DigitalBridge Group, Inc. (DBRG) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Colony Capital Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] I would now like to turn the conference over to your host, Lasse Glassen of Addo. Please go ahead.

Good morning everyone, and welcome to Colony Capital Inc's third quarter 2015 earnings conference call. With us today are the Company's Chief Executive Officer, Richard Saltzman; and Chief Financial Officer, Darren Tangen. Kevin Traenkle, the Company's Chief Investment Officer; and Neale Redington, the Company's Chief Accounting Officer, are also on hand 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, November 5, 2015, and Colony Capital does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was issued earlier 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. And now, I'd like to turn the call over to Richard Saltzman, Chief Executive Officer of Colony Capital. Richard?

Thank you, Lasse. And welcome everyone to our third quarter 2015 earnings call. I'm delighted to announce another outstanding quarterly performance. Our best quarter to date in only our second quarter since we completed the transformative combination transaction with Colony Capital in April of this year. FFO and Core FFO were both $0.54 per share demonstrating the efficacy of our new business model and the continued earnings power of our existing real estate investment portfolio. This investment portfolio which has grown to include an increasing number of high quality real estate equity investments provides an asset base that should continue to deliver more stable returns overtime and without the same kind of reinvestment risk typically associated with more heavily weighted debt investment portfolio. On the other end of the barbell the Colony Capital investment management business should provide the growth engine that has the potential to turbo charge our financial results overtime. As we increase our assets under management through raising and stewarding third-party capital. As a result of our strong performance thus far in 2015 and our ongoing confidence as we look out to 2016, I am pleased to announce that we will be increasing our dividend by 5% to $0.40 per share for the fourth quarter. Third quarter results were propelled by strong performance in all of our business segments, including our three equity segments Colony Light Industrial Platform or CLIP, Colony American Homes and other equity which includes our triple net lease investments, and our two other segments, debt investments and investment management. We have been very active in deploying capital in the United States and Europe. Since the last quarter, capital deployment and commitments by the company totaled $970 million, while deployment and commitments in our private funds totalled approximately $670 million during the same period for aggregate deployment of $1.6 billion. Aggregating all of this new investment activity 55% was in Europe and 45% in the U.S. while 63% was in equity and the balance or 37% in debt. On the asset management front we resolved two European loans in the third quarter with very successful results. The average internal rate of return on these two investments was in excess of 18%. Since our interception we have now fully or partially realized on 36 transactions that have averaged in internal rate of return of 19%. Furthermore, investment portfolio realizations continue to provide an important source of liquidity and reduce our reliance on external capital markets as we sponsor the next generation of legacy funds and new programs. Turning to fund raising, our team has been working diligently on raising capital for a variety of legacy and new vehicles, including then next generation flagship distressed credit fund. Although market volatility has somewhat impacted the timeframe for these closings, and our ability to announce anything concrete today, we continue to be extremely confident of our ability to meet our fund raising targets. From the balance sheet we have committed to make a GP co-investment of 20 % in our next distressed credit fund upto a cap of $500 million. And we hope and plan to provide a meaningful update on our first closing by the end of the year. I’d like to turn to our key equity platform investments, starting with the Colony Light Industrial Platform or CLIP which continues to generate stable and solid returns. As a reminder, CLNY owns 62% of CLIP and our share of Core FFO was $10.2 million or 40.08 per share representing an annualized Core FFO yield of approximately 9% against our average equity investment. Consistent with the prior quarter but measured against an increased equity base. The CLIP team has been busy leasing up the portfolio at net effective