DigitalBridge Group Inc

NYSE:DBRG

Earnings Call Transcript 2017-Q4

[Operator]

Greetings, and welcome to the Colony NorthStar Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Lasse Glassen, ADDO Investor Relations. Please go ahead.

[Lasse Glassen, executive]

Good morning, everyone, and welcome to Colony NorthStar Inc.'s Fourth Quarter and Full Year 2017 Earnings Conference Call. With us today from the company is Tom Barrack, Executive Chairman; Richard Saltzman; President and Chief Executive Officer; and Darren Tangen, Chief Financial Officer. Kevin Traenkle, the company's Chief Investment Officer; and Neale Redington, the company's Chief Accounting Officer, are also on the line to answer questions.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, March 1, 2018, and Colony NorthStar does not intend and undertakes no duty to update future events or circumstances. In addition, certain financial information presented in this call represents non-GAAP financial measures reported both on 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 Tom Barrack, Executive Chairman of Colony NorthStar. Tom?

[Thomas Barrack, executive]

Thanks, Lasse, and good morning, everybody. Before we get to the meat of this presentation, I wanted to give you my personal perspective and headline. Those of you who know me personally understand I've always had a mantra in giving the bad news first, and you've got the bad news this morning. And we in the organization understand the true definition of not confusing efforts with results and the efforts of the organization have been extraordinary and the results have been disappointing and that's the bottom line. The good news is that the fundamental belief that we had in this merger is still my personal belief. And what we will do going forward from a level-setting base of turning from a yield-driven model to a total return-driven model, which is necessary in the current economic environment that we're finding ourselves in.

I'm 100% focused. I'm still one of the largest personal shareholders in this company. It's a majority of my personal net worth. It's the dominant factor in my and my family's pride, reputation and future, and I don't intend to leave it tainted or unattended. With that, the investment management side of this business has never had better potential on Colony's global franchise, it's never been better. And I intend to personally usher the operational side of that business in the future and be back to you with more detail soon.

With that, I'll turn it over to Richard Saltzman.

[Richard Saltzman, executive]

Thanks, Tom, and good morning, everyone. So on the call today, I will provide a high-level review of our 2017 results and performance, talk about this morning's announcement of our reduced go-forward dividend. I'll also provide a NorthStar merger postmortem in terms of what went right and what went wrong, how we are addressing our underperforming areas and where we go from here.

So in terms of results, 2017 was a disappointing year overall. However, we did make significant progress on transitioning our business and simplifying our balance sheet by monetizing $5 billion of nonstrategic assets and platforms, refinancing more than $3 billion of corporate and mortgage debt and achieving G&A merger synergies of approximately $150 million, which exceeded our original target of $115 million. We also raised $2 billion of new incremental third-party capital during 2017 across all of our business lines and platforms, while deploying $2.8 billion of capital into new investments, $1.8 billion by the company and $1 billion from funds managed by Colony NorthStar.

Furthermore, since the beginning of 2018, we implemented the first phase of 2 very significant investment management strategic initiatives. First, the creation of Colony NorthStar Credit Real Estate, market-leading credit REIT and $5.1 billion asset scale with a corresponding $3.3 billion of equity book value. In addition to having robust growth prospects, Colony NorthStar's position starts with an approximately $1 billion equity balance sheet investment in this company, alongside of $2 billion plus of permanent third-party capital. Second, we just announced today a $1.4 billion first closing of our digital Colony fund to invest in global real estate digital infrastructure such as data centers and cell towers. As part of that closing, we will soon transfer our recently acquired interest in ATP, Andean Tower Partners, a South America-centric cell tower company, to the fund.

So 2018 begins with 2 new large platforms that have both excellent opportunity sets as well as accretive additional growth prospects. Various other third-party capital raising initiatives continue, including most notably our U.S. open-ended industrial fund as well as co-investment opportunity such as Project Tolka, the Irish nonperforming loan portfolio that we acquired 1 year ago, primarily backed by Class A Dublin office properties as well as a new commitment with the core hotels to acquire majority interest and a substantial subset of their real estate-owned hotel portfolio, alongside a consortium of other large institutional investors.

On the other hand, our earnings performance has not lived up to expectations, emanating from more challenging industry conditions in health care, real estate as well as our retail broker dealer distribution business combined with impairments and lower returns in our residual real estate private equity secondaries and CDO securities portfolios. Higher floating rate interest costs [ beneath our in-place caps ] also reduced earnings as well as slower-than-anticipated redeployment of investment cap.

Our bias, which I will elaborate on, is to be more conservative and judicious in investing new capital currently as valuations generally remain high and the number of areas where the supply-demand dynamic remains very strong has dwindled. Last but not least, we did not raise as much incremental fee bearing third-party capital as we had hoped to fill the gap and the burn off of both gains generated by the Colony legacy portfolio as well as finite-life legacy funds that are at the end of their partnership terms.

Core FFO for the quarter was $0.16 per share. And for the first time in 2017, no material gains flowed through earnings for the quarter. Furthermore, the fourth quarter represents seasonal weakness in our hospitality business. This Q4 result produced full year of 2017 core FFO of $1.16 per share, well short of our target at the beginning of the year.

