DigitalBridge Group, Inc. (DBRG) Q2 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Colony NorthStar Second Quarter 2017 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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, Addo Investor Relations. Thank you, you may begin.

Good morning, everyone and welcome to Colony NorthStar Inc.'s second quarter 2017 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 the line to answer questions. Before I hand the call over to them, please note that on this call certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time-to-time. All information discussed on this call is as of today, August 9, 2017 and Colony NorthStar 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 reported on both a consolidated and segmented basis. The company's earnings release, which was released yesterday afternoon 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 also 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 would like to turn the call over to Richard Saltzman, Chief Executive Officer of Colony NorthStar. Richard?

Thank you Lasse and welcome everyone to our second quarter 2017 conference call, with another extremely busy and productive quarter for Colony NorthStar. Our first full quarter as a combined company following the merger of Colony Capital, NorthStar Asset Management Group and NorthStar Realty Finance in January of this year. And I'm very pleased to report that our new company is off to an excellent start in the first half of 2017. As we communicated earlier in the year, 2017 is a year to focus on streamlining and simplifying the business and achieving synergies from the merger. In our broader quest to establish Colony NorthStar as the preeminent diversified equity REIT with unique and powerful embedded investment management platform. During this call, I will provide a mid-year report card on the 2017 corporate priorities we presented at the beginning of the year and as highlighted in our publicly filed investor presentation. In short, we have made tremendous progress towards the achievement of these goals which include specific cost savings targets, overall business and investment portfolio simplification, investment management fund raising and optimization of our capital structure. For sure, 2017 is a transitional year for our company. As we rotate out of non-core assets and businesses, and into strategic property verticals and various investment management products and co-investment platforms, investment management constructs which will either compliment or enhance our real estate verticals. One consequence of accelerating this asset rotation is the lag time between divestitures and the redeployment of that capital. So admittedly, we are currently significantly under invested relative to our liquidity position and optimal capital structure, consistent with our desire to be cautious at this particular point in the market cycle. However, the tradeoff does result in a temporary diminish in earnings. In terms of performance, second quarter core FFO was $204 million or $0.35 per share. These results include a $0.02 per share downward net asset value adjustment within our secondary real estate private equity portfolio as a result of several fund sponsors unexpectedly writing down their fund values during period. Excluding this adjustment which is not expected to be recurring, core FFO would have been $0.37 per share. Last night we also declared a third quarter dividend of $0.27 per share, unchanged from the prior quarter. This is also consistent with our expectation of a $1.08 per share of annualized dividend, which we anticipate will be well covered by our 2017 core FFO. Second quarter operating results across our property verticals and investment management businesses were mixed. We had continuing strong results in industrial to slightly softer results in healthcare and hospitality. Within investment management, our institutional business continues to track towards a strong 2017 performance led by our industrial open-end fund, several balance sheet led co-investment opportunities that we expect to syndicate in the near future, along with the final closing of our most recent global optimistic credit fund at the end of last quarter. On the other hand, an extended period of extraordinary structural change and market disruption including the very recent Department of Labor fiduciary rule adoption and implementation in June has negatively impacted the retail investment management business year to date. Despite these industry challenges, we remain optimistic that the