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Edited Transcript of CLNC.N earnings conference call or presentation 9-May-18 2:00pm GMT

Q1 2018 Colony Northstar Credit Real Estate Inc Earnings Call

May 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Colony Northstar Credit Real Estate Inc earnings conference call or presentation Wednesday, May 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin P. Traenkle

Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director

* Lasse Glassen

ADDO Investor Relations - MD

* Neale W. Redington

Colony NorthStar Credit Real Estate, Inc. - CAO

* Sujan S. Patel

Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer

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Conference Call Participants

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* Benjamin Zucker

* Douglas Michael Harter

Crédit Suisse AG, Research Division - Director

* Jade Joseph Rahmani

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Julian Broche

RBC Capital Markets, LLC, Research Division - Associate

* Randolph Binner

B. Riley FBR, Inc., Research Division - Analyst

* Stephen Albert Laws

Raymond James & Associates, Inc., Research Division - Research Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the Colony NorthStar Credit Real Estate, Inc. First Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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Lasse Glassen, ADDO Investor Relations - MD [2]

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Good morning, everyone, and welcome to Colony NorthStar Credit Real Estate, Inc.'s First Quarter 2018 Earnings Conference Call. We will refer to Colony NorthStar Credit Real Estate, Inc. as CLNC, Colony NorthStar Credit or the company throughout this call. With us today are the company's President and Chief Executive Officer, Kevin Traenkle; and Chief Financial Officer, Sujan Patel. Neale Redington, the company's Chief Accounting Officer, is also online to answer questions.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, May 9, 2018, and Colony NorthStar Credit does not intend and undertakes no duty to update for future events or circumstances.

In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released yesterday evening as available on the company's website presents reconciliation to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

And now I'd like to turn the call over to Kevin Traenkle, President and Chief Executive officer of Colony NorthStar Credit. Kevin?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [3]

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Well, thank you, Lasse. It is with great enthusiasm that I welcome everyone to our inaugural earnings call for Colony NorthStar Credit. I will begin today's call with an overview of our recent financial and operational highlights, along with a discussion of the significant accomplishments we made during the quarter. I will conclude my remarks with our key management priorities as we look ahead to the remainder of 2018 and beyond.

Sujan Patel, our CFO, will then discuss the details of our first quarter financial performance, including an update on our deployment activity, investment portfolio, balance sheet and liquidity position. A question-and-answer session will follow our prepared remarks.

On January 31, 2018, Colony NorthStar Credit was formed through the combination of 2 credit-oriented nontraded REITs, NorthStar Real Estate Income Trust and NorthStar Real Estate Income II and a high-quality portfolio of credit assets contributed by our sponsor, Colony NorthStar. Following the merger of these 3 portfolios, we completed a successful listing on the New York Stock Exchange under the ticker symbol CLNC on February 1, 2018.

With the closing of the merger one month into the year, the results we present for the first quarter of 2018 only represents the premerger results of Colony NorthStar contributed assets, which was the accounting acquirer, for the month of January and the results of all 3 entities, which comprise now Colony NorthStar Credit for the month of February and March. Therefore, these results represent only a partial quarter for Colony NorthStar Credit as a whole and are not necessarily indicative of our combined financial performance in future quarters.

It has been very busy and productive few months for Colony NorthStar Credit, and we could not be more excited about our future. Starting with our financial highlights, we reported first quarter core earnings of $44.4 million or $0.44 per share. This early result reflects the strong operating performance of our large, diversified and seasoned portfolio, yet still does not reflect the company's true potential. Our balance sheet possesses considerable liquidity, which can be invested accretively to grow company earnings.

At quarter end, our investment portfolio stood at approximately $5 billion in total assets at-share, including a diversified mix of floating rate senior loans, mezzanine loans, preferred equity, CMBS, net lease real estate and other non-core assets.

During the quarter, we declared and paid a monthly cash dividend of $0.145 per common share for the month of February and March. Subsequent to quarter end, we also declared a $0.145 per share dividend for the months of April and May. This represents an annualized dividend of $1.74 per share which, based on yesterday's closing stock price, reflects a very attractive current annualized yield of over 9%.

In terms of new investments, we have been extremely busy in 2018 evaluating opportunities to deploy our over $600 million of corporate liquidity. Capital deployed this past quarter totaled approximately $228 million. And year-to-date, we have now invested or have allocated to invest over $525 million of capital for investments that have either closed or in advanced stages of execution.

