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Edited Transcript of CLNY.N earnings conference call or presentation 8-Nov-19 3:00pm GMT

Q3 2019 Colony Capital Inc Earnings Call

LOS ANGELES Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Colony Capital Inc earnings conference call or presentation Friday, November 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren J. Tangen

Colony Capital, Inc. - President

* Marc C. Ganzi

Colony Capital, Inc. - MD

* Mark Melvin Hedstrom

Colony Capital, Inc. - Executive VP, CFO, COO & Treasurer

* Thomas Joseph Barrack

Colony Capital, Inc. - Founder, Executive Chairman & CEO

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Conference Call Participants

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* Jade Joseph Rahmani

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

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Randolph Binner

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

* Lasse Glassen

ADDO Investor Relations - MD

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Presentation

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Operator [1]

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Greetings. Welcome to Colony Capital, Inc.'s Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Lasse Glassen, 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 Capital, Inc.'s Third Quarter 2019 Earnings Conference Call. Speaking on the call today from the company is Tom Barrack, Chairman and CEO; and Mark Hedstrom, COO and CFO; the Company's President, Darren Tangen; and Future CEO, Marc Ganzi, are also available for the question-and-answer session.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from 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, November 8, 2019, and Colony Capital does not intend and undertakes no duty to update for future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures reported on both a consolidated and segmented basis. The company's earnings release, which was issued this morning and is available on the company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors. In addition, the company has prepared a table that reconciles certain non-GAAP financial measures to the appropriate GAAP measure by reportable segment, and this reconciliation is also available on the company's website.

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

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [3]

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Good morning, and thank you, Lasse. This past quarter, we continued to successfully execute our strategic objectives of accelerating liquidity, surgically managing and stewarding legacy businesses in the best interests of our multitude of stakeholders and pivoting to become the leading hard asset solutions provider of occupancy, infrastructure, connectivity, equity and credit to the world's leading mobile communications and technology logos and, in doing so, to bridge the digital divide. These goals included: one, to reduce G&A and realign the incentives of our athletes on the field; two, to simplify our business and align our capital structure with our business strategy; three, generate liquidity through the value maximization of legacy businesses while arbitraging the mismatch between the public and the private valuations of the company's assets; four, transition the return profile of Colony Capital's balance sheet assets away from current yield and into total return with a definable digital real estate [asset]; and lastly, focus on new REIT-eligible digital real estate balance sheet originated acquisitions, vehicles and platforms and digital real estate investment management products in which we have an edge and can build to scale.

Overall, I'm pleased with the progress we have made in delivering our objectives and sharpening our focus on digital infrastructure and digital real estate, which we believe will enable Colony Capital to capitalize on compelling high-return opportunities in a sector positioned for continued strong secular growth. Now I'd like to provide you with a review of some of the key highlights from the quarter.

Digital Bridge. During the quarter, we completed the acquisition of Digital Bridge and named Marc Ganzi as Colony Capital's next CEO effective no sooner than the second half of 2020. The transaction brings Digital Bridge's world-class team of investment professionals and portfolio of high-performing assets under the Colony franchise. Marc is with us on the call today and will be available for Q&A at the end of the call.

Colony Industrial. We also entered into a definitive agreement to sell our light industrial platform to Blackstone for $5.7 billion. The transaction allows Colony to achieve compelling returns for investors and generate significant liquidity, which, among other uses will help accelerate our ongoing transition into digital real estate and infrastructure. Since our acquisition of Cobalt at the end of 2014, we will generate total profits to our shareholders of approximately $600 million.

Next, NRE. In addition, we completed the sale of NRE to AXA for $17.01 per share. As a result of the transaction, Colony generated gross proceeds of $160 million from the sale of our 11% ownership position and the monetization of the management contract. And most importantly, shareholders in NRE should receive an approximate 16% realized IRR from the inception of their investment.

Other Equity and Debt. We made continued progress in the accelerated monetization of our Other Equity and Debt segment, completing $272 million of asset monetizations just this quarter. Inclusive of this quarter's OED monetizations, total year-to-date OED monetizations amount to $651 million.