The NorthStar merger, which closed a little over 1 year ago, has not produced the math than we anticipated when we completed the transaction. It was a merger that was supposed to be earnings neutral at worst. And so far, it has proven to be earnings dilutive. Furthermore, the merger integration has taken longer than expected. We believe that we are largely at the end of that process, and we have much greater confidence around the go-forward anticipated results from the inherited NorthStar businesses that have been the primary source of our underperformance in 2017.

In this vein, we made some significant organizational and personnel changes over the course of 2017 to fix and drive improvement in these various areas of underperformance. The goals include providing appropriate leadership as well as more clear responsibility and accountability for each of our various business sectors.

NorthStar rely on a significantly outsourced business model, depending on outside asset and property managements, joint venture partners, et cetera, without enough media control over real-time information flow nor important property level decisions. Amongst other initiatives, we are internalizing as many of these functions as we can across our portfolio with the simultaneous objectives of improving performance as well as being more efficient from a margin and expense perspective.

Retail broker-dealer distribution was another area of very disappointing results. The industry generally remains an enormous transition from major regulatory headwinds, including the newly implemented fiduciary rule as well as a change in product constructs, more conservative 40 Act and interval funds that operate with less leverage and offer more liquidity options.

Capital raising in 2017 from these channels totaled only $137 million, down from past levels of an excess of $1 billion per year. To both reduce cost and provide the right go-forward leadership, we entered into an agreement to merge with S2K which still needs to clear regulatory approvals, which we expect to occur in the next few months.

One other substantial area of negative volatility to expect earnings results was in the legacy NorthStar real estate secondaries and CDO portfolios. These investments are much reduced from their original amounts as they are near the end of their lives, which generally implies elevated [ tail risk ]. In other words, [ pushed out lower exits have magnified impacts on what remains ]. We believe we have now adjusted the basis of these investments to fully anticipate the remaining impact of these types of events.

Let me next focus on our go-forward business, including the resetting of our dividend based on the confidence we have around our new baseline of recurring earnings, excluding gains, combined with a generally conservative bias we have toward preserving cash at this juncture of the real estate and economic cycles. Earlier today, via our earnings release, we announced that expected dividend level of $0.44 per share for the calendar year of 2018. This is a meaningful reduction from the $1.08 per share we paid in 2017. That $1.08 per share was completely covered by both our taxable income and core FFO results over the course of the year at $1.16 per share, which included approximately 25% contribution from asset sale gains. In other words, the dividend was 100% taxable with no return of capital component. As a reminder, the $1.08 per share dividend for 2017 was derived from the former Colony capital dividend level, adjusted for the NorthStar merger exchange ratio. However, that level of dividend was arrived at based upon the evolution of starting as mortgage REIT that was opportunistically investing for total return during the depths of the financial crisis and beyond. Capital gains were generated every year at a consistent level of 20% to 25% of the company's earnings and dividend.

More recently, the company morphed into an equity through the creation of the single-family rental platform, which has been recently sold and then subsequently, the acquisition of the U.S. light industrial business, which has doubled in size and all culminating with the NorthStar merger. As a result, our cash flow profile has significantly shifted from higher-yielding, shorter-duration assets towards lower-yielding, longer-duration assets that also have CapEx requirements.

Our business model is to fill in as much of the earnings gap as we can through investment management economics both recurring fees and profits interests. But in 2017, we merely treaded water in that regard based upon the burn off of legacy funds offsetting the economics of the new capital that we raised. Therefore, our go-forward focus and emphasis is on permanent and other longer duration capital platforms of which we now have 3 totaling more than $7 billion of AUM to minimize this cross current in the future.

However, until we accomplish that, the proven course of action is to substantially lower the dividend. As well, we believe that the current environment warrants protecting cash and limiting deployment to those areas where the supply-demand dynamics are very favorable. Higher interest rates and pockets of excess supply are putting in pressure on real estate valuation in many areas, despite the expectation of continued and perhaps more robust growth in the economy.

Therefore, our reset of the dividend is to a level approximating our baseline net cash flow from operations for 2018 as well as our estimated taxable income fee. It is intended to be more than amply covered by our core FFO with a fairly generous cushion. This saves $367 million in liquidity, where excess cash can be utilized to pursue select deployment opportunities in areas where we are confident of both fundamentals and our ability to raise third-party capital adjacent to our own, further deleveraging and to buy back stock opportunistically based upon a newly authorized $300 million program which we also announced this morning.

Growth areas that we continue to find attractive include U.S. industrial, global digital real estate infrastructure, Europe, credit and multifamily residential. On the other hand, we continue to deemphasize and prune health care, hospitality and our Other Equity and Debt segments. But the defining characteristics for us generally are excellent risk-adjusted total returns alongside of the ability to place co-investing capital attractively. That discipline will continue to be applied across all these areas of emphasis as well as any potential new areas of interest. Notwithstanding, we expect to continue to be a net seller of assets during 2018.