Overall, the investment landscape of Colony NorthStar Credit remains favorable and plays to the competitive advantages of our diversified and flexible real estate credit investment mandate. Macroeconomic conditions are healthy with regard to demand for real estate, steady job growth, strong corporate profits and solid transaction volume. The lending environment is competitive, and there's significant capital chasing loan origination opportunities. We have seen financing spreads compress, particularly in the senior parts of the capital structure. However, our borrowing costs have also improved, thereby offsetting much of this pressure and allowing us to maintain our targeted net yield profile.

Pricing has remained more favorable with less spread compression for opportunities in the middle of the capital stack. As a result, our ability to participate in mezzanine loans, preferred equity, noninvestment grade CMBS and other structured credit opportunities provide the optionality to not chase low yields in the senior loan market and achieve our targeted return.

Ultimately, we believe that our differentiated strategy provides flexibility to achieve attractive risk-adjusted returns through various points of the economic and real estate cycle.

From a thematic standpoint, our conviction is biased toward select markets and submarkets with strong growth prospects, favorable supply-demand fundamentals and higher barriers to entry. As we evaluate new transactions, we look for strong sponsorship and executable business plan and a low CLNC last-dollar basis, providing a meaningful equity cushion. We continue to believe strongly in for-rent housing, office, industrial and hospitality, where we had field sourcing advantages and broad credit underwriting expertise. Aside from these, we also see attractive opportunities in construction financing, where increased scrutiny and regulatory pressures on banks have created a unique opportunity for nonregulated financiers like Colony NorthStar Credit to generate outsize returns.

Overall, our pipeline remains very robust and includes approximately $1.4 billion of transactions in the term sheet base, in addition to the $525 million of capital allocated to investments year-to-date, and that's coupled with $9 billion of investments under review. Our investment appetite and process is very discerning. We have plenty of desirable investment opportunities, and we expect to prudently invest our liquidity in accretive transactions. With these macro conditions as a backdrop, the numerous competitive strengths we bring to bear provide a strong foundation to drive long-term growth and maximize value for our shareholders. Let me take a moment to highlight some of these.

First, with approximately $5 billion in total at-share assets and over $3 billion in book equity value, Colony NorthStar Credit is one of the largest credit REITs in the market by book equity value. Our scale brings competitive advantages by allowing us to pursue larger investments where less competitive pressure exists. Our scale also allows us to pursue a broad range of investments that further enhance portfolio diversification and provides us with access to very efficient capital sources. A good example of this is the $400 million corporate revolving credit facility that we secured during the first quarter in addition to another $1.7 billion of master repurchase facility, both of which are at very attractive pricing.

Second, we have a flexible investment mandate across the capital stack. As I alluded to earlier, we are not boxed into a single strategy and have the ability to move with the market up and down the capital stack from senior loans to mezzanine loans and CMBS as well as preferred equity and triple-net owned real estate. This gives us the unique ability to seek the best risk-adjusted returns in the marketplace, providing one-stop shop and/or other fulsome financing solutions at any given point in the economic cycle.

Third, Colony NorthStar Credit has an attractive, seasoned and well-diversified income-oriented portfolio. Our portfolio is comprised of stabilized assets originated over the past 5 years with attractive in-place yields as well as potential for capital appreciation and net asset value growth through our owned real estate and equity participation. Importantly, the portfolio is well diversified across asset class, investment type and geography, which we intend to maintain.

Fourth, with an approximate 37% or $1 billion plus equity position in CLNC, the interests of our sponsor, Colony NorthStar, are highly aligned with other CLNC shareholders. Importantly, we expect to derive significant benefit from Colony NorthStar, who brings a global brand with a deep bench, providing extensive loan origination, asset acquisition, loan servicing, asset management and capital market execution capabilities.

And finally, we're in a strong position to significantly and organically grow our business. With $620 million in available liquidity and a conservative under-levered balance sheet at only 33% debt-to-asset, we have the ability to continue to deploy capital on our targeted asset classes with the financial resources already on hand. And although we may do so opportunistically, we do not need to access the equity capital markets in order to fund our near-term pipeline of opportunities.