Credit investment management. We held the first closing of our fifth global real estate credit fund with total capital commitments of $428 million. Next, G&A reduction. During the quarter, we achieved approximately 80% of the expected total $50 million to $55 million of the previously announced cost savings on a run rate basis and are on track to meet or exceed our target by early 2020.

CLNC. Last night, CLNC reported third quarter earnings and announced a new strategic plan to bifurcate its portfolio into a core segment and the balance into a legacy non-strategic segment. The new plan will generate significant liquidity for CLNC from the sale of these nonstrategic assets, which will be reinvested into new core investments. This asset rotation out of the legacy nonstrategic segment into the Core segment will drive Core growth and Core Earnings and simplify the overall business. As a result of this new strategy and reduced hold periods for nonstrategic assets, CLNC did recognize meaningful impairments in the third quarter, which brings its undepreciated GAAP book value down to a level that we believe is a good reflection of the company's NAV based on the planned asset sales, and concurrently, the dividend was reset to a level that is now covered by in place Core Earnings.

Combined with significantly improved disclosure regarding CLNC's assets, we believe these actions, taken together, better position the company for long-term growth and shareholder value creation. Additionally, and as we disclosed last night, Colony Capital has initiated a discussion for the independent directors of Colony Real Estate Credit (sic) [Colony Credit Real Estate] regarding a transaction to create the preeminent internally managed credit REIT with a clearly defined strategy and positioned for greater growth and profit maximization. This potential transaction would involve a transfer of Colony Capital's market-leading credit management business to Colony Real Estate Credit (sic) Colony Credit Real Estate . Representing yet another step in Colony Capital's strategic repositioning to simplify both businesses, align shareholder interests into definable and specific lanes for each and establish Colony Capital as the leading platform for digital real estate infrastructure and Colony Real Estate Credit (sic) Colony Credit Real Estate as the leading internally managed mortgage REIT. While Colony Capital looks forward to engaging closely with CLNC on a potential transaction, there can be no assurance of an agreement that may be reached or what form a potential agreement may take. We will update you with more detail on the potential transaction and the proposed internalization of management at CLNC in the coming months.

We've executed on what we stated we would do when I became CEO, and we are pleased with our significant progress to date. Now looking ahead. Sale at Industrial is anticipated to generate roughly $1.2 billion in net equity proceeds to Colony Capital, and we expect this transaction to close by year-end. As a result of the sale and other monetizations referenced earlier, Colony Capital will be equipped with a substantial quantum of liquidity at what we think will be a very appropriate time. We are targeting sharing the details of Colony 2.0's digital strategic plan, which we outlined in broad strokes in September in the presentation posted on our website, sometime in mid-December, and we look forward to speaking with you then.

In summary, the Colony Capital Board and management team are confident in the compelling growth prospects available to us, and we believe we are taking the right steps to drive long-term value for all stakeholders.

And now I'll turn it over to our CFO and COO, Mark Hedstrom. Mark?

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Mark Melvin Hedstrom, Colony Capital, Inc. - Executive VP, CFO, COO & Treasurer [4]

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Thank you, Tom, and good morning, everyone. As a reminder, in addition to the release of our third quarter earnings, we filed a corporate overview and supplemental financial report this morning. Both of these documents are available within the public shareholders section of our website. On the call today, I will provide a review of the third quarter results, business segment performance, status of our cost reduction initiatives and several important transactions which occurred during and after the end of the quarter.

Turning to our financial results for the third quarter. GAAP net loss attributable to common stockholders in the third quarter was $555 million or $1.16 per share. Largely the result of certain charges and provisions for loan losses totaling $540 million for the company's share. Of this total, $387 million was attributable to the reduction of goodwill primarily as a result of a charge for the pending fourth quarter sale of the industrial platform and real estate portfolio. In addition, there was impairment of goodwill related to the decrease in future management fees from CLNC resulting from its portfolio bifurcation and reductions to portfolio carrying value, which I will discuss in more detail later. All of which are critical components of the company's ongoing strategic repositioning. Reflecting very strong performance and execution in the quarter, core FFO was $102 million or $0.19 per share. Excluding net losses of $4 million primarily related to net investment losses and other equity and debt offset by the management agreement termination fee received from NRE, core FFO would have been $106 million or $0.20 per share.

