of that transaction and would have offset all of the losses that occurred.

So we hope there's a balance there. But as we call assets and sell assets, there's going to be timing issues related to gain and loss recognition. And we think that we ought to also focus on the recurring part of the business as well as lost -- gains and losses that are not necessarily recurring.

[Mitch Germain, analyst]

All right. Last one for me. I think about $0.14 in the quarter, I think you had a little bit of one-time or least you referenced with Healthcare in the press releases. Anything else that needs to be pointed out with regard to thinking how clean was the quarter and what sort of adjustments that we need to do?

[Thomas Barrack, executive]

Yes. I think -- let me start. And then Mark and Darren can jump in. I -- the timing of what we're doing now, right, we're doing digging out of the hole. And the good news is the market has really helped us in digging out as we've gone from a gigantic defense which you've all endured with us for the last 18 months to figuring out what is the offense. And we're clear on what the offense is now. We're going to clean up the balance sheet, we're going to simplify the business, we are going to turn to digital and everything that relates to it, including the emerging markets and credit. All of those silos are going to be digitally oriented, and timing is the difficult thing as we call these other assets.

So if you look at NRE, NRE was a major portion of our miss this quarter because it was recorded a miss. So what Mark explained, I think we all feel confident. This year, we're fine. We aren't at the level of surgical execution where we get the exact quarter right especially on a lot of these dispositions which were quite complicated. But we've got the wind in our back. We understand where we're going. We've simplified a lot of the G&A and strategic process which we're going to continue to do. But the great thing is now we've got an offense. So I don't think there's any surprises that I see. Mark, Darren?

[Mark Hedstrom, executive]

Got it. I think that's right, Tom. I would concur and, again, the timing of the NRE transaction would have been -- would have -- and the one-time charge for the health care refinancing transaction costs were several pennies of income during the period even ex gains.

[Operator]

Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I would like to turn the call back to Tom Barrack for closing comments.

[Thomas Barrack, executive]

Thanks, everybody. It's an exciting time for us. And just from my own personal point of view, it's one of those moments where after struggling through this for the last 9 months, as you all have, trying to figure out not only what it is that we've got in the $22 billion balance sheet and $60 billion of assets, which by the way in this market, I'm elated to have. Scaling up on anything is difficult and impossible.

And going forward on assets that have obsolescence in them and functional and financial issues is always difficult. What we've got now is a forward program on all 3 legs: we understand the strategy; we are going to go to digital integration of all the businesses that make sense; the businesses that we have that don't make sense that have economic viability, we are going to find the right capital structure and place to home them. That will take us a little bit, but we know where we are going. And we've got a great go-forward management team, adding Marc to the existing management team that we've got, and we are through most of the surprises. So thanks for your patience. We are really looking forward to the future. And I think this next quarter and the arithmetic and math behind digital that we're going to give to you by the year-end is going to be enlightening. So thanks, everybody.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.