rents well above under writing, while also improving overall portfolio quality through select acquisitions as well as divestitures of non-core assets. Since our acquisition last December, CLIP has acquired net of dispositions approximately 3.8 million square feet of space for approximately $220 million. As a result, the portfolio has expanded to more than 300 properties containing 34 million square feet. The CLIP platform currently has approximately 232 million of existing uncalled capital commitments and 83 million undrawn on its acquisitions facility to make further investments. We also expect to continue to grow the business by raising additional third party equity capital. Turning the Colony American Homes or CAH it is now well known that back in September CAH signed a definitive merger agreement with Starwood Waypoint Residential Trust or SWAY to create a new company called Colony Starwood Homes that would continue to trade on the New York Stock Exchange. Having previously evaluated many alternative options, we believe that long term value is maximized via the creation of the best in class $8 billion industry leader. Scale and differentiated management are two of the necessary ingredients to truly transform the SFR space. The two portfolios aggregate to more than 30,000 homes with a significant amount of geographic overlap and concentration in markets with strong expected rental growth and home price appreciation potential. Based upon the continuing progress we see in CAH’s operations, and an identified $40 million to $50 million of annual cost synergies. The merger should create enormous catalyst to quickly ramp ownings and dividends. You can view the publicly filed presentation on SWAY's website, which dimensions the strategy, rationale and expected earnings impact from this proposed transaction. And if all goes according to plan, we expect the transaction to close in early 2016. As most of you know we also have a lending division within CAH called Colony American Finance or CAF that will be excluded from the SWAY merger. CAF has its own self sufficient management team, operations and separate capital base of third party equity in debt. To date, CAF has originated more than $1 billion of loans to single family home for rent investors and just executed its first securitization selling 224 million of bonds backed by 69 loans. This execution locked in a return on equity for the retained interest of 20%. As mentioned last quarter, CAF has already raised $113 million of third party private equity with associated management fees and carried interest that inures to the benefit of CAH owners. Although much remains to be done in order to complete the SWAY merger and post merger business plan execution and separately to successfully grow Colony American Finance we now have a visible roadmap for a path to liquidity and what we expect will be a highly successful CAH investment conclusion. Last but not least in our other equity category we continue to make investments generally intended to be included in new funds and vehicles that we will sponsor. Most of this activity is in Europe based upon elevated levels of distress and restructuring, combined with massive monetary and fiscal stimulus as we saw in the United States several years ago. Along with competitive advantages that includes substantial infrastructure and proprietary relationships assembled over a 20-year period, we believe this represents the most compelling macro risk adjusted opportunity in the world today. Select individual opportunities are attractive than other geographies too, but not at the same scale. In conclusion, this was a great quarter but I want to focus on our future. First, we feel blessed to have an incredible opportunity set before us and a unique platform to take advantage of it. The objectives were simple; turbocharge growth combined with the safety and stability of high quality real estate assets that we plan to own for the long term. Furthermore, we recognized that while our messaging may be simple, our financial reporting has become more complicated as a result of the merger. As we continue to transition, we understand that providing more substantive disclosure to a supplemental package is imperative. Darren will speak to this in a moment as we get ready to post such information on our website. In the meantime as a company we’ve never worked harder, as it is increasingly clear how the opportunities before us have multiplied as a result of our scale. Simultaneously we and our shareholders have been better aligned, all of which creates an incredible backdrop for our go-forward performance. And now, I’ll turn the call over to Darren Tangen, our CFO for a more detailed summary of our third quarter financial results.