During the quarter, we have continued to make progress towards our strategic initiatives, which Tom just discussed, and we also had a strong operational quarter across most of our existing 6 reportable business segments, Healthcare being the exception as well as continued progress against our cost reduction objectives.

Starting with the health care real estate segment, same-store portfolio NOI decreased 7% compared to second quarter 2019. Third quarter 2019 same-store net operating income included a onetime write-off of certain tenant rent receivables in the hospitals portfolio. Excluding onetime items from same-store NOI, the Healthcare same-store portfolio sequential quarter-to-quarter comparable net operating income would have decreased only 4%. On the financing front, we refinanced a $212 million British pound loan on a portfolio of U.K. senior housing assets with a new GBP 223 million, fully extended 5-year loan at a substantially reduced interest rate. This refinancing, along with previously completed refinancing transactions this year, addresses all near-term health care real estate loan maturities.

As part of the completion of the 2019 health care refinancing initiative, the company unwound a legacy $2 billion notional forward interest rate swap that was assumed in connection with the January 2017 Colony NorthStar merger. The swap was originally entered into in June 2015 to hedge against potential increases in interest rates and the resulting potential for new equity financing required for certain Health Care mortgage debt maturing in December 2019.

Subsequent to the June 2019 refinancing of the largest health care loan, the company unwound the entire swap in the aggregate amount of $365 million. For core FFO purposes, the company has excluded realized losses related to the swap because the swap was an economic hedge against the refinancing risk of the maturing debt in the Healthcare portfolio, and core FFO does not reflect any realized gains or losses within our real estate verticals or investment management businesses.

Turning to the Industrial Real Estate segment, which performed slightly better operationally than planned for the quarter. The previously announced sale of substantially all industrial assets is still anticipated to close in the fourth quarter of 2019. Accordingly, for all current and prior periods presented, the related assets and liabilities of the Industrial segment are presented as assets and liabilities held for sale on the consolidated balance sheet and the related operating results are presented as income from discontinued operations on the consolidated statement of operations. As a result of the pending sale, GAAP net loss and core FFO for the quarter included $36 million of accrued carried interest income that we expect to earn from the industrial open-end fund based on the contractual sales price with a corresponding charge for management's 50% share. Additional amounts are expected at the closing of the transaction.

Moving on to the Hospitality Real Estate segment. Compared to the same period last year, third quarter 2019 same-store portfolio NOI before FF&E reserves increased 2%, primarily due to a onetime reversal of property taxes that were accrued prior to 2018. Excluding the onetime reversal, third quarter 2019 NOI before FF&E reserves was generally flat compared to the same period last year. Yesterday, CLNC announced a strategic plan to bifurcate its assets into a core portfolio, which will grow and a legacy nonstrategic portfolio, which will be monetized with proceeds reinvested into the core portfolio. As part of its portfolio rationalization, CLNC meaningfully reduced the carrying value of certain of its legacy nonstrategic portfolio to better represent its market value in anticipation of these sales.

Further, CLNC reset the current dividend to levels which can immediately be covered by in-place Core Earnings and amended its definition of Core Earnings to only reflect the results of its core portfolio. CLNC reported third quarter Core Earnings of $45 million or $0.34 per share versus $41 million or $0.31 per share in the prior quarter. Also in connection with CLNC's portfolio rationalization, the company amended its management agreement with CLNC to make effective, in the fourth quarter, the alignment of the fee base with the newly reduced book value, which results in a decrease in the annual base management fees from $45 million to $33 million beginning in the fourth quarter.