Before turning the call over to Sujan, I'd like to provide an overview of our top management priorities as we look ahead to the remainder of 2018 and beyond. In the near term, we are highly focused on the deployment of our liquidity into targeted asset classes to grow our investment portfolio. We also see significant opportunities to immediately increase our return on equity through moderately increasing leverage. We also remain flexible and creative as we make new investments in order to provide accretive and attractive risk-adjusted rates of return. Additionally, we are very focused on the asset management of our portfolio. We have our own in-house team that employs a robust risk-ranking system, which is constantly looking over and reevaluating the portfolio. This enables our team to immediately get more involved with transactions as soon as further attention is warranted. Considering the size and number of assets in our portfolio, we have relatively few focus assets that have high priority rankings at this time.

Over the longer term, we'll focus efforts on rotating out of our non-core assets, including the natural runoff of our real estate private equity interest and opportunistic asset sales of our non-core owned real estate. As we successfully execute these priorities, we're confident in our ability to raise the dividend, narrow the trading discount to current book value and accretively grow the company. Although we have just started our journey, I'm convinced, now more than ever, of the tremendous potential within Colony NorthStar Credit and the opportunity to unlock significant value for our shareholders.

And now, I'll turn the call over to Sujan Patel for more detailed explanation of our first quarter operational and financial results.

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [4]

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Thank you, Kevin. I'm happy to speak with you all today on Colony NorthStar Credit's inaugural earnings call. I'd like to start by mentioning a few housekeeping matters prior to the discussion of our results. As Kevin noted, because the formation transaction closed on January 31, our first quarter results reflect only the premerger stand-alone earnings of the accounting acquirer, which were the assets contributed by Colony NorthStar for January, and the combined earnings of Colony NorthStar Credit for February and March.

As a result, you will notice that our core earnings per share results take into account a weighted average share calculating using common stock and OP units owned by Colony NorthStar for the first 31 days of the quarter and then the fully diluted total class A and class B-3 common stock and OP units outstanding for the combined company for the remaining quarter.

I also want to draw your attention to our first supplemental financial report, which is available on our website. We believe this supplement will help investors and research analysts understand our company better, given the granular data it provides on each of our segments, and we expect to enhance this disclosure in future periods.

Now let's begin with a summary of our financial results for our first quarter. The company reported GAAP net loss of $4.7 million or $0.05 per share and core earnings of $44.4 million or $0.44 per share. As Kevin noted, we have had an active period of capital deployment. So let me provide some details on some of our investment activity year-to-date.

So far in 2018, we have allocated over $525 million of capital through closed deals or deals in advanced stages of execution. This includes, among others, an approximately $170 million first mortgage loan on a high-end hotel in a prime location in Northern California, a $90 million preferred equity investment in a portfolio of Class A office properties in the New York Metro area, a $40 million upsize in an aggregate $100 million junior financing for an iconic mixed-use development project in Los Angeles and an $80 million acquisition of a net lease office property in an attractive market in Northern California.

Turning to our in-place portfolio. Our loan book at quarter end stood at $2.3 billion and included a total of 83 investments with an average loan size of $28 million and a weighted average remaining extended term of 3.3 years. The weighted average unlevered yield on the loan portfolio is an attractive 8.2%. In terms of composition, senior loans, mezzanine and preferred equity position comprise 69%, 23% and 8% of the portfolio, respectively, at quarter end. Over 95% of our senior loan portfolio and approximately 77% of our total loan portfolio is floating rate, and thus positively exposed to increases in LIBOR. All else equal, a 1% increase in LIBOR would increase our net interest income on our loan book by approximately $10 million or approximately $0.08 of additional core earnings per share.

Moving to CRE debt securities. Our portfolio had a $318 million carrying value at quarter end and was comprised of 55% investment-grade investments and 27% non-investment-grade investments, with the remainder non-rated. When we look at the credit metrics on CMBS today, we continue to see value in this space. With our own CMBS portfolio having weighted average LTVs sub-60% and DSCRs over 2x, we have been selectively adding to our holdings. Our portfolio is predominantly investment grade, and we are looking to selectively source BBB and non-investment grade CMBS bonds that meet our underwriting criteria along with continuing to look at attractive VPs opportunities.

During the quarter, we purchased approximately $15 million face value of securities and post quarter and added an additional $18 million of face value. Our triple-net lease portfolio had a carrying value of $678 million as of March 31. The 59-property portfolio consists primarily of industrial and office properties totaling 10 million square feet, of which 96% was leased. The weighted average remaining lease term as of quarter end was approximately 4 years, and the portfolio is geographically well diversified.

Moving to our non-core assets. The other real estate equity book finished the quarter with a carrying value of $760 million. The portfolio consists of predominantly office and multifamily and student housing properties with 2.6 million total square feet of which 90% was leased. The weighted average remaining lease term of the commercial properties as of quarter end was 4.6 years.