Despite some significant accomplishments toward simplification last year, we still have many moving pieces. Combined with our disappointing financial results, the management team together with our board have determined that we should hire a financial adviser to help us expedite our continuing objectives: streamlining, monetizing and deemphasizing noncore business lines and assets, all with the objective of simplification and reinvesting in new strategic growth platforms that are both compelling and capable of turbocharging our investment management business. We have retained Morgan Stanley to help us execute this plan over the coming months.

So in summary, 2017 was a very disappointing year overall for Colony NorthStar. Our financial results miss emanated primarily from legacy NorthStar businesses that are either experiencing macro headwinds or are dependent on outside partners and managers who generated less-than-anticipated results. The Colony's legacy institutional investment management business only treaded water last year, as I previously stated. For our model to work, new third-party capital initiatives need to significantly exceed the burn off of legacy funds, thus an increasing focus and emphasis on permitting capital constructs such as CLNC, the Colony industrial open-end fund and NRE. The good news is we are establishing a very comfortable baseline from which to move forward regardless. Committed and fully aligned with our shareholders, management is absolutely committed in getting this right and demonstrating the progress we know we can deliver, both in this year 2018 as well as in the future. So I just want to thank you again for all of your support.

And with that, I'll turn the call over to Darren Tangen.

[Darren Tangen, executive]

Thank you, Richard, and good morning, everyone. As a reminder, in addition to the release of our fourth quarter and full year 2017 earnings, we filed a supplemental financial report this morning and both of these documents are available within the public shareholder section of our website. On the call today, I will review fourth quarter and 2017 results, analyze the performance of each of our 5 business segments, speak about the dividend cut and rationale and conclude with some comments on liquidity and general business outlook.

Turning to our financial results for the fourth quarter and full year 2017. Net loss attributable to common stockholders in the fourth quarter was $368.1 million or a loss of $0.69 per share and full year 2017 net loss attributable to common stockholders was $333.1 million or a loss of $0.64 per share. A few material accounting items to mention during the fourth quarter that impacted our GAAP results: We recorded a goodwill impairment of $316 million to reflect a lower value in our investment management business, primarily attributable to our retail broker-dealer distribution business. And we also wrote down management agreement intangible assets by $35 million to reflect amendments to our management agreement in our health care non-traded REIT, NHI, net of deferred tax impact.

On the positive side, we recorded an income tax benefit of $25 million resulting from the corporate income tax rate changes enacted by the Tax Cuts and Jobs Act. On a combined basis, these noncash items represented a negative $326 million charge to the income statement for the fourth quarter. These significant noncash items were reversed in the calculation of core FFO for the period. Fourth quarter 2017 core FFO was $95.1 million or $0.16 per share compared with core FFO of $0.33 per share in the third quarter. The sequential quarter-over-quarter decline is primarily attributable to only $0.01 per share of net gains being recognized in the fourth quarter, the lowest quarterly gain contribution in 2017. By comparison, third quarter gains were $0.06 per share on a net basis when also adjusting for noncash loan provisions and impairment-related charges.

Additionally, the fourth quarter is seasonally weak within our hospitality business and this represents approximately $0.05 per share difference compared to the third quarter, including our interest in the THL Hotel Portfolio, which sits in the Other Equity and Debt segment. Other sequential quarter negative variances totaling $0.06 per share included further impairments in our CDO securities portfolio, lower acquisition fees in our investment management business, lower health care NOI and various other financing and administrative costs. Although full year 2017 core FFO of $1.16 per share more than covered our $1.08 per share dividend, gains represented approximately 25% of this figure as we sold and monetized various nonstrategic assets and businesses over the course of the year. This full year core FFO result was below expectations, primarily due to the following reasons. One, challenging market conditions in certain of the companies real estate verticals, including health care and hospitality; two, slower third-party capital raising than expected, particularly in the retail broker-dealer distribution business; three, underperformance and mark-to-market impairments to our merger purchase price allocation within our private equity fund secondaries and CDO securities portfolios; and four, accelerated asset sales versus expectations accompanied by [ slower redeployment of that ] repatriated capital.

On the positive side of the ledger for 2017, we accomplished a number of significant milestones that Richard highlighted, including asset sales, capital deployment, debt refinancing, G&A cost savings and laying the groundwork for the creation of CLNC and yesterday's $1.4 billion closing of the digital Colony partners fund.

Turning to each of our business segments. I'll provide a brief summary of the financial results for each of our 5 reportable segments, including a general 2018 outlook, starting with Healthcare Real Estate. We ended the quarter with 417 properties, and the company's ownership interest in this segment was approximately 71%, equal to prior quarter. Fourth quarter 2017 same-store consolidated NOI declined from the third quarter of 2017 by 1%, from $77.7 million to $76.9 million. All told, fourth quarter core FFO contribution from the health care segment was $17.5 million compared to $22.7 million in the prior quarter. The decrease was primarily driven by a $3 million tax expense in addition to the same-store NOI decrease. Looking forward to 2018, we expect industry conditions to remain challenging for Healthcare Real Estate, particularly in the skilled nursing facility sector, and we are forecasting same-store NOI to decrease a further 3% in 2018.