retail investor management business will continue to institutionalize and rebound. Furthermore, we've positioned our platform and product line up to take advantage of these evolving market conditions. This includes products with lower condition structures, liquidity and daily NAV reporting features, just some of the enhancements necessary to create products that can be distributed to a broader market as well as establishing better alignment with Colony NorthStar as a sponsor including through more significant balance sheet co-investment. Turning back to our strategic priorities and beginning with asset sales and capital deployment, year-to-date Colony NorthStar has completed asset monetizations totaling $3.6 billion of gross asset value and capital deployment totaling $1.5 billion of gross asset value. Asset monetizations were $384 million in the second quarter, primarily related to selling the remainder of the company's interest in Colony Starwood Homes and $437 million more recently in the third quarter to-date. These monetizations were all completed at attractive valuations and have generated significant liquidity while simultaneously simplifying our business. Most importantly and as mentioned on last quarter's earnings call, we'll also now made significant progress towards establishing a third-party permanent capital entity, which will focus on Colony NorthStar's US conventional loan and credit equity businesses including most of our existing investments in this space. We are cautiously optimistic about unveiling this soon and with a goal of having it in place within the next quarters. In fact, our expectation is that the entire other equity in that segment will be wound down completely as a result of these transfers combined with the aforementioned dispositions and run off activity. Net sale proceeds will be a meaningful source of capital returning to the balance sheet to be deployed elsewhere, be it in strategic property verticals, balance sheet led co-investment opportunities, seed investments in new investment management vehicles, share repurchases or general deleveraging. At present we have more than $1.2 billion of liquidity, which if invested would provide substantial upside to our current run rate earnings. In this regard, we continue to review a wide range of investment opportunities including additional property acquisitions in our industrial segment and in Europe. To that end during the second quarter, we purchased approximately 9% of the common stock of our externally managed publicly traded European focused REIT NorthStar Realty Europe or NRE. We continue to believe that Europe is approximately four to five years behind the US in terms of its financial health and recovery. We also believe in a complementary public and private approach to the broad-based investment opportunities available there. Public for more current income oriented transactions and strategies, private for more backend oriented residual opportunities. Creating better alignment with shareholders at NRE through our equity stake is the first of many steps towards narrowing the trading discount to current NAV and being in a position to accretively grow the company and our platform for the benefit of both NRE and CLNS shareholders. The intersection of property and technology is another macro theme for us. Although technology has always influenced real estate development and fostered new forward-looking trends in past cycles, never before have we seen the kind of outsized impact that we're witnessing across all property sectors in this cycle. Staying with or ahead of this curve is uppermost in our minds as we debate and examine different opportunities. For instance, our success in the single-family for rent space was among other factors very much attributable to the creation of user friendly technology that both tenants and employees could avail themselves of. In the former case this led to a huge marketing advantage and ease of access to a tech savvy millennial constituency. And in the latter case it created operating efficiencies in the field to drive margins and level the playing field with multi-family. In our US light industrial platform on the other hand, we're in a space that benefits enormously from e-commerce and owning that last mile of distribution. So whether it's staying ahead of what we positively impacted versus disrupted or using technology itself to foster a competitive advantage, we intend to overlay this analysis and thinking across our entire business. Certainly state-of-the-art real estate spaces such as data centers, towers