As a reminder, these assets were contributed as part of the merger with 2 legacy nontraded REITs and are not part of our long-term targeted asset classes. That said, these assets are performing with stable cash flow, and we will look to opportunistically exit these investments while maximizing value.

Finally, the total carrying value of our non-core interest in real estate private equity funds was $257 million at quarter end. The weighted average life of this portfolio is approximately 1.3 years, and as Kevin discussed, we expect these positions to liquidate in the near term. This will provide an additional source of liquidity to deploy into our higher-yielding targeted asset classes, senior mezzanine loans, preferred equity, CRE debt securities and net lease real estate.

Turning now to our balance sheet and our capital structure. We have had a very active start to 2018. During the first quarter, we secured a $400 million corporate revolving credit facility from 5 relationship banks. This facility is currently undrawn and provides a great liquidity source to fund future investments. Subsequent to quarter end, we increased our existing master repurchase facility capacity by $500 million from $1.2 billion to $1.7 billion. Current excess borrowing capacity under our master repurchase facilities now stands at $1.2 billion and provides ample liquidity to fund our originations pipeline.

In terms of our capital structure, as of March 31, our total at-share capitalization was $4.7 billion, excluding cash, with a total debt balance of $1.6 billion. Our net debt-to-equity ratio was 0.4x at the end of the quarter, which is significantly lower than our peer group and our expected long-term target. Given our current underleveraged capital structure, we believe there are significant embedded growth opportunities as we move forward.

Our current liquidity stands at approximately $620 million. This consists of $220 million of cash on hand and $400 million of undrawn capacity on our corporate revolving credit facility. As Kevin mentioned, we have a very strong liquidity position to execute on our business plan and do not see an immediate need to raise capital in the near term.

After the successful merger that created Colony NorthStar Credit Real Estate, we are pleased by the results from the shortened quarter and look forward to presenting a full quarter results to you later this summer.

Now I'd like to turn it back to the operator for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Stephen Laws with Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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I guess, Kevin and Sujan, first of all, congratulations on your first quarter as a public company. I know that's exciting to report these results.

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [3]

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Thanks, Stephen.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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I guess, you touched on this and really thinking about a broader question, levering up the portfolio, deploying capital, pipeline. I know, Kevin, in your prepared remarks, you talked about the ability to move up and down the investment stack. So can you maybe spend a little bit more time talking about how -- which buckets of the portfolio you expect to grow this year? Or maybe any type of target mix of say senior loans versus mezz, versus new real estate investments, that you kind of see in your current pipeline or that you expect to see the portfolio develop this year?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [5]

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Yes. Sure. So I guess, first of all, we have no hard and fast or dedicated allocation percentages that we're shooting for. Rather, we're kind of taking in all transactions as they come, and we're just looking for the best risk-adjusted returns that we can find. But that said, based upon what we're seeing in the marketplace today, the senior loans do seem to be getting a little bit more competitive. It seems like maybe some stuff higher up in the capital stack are maybe moving towards maybe the middle of the capital stack. The mezzanine positions, even preferred equity, those yields haven't moved as much. So I think just by the way of definition, we're probably moving a little bit more towards doing some mezzanine, some preferred equity. Even triple net lease is becoming pretty interesting to us as well. So we're kind of still looking at everything, and this changes from month to month depending on what transactions are out in the marketplace and who is getting aggressive on which deals. But right now, I think that's the direction that we're -- we think we're going to go for at least the next few months.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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Great. And to the loan portfolio, appetite for floating versus fixed, is there an increased focused on floating rate loans given where we are in the interest rate cycle? Or are you seeing opportunities on the fixed rate side as well?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [7]

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Stephen, it's Sujan. Good question. On the senior loan side, we've always been predominantly floating rate, and we continue to originate floating rate senior loans, and we'll see the benefits of rising LIBOR through the portfolio. And if you pull out the mezz and preferred equity components from our loan book, you'll see us over 95% floating rate. In the middle of the stack, you tend to see those investments structured often times on a fixed rate basis, typically at borrower's request given where they're priced in the double digits. And so there I'd state the balance, we're exploring some opportunities where we are pricing mezz and perhaps on a floating rate basis, but some of that will be fixed rate as well.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [8]