Next is our other equity and debt or OED segment, a $1.6 billion equity-carrying value portfolio, separated into strategic OED and nonstrategic OED. Strategic OED includes our investments alongside third-party capital where we earn investment management economics and which we plan to grow over time. During the third quarter, the undepreciated carrying value in strategic OED decreased by 16% primarily due to the completion of the sale of NRE and the first closing of the company's fifth global credit fund, which returned capital previously advanced by the company to warehouse investments for the fund.

We are also actively managing and liquidating nonstrategic OED, which includes legacy investments which are not core to the current investment management business. During the third quarter, undepreciated equity carrying value and nonstrategic OED declined by $79 million or 8% to $935 million.

Our Investment Management business segment grew significantly during the quarter due to the July 2019 acquisition of Digital Bridge, which was only partially offset by the sale of NRE and certain other assets during the quarter. Colony ended the third quarter with third-party AUM of $39.3 billion, up 37% compared to $28.6 billion last quarter. And fee-earning equity under management increased to $22.4 billion, up $0.24 compared to $18 billion last quarter.

Next, I will provide an update on the corporate restructuring and reorganization plan announced during the fourth quarter of 2018. During the year, since initiation of the plan, the company has achieved approximately 80% of the expected $50 million to $55 million in cost savings on a same-store run rate basis through various initiatives, including the reduction of more than 13% of the company's workforce existing at the time the restructuring was announced. We expect to meet or exceed the original cost savings target over the next 1 or 2 quarters. You will increasingly see the impact of these G&A savings in our GAAP financial statements and core FFO together with the impact of cost reductions following the completion of in-process sales transactions. However, period-to-period comparisons are difficult, principally due to significant onetime employee transition costs related to the sale of NRE and the addition of Digital Bridge in July 2019. As an example, in the third quarter, employee separation costs totaling $39 million relating to the sale of NRE were included in compensation costs. While other income was grossed up by $26 million of that amount representing amounts paid or reimbursed by NRE. Third quarter G&A costs reported on a core FFO basis, which adjusts for onetime and noncash costs, including those I just mentioned, declined 14% on a same-store year-over-year comparison.

In summary, we are very pleased with our strategic progress and operating results during the first 9 months of 2019, and we look forward to finishing the year strongly and following up soon with the company's detailed strategic plan.

With that, I'd like to turn the call over to the operator to begin Q&A. 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 Jade Rahmani with KBW.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [2]

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I guess to start off with, regarding the CLNC internalization proposal, I'd like to know if you've considered or would consider some kind of transaction with a third party, such as a Brookfield or Blackstone, who could take over the company, acquired the management contract and how that would compare with a related party transaction between the 2 entities?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [3]

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Jade, it's Tom. Thanks for the question. Obviously, it's unbelievably complex. And we can't deal with specific details. But generally, it's simple. We are the largest shareholder, and we will continue to do whatever the best execution is in the interests of all the shareholders. And since we're the majority shareholder, that's really us. So because of the complexity of the entity and the other Colony credit vehicles that, at times, co-invest with that entity, and the external management contract, it's a complicated reach for a third party. We have belief in our own management team. We have belief in the assets. What we did yesterday was a step forward for the creation of what we think will be a best-of-class mortgage REIT, but we'll obviously look at all available options. But when you get into the complexity of what's here, we think this is really the best and probably only vehicle. Darren is here. Darren sits on that board. Are there any other comments?

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Darren J. Tangen, Colony Capital, Inc. - President [4]

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No, I would agree with that completely, Tom. And there's work to do here in the coming months, as Tom said. But I think, at the end of the day, we think that this is the best solution for all stakeholders involved.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [5]

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Yes, I mean, I think it's interesting to hear you say that because I've now followed this company since 2009 and seen a multitude of these value destroying transactions. And I think you might want to consider whether a third-party would also make sense and weigh the cost benefit of such interest if it were to materialize. I believe that there are numerous debt vehicles that are in a private format right now that would value highly permanent capital that a mortgage REIT offers, and I think that should also be evaluated.