and fiber networks are among those areas of interest. We've already had good experience through our investment management business in data centers in Europe as an example, definitely more to come on this topic in future quarters. On the expense synergy front, we have achieved approximately 110% of the original identified $115 million of annualized synergies and approximately 100% of the originally identified $80 million of annualized cash energies on a run rate basis. While we're extremely pleased with this result, we expect to identify additional ways to rationalize costs through improved operational efficiencies on a go-forward basis. Connected to expense savings, we also ahead of schedule in combining Legacy Colony and NorthStar offices around the globe. For instance, London, Luxembourg and Dallas office integrations are now complete. The largest New York is well underway and expected to be complete during the fourth quarter of this year. This is also a critical component to the progress we've made [indiscernible] and ensuring that we benefit optimally from the plethora of talent that both organizations brought to the table. Shifting to balance sheet optimization, we had approximately $2 billion of corporate and asset level financing - refinancing in the quarter, where we successfully extended and staggered maturities and reduced our blended cost of funds while keeping overall leverage inside of target levels. Darren will speak to this in greater detail in a moment. Moving next to our investment management business and fund raising activities. Colony NorthStar and its affiliates have raised approximately $1.4 billion of capital from institutional and retail clients during the first half of 2017. The majority of our fund raising year-to-date has been sourced from institutional clients and we expect this trend to continue through the balance of the year as the retail market stabilizes from the regulatory headwinds previously described and starts to grow again during the second half of 2017 and into 2018 and beyond. Pleased with these fund raising results and are well on our way towards achieving our $2 billion capital raising target for the year, double our fund raising performance in 2016. Our investment management platform with $40 billion of assets under management inclusive of 14 billion of AUM within our Townsend subsidiary. Supports our core real estate verticals by leveraging our current asset level returns with investment management fees and carried interests. The turbo charged financial model without incremental financial risk. We have also been able to use our balance sheet to secure deals and then subsequently syndicate the equity. For example, we expect to report next quarter on a successful institutional capital raise around one of our recent balance sheet lead investments that is slated for co-investment. This approach securing an investment or portfolio first and then procuring co-investment immediately thereafter is increasingly becoming programmatic for Colony NorthStar. In fact we did this for Colony Industrial via the Cobalt acquisition back in 2014 and have two additional portfolios that we're now working on beyond the referenced single asset co-investment closing that should occur in this current third quarter. Increasingly this is a preferred construct for many larger investors such as sovereign wealth funds and the like. Overall, we are very pleased with the efforts we have made on our top initiatives. Our plan is to simplify, streamline, and position the company for rerating or higher multiple of current earnings as we demonstrate and replace less certain revenue and profits with more recurring investment management fees. Simultaneously we could use our liquidity and balance sheet strength to pursue strategic growth opportunities in carefully selected areas. I'm looking forward to reporting further progress on all these topics in future quarters. Last but not least and before I turn the call over to Darren Tangen our CFO, I'd like to commend and thank our employees for their perseverance and dedicated efforts. No one said that a three way merger of this scale was going to be easy and it's a fact that everyone's job at our company has changed somewhat. The degree of complexity alone manifests itself in a non-linear progression as we pursue and achieve our objectives. Despite these challenges I couldn't be more proud of how our team has pulled together working tirelessly to create shareholder value every day. And I just want to say keep up the good work everyone, it's clearly paying off. Darren?