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Great, Sujan. I did see that color on Page 8 of the deck, so I appreciate the disclosure you guys provided. On a bigger picture, given where the stock is trading, I know there's limited track record, but with the stock at a roughly 20% discount to book, Kevin, how do you -- and obviously a significant amount of liquidity and an under-levered balance sheet. How do you think about opportunities to repurchase stock versus returns available on new investments and growing the portfolio? Can you do both? Is there one you prefer over the other? So will you guys consider repurchasing stock here given where the shares trade relative to book?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [9]

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Yes. Absolutely. I mean, it's something that's on the table. We do have a $300 million bucket of capital available to us to repurchase stock. It's something that we're looking at constantly. We're looking at how the trading of the stock is going, looking at all of our alternatives. But right now, I mean, we're seeing a lot of good opportunities to put the capital to work at decent yields. So unless something happens drastically differently on either the investment side where we're not seeing good investment opportunities or if the stock price moves in a direction that's just too wide of where it ought to be, it's something that we can consider going forward.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [10]

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Great. I appreciate the comments there. And to touch on the non-core assets. I know you mentioned the private equity, you expect to liquidate soon. I think the average life is a little over a year. Are there any tails in there? Like, are there any that you worry may stick around for a while? Or how do you view the, I guess, the bell-shaped curve around the average remaining life of the private equity interests?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [11]

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The majority of that is inside of 12 months. And there is -- and so I'd say the bulk of it is in the next 12 months. There are some components that have a little bit longer tail, but all of it we anticipate within 18 months.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division - Research Analyst [12]

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Great. And then any color around the timing or opportunities you've seen to liquidate or sell the non-core real estate, other real estate bucket?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [13]

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Yes. So I mean, it's nothing that we're in a rush to liquidate right now. I mean, as you noticed, we do have a lot of liquidity right now. The real estate that we do own that's classified as non-core is good real estate, it's producing some nice yields. Yes, I think we'd want to kind of deploy more of our balance sheet, kind of put more capital to work, lever up a little bit more before we start to look a little bit more closely on when we want to monetize those investments. But it is a source of liquidity at some point. It's good real estate, kind of generating some good income right now. It's something that we'll look forward to perhaps monetizing it at some point in the future.

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Operator [14]

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Our next question comes from the line of Steve Delaney with JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [15]

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I know that you're probably thrilled to be talking about real results rather than performance for a change. So remind me about target leverage and some idea of how many quarters you think it will take to be optimally deployed in the portfolio?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [16]

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Sure. This is Sujan. So we're quite under-levered today as we've commented and in the low 30s. And as we execute on the pipeline and utilize leverage on the senior loan component as well as any potential net lease we acquire, we do see that leverage approaching in, call it, the mid-50s towards the end of the year as we fund our pipeline and that's kind of the target we're working towards.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [17]

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Okay. So in terms of debt-to-equity 1.0 by the end of the year, right?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [18]

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That's correct.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [19]

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Okay. And then longer term, what would you say looking out to -- I know it's a mix of assets, right, has just about everything to do. The more senior the portfolio is, the higher that debt-to-equity will be. But do you envision that over the next 2 to 3 years to move higher still? Or will we have to wait and see what the investment opportunities look like?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [20]

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Yes. And I think that mid-50s is really our longer-term target. So it (inaudible) comment if the pipeline shifts a different direction over the balance of the year, you may see us making a little longer to get there, but that's -- and that is influenced by investment mix.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [21]

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Yes, totally. We see it anywhere from, I think Apollo is 0.8. And we have people that are pushing up to 2.8, 2.9 and it's just all the question of what you have in the loan portfolio. And your 1.0 sends a clear message to me about the diverse nature and Kevin's point about investing up and down the capital stack. But that's helpful for modeling purposes to know -- that kind of implies an asset mix, I guess, is what I'm saying. That will be helpful to us.