Moving on to the Industrial Real Estate segment. As of December 31, 2017, the industrial portfolio consisted of 369 properties, totaling approximately 43 million rentable square feet which was 95% leased. The company's ownership interest in the segment remained at approximately 41% during the quarter. The portfolio contracted marginally in size during the period due to 22 noncore buildings totaling 1.3 million square feet being sold which was partially offset by the acquisition of 3 buildings. This is consistent with our desire to continuously prune or sell inferior properties and upgrade the remaining overall portfolio. Acquisitions closed [ during ] the contract in the first quarter of 2018 will resume the growth trajectory for this business. Operationally, fourth quarter 2017 same-store consolidated NOI was $40.2 million, an increase of $1 million or 2.6% from the prior quarter. Core FFO contribution increased to $15.8 million compared to $13.4 million in the prior quarter due to improved same-store operations and the recognition of approximately $1.7 million of carried interest. Our 2018 outlook for industrial includes 3% plus same-store NOI growth relative to 2017.

Turning to our Hospitality Real Estate segment. As of year-end 2017, the hospitality portfolio consisted of 167 primarily select service and extended stay properties, and the company's ownership interest in the segment remained at 94%. As I've mentioned already, Q4 and Q1 are always seasonally weaker periods than Q2 and Q3 for our hospitality segment. But on a positive note, compared to fourth quarter 2016, fourth quarter 2017 same-store consolidated revenue was up 3.5%, and EBITDA increased approximately 4.1% from $57.6 million to $60 million, primarily due to having more rooms and service following renovations as well as hurricane and fire-related business. Our outlook for our hospitality segment is 1% RevPAR and EBITDA growth in 2018 compared to 2017, reflecting a conservative view on economic conditions for this year.

Our Other Equity and Debt, or OED, segment, includes our GP co-investments and opportunistic in noncore legacy investments, which totaled approximately $5.7 billion of undepreciated asset carrying value and approximately $4 billion of undepreciated equity carrying value as of December 31, 2017. Core FFO contribution from OED in the fourth quarter was $47.7 million compared to $133.5 million in the third quarter. The decrease is primarily driven by a $55 million gain in the third quarter from the sale of a Swiss net lease property and $29 million of lower income from our CDO securities portfolio and some seasonality and onetime expenses in our THL Hotel Portfolio in the fourth quarter.

The formation and listing of CLNC, the new commercial mortgage REIT, is the most significant news in the OED segment, which closed on January 31, 2018. This transaction involves CLNF contributing 29 investments and $1.1 billion of net book value in exchange for a 37% ownership interest in the company. This is both a simplifying transaction for Colony NorthStar's OED segment and creates a valuable new permanent capital investment management business for CLNS. Just this week, CLNC announced its inaugural monthly dividend and was trading close to an 8.3% dividend yield as of yesterday. In addition to receiving 37% of the earnings generated by CLNC, CLNS will now earn approximately $49 million in annual management fees based on CLNC's current capitalization.

I would also like to highlight the recent news regarding the pending merger between Albertsons and Rite Aid, which is expected to create an ultimate liquidity event for our ownership interest in Albertsons, another investment residing within the OED segment. The merger is expected to close early in the second half of 2018, subject to the approval of Rite Aid's shareholders, regulatory approvals and other customary closing conditions. CLNS maintains an approximate 2.2% ownership interest in the premerger Albertsons platform resulting from an initial investment of $50 million.

The outlook for the Other Equity and Debt segment is to continue harvesting investments in the nonstrategic component of the segment, which represents $2.4 billion of equity net book value or approximately 60% of the entire OED segment. The $1.6 billion equity net book value remaining balance includes strategic GP co-investment positions such as CLNC and NRE, where the company receives various investment management economics from the related third-party capital in such vehicles. We project the return of close to $1 billion in capital from nonstrategic OED investments over the course of the next 2 years and a 2018 run rate core FFO yield from the whole segment of approximately 8% based off net book values.

Lastly, our investment management business ended the quarter with $26.9 billion of third-party assets under management, down from $41.7 billion at the end of the third quarter. The decrease in AUM was primarily driven by the sale of our interest in the Townsend Group, which represented $14.8 billion of AUM. Fourth quarter core FFO contribution from the investment management segment was $69.6 million, up from $56.3 million in the prior quarter. The increase was primarily related to a onetime tax benefit offset slightly by lower acquisition and disposition fees from the managed non-traded REITs.

Some of the more important changes to the investment management business over the course of 2017 that will impact earnings performance in 2018 include: number one, the formation of CLNC, which was accretive to value but dilutive to run rate fee revenues by $0.03 per share; two, the management contract amendment for the health care non-traded REIT, which is also $0.03 per share dilutive; three, the sale of Townsend, which is $0.04 per share dilutive; and lastly, the merger of our broker-dealer with S2K, which is expected to be $0.02 per share accretive year-over-year.