Thank you Richard, and good morning everyone. Starting with some housekeeping matters, our results for the second quarter ending June 30, 2017 represents the first full quarter of operations for Colony NorthStar. As such, when comparing second quarter results to those of the first quarter keep in mind first quarter results reflect the pre-merger standalone earnings that the accounting acquirer Colony Capital for the first ten days of January and the combined earnings of Colony NorthStar for the balance of the first quarter. Also in addition to the second quarter earnings release which we filed, excuse me, we filed the second quarter supplemental financial report and an updated company investor presentation last night and all of these documents are available on our website. With that I will turn to our financial results for the second quarter. Net income attributable to common stockholders was $38.6 million or $0.07 per share and core FFO was $203.6 million or $0.35 per share, up from core FFO of $0.31 per share in the first quarter. Second quarter core FFO included net gains totaling $59 million or $0.10 per share. The majority of these gains resulted from the sale of our remaining interest in Colony Starwood Homes and the disposition of a sale leaseback investment in Phoenix, Arizona which together contributed $70 million towards second quarter core FFO. These gains were upset by an 11 million negative mark to market adjustment in our secondary real estate private equity portfolio related to net asset value markdowns by a few underlying fund sponsors. In addition to the Colony Starwood Homes and Phoenix sale leaseback investment realizations we sold the first mortgage loan and other smaller investments for total second quarter disposition proceeds of $384 million. Subsequent to quarter end, we've completed a further $437 million of asset monetizations including the disposition of a sale leaseback investment in Switzerland involving a portfolio of university campuses and the sale of Colony American Finance. Turning to acquisition activity, the company's second quarter new investments totaled $670 million. Noteworthy transactions include the acquisition of a Class A 1 million square foot plus office building in Downtown Los Angeles for approximately $460 million. This balance sheet lead investment slated for co-investment is generating strong interest from third-party institutional investors and we expect to report a successful equity indication of this investment on our call next quarter. We also increased our ownership stake to approximately 9% in one of our managed companies NorthStar Realty Europe or NRE. Finally, the company originated an $84 million preferred equity investment with a 12% coupon in a stabilized Class A Long Island, New York office portfolio sponsored by one of our strategic partners. I will now provide a brief summary of the financial results for each of our five reportable segments starting with healthcare real estate. As of June 30, 2017, the number of properties in our healthcare portfolio held constant at 425 compared to the end of the first quarter. As a reminder, the healthcare portfolio is composed of senior housing communities, medical office buildings, skilled nursing facilities and hospitals. The company's ownership interest in the consolidated healthcare segment remained constant at approximately 71% during the quarter. Compared to the first quarter 2017, second quarter same store consolidated revenue growth was 2.4%. However consolidated net operating income decreased slightly from $79.3 million to $78.5 million or negative 1%. While we experienced quarter over quarter NOI in our senior housing medical office building and hospital portfolios, a tenant in our skilled nursing triple net portfolio is experiencing some difficulty which caused us to recognize a $3.6 million bad debt expense and thus lower net operating income in the period. We are actively evaluating all options to stabilize the skilled nursing sub-portfolio. All told second quarter core FFO contributions from the healthcare segment was $24.8 million. Moving onto industrial real estate segment, as of June 30, 2017 the industrial portfolio consisted of 354 light industrial properties totaling 39 million rentable square feet, which was 95% leased. During the second quarter, we acquired ten industrial buildings totaling approximately 1.6 million square feet for approximately $170 million and disposed of nine non-chord buildings totaling approximately 1.3 million square feet for $37 million. Robust transaction activity have continued into the third quarter as we have acquired an additional 20 industrial buildings totaling approximately 2.8 million square feet for approximately $201 million and disposed of one non-core building totaling approximately 100,000 square feet. While we remain in growth mode in our industrial segment, we will continue to be disciplined about calling inferior properties in order to constantly upgrade overall portfolio quality. The company's ownership interest in this segment decreased from approximately 43% at the end of the first quarter to 41% at the end of the second quarter due to incremental fund raising in the open end fund. Operationally, second quarter 2017 same-store consolidated net operating income was $36.9 million, an increase of $579,000 or 1.6% from the prior quarter and an increase of 3.6% over second quarter 2016 which was comparable to other public industrial peers. We continue to observe tremendous momentum in the operating fundamentals of this sector driven by low vacancy rates, limited new supply and strong demand drivers such as booming e-commerce activity. Core FFO contribution decreased to $12.5 million compared to $13.4 million in the prior quarter because of the lag time to deploy recent capital contributions into the opening fund. Moving to our