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [22]

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That's exactly right, Steve.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [23]

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Okay. Sujan, going through -- I didn't have a lot of time to go through the deck too closely because I flew back from the West Coast last night, but perusing it, I did not see a book value calculation. And I was just curious. The first question we get, not for this call, but at some point the Street is going to have to figure out exactly what the book value calculation is for you guys, whether it's simply a GAAP figure. I think some will certainly use tangible, some may want to add back depreciation. We have several companies that we use undepreciated tangible book value for. I'm just curious how -- if somebody asks you Sujan, an investor, what's your book value, how would you reply to that, book value per share?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [24]

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Sure. And good question. So Steven, I guess if -- we provided the info in the financials that went out in the release. But if you look at our total stockholders' equity of $3 billion and add back our noncontrolling interest in our OP, you get to about $3.1 billion. And we put in the supplement our most recent share count of 131 million shares, and so that gives you about $23.69. And that's pre-adding back any depreciation.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [25]

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Okay. So did you say $23.69?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [26]

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That's correct.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [27]

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Okay. I'd calculated $23.67. So we're in the same ballpark. So we'll have to decide what to do about depreciation. On depreciation, you have a line, you had your deferred leasing cost and intangibles combined. Will the 10-Q give us details as to what is actually goodwill, what is other intangibles, so we can parse that a little bit into the multiple components of that one line?

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Neale W. Redington, Colony NorthStar Credit Real Estate, Inc. - CAO [28]

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Steve, it's Neale Redington. We don't have any goodwill in there. So we will have the details you'd expect in the 10-Q to be able to break that out, but there is no goodwill in there.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [29]

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Okay. Great. That's good to know, and we'll take a look at the intangibles when you give us that schedule. When do you intend to file the Q?

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Neale W. Redington, Colony NorthStar Credit Real Estate, Inc. - CAO [30]

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Perhaps by end of the week, but probably beginning of next week.

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Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [31]

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All right. Early next week. Okay. And my final question. Do you use -- on risk management, Kevin made some comments about your process. Do you use a 5-point scale?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [32]

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We do, Steve. We do use a 5-point scale.

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [33]

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Okay. And will -- do you anticipate the 10-Q will provide detail if there are any 4 or 5 rated loans currently?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [34]

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At this point, I mean, we're trying to -- our portfolio is a little bit different than our competitors and peers. So we're still in the process of trying to come up with a system that kind of is applicable for our portfolio but also make sense across the industry. So it won't be in the 10-Q right now, but as soon as we figure out how to do the right weightings across the different types of investments that we have, it's something that we plan to hopefully disclose at some point in the future.

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Operator [35]

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Our next question comes from the line of Ben Zucker with BTIG.

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Benjamin Zucker, [36]

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I guess, I'd like to pick up where Steve just led us. Then could you just quickly discuss the underlying credit trends and quality of your loan portfolio right now? Are there any defaults that are worrisome? Is everything paying? Any loans on PIK interest, that kind of stuff?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [37]

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Yes. Okay, well, it's a big portfolio right now. I had -- I'm glad to report that almost everything is going as planned. But as you can imagine, at any given time, with a portfolio that is maturing as big as this portfolio is, we're always going to have some loans that we're looking at a little bit more closely. I think right now, we have 4 loans right now that are in -- technically in default -- 5 loans right now that are in default. One should be paying off here sooner, so -- for different reasons, some as simple as just maturity defaults, some of which there might be some discussions and negotiations going on with the borrowers on using amending, extending, reworking some of those loan agreements, but relatively few from a number standpoint.

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Benjamin Zucker, [38]

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Great. That's helpful. And yes, we see those technical maturity defaults a lot. And I think they most commonly just get extended and paid off at full. So no issues there. In your income statement, you have a line item for transaction, investment in servicing expense. Does any of that possibly relate to added or incremental costs associated with your public listing like legal fees or anything? Or is this line item a recurring part in the regular course of business that we should expect to see in the future quarters at this magnitude?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [39]

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Yes. Ben, it's Sujan. The majority of that is from merger-related expenses. So you'll see that most of that goes away going forward.

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Benjamin Zucker, [40]

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Great. And then I'm assuming that's why we saw the vast majority of that added back in your core earnings calculation, which make sense.

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [41]

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That's correct.

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Benjamin Zucker, [42]

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And then lastly, I'm sure this will be disclosed in the 10-Q, but I didn't see it mentioned in the supplement. Did you repurchase any shares following the fourth quarter earnings report, when I believe the repurchase authorization first became effective? And if so, would you be willing to provide us with the number of shares and average price? Or how much remaining capacity would be left after that?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [43]

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Yes, Ben. We have not exercised any of those repurchase options that we have on the table right now. So no shares have been bought back.

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Benjamin Zucker, [44]

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Great. So that was -- you still have -- was that a full $300 million remaining and in place?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [45]

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Correct. We still have $300 million in place and available for stock repurchases.