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [6]

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But obviously, that's the object of what we're doing. So we hope you're right, and we hope there's lots of participants who have lots of great ideas for all the shareholders, and we'll entertain them appropriately as they arise.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [7]

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And what's the technical reason that a shareholder vote would not be required? Because I believe that Colony Capital owns 36% of Colony Credit.

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [8]

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So Jade, if what is being sold is the management contracts associated with Colony's private credit businesses and an internalization of the contract. If the consideration involved is cash and not the issuance of stock by CLNC, then, under that scenario and transaction structure, it's not necessary that there would be a shareholder vote.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [9]

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Okay. Is there any contemplation that some portion if not the majority of Colony capital's OED assets would also be transferred or sold to CLNC.

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [10]

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Too early to make that determination, right along that road, there is some complexity because there's co-investing entities of CLNC with other private captured entities of CLNY, and we'll let the process determine what's viable and what's not. And of course, some of those silos are managed by the same management group, which was what our thought process was and our internalization to align those interests. But we'll let the process dictate what's viable and what's not. It's too early for us to know.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [11]

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Turning to Industrial. Is it for us to understand that the timing of the sale was delayed? And can you provide any color on that? When do you anticipate the sale closing? And can you explain?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [12]

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Yes, the timing of the sale is not delayed at all. We've always said that it's by year-end and will continue to be by year-end. We anticipate the middle of December. And all things are on target. A portion of the entire portfolio, the bulk portion, is not going to be executed in the same context, and it's a tiny portion of the overall transaction, less than 2% -- $200 million. But everything is on target to close. No issues.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [13]

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Okay. On the health care side, Ventas reported somewhat disappointing results and curtailed their growth expectations for 2020, does that change any scenarios that could play out with respect to the Healthcare portfolio and how you're thinking about that?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [14]

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Not really. I mean, Ventas is best-of-class. Debbie does an amazing job, and she's dealing with headwinds in the industry as the industry transitions and is looking for transparency as everybody does. We continue to view them as a valued stakeholder, and our car refinancing [be] pivotal. And I think she's going to fight her way out of this to victory, and it doesn't affect what our practices and policies are going forward.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [15]

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And then just lastly, in terms of the transition and transformation of the company toward Colony Capital 2.0, digital focused company, would you give any consideration to a potential privatization of the company? Or do you view -- you do highly value the benefits of being public?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [16]

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Look, we obviously value the benefits of being public when it works to your effect. Every day is a frustration when we're trying to explain in public market value of the assets that are -- sometimes they're evaluated in the private market. And the investment management business is something that's not really well regarded in a public setting. So as we've struggled through in this last year, this idea of a diversified REIT investment manager [toggle], we realize that the market doesn't buy that. What you want is a clear single swimming lane. And then the public market and issuing new equity offers an abundance of benefits. The digital business, we think, is best handled in a public setting because the balance sheet and the liquidity that we're generating can be used as a great tool. And the investment management side of the business is liquid and as opulent as we've seen it. These digital categories that you run across -- and then Mark is here and can talk a little more about it. As we relate to assets on the balance sheet that have high-growth potential on one hand, and we transition from legacy assets, which, in our opinion, as I've said before, are physically obsolescent or financially obsolescent or functionally obsolescent. That balance sheet accretion on a total return basis is really interesting to us as an owner. And on the investment management side, leading with that kind of a balance sheet creates more alignment for the limited partner universe. Marc, anything to add?

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Marc C. Ganzi, Colony Capital, Inc. - MD [17]

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No, Tom, I think you've synthesized it correctly. We really feel like there's an unprecedented opportunity to deploy capital across our very valuable platforms and new platforms. We're seeing over $480 billion of investment opportunity across the digital infrastructure ecosystem over the next 5 years as we deploy mission-critical IoT networks, 5G networks, the Internet of Everything, as we call it. And when we sort of look at that side-by-side against what we see in sort of traditional real estate and investing in traditional real estate that market set opportunity is just a bigger pool of opportunity for our tenants and our customers.

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [18]

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And just a follow-up on that. Is the INXN deal something that you considered, or even at this stage, would consider as a potential transaction?