hospitality real estate segment, as of June 30, 2017, the hospitality portfolio consisted of 167 primarily select service and extended stay properties unchanged from March 31, 2017. The company ownership interest remained approximately 94% during the quarter. Compared to the second quarter to 2016, second quarter 2017 same-store consolidated revenue was flat, but EBITDA declined approximately 1.7% from $83.1 million to $81.7 million primarily due to higher property taxes and wages. Core FFO contribution from the hospitality sector was $42.7 million for the second quarter. Our other equity and debt segment includes our opportunistic and non-core investments which totaled $6.3 billion of undepreciated asset carrying value and $4.2 billion of undepreciated equity caring value as of June 30, 2017. Although we sold the remainder of our position in Colony Starwood Homes in the second quarter, which was a reduction to this segment, two new transactions mentioned earlier, the Class A downtown LA office building acquisition and the share purchase in NRE increased at least temporarily exposure to the segment. It is also worth noting that subsequent to quarter end, we assumed ownership of a $1.3 billion 148 hotel portfolio known as [indiscernible] which will be another temporary addition to this segment. Ownership of the [indiscernible] portfolio came via consensual foreclosure from an original mezzanine loan position. The company owns approximately 55% of this portfolio with the balance owned by third-party capital under our management. At a basis of $92,000 per key and a 9% debt yield as the June 30, 2017 on depressed financial results, we are optimistic about the ultimate prospects for this investment. Also as Richard highlighted, we are evaluating strategic alternatives for a substantial portion of our US debt and credit equity investments in our other equity and debt segment for contribution to a new externally managed permanent capital vehicle. This transaction will not only simplify Colony NorthStar's balance sheet but also expand our investment management business with the strategy that is a core competency of legacy colony and Colony NorthStar. On the earnings front, the other equity and debt segment contributed second quarter core FFO of $157.1 million which included 59 million of net gains as previously mentioned. Lastly, our investment management business ended the quarter with $40.3 billion of third-party assets under management, down slightly from $40.7 billion at the end of the first quarter. The increase in institutional fundraising was offset by asset sales and liquidations, including the remaining stake in Colony Starwood Homes within our private equity funds. It is important to note that both first and second quarter assets under management figures include approximately 14 billion of AUM at Townsend, which is currently held for sale. During the second quarter, total fees and revenues were $54 million, compared to $60 million in the first quarter. The decrease was primarily related to lower acquisition and disposition fees earned from our retail companies. However, second quarter core FFO contribution was $41.6 million, up from $31.4 million prior quarter, driven by lower compensation and tax expense. I would like to next touch on capital structure. Total capitalization, excluding minority interests, was $18.5 billion, based on debt balances as of June 30, 2017 and our share price as of August 4, 2017. Of this, total pro rate debt was $8.3 billion, representing a 45% debt to capitalization ratio. During the second quarter, we were very active in refinancing both investment level and corporate level debt at lower rates and longer terms. First, we refinanced more than $1.6 billion of consolidated mortgage debt in the hospitality segment, pushing out the fully extended maturity dates from 2019 to 2022, while reducing our blended spread over 30-day LIBOR by 40 basis points from 3.44% to 3.04%. In addition, within our industrial segment, we completed the refinancing of our original $1.1 billion variable rate debt facility that financed our initial acquisition of the Cobalt portfolio in late 2014. This refinancing process spanned two years and involved $862 million of new mortgage financing in 12 separate uncrossed pools with a weighted average fixed interest rate of 3.8% and original term in excess of 12 years. And finally, at the corporate level, we completed a new issue 7.15% Series I perpetual preferred stock offering, generating net proceeds of $334 million with the majority of these proceeds used to redeem all of our callable 8.75% Series A and 8.5% Series F preferred issues. The net result of the issuance was 140 basis point improvement compared to the blended rate of the redeemed shares. Looking ahead, there remains $475 million of preferred stock callable in 2017 that has a blended rate of 8.4% and we will look to refinance this at lower rates later in the year. In conclusion, it was another very good quarter for Colony NorthStar, as we progressed towards the achievement of our strategic plan. Our corporate priorities are mainly internally focused rather than externally focused and include such activities as monetizing non-core assets and businesses, rationalizing cost throughout the organization, optimizing our capital structure and improving the operation and earnings of our existing businesses. For sure, these undertakings create some noise and disruption in some of our near term financial results, but we are only at the beginning of an exciting transformation for Colony NorthStar and we remain sanguine about the value proposition for our shareholders by delivering on our vision of creating a must own, large cap diversified equity REIT with a synergistic embedded investment management business. So with that, I'd like to turn the call over to the operator to begin Q&A. Operator?