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Operator [46]

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

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [47]

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You mentioned B-pieces. Is there anything on the M&A front in that sector that might interest you?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [48]

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Well, I mean, Jade, thanks for joining by the way, and thanks for the question. So there is nothing imminent. But as you know, we always have our eyes on the lookout for things that are interesting. So from time to time, when we think that there might be something trading below what it should be trading for, it's something that we'll consider. We do have teams that are out there in the marketplace kind of looking at the different types of transactions that might fit into the bucket that you're describing. But nothing imminent, but it's something that we will look at.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [49]

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Okay. On the non-core assets, can you say how much leverage is against those assets. And if you expect the monetization to result in any gains or to be neutral to book value?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [50]

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Jade, it's Sujan. So the non-core assets have about 55% to 60% leverage at the asset level. And as I think we've disclosed, the 2 nontraded REITs came over at fair market value. So we're assessing exit values and opportunities across that portfolio. There could be gains above that as well.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [51]

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Okay. Just lastly, I think you initially made some comments about the spectrum of investments you're looking at and indicated the middle of the capital stack yields have been stickier and those seem relatively more attractive. I guess, how do you weigh the stickiness of the yields versus credit risk in those investments at this point in the cycle?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [52]

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Yes. I mean, it's something that we're always looking at, looking at the risk-adjusted rates of return. So just because we can get higher yields, it doesn't mean we're going to do it if it means we're taking on undue risk. So it's an art and a science to kind of figure out what the appropriate risk-adjusted rate of return is for whatever position in the capital stack that you have. But largely speaking, I think when we kind of tease out some of the, maybe, financing that you would do on a first mortgage and what kind of retained positions, equity positions you would be left with on a risk-adjusted basis, I think our returns on the mezzanine or the middle part of the stack is much higher than what you would get on senior mortgages right now. They tend to be fatter. So your LTVs kind of kick in a little bit lower in the stack. They might be a little bit higher, but then the higher yields that you get, I think, is warrants, that kind of return. So it's pretty good. We like it. We like it a lot. Things change in the senior part of the stack. We'll go back there and start originating first mortgages, but risk-adjusted basis, that's where we're finding the sweet spot.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [53]

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And on the senior side, are you seeing lenders make concessions on structure and proceeds, advance rate beyond just a loan pricing equation?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [54]

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Yes. Jade, we haven't seen anything that concerns us across the peer set and across the senior loan originations that we're competing on. I think we see a lot of it is pricing related, but not necessarily credit risk related. And any structural elements we see, I think, majority of groups like ourselves that are looking at lot of the senior loan originations are equipped to underwrite some of the transitional business plans. And so I think any loosening of structure may be around just allowing more time for folks to execute their business plans and things that we don't think really impact the credit ultimately.

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Operator [55]

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Our next question comes from the line of Randy Binner with B. Riley FBR.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [56]

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I still have a couple. I guess, the funding side, just want to clarify a couple of things. One, just the comment that you wouldn't anticipate needing to tap the capital markets. That's just an expression of saying that you have good cash on hand and then access to either the credit facility or the repurchase facility. So your expected pipeline over the course of the year would be within the constraints of those 3 structures, is that the right way to think of it?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [57]

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Well, I think we absolutely have enough liquidity to fund a robust pipeline and the pipeline that we're seeing, but our goal would be to go raise potentially capital through a variety of channels available to us to the extent we needed to raise additional capital. But I think right now, we're focused on using the cash we have, using our revolving credit facility we have, and we can go raising the capital if needed.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [58]

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Okay. And then on the repurchase facility, can -- I'm presuming that some funding costs there are higher with the rise in short-term interest rates. Is that right and can you dimension that out? Kind of what change have you seen in short-term funding costs?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [59]

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On our -- if you're referring to our repo lines where we're financing our senior loans, those are -- we've actually seen the borrowing costs on those come down for us post combination and listing just on account of our scale. And so with the new relationships we formed, we actually anticipate a lower cost of funding on those lines going forward. And a lot of that also as you look to the CLO market, you see just a lot of compression there. So we've actually benefited.