Thank you, Richard. Before proceeding with my comments on our third quarter results and as Richard just mentioned I’m pleased to report that we will be augmenting our financial and operational disclosure with a supplemental financial package this quarter which will be made available on Monday, November 9 concurrent with the filing our 10-Q. The supplemental will provide granularity on our financial and operating performance as well as details on each component of our capital structure. Further we will be providing Colony’s pro rata share of each line item in the income statement and balance sheet to clarify our economic interest within the consolidated financials, which includes significant investment level and operating partnership or OP non controlling interest. And while we have been providing a segmented income statement and balance sheet in prior quarters we wanted to expand the disclosure on each of our five reportable business units by detailing operating performance, allocable debt and portfolio statistics as applicable. We hope that you will find this supplemental report helpful and better understanding our business. Now, moving onto a summary of our financial results for the third quarter of 2015, Colony Capital reported Core FFO of $73 million or $0.54 per basic share and FFO of $72.2 million or $0.54 per basic share. We paid a dividend of $0.38 per share in the quarter and as Richard mentioned we are declaring an increased dividend of $0.40 per share for the fourth quarter an indication of our positive business and Core FFO outlook for 2016 and beyond. Third quarter results were supported by a net positive contribution of approximately $0.11 per share resulting from two successful European loan resolutions less the provision for loan losses taken on several of our legacy loan portfolio acquisitions. Over the last couple of years we have reported on our increased investment activity in Europe and we are now starting to see the benefits of these activities materialize in our earnings. We expect additional successful European realizations in the quarters ahead. These positive resolutions were offset by a provision for loan losses which represents a partial reversal of prior accruals and fair value step ups but does not represent an overall impairment to our original acquisition cost basis in these loan portfolio acquisitions. This provision totalled $26.5 million on our consolidated income statement for the third quarter but the company’s share was close to the $8 million or $0.06 per share net of non controlling interest. Again, this type of breakdown between company and non controlling interest will be more clearly illustrated in our supplemental that we will file next week. The provision for loan losses relates to specific loan portfolio that we acquired at a discount, which we refer to as purchased, credit impaired loans of PCI loans in our filings. On average these loan portfolio acquisitions remain on track to exceed underwritten returns but loan through accounting requires mark-to-market unrealized losses in any one loan approval to be taken currently while mark-to-market unrealized gains may not be recognized until realized. We have taken loan loss provisions in prior quarters in our unconsolidated joint ventures. However, they were not visible until we began consolidating these investments in the second quarter of this year. Now, I would like to provide an update on the financial and operational performance of Colony American Homes, CAH and Colony Light Industrial Platform, CLIP starting off with CAH. At the end of the quarter the CAH portfolio stood at approximately 19,000 homes in 11 states and overall occupancy was 94% consistent with prior quarter. Also consistent with prior quarter CAH’s stabilized portfolio generated a 9.3% gross revenue yield and 5.3% net unleveraged yield at the property level during the third quarter with Core NIO margins of approximately 61%. Rental growth was strong again with a 5.2% growth rate on lease renewals in the third quarter up from 4.7% in the second quarter. Lastly, we retained 76% of the tenants who had expiring leases in the third quarter inline with the first half of the year. Third quarter Core FFO contribution from CAH was $0.04 per share consistent with the first and second quarters of 2015. In addition to the $325 million special dividend paid in July, CAH paid a $7.3 million regular way second quarter dividend which increased 67% to $12.1 million for the third quarter. Moreover, we expect increasing Core FFO contribution and dividend distributions from our CAH investment as a result of the pending merger with SWAY as illustrated in the publicly disclosed merger presentation. As a reminder, CLNY originally invested $550 million in CAH for a 23.3% ownership interest. To date, CAH has returned $107 million in capital to CLNY. When you then add our share of Colony American finances book value of $58 million CLNY’s net basis in the proposed Colony Starwood homes merged entity is approximately $385 million. CLNY’s pro rata ownership interest of Colony Starwood Homes will be approximately 13.8% or 15.1 million shares. Now turning to CLIP, the portfolio was approximately 91% leased at September 30, consistent with the end of last quarter, but note that this is 3 percentage points higher than our original underwriting at this juncture. Further, net effective rents on new leases and lease renewals continue to average more than 10% above underwriting. Core FFO earnings contribution from CLIP for the third quarter was $10.2 million or $0.08 per share which has leveled the prior quarter. On the capital markets front we have also been active. As Richard mentioned Colony American Finance executed its first securitization selling $224 million of non recourse bonds which generated a return on equity of 20% on the retained interest. And our transitional commercial real estate lending platform also known as Colony Mortgage Capital or CMC completed its third securitization transaction in September selling $340 million of match term non recourse senior bonds with a weighted average coupon of LIBOR plus 236 or retained interest of $137 million yield the blended rate of LIBOR plus 12% before season expenses. With the scheduled wall of commercial mortage maturities over the next few years we remain bullish on the transitional commercial real estate mortgage origination business which provides attractive risk adjusted deals in the low double digits by self origination first mortgage positions and financing the loan portfolios in the capital markets on a match termed non recourse basis. Within CLIP in the third quarter, we refinanced $151 million of short term floating rate bridge debt with $166 million of ten-year interest only fixed rate debt with 3.8% coupon on assets we intend to hold longer term. And in this vein, we are in the process of terming out additional floating rate acquisition debt with longer term fixed rate debt. CLIP also closed on a $100 million revolving acquisition credit facility in the third quarter. With this facility and total uncalled capital commitments of $232 million we have plenty of dry powder to pursue additional accretive acquisitions within this platform. Finally, I will wrap up my remarks with an update on our liquidity position. Early in the third quarter we exercised the accordion feature of our revolving corporate credit facility by increasing commitments by $155 million to a total facility size of $800 million. Inclusive of availability under our upsized credit facility cash on hand and proceeds we anticipate from financings sales and repayments in the remainder of 2015 and early 2016 we will have over $1 billion of liquidity available for our ongoing investments and to sponsor the next generation of legacy funds and new programs. All-in-all it was another solid quarter for our company and we remain upbeat about the prospects for 2016 and beyond. As we continue to enjoy strong performance from our legacy real estate investment portfolio and we begin to see greater incremental contribution from our higher growth investment management business. With that, I’d like to turn the call over to the operator to begin Q&A