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Marc C. Ganzi, Colony Capital, Inc. - MD [19]

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I'm sorry, clarify the question. Are you talking about the privatization of the IM business?

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Jade Joseph Rahmani, Keefe, Bruyette, & Woods, Inc., Research Division - Director [20]

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The InterXion transaction which Digital Realty Trust is under agreement to acquire, I was wondering if that's something Colony -- Digital Colony would have considered or could still, at this stage, consider?

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Marc C. Ganzi, Colony Capital, Inc. - MD [21]

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Sure. Thank you. We honestly don't comment on market rumors related to transactions that -- in the press that our name is being circulated in. And so for the time being, I'll say that no comment as related to InterXion.

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Operator [22]

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

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [23]

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Maybe now that -- Marc Ganzi, I'd appreciate your comments here. Stock price, today, about $0.50 on the dollar as to where your OP units vest at. What gives you confidence that this company can turn things around?

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Marc C. Ganzi, Colony Capital, Inc. - MD [24]

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Sure. Thanks, Mitch. Listen, as Tom likes to say, Mitch, we're playing offense and we're playing defense. The defensive side of the ball, we've made very clear what our objectives are and what we promised to commit to the market. The sale of NRE, the sale of industrial, the pruning of our OED portfolio, those are essential components for us to clarify our story and allow us to be on a singular mission to do the things that we want to do. On the offensive side of the football, we've been very clear about what we want to do. We want to take balance sheet capital, put it to work behind our best logos, our best businesses, our best executives in places where we think we can deliver more total shareholder return.

Now let's unpack the comment of total shareholder return. One, we want to buy assets effectively cheaper than where we're selling assets. Second, we want a higher implied yield. Third, we want to be involved in businesses that have higher double-digit organic growth, which are resident in some of the businesses that we already own and operate today. As I think most of you know, Colony, today, owns and/or manages 10 very valuable digital assets, which we'll be happy to give you some of the highlights of what we did in the third quarter as it relates to those assets, which there were a lot of great things happening down in the digital domain within Colony. We believe also, when you take that balance sheet, Mitch. And you weaponize the balance sheet, and you're able to deploy capital into either GP commitments of our digital economy partners, one, which was the most successful first time ever SEC fund; and two, where we can use that balance sheet effectively to warehouse transactions like we did with Andean Tower Partners; and three, where we can step up and we can use the balance sheet to acquire portions or majority portions of businesses that perform in every metric in a superior facet as it relates to what we've done traditionally in either industrial, health care or lodging.

And so there's 3 ways to use the balance sheet capital. If we're effective at using that balance sheet capital, Mitch, in deploying capital across those 3 different avenues that I just mentioned, we believe 2 things will happen. One, we will be able to raise more third-party capital, and in doing so, we will grow our investment management platform. It is -- we have a very, very clear strategy that we're going to unveil to you and the rest of the world in early December that will make this abundantly clear. Second, when we think about how we can grow the business, it's no secret that digital assets trade at a much higher premium to where we trade today. And if we think about why they trade at a premium, it's because the businesses that we own and operate today at Colony, own and/or manage, have longer term leases, higher concentration to investment-grade, lower churn and, most importantly, much stronger fundamental organic cash flow growth. At the end of the day, any REIT, whether it's a digital REIT or whether it's an esoteric REIT, the most important factor, Mitch, is your ability to lease vacant space and to continue to grow free cash flow growth. The way we turn the ship, the way we get your confidence back is by doing that, by owning assets and owning businesses that have implied higher organic growth rates. And as we've demonstrated over the last 25 years in the businesses that we own and operate, we've managed to do that. And as this business plan and this strat plan becomes more apparent to you and the rest of the world, we believe that people will want to own this company. And people will want to own these shares as the first truly diversified digital REIT and digital investment manager. That's where we're going. And whilst we haven't been able to give you that specific color today. I can assure you, when we do unveil that, that it will be very transparent, and it will be something that we believe that others will want to partake in and join that journey with us.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [25]

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Are there any considerations, whether it be debt covenants or balance sheet or other, that prohibit you from pursuing sales over the course of the next 12 to 18 months of health care and lodging?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [26]

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No, none.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [27]

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Okay. Can you just maybe socialize the -- A, the industrial sale process in terms of how it turned out with regards to the demand bidding? And then, I guess, you're holding back now after previously announcing the sale. It looks like you're holding back the bulk industrial side of that. Can you just kind of elaborate what's going on there?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [28]

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Yes, Darren is here. And Darren ran the process. Darren, do you want to comment on that?