I would also like to touch on the interest rate environment and its impact on our business outlook. The 2018 forward LIBOR curve is currently about 90 basis points higher than the average LIBOR rate over the course of 2017. This translates to approximately $0.07 per share more interest expense or dilution to core FFO based on our current capital structure, which includes $4.8 billion of floating rate debt, excluding the assets and liabilities contributed to CLNC. Said differently, for every 25 basis points increase in LIBOR, the company incurs approximately $12 million of incremental interest expense or $0.02 per share. This business and interest rate outlook and the resulting estimates of taxable income and distributable cash flow were key factors in our decision to lower the annualized dividend to $0.44 per share in order to save approximately $367 million in liquidity to use for selective investment management base growth opportunities, deleveraging and stock repurchases.

Turning to our liquidity position. We currently have approximately $1.2 billion of liquidity between availability under our corporate credit facility and cash on hand. And as mentioned earlier, we are going to continue to focus on harvesting nonstrategic investments in our Other Equity and Debt segment, which is expected to return in excess of $1 billion of capital over the next 2 years. From a business strategy standpoint, we continue to focus on growing and emphasizing certain areas of the business, including industrial, multifamily, Europe and credit, while also growing balance sheet light, total return, investment management businesses like digital real estate infrastructure and European hotels. We will continue to deemphasize and derisk other segments of the business, including health care, hospitality and nonstrategic Other Equity and Debt. Capital will be allocated to opportunities providing the highest total return on investment, including the repurchase of our securities, but while always remaining vigilant about leverage and liquidity.

Unquestionably, the earnings performance resulting from the NorthStar merger has been disappointing. But it's important that we level set with the market and confidently establish a new baseline of operating performance for 2018 from which we can grow. The decision to reduce our dividend will enable us to continue to strengthen our balance sheet and finance future growth without the need for external capital raising. We believe this is consistent with our guiding principles of fiscal responsibility and strength.

Colony has been in the real estate and investment management business for 27 years and we remain committed to our culture. This culture includes being transparent and direct and relentlessly results driven. On the latter point, we have not produced results to our satisfaction, but we are confident that 2018 represents a bottom, an inflection point and our performance will improve from here. Richard addressed that we have made select structural and personnel changes within parts of the organization that we inherited through the NorthStar merger, and which have underperformed, and we are confident that we now have the right teams in place to deliver the desired results. Being an outsourced passive owner of real estate is not a solution nor is it our long-term plan. We will take control positions and apply an investment management model to all of our balance sheet heavy real estate businesses and our balance sheet light total return strategies to accelerate our growth and improve our financial performance. Concurrently, we are redoubling our efforts to simplify our balance sheet and business, streamline our organization and accelerate opportunities to maximize shareholder value.

So with that, let me turn the call back over to the operator to begin Q&A. Operator?

[Operator]

[Operator Instructions] Our first question is coming from the line of Jade Rahmani with KBW.

[Jade Rahmani, analyst]

I think at the outset of the Colony NorthStar merger, you set forth a strategy in which there would be key property verticals and you would raise third-party capital around those and supplement those with opportunistic balance sheet light strategies. And so I have 2 questions. One is, is that strategy even appealing to LP investors who would be your partners in those investments, considering you've made somewhat cautious comments on some of these verticals such as health care and hospitality? But secondly, considering the magnitude of share price decline, is it time to rethink this strategy and in fact pivot, focus on investment management as the heart of the company and pursue and reaccelerate aggressive asset dispositions of all noncore assets across the entire company, not just in other debt and equity, and take that excess liquidity and revamp investment management through the hiring of new personnel from some of your competitors?

[Richard Saltzman, executive]

Jade, it's Richard, and that's an excellent question. Thank you. Look, we still believe in what we set forth a year ago. However, I think the points that you're making resonate, and certainly, we would like to expedite the sale or the

[Audio Gap]

of everything that's noncore, not just what's in other debt and equity. Albeit, we just have to be cautious around that just given the current market environment, some of the headwinds that we referenced we are experiencing in some of these spaces. So it's not necessarily easily done in an instantaneous fashion. But certainly, focusing on investment management, I mean, that's basically our core DNA and our core competency. And we agree with your comments that, that's the heart of what our business model should be, albeit surrounded on a selected basis by smart, balance sheet heavy investments in those areas that we think have the most legs, that can produce the most total return in a market environment which is good from the standpoint of the robust economic growth that seems to be out there from a macro standpoint. But on the other hand, in the real estate space, just given the run up in terms of the low interest rate environment that we were in and pockets of excess supply, you just have to be really careful in terms of your space selection. So I think your comments are -- really resonate in terms of our company and our senior management team and we're focused on that.

[Operator]

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

[Mitch Germain, analyst]

So Darren, you referenced a wholesale number of changes to kind of the way that we should be thinking about the outlook. And I'm trying to understand, how should we view like a kind of run rate from this point? Yes, this quarter had some seasonality and some kind of onetimers. I'm just trying to quantify what's the baseline here in terms of how to move forward?

[Darren Tangen, executive]

Sure, Mitch. Okay. Well, I think, look, I think the biggest -- there's a couple significant changes year-over-year to think about. I mean, I gave a little bit of guidance regarding the business segments, the real estate verticals, hospitality, health care, industrial and sort of the outlook year-over-year for those. We've obviously had some pretty meaningful changes in the investment management business, particularly around the retail investment management businesses, which is why I sort of walked through the changes there, which is CLNC, the management agreement change at NHI and certainly, the sale of Townsend will also be impactful. And then I think the next big thing is just the fact that we're expecting considerably less gains in 2018 versus 2017, right. So if 25% of our gains -- sorry, 25% of our income, our core FFO in 2017 came from gains, we're not expecting that type of gain contribution going into 2018. So given that fourth quarter was really a quarter for the first time that we didn't have meaningful gain contributions as we highlighted, that's probably a better proxy for kind of what the run rate is going forward.