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [60]

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Yes, maybe just, I guess, augment that statement. So for sure, LIBOR is going up, but we're seeing spreads compress. So the spreads are coming down, LIBOR is going up. But on net-net basis, as Sujan pointed out, our cost of borrowing has come down.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [61]

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So spreads are compressing more than LIBOR is going up, at least for your book?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [62]

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For our book, yes.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [63]

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Okay. And then just another question about things that you're looking at out there. The deals to date that you listed off at the top of the call were all seemingly in kind of gateway cities, I think, kind of bigger properties, but you have a lot of diversity within your portfolio. So I'm curious if you -- do you have a preference for gateway cities? Or is there may be more value in second and third-tier cities? Where do you see that debate?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [64]

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Yes, for sure. I mean, the preference -- we do like the bigger markets. We like the markets that have more volume, kind of deeper pools of acquirers, kind of more robust job growth and population growth. So those are the markets that we like. Those tend to be kind of more coastal. We will look at other markets that are outside of that, but we kind of look at them with a lot of scrutiny to make sure we like our position within the capital structure. We like the equity cushion that we have from our sponsor. We look at the sponsor's business plans and the competitive positioning of the assets. So even though we do like some markets, we'll look at everything and we'll price it. We tend to kind of price ourselves out of some of the smaller markets just because we think that the yield required, because of the risks that you might be taking on, are higher, which is fine. But those are definitely our preferences, bigger markets, coastal markets, growth markets.

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Operator [65]

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Our next question comes from the line of Doug Harter with Crédit Suisse.

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Douglas Michael Harter, Crédit Suisse AG, Research Division - Director [66]

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I was just wondering, how much control do you have over the timing of the disposition of the non-core assets, if your new loan opportunities were to come in faster or slower than you're currently planning?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [67]

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On the private equity fund interests, those are passive, and we don't control that, but we have good visibility into that and direct access to the various GPs, so we can get good handle on timing. But the non-core real estate we own, we fully control the ability to execute on our business plans there, and so we can control the timing.

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Operator [68]

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Ladies and gentlemen, we have time for one more question. Our next question comes from the line of Jason Arnold with RBC Capital Markets.

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Julian Broche, RBC Capital Markets, LLC, Research Division - Associate [69]

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This is Julian on for Jason. Can you guys speak on the EPS impact there was on the quarter from the cash drag? And then speak to maybe how quickly you guys would be able to deploy that cash/remaining liquidity into new investments?

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Sujan S. Patel, Colony NorthStar Credit Real Estate, Inc. - CFO & Treasurer [70]

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Sure. Thank you, and great question. If we account for the $350 million of cash drag that -- and have that fully invested, that's about an incremental $0.07 per quarter. And so we are very focused on deployment and the impact that would have on our core earnings.

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Julian Broche, RBC Capital Markets, LLC, Research Division - Associate [71]

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Okay. And then I guess, for a follow-up. Go ahead, sorry.

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [72]

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I was just going to answer the second part of that question in terms of the deployment. I mean, we have a pretty robust pipeline right now. So we do anticipate kind of not only investing the cash but also tapping into some of the credit facilities that we have, repo facilities. So by year's end, for sure, all the cash will be invested plus we'll be hopefully pretty significantly drawn on our revolver as well as having more of our repo facilities put to work as well.

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Julian Broche, RBC Capital Markets, LLC, Research Division - Associate [73]

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Okay. And then just a follow-up. Is there any considerations in terms of broadening your investment mandate outside the U.S., maybe in like U.K./Europe area?

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [74]

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So those are markets that Colony NorthStar has been in for quite some time, over a couple of decades now. So we do have operations over there. Just based upon what we're seeing here in the U.S. and some of the opportunities that crossing our desk over in Europe, we do think that it could be prudent for us to maybe carve out a slice of our portfolio to be invested over in Europe, something that we're exploring right now and for the right opportunity at the right yields. I do think we are seeing yields that are probably higher for the same kind of risk that you would be taking here in the States. So it's something that we're assessing, and it could be an interesting addition to the portfolio.

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Operator [75]

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Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I would like to turn the call over to Colony NorthStar CEO, Kevin Traenkle, for closing remarks.

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Kevin P. Traenkle, Colony NorthStar Credit Real Estate, Inc. - CEO, President & Director [76]

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Thank you, operator. Yes, I just want to thank you all for your support and for joining us today. I guess, I'd also like to remind everyone of our busy marketing season in May and June. So far on the calendar, we have a non-deal road show hosted by Raymond James on May 17. That's followed by the KBW Conference on May 31. We will be attending the Nareit Conference from June 5 to June 7. And then finally the JMP Conference on June 19. These will all be in New York City, and we hope to see many of you at these events. And with that, just on behalf of the entire team at Colony NorthStar Credit, we thank you for tuning in today, and we look forward to updating you of our progress when we report our second quarter results in early August. Thanks for joining.

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Operator [77]

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