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Dan Altscher with FBR Capital Market. Please proceed.

Good morning, everyone. This is actually Cole Allen on for Dan Altscher. A really great color on the quarter and looking forward to reading the supplement next Monday. Just got a couple of quick ones today. I guess could you, maybe walk through the SWAY merger with CAH and kind of what the rationale for doing this was as opposed to maybe some of your other options? That would be great.

Sure. Thanks Cole. So I mean we have been focused on various options on behalf of CAH. And I think our conclusion was that a merger given what we think the long term consolidation play will be in the space really represented the best option to pursue in terms of maximizing value. You know right now the SFR space is still incredibly fragmented and you know of the roughly 16 million homes add a 90 million in the United States that are owned by investors and rented, only a couple of 100,000 are owned by institutional groups like ourselves and SWAY. And we believe in the long term consolidation and that scale is going to be a crucial differentiating factor in terms of market synergies both from revenue and an expense standpoint in terms of how you manage this business from a go-forward basis. And we also believe in the public company model for having a perpetualized company that will be able to grow its market share and be a best in class industry leader. So all these things led to the conclusion that if we could get public through and M&A transaction like we are doing with SWAY that that would really be optimal in terms of how we maximize value. So, I think we feel very fortunate that SWAY and its board and its management were like minded, you know in terms of how they looked at the go-forward opportunity and we are really pleased and looking forward to combining.

And Cole, just it’s’ Darren here. Maybe one more point to add on that. I mean, I think when you look at the portfolios of the two different companies there is a lot of overlap in the geographic footprint of that which is one of the primary reasons why the disclosed amount of potential synergies of $40 million to $50 million a year is so significant because again the two companies own portfolios that are in a lot of the same markets.

Yes that makes a lot of sense. Thanks for the color there. And then I guess moving to the $27 million loan provision that was great color I thought you gave on the color. Just want to make sure I fully understand it. So, it's going to be for all intents and purposes a pretty much non-cash loan provision that you guys are taking and if I understand this correctly you have to take the mark down but on gains that you can't market up till you've realized. Would there be gains in the past I guess?

Yes, so let me try to cover that. And there is some sort of complicated accounting around this. But first of all the $26.5 million loan loss provision that you see on the consolidated income statement represents both the company’s share as well as non-controlling interest share in various loan acquired loan portfolios. So of the $26.5 million of our $8 million really belongs to the company and the balance represents non controlling interest. And these provisions that have been taken on few of these loan portfolio acquisitions relate to specific pools of loans within those portfolios where there's an unrealized sort of mark-to-market loss that's being taken. But in the same portfolio there was another pool where there was a mark-to-market gain. You don't get to recognize that until all the loans in that pool have been fully resolved. So, it’s an accounting situation where you take the losses currently but you don't take the gains until realized. And furthermore, in some of these loan portfolios we have had accruals, so if you think about the original cost basis when you buy the portfolio that carrying value may step up over time through accrued interest and then for some of the loan portfolios there was actually the fair value step up that it occurred in the second quarter as a results of the merger, which is why the carrying value maybe in excess of the actual original cost basis in those loan portfolios. So, there's a few things going on, but the provision is being taken against existing carrying value which in many cases again is about the original cost basis.

Got you.

So these are portfolios that generally where we were buying at very meaningful discounts to unpaid principal balance. Where there was this prior accretion that Darren was just referencing, which in some case is now being reverse somewhat.

Okay. Okay. Got you. But the balance original cost is not at risk here?

Correct

Okay. Got you. And I guess one, last one, I guess you guys are doing about a $490 million REO portfolio in U.K, could you possibly give some color on what that portfolio is?

Yes. This is Kevin Traenkle here. So, as a portfolio of assets that we're buying from a European bank who had port close on the assets, it’s all commercial estate compress of office and retail assets. We think we're getting it at a very compelling price and its really in line with everything else that we've been doing here in the U.S. over the last several years as well as what we're doing over on the continent and we're very happy about that acquisition.