[Mitch Germain, analyst]

And when you gave those changes of interest rate NHI and all those wholesale differences that was based on the full year 2017 result as to how to think about what that impact would be on the full year 2018?

[Darren Tangen, executive]

Correct.

[Mitch Germain, analyst]

Okay. Richard, you said something interesting to me, which was, obviously, synergy is higher, but integration taking longer. And you also referenced, call it $5 billion or so of monetizations and significant progress in that front. So help me reconcile what's been done and what's taking longer in your view?

[Richard Saltzman, executive]

Well, I mean, I think what's taking longer because that's where the emphasis of your question should be, right, we've listed what's been done, is accelerating to the extent that we can, exiting noncore and redeploying that capital either in the strategic areas that we want to grow, and perhaps a new 1 or 2 that again can generate the best risk-adjusted total returns and also have adjacency in terms of our being able to raise a lot of outside third-party capital besides our own combined with further deleveraging. Perhaps, just given where the shares are trading now, maybe opportunistically purchasing shares, pursuant to the new stock buyback program that we just announced this morning. But that shift, right, which we were hoping was only going to take us a year or 18 months at most clearly is taking a lot longer. So to some degree, while our thesis remains in place, clearly, the execution on that thesis is getting pushed out as a function of these headwinds and delays just in terms of being able to execute our business plan.

[Darren Tangen, executive]

And Mitch, it's Darren. The only other thing I would add to that is that the internalization of some of the prior outsourced business model that NorthStar employed for some of their businesses is also something that we're still in the process of working through. So I think we also think about that as part of the overall merger integration as well.

[Mitch Germain, analyst]

Got you. Okay. And then, I guess, maybe which kind of is probably -- extends the kind of my question before, which is how do you foresee Morgan Stanley's role going forward? Are they really set out to try to identify those parts of your business that need to potentially be sold or work with you to maybe take away some of that effort and burden so you cannot be completely centered on one and kind of look at the whole business as a totality going forward?

[Richard Saltzman, executive]

Well, look, I think it's going to be an iterative process with them. So I think it starts with our plan and analyzing kind of the strengths and the weaknesses around our ability to get to the finish line as expeditiously as we would like to. And then to the extent that there are weak links in that plan, perhaps some input as to how we adjust, how we may think about other options. But in general, this is a financial exercise designed to help us expedite what we otherwise want to execute. That's what we're hoping to obtain from Morgan Stanley. But it's going to be an iterative process over the next couple of months.

[Mitch Germain, analyst]

Got you. And I think about a year ago, I would have said I'm not really sure what that finish line looks like. And here we are a year forward and I think we're still trying to figure out what that finish line looks like. I mean, is there a kind of -- do you have what you view as what you -- where you want Colony to be versus where you are today? Or is that strategy still evolving?

[Richard Saltzman, executive]

No, I think we do. We know exactly where we want to be. What's frustrating is our ability to get there as quickly as we would like. So all these moving pieces, being able to deploy capital in the strategic areas that we want to emphasize and that we think make sense today, that takes some time in this kind of environment because you do need to be careful. And at the same time, exiting areas that -- [ and odd ] kind of collections of assets that we want to deemphasize where maybe there are headwinds, and therefore, it's not so simple to just exit instantaneously, that's the challenge that we've been encountering. And that we anticipate is still going to be a challenge in this year. Albeit we did make a lot of progress on many of the pieces, and we hope and expect to make a lot more progress on many of the other pieces this year. We will be a net seller, as I stated in my remarks.

[Mitch Germain, analyst]

Great. I think it would be helpful, at least for myself and I'm sure for others, to kind of know what that finish line looks like or kind of what that strategy will be to get there because I think there's still a lot of uncertainty as to what you will be and how you will evolve over the course of the next 12 to 24 months.

[Operator]

Our next question is from the line of Jason Arnold with RBC Capital Markets.

[Jason Arnold, analyst]

I was just curious if you can comment on how we should kind of think about the asset management opportunity and outlook here for going forward in light of the retail broker-dealer kind of asset opportunity seeming to be a little bit sidetracked, maybe just kind of talk about retail in general as an opportunity set and then also kind of institutional.

[Richard Saltzman, executive]

Sure. Look, I think clearly markets are still quite liquid. There's a lot of capital sitting on the sidelines. And I think that capital, despite the liquidity, is quite judicious and discriminating about where it wants to be and who it wants to be with. So right now, our model for 2018 is pretty much 100% focused on the institutional side, okay. We think given what's happened in the retail capital raising environment, that hopefully there's a strong future there over the course of that whole space transitioning to a new model and a new approach. But at least for the time being, we're just discounting it completely in terms of thinking that it's really going to benefit us. So we have a lot of confidence in our new partner. We haven't yet closed, but S2K, that if there's a group that's going to be able to figure it out, they're at the front of the class. But really, the focus is completely on the institutional side of the business. And again, there's plenty institutional capital sitting on the sidelines, evidenced by this first closing that we just announced this morning in terms of the $1.4 billion that we raised. But again, it's got to be in those spaces which the market thinks are smart and where there's the best risk-adjusted opportunities, which is not the majority of the spaces out there, okay? It's clearly the minority of the spaces. So that's our plan.