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Darren J. Tangen, Colony Capital, Inc. - President [29]

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Yes, Mitch, it's Darren. So I mean the process -- sale process itself was incredibly robust, as you might imagine. I mean there was a tremendous amount of interest. I think we had over 10 submissions on a $5-plus billion portfolio in the first round. We brought several groups through to the second, and as you now know, Blackstone prevailed. As it relates to the -- there's a $200 million component in the $5.9 billion that was originally announced, which is the bulk portfolio component. And as we announced back in September when the deal was printed, there is some third-party consents that were associated with that because we were selling a 51% interest in a partnership. So the expectation -- we are engaged in other sale discussions relating to that [fault] portfolio. It may be somewhat delayed from the end of the year. It could be a January, February type closing but something that we still expect to happen pretty quickly. But again, it's $200 million of a $5.9 billion trade, so it's somewhat immaterial in terms of size.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [30]

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And as those third-party consents are realized, is it a new sale process that is launched? Or does it go to Blackstone?

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Darren J. Tangen, Colony Capital, Inc. - President [31]

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Not Blackstone. So the original deal was that Blackstone was going to buy the 51% interest in the partnership. So it's going to end up being sold to a different party. But it's not an entirely new sale process that's being launched? No, it's involving some of the affiliated parties in the deal today. So it's something that we expect we can document and close quite quickly.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [32]

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Got you. Last for me, maybe Mark Hedstrom. How should I think of a clean run rate? You've got a whole bunch of NRE noise, you've got a whole bunch of noise in OED, some onetimers in almost every single segment. What's core earnings absent onetimers?

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Mark Melvin Hedstrom, Colony Capital, Inc. - Executive VP, CFO, COO & Treasurer [33]

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I think we're looking at rates that are going to be slightly down from this quarter on a run rate basis with the sale of industrial and the sale of NRE. How quickly we deploy that capital, Darren, in other investments as well as get the benefit of the digital platform and the digital investments, those investment management economics, those are going to be accretive. So I think we don't really have a lot of guidance there for you right now. We think this quarter is a good quarter. We expect the fourth quarter to be a good quarter for us as well. But I think run rate going forward, there's still a lot to do with the strategic plan to develop a real firm number for that.

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Operator [34]

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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 [35]

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So I wanted to just try and scope out a better understanding of this December event. Is it -- you said early December, mid-December, I think planning for these things is helpful. So is there a firmer time frame you can give us? Can you lay out what the format is going to be? Do you plan to resegment or otherwise restate the financials?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [36]

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Randy, it's Tom. The format's is going to be -- we're going to post on our website a definitive strategic plan. It doesn't have anything to do with restating the financials. It has to do with setting forth sources and uses of capital, which is what you're going to be the most interested in, and we've created a tremendous amount of liquidity, and everybody is saying," That's terrific, where does it go?" Yes. You have a number of options, of course. We've got liability management on one side. We've got the deployment of balance sheet capital for digital and new acquisitions. We have the deployment of balance sheet capital on at least 3 new digital limited partner products that we're about to launch.