Yes. And as we stated in our prepared comments, most of what we're doing on the equity side today is intended to go in different funds and vehicles that we're currently in the market trying to raise capital for, so this is an example of something like that just FYI.

Awesome. I guess that's all I had. Thank you, guys so much.

Thank you.

Thank you. Our next question comes from Jason Weaver with CRT Capital. Please proceed.

Hi, good morning, guys, congratulations on the quarter and thanks for taking my questions.

Hey, thank you, Jason.

Doing well. Thanks. First on the Colony American Homes, SWAY merger, can you tell us what you plan to do with this year's received, i.e., we hold on internally or considered distributing any kind to Colony's shareholders. And a follow-up to that, given the size of your interest in those combined company, we be consolidating their financials with your own?

Well, let me take the first question. It's Richard. First of all, we will be subject to nine months lockup once we get the shares. And second, it is our intent to keep the shares and not distribute them directly to CLNY shareholders and subsequent to nine months we'll then be in a position to kind of figure out what exactly we want to do. I'd like to turn it over to Darren to answer the consolidation question.

Yes. So from an accounting perspective, Jason, we will be continuing to account for the interest under the equity method, so pro forma for the merger we will own 13.8% of the merge company, so we'll picking up approximately 13.8% of the merge company's earnings on a go forward basis.

Got you. All right. Thank you. And I know you might be able to get into specifics, but I would always also ask to see what you could say regarding the pace and magnitude of the conditions for capital rising for the CDCF [ph] front as well the European vehicle?

Well, look, we pressed our legal team hard just to be able to say what we did in our earlier comments, so we have to kind of keep to that. I'm sorry. But as I mentioned hopefully we'll be reporting more on our first closing in credit distress fund series hereby at the end of the year.

Okay, understood. Maybe this might be more palatable. You mentioned $1 billion in available liquidity, is that inclusive of what your estimate you'll have to contribute as a GP for those closings?

No. That would be use of capital. I was just referring to the source of capital. Source of the capital being availability under our various lines of credit, cash on hand and then as well proceeds that we're expecting from various financings, repayments and realizations over the next couple of quarters, that what amounts to the greater than $1 billion of liquidity. And then on the uses side, one of the uses over the next couple of years will be our pro-rata share or GP commitment to the next credit fund as Richard has highlighted in his remarks.

Okay. Thanks a lot, guys.

Thank you.

Thank you. Our next question comes from Eric Beardsley with Goldman Sachs. Please proceed.

Hi. Thank you. Just on those realizations, well, you actually see cash gains or there something that would not actually coming back to Colony shareholders?

So, you're referring to the two European loan resolutions, Eric?

That's right.

Yes. So, that was cash that actually return to the company. So those were real cash realizations.

Okay. And I guess I'm not sure in terms of future realizations, but how should we think about the pace of EUM of the existing funds in terms of some of the harvesting there?

Well, it's hard for us to give more detail than we have on that for the moment. I think as we report in subsequent quarters we hope to be in a position to provide more transparency on this, but we're doing the best that we can at the moment. And you'll see more information in the supplemental package that Darren cited. We're going to be posting to the website on Monday. So, it’s a little bit of a work in progress still in terms of how we get you more detailed information without compromising any competitive information on the one hand and at the same time through this more detailed supplemental package that we're going to be providing on an ongoing basis.

Got it. Are those European debt investments and the private funds, are those separate?

They were actually in both.

Yes, share.

They were shared.

Shared. So if you remember our old paradigm was to share investments with our funds generally in a 50-50 ratio. Whereas our new paradigm on a go-forward basis is generally to make a significant investment through the GP or whatever the sponsor entity position is, but have the fund owned 100% of the position.

Got it.

So, we're moving from one construct to a different one.

Got it. And can you just remind us in terms of what the actual fund raising targets are for the earn out, was it some like $6 billion over three years, just wondering sure had that number correct?

Yes. There was actually two different measurement periods. Eric, there was $4 billion over two years or $6.7 billion over three years, so call it roughly little over $2 billion a year.

Okay. And your prepared remarks, you said that you still expect to be on target to meet those?

Correct.

Okay, great. And then just lastly this might have been some noise of consolidation as well, but just to step up in the interest income this quarter on a sequential basis, what drove that?