[Jason Arnold, analyst]

Okay. And then I guess the other one I wanted to ask on was the outlook on gains being obviously less than before. Is that a product of just kind of what you expect to see from an asset disposition standpoint, being maybe more the stuff that you thought you might retain in hospitality and health care, but that maybe now doesn't look quite as attractive? Or maybe you can talk a little bit further on kind of the gain -- lower gain outlook?

[Darren Tangen, executive]

Sure, Jason. It's Darren. It really is more a function of the fact that the gains have been produced predominantly from legacy Colony investments and that partly to do with how the merger accounting work because it was -- Colony was the accounting acquirer and the Colony asset came over at historic cost basis. So as we've been working our way through the Other Equity and Debt segment and selling some of those nonstrategic, noncore assets, that's what was triggering a lot of the gains last year. For instance, the sale of our position in SFR, which was the single family home for rent company, that produced a lot of gains for us last year. But as we're selling out of those nonstrategic positions, which we've made a lot of progress on, we're just getting down closer to the end where there's just not as many of these nonstrategic, noncore assets remaining to be sold that would be candidates for producing gains. But there's still -- there are still a few. I highlighted one example today in terms of our position in the Albertsons company, which has just announced its merger with Rite Aid. I mean, that's an example of an existing noncore asset that could produce gains in the future.

[Jason Arnold, analyst]

Okay. Do you give any pro forma view on the gain on that one, in particular? Or is it maybe a little too early to talk about?

[Darren Tangen, executive]

Well, I think you can work through some of the publicly disclosed information about that merger. I think the Albertsons company is going to end up owning about 70% of the company and the existing Rite Aid company will be about 30%. And so you can actually -- and we own today -- our investment in the premerger Albertsons is about a 2.2% ownership interest. So I think you can look through where Rite Aid is trading today at around -- or at least as of yesterday, was about $2 a share. I think the deal was struck when they used -- they pegged the share price at a $2.35 price. But you can run through the math to sort of see what that 2.2% ownership interest that we hold in Albertsons would equate to. And it could end up being over a 2x kind of multiple.

[Operator]

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

[Jade Rahmani, analyst]

On the health care side, is there any plan to merge the CLNS portfolio with the non-traded REIT?

[Richard Saltzman, executive]

Nothing that's being contemplated at the moment.

[Jade Rahmani, analyst]

Okay. In terms of the fair value of the Other Debt and Equity (sic) [ Other Equity and Debt ] segment, is your view that it's in line with the current carrying value? Or should we anticipate future impairments? You mentioned that there were write-downs in the NorthStar CDOs and the secondary PE investment. So assuming those are the main sources of volatility, perhaps carrying value is a fair assumption. But many people look at CLNS and have an NAV estimate and one of the key assumptions is the valuation of this other debt and equity portfolio.

[Darren Tangen, executive]

Sure. And so Jade, yes, I think it's a fair comment to say that the 2 subcomponents of Other Equity and Debt that have the most valuation volatility over the course of the last year has been the CDO securities and private equity fund secondary interest that we inherited from NorthStar. We took a number -- and a little bit of this just had to do with how the merger accounting worked and how purchase price was allocated at the closing of the merger. I mean, looking back, there was too much value attributed to those 2 components and that's one of the reasons why we had to take impairments over the course of last year. We think we've now got them fairly marked. And I would say for the balance of the Other Equity and Debt segment, we feel comfortable with the values, certainly the net book value that you're seeing there. And I was highlighting a little bit earlier the safe -- the Albertsons example, I mean, that's an investment that sits at cost in our Other Equity and Debt segment right now and has the potential for upside. So -- but there are still some investments in that segment that have some upside valuation potential. But I think in terms of the net book value that you see disclosed in our materials, that we feel good about it.

[Jade Rahmani, analyst]

And the way the accounting works for CLNC and NRE, your equity in those entities, is that going to be marked each quarter based on where those stocks are trading? Or is that at historical cost?

[Richard Saltzman, executive]

No. So historical cost and we'll just pick up our pro rata share of earnings from those 2 companies based off of our 37% ownership interest in the case of CLNC and 10% ownership interest in the case of NRE.

[Jade Rahmani, analyst]

In terms of this quarter's core FFO of $0.16, you mentioned it included a $0.01 net gain. Did it include the tax benefit that you got in the quarter, received in the quarter in investment management?

[Richard Saltzman, executive]

It did.

[Jade Rahmani, analyst]

And what was that again, on a per share basis?

[Richard Saltzman, executive]

About $0.03.