And we have all of the usual frameworks of [discern] between stock buybacks, special dividend, the timing of what we do with that liquidity and what that means to the existing silos going forward. We're not abandoning legacy businesses. So we've got shareholders. We have limited partners in legacy business. We've got substantial cash flow from things that the market hates, like hospitality and health care. And we're moving on all those fronts, and we're going to give you a bird's-eye view of the optionality of where those legacy assets go and the growth of what digital is and third-party capital and balance sheet acquisitions going forward, and we'll do that by the middle of December.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [37]

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Okay. And then I can presume there'll be a call and other ways to interact with management around that. Yes?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [38]

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Absolutely. Look -- once we do that, we're going to have a series -- we're a digital company, and we're going into digital age, and what we do is have phone calls and decks, but we're going to start a new program. So in addition to non-deal roadshows, we're anticipating webinars, town halls, a series of communication events that will also give all of you a better view of what is this digital brick, what is this digital highway. Everybody knows what's happening in digital REITs and are all defined within their own lanes. And what's happening of these new kind of digital nation states that make them the best counterparty for somebody like us, which is a hard asset investor, is complicated. So in addition to our strategic plan of saying, here's the math, and here's where we're going. Here's the time frame of how we're getting there on the existing Colony businesses and the to-be-acquired Colony businesses is really a [teach-in] in the assets that we're buying. So we anticipate in the last part of this year and the first quarter of next year to roll out a new communications format and plan that we think we'll be forming.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [39]

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Yes, that transparency will be welcomed. And then I guess I'd take it from your comments, if I'm hearing it correctly, then it's -- and I know you can't commit to this, but it feels like you're saying it's less likely to be kind of a core versus noncore separation and more likely to be what's going on with the existing business and then the addition of the digital pivot. Is that fair?

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [40]

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Yes.

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Mark Melvin Hedstrom, Colony Capital, Inc. - Executive VP, CFO, COO & Treasurer [41]

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Yes.

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [42]

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But with specificity, right? The initial parts of it are what are the gauging of monetizations and what's the balance of dividend and total return. And that's what you're trying to gauge, and that's what we're always trying to gauge. So one foot on the brake and one foot on the gas, and these hiccups are difficult for you to understand. And we look at every day and say, you know what, it's not easy being an owner, it's much easier to be an investor because all of you can vote with your feet. You like it, you buy more, you don't like it, you're out. We're making decisions across the board as an owner that have 3-year, 4-year, 5-year consequences, and sometimes that's difficult, and that's where we've been. So we're not envisioning gigantic distortionate moves in the strategic plan. What you're going see is our view of the very carefully thought strategic realignment, the Colony 2.0, of what we do with the legacy assets, the cash flow that we have, the liabilities that we have on balance and the deployment of that capital in a logical way. And what you've seen in CLNC is our view as a shareholder of saying, " How do we streamline these confusing interest in a way that, in the short term, causes some turbulence to our share price." Again, as an investor, that's not desirable. But we know we're going to get back to book value. As soon as we get back to book value, we have a different day on the job because we love our management team, and we love where we are in the space. So we're going to give you, I think, the arithmetic that you want to go to the good questions you're all asking. It's taken us a while to get there because, as you know, it's not simple.

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Randolph Binner, B. Riley FBR, Inc., Research Division - Analyst [43]

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I just had another question. On the interest rate swap, if I understand this correctly, you took a loss of $91 million. And that is a lot of money, but it was actually somewhat better than we expected. And so I just wanted to clarify if that matter is entirely resolved or if there's some ongoing exposure.

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Mark Melvin Hedstrom, Colony Capital, Inc. - Executive VP, CFO, COO & Treasurer [44]

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The matter is entirely resolved. The swap is settled and closed. There's a small payment due in the beginning of December, but that's reflected and accrued in our financials. The total cost of getting out of that swap was $365 million, of which, I think, about $240 million is reflected in the current year, there was some of that, that was taken for GAAP purposes in 2018. So it is completed. It's all reflected in the financials and closed out except for this cash transfer that occurs in early December.

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Operator [45]

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There are no further questions left in the queue. I would like to turn the floor back over to management for any closing remarks.

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Thomas Joseph Barrack, Colony Capital, Inc. - Founder, Executive Chairman & CEO [46]

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Thanks, everybody, for your participation, and thanks for your patience, and we will be back to you in mid-December to put more flesh on the skeleton of what we talked about. Thanks, everybody. Have a good weekend.

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Operator [47]

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This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.