Yes. So, that was some of these European loan resolutions that I was mentioning. So, the acceleration of the amount we actually were repaid on those loans relative to our carrying value flow through interest income. Now, there was some offsetting foreign exchange, retranslation losses and then there was associated hedge gain. So there were three different things that took place, right, so you had a positive resolution in a euro denominated loan investment. You had a loss on the FX difference between when we made the investments or when we brought the cash back to the U.S. And then, there was a positive hedge that we had in place. So, it was really sort of all three of those things that happened on particular investment.

Got it. I guess what's the clean number to the extent you have it?

Well, the number I said in my remarks, Eric, which I'll just sort of point it to you which is a blend of the after FX on hedges, those two resolutions in Europe, so that was obviously -- all of that was a positive. Then there was a negative of the $0.06 per share which was our share of the loan loss provisions and the loans acquisition, the net of all of that was $0.11 per share.

Okay. If interest income dollars, I guess, I'm trying to think about where that stood excluding all that I guess try to back into it, but if you have that number?

Yes. So, it would be $0.17 a share approximately, right, because I said that was a net $0.11 with $0.06 coming from loan loss provision, so that would leave you with $0.17 a share that's net of FX.

That is net of…

But that's net of that..

Right, right, that just on the positive resolutions, but including the FX loss that we took.

That's right. Got it. Okay. That's helpful. And then just lastly, if one of you comments on any trends you're seeing in financing some of the debt investments?

Well, the financing environment continues to be very positive in terms of availability of capital. And with anything in Europe its earlier day than let's say in the U.S. just like we reference vis-à-vis these would be opportunity set and for while various leverage was available now increasingly a little bit more leverage is available, but its more like the U.S. was a few years ago. So, still the work in progress with respect to recovery in those capital market and legal finance, whereas in the U.S. things have gotten a little bit more mature, so you can do more regular way financing levels at attractive rates and spread.

You didn't see any impact this past quarter in terms of the debt market volatility and your ability to finance some of the transitional loans?

Well, look, we did probably leave a little bit on the table in terms of the securitization that we did against our transitional loan book. So, we still ended up with a very good result in terms of net yield on our retained interest, so LIBOR plus 11.5, but if we've gotten execution done just 30 to 60 days earlier it would have been even higher than that. So it did impact us, but we're still fine.

Got it. Terrific. Thank you.

Thank you.

Thanks, Eric.

[Operator Instructions] Our next question comes from Jason Arnold with RBC Capital. Please proceed.

Hi, good morning guys. Just curious if you would update us on your regional areas of appeal, I know you mention Europe but any other geographic areas of kind of higher interest to you right now. And then maybe also comment on kind of capital stack, I know in the past you've said that Europe is kind of been in debt and equity and all sorts of stuff, U.S. has been a little bit more mature and preferred equity been kind of the area of preference, but maybe you just kind of comment on those broader items?

Sure. So look, just from a regional standpoint, we're still finding interesting opportunities here in the U.S. albeit they are more one-offs, rifle shots other than what we're doing in both single-family for rent space and also in the light industrial space where its more transcontinental in terms of the entire U.S. and we still see a very favorable supply demand dynamic. Outside of the U.S. Europe is the best macro opportunity. As I stated, I think we're seeing some pockets of distress in other places for sure, right. I mean, emerging markets in particular, Brazil, China. There are some pressure out there. We haven't necessarily done anything in those markets to-date, but we could generate some interesting opportunities on a go forward basis and we're constantly monitoring all of these markets. In terms of capital stack, our preference is always. We're seeking equity returns, but our preference is to be as high up in the capital stack as we can be. And depending on where you are in the cyclical maturation of the particular economic is going allow you either to be doing that higher in the capital stack in terms of first mortgages and the like, alternatively like in the U.S. today away from our transitional first mortgage loan book, which is a place where traditional lenders really can't go. We're playing in equity. So, it just depends. But right now, we're very comfortable with risk award relationship of all the different things that we're doing. And we really don't see anything troubling from the standpoint of overheating, certainly not in the category that we're focused on.

Great. Good color there. Thank you. And then I guess the other one, could you just talk about the retention of Colony American Finance in the transaction there and then the opportunity set that you see prospective land in that business. Maybe just an update there would be helpful?