[Jade Rahmani, analyst]

So ex-gains, it would be something like $0.12, then we should adjust for $0.05 of negative seasonality on hospitality and then we should annualize that and take into account those other items you mentioned with respect to reduction of fees, Townsend sale, et cetera?

[Darren Tangen, executive]

Yes, although there were some other impairments too in the fourth quarter that -- in the CDO securities portfolio that you should probably assume are not going to continue and that was $0.02 as well. So that would be sort of a positive adjustment that you would make to get back to a better run rate number.

[Jade Rahmani, analyst]

Okay, that makes sense. What's the environment like currently for fundraising? I mean, on the institutional side? We've seen Blackstone, Starwood, Brookfield raise enormous real estate funds. So there seems to be a lot of demand, and yet I think the Colony fundraising has been somewhat modest. What would you say is the current environment?

[Richard Saltzman, executive]

I think lots of liquidity, Jade, albeit very discriminating. And we did raise $2 billion of capital last year. We just had a first closing of $1.4 billion in this new initiative that we talked about this morning. So we are raising meaningful amounts of capital. But not as much as we need to relative to the burn off that we had last year and legacy funds that we manage combined with the lack of contribution from retail. So we need to get into a higher gear that we're completely focused on, and that's how we're going to make up this gap.

[Jade Rahmani, analyst]

I've gotten some questions about the company's liquidity profile and whether there's any existential risk to the entity. We've seen the preferreds, for example, trade off. So just looking at the capitalization, nearly all of the debt is secured. But there is about $1 billion of unsecured debt, including the TruPS and there's about $1.6 billion of preferreds. So what could you say about company's liquidity profile and sort of any existential risk you would think exists?

[Darren Tangen, executive]

So Jade, I mean, I think we feel very good about our liquidity position. I mean, as you know, the $1.6 billion of preferreds that we have outstanding are perpetual preferreds. We do -- and the same thing with the TruPS, there's $280 million of TruPS, which are technically unsecured notes, but those have very long dated maturities that are sort of 15-plus years out in the future. And then we've got $600 million of converts, convertible debt that's outstanding that again, we feel -- which have medium dated duration associated with them. So we feel very good. That, in combination with the fact that we're going to have as much capital being repatriated to the balance sheet over the next couple of years as we exit some of these noncore assets and businesses sets us up to be in a place where we're going to have ample liquidity. But of course, the other decision that has just been made in terms of reducing the dividend, that too will enable us to fortify the balance sheet and have more liquidity available for deleveraging or buying back securities or, of course, most importantly, for deploying into value-enhancing strategies.

[Operator]

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

[Mitch Germain, analyst]

Just a quick one for me. In terms of the non-traded business, I know you guys have talked about it a bunch, and clearly it seems like you're trying to get that thing back up and running. But when you guys acquired NSAM and NorthStar, many of the regulations and many of the headwinds in the industry were somewhat already known. So I'm just curious, it seems like there had to be something else. Was it just mismanagement? Was it a lack of available product? Was it the distribution capabilities? What do you really truly think was the biggest headwind on the business?

[Richard Saltzman, executive]

Well, look, I think it's a fair comment, Mitch, for you to say those headwinds were already on the horizon. However, the fiduciary rule hadn't been implemented, that didn't take place until the middle of last year. And just exactly how it was going to play out was somewhat unclear. It's clearly gotten a lot worse. Before, you could argue that there's been a trough and it's starting to improve and people have really figured out what the new model is going forward. And this is not idiosyncratic to us. This is an industry-wide phenomenon. So you've seen certain groups get out of the business completely. You've seen other groups decide [ opportunistically to try ] to get into the business this past year, albeit at a much cheaper entry. So it's just -- it's totally in flux is what I would tell you. I mean, the capital raising in aggregate is off in excess of 80% from what it was during the peak times. And it absolutely got worse than what it was when we were underwriting the merger initiative.

[Mitch Germain, analyst]

So Blackstone's had some success and I know we have Starwood and other well-regarded investors that are entering the fray. What are they doing right? And how would you replicate that model?

[Richard Saltzman, executive]

So look, I think Blackstone's focus is currently in the wirehouses, okay, which was a channel that historically didn't really participate in this retail distribution non-traded space. So the traditional channel was the independent broker-dealers, also people are trying to access the RIA community. But Blackstone, given their reputational capital and relationships with the wirehouses, has gotten access to those distribution systems and that's clearly served them well. I think others who can also access that distribution system will also have success. But I think the traditional channels remain challenged. And people are still trying to figure out how do you modify the products and the offerings to be attractive to those traditional channels and hopefully other channels. And historically, the wirehouses have not wanted to open up their distribution systems to these types of products. Blackstone currently is an exception to that.

[Operator]

At this time, I will turn the floor back to management for closing remarks.

[Richard Saltzman, executive]

Okay. In summary, as we stated, 2017 was a very challenging year for us. But we've now level set, have a new baseline that we're highly confident that we can grow from. Albeit the execution on the NorthStar merger is pushed out for at least a year or 2, as I stated on the call. But I want to thank everyone for joining us this morning. Your support is very important and critical to us and we appreciate it. We look forward to further conversation and hopefully reporting much better news. Thank you.

[Operator]

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