Well, sure. I mean, look, we just didn't think we were necessarily going to get the right credit for it in connection with now the more super sized equity ownership SFR company we're creating in terms of Colony Starwood Homes. But on the other hand that mean, its business with incredible opportunity set and potential. I mean, just a loan in single family rent space as I was referencing you've got these 16 million homes that are owned by investors and again institutional part of the market is only couple of hundred thousand. So the other 15 million represent opportunity set for Colony American Finance and the other few groups that have chosen to enter that space. But we also think there maybe expanded opportunity for Colony American Finance in single family lending of one sort or other which we may explore, so we're very excited. We've been able to raise separate both from the securitized side and an equity standpoint for that business, so we think that would be another very significant value contributor to the overall Colony American Homes investment proposition.

Great. Excellent. Thanks for the color.

Yep. Thank you Jason.

Thank you. Our next question comes from Jade Rahmani with KBW. Please proceed.

Hi. Thanks for taking my questions and I had to jump on the call late. So, I apologize if any of this has been asked, but just in terms of the European capital raising, can you give any additional color on what kind of the situations those can tell?

Jade, hi, it's Richard and thanks. We're pretty limited in what we can say above and beyond what we said in our prepared comments which was that we are investing a lot in Europe right now with the margin more than half of our new investments are occurring in Europe. And then in addition, we commented on the next series of our credit distress fund. We're hopefully we'll be in a position to report on our first closing before the end of the year. But really that's we're at liberty to able to say today.

Okay. And will the supplemental include disclosure on specific funds; how much capital has been called on the rich fund and potentially something about the duration of that capital?

It will have some of that information, Jade. I'm not sure its going to have projections relating to when we expect realizations to happen within funds and that how legacy funds may burn off over time which obviously requires a fair amount of conjecture. But it is certainly going to have greater information than we've disclosed today.

And in terms of the cash on the balance sheet, how much of that is actually freely available to be invested and how much do you need to keep for either the fund purposes or for restricted cash?

Well, there is a separate line item for restricted cash which is perhaps borrower reserves and tenant deposits and that kind of things which is separate from the cash item that you see on our balance sheet, but the majority of that is available for use.

Okay. And just overall in terms of where we are in the cycle and current valuations and what do you think is driving the disconnection between public market valuations and private and do you think M&A is a potential opportunity for the company to pursue?

Well, certainly, there has been a disconnect I mean based on public market volatility that we saw over the summer and early fall. To some degree that disconnect is narrowed somewhat in terms of the recent uptick certainly in equity REIT market, but there are still some interesting opportunities out there. And look, I mean, some people public markets forecast where the private going to be going and sometimes that's true. On the other hand some times the public markets anticipate incorrectly or just get website based on technical volatility based on supply/demand dynamics just in publicly traded world and liquidity issues that different have. So it's hard to tell which is happening necessarily. But certainly based on how we see fundamentals right now, we think the market still has legs, so we don't things peaking yet. And therefore if there is a real disconnect in connection with a public company where we have insight and we think it's an interesting opportunity we might pursue it.

And then just in terms of core earnings, core FFO and the dividend, how do we think about modeling sort of a normalized payout ratio. And just going forward, are you going to plan to introduce some kind of recurring capital maintenance assumption in order to give color on what the payout ratio is and what would be available for distribution as the amount of real estate equity increases?

Yes. Well, I don't think – we're not 100% sure to be candid, how much transparency we'll be able to provide. But for sure, raising the dividend $0.02 per quarter as we did shows our confidence in terms of the go-forward recurring part of our earnings. And we're not going to payout a 100%. That just wouldn't be smarter prudent in our opinion. On the other hand, we'd like to payout as much as we think we can within appropriate cushion, again, what we think is recurring, even though we benefit in addition to what's recurring from these one time gains that we're able to take advantage off and we have other opportunities to add our portfolio to take advantage of further gains as I think you probably know. So, still a work in progress in terms of exactly how we'll share information that gives you literal payout ratio, but certain take as a good sign, taking the dividend up to $0.40 and that $0.02 being something we're very confident is recurring.

Okay. Thanks very much for taking my questions.

Thank you, Jade.

There are no questions. I would like to turn the floor over to Richard Saltzman for closing comments.

Okay. Thanks, everyone, again for joining us this morning. We really appreciate your continued confidence in us and again we couldn't be more pleased with the quarter and our outlook for the balance of 2015 and next year and we look forward to reporting on our progress in subsequent calls. So, thanks.