[Operator Instructions] Our first question comes from Jessica Levi-Ribner of FBR. Please proceed with your question.

My first is on share repurchases. You didn't do any more than had been announced at the end of the first quarter. And so I was just wondering how you think about repurchases and what levels of the stock are attractive to you?

Look, I think we had an opportunity in the prior quarter and the beginning of this quarter to buy a fair amount of our stock in terms of what we actually have set forth in our buyback plan at very attractive prices. Generally speaking, around 13 plus or minus and in some cases even below 13. So, we pause for the balance of this quarter, as we were ferreting through all of the rest of our activity, recognizing that this is still a good part of the year to go here as we kind of analyze the various choices that we have before in terms of deploying capital and looking for the buybacks. Just trying to be judicious.

Okay. The permanent capital vehicle, do you anticipate that to be a public vehicle or a private vehicle within the investment management segment.

Yeah. Look, we're analyzing all of the various choices, which would include both public and private and I think at this juncture, we're really not at liberty to say anything beyond that, but there is certainly a number of different ways that you can do what we're trying to accomplish.

Just turning to fund raising for a moment, with the potential loss of the AUM that Townsend has, how can we think about, I guess, momentum going forward? Do you plan on raising capital round the healthcare and hospitality portfolios? And maybe a look into how the third quarter is going already?

Well, for sure, our gross AUM is going to get reduced, if in fact we're successful selling the Townsend business. On the other hand, I mean I think we're looking at a variety of different options, both with respect to the verticals as well as directly in the investment management business. And I think, as we've shared before, in terms of how both healthcare and hospitality are positioned longer term, it's still a little bit unclear to us whether we want to have them as strategic verticals or alternatively as part of our investment management businesses with a little less balance Sheet participation. So for example, we did the joint venture in connection with healthcare last quarter. And it could be more of that that we're going to do. The same might be applicable to hospitality. We're certainly not trying to grow those businesses at the moment. Where our focus in terms of growth is, is more on the industrial side, what I described with respect to Europe as well as more interesting things that we want to do in the technology space related to real estate as I also cited. And then we continue to be fairly bullish about the US residential sector, which we've also talked about in prior calls. Certainly, selling the Colony Starwood Homes position was a little bit bittersweet for us, just in terms of all of the pain and effort that went into creating that company organically from scratch over the last five, six years. And then because we had it in an investment management construct, which was more closed end, we had to liquidate even though we think very highly of that business and that team and we think it will continue to have legs. Similarly, we also think that other businesses in the US residential rental space have the same fundamentals going for them, albeit you have to look at it through a lens where you're also examining where the new supply is because that's tempering some of the growth in some of those markets as we speak, but nonetheless, we have a lot of good partners in the multi-family space as an example here in the US. And we're certainly trying to do more things with them.

Our next question comes from Mitch Germain of JMP Securities. Please proceed with your question.

I'm curious about the synergies and how to take the savings and identify them on your financials. It did seem like some of your compensation and admin costs went up quarter over quarter and I know that there was some kind of one timers last quarter, so just - maybe just try to provide some perspective on how I should think about those line items or other line items going forward.

Hey, Mitch. It's Darren. I'll try to take some of that. There are still, I mean, the first quarter which included the closing of the merger definitely had some one-time expenses and then as it relates to some of the stock compensation expense, there are some merger related stock compensation expenses, which will be amortizing over the first year post-closing. I think the right way to think about the G&A if you're looking at it on a cash basis and that's where we've talked about this $80 million cash G&A cost savings target related to the merger, if you go back pre-merger and look at the combined cash G&A of the three individual companies, that was running at roughly about $305 million. So if you apply an $80 million cash savings to that, that brings you down to around $225 million of cash G&A run rate pro forma for all those cost savings being built in. So I think that's probably the guidance that I would give and I think we've given in the past around cost savings.

I'm curious about, is the Southern California Office Building, a, I know Richard had referenced potentially some sort of vehicle in which you guys are creating, next quarter for fund raising, is that what you're talking about? And b, how does that office building fit into your investment strategy or thesis going forward.

Well, look, that's an example just like we cited last quarter, this non-performing loan portfolio that we purchased from NAMA [ph] of situations where we're positioning it on the balance sheet, but in contemplation of offering co-investment and where, this is not going to be a vertical. But it's really intended to be more of a balance sheet light approach to good investment opportunities on kind of a deal by deal basis where we're highly confident around the ability to co-invest either coincident with the closing of the deal or shortly thereafter. And so therefore, Mitch, I mean I think you have to appreciate that typically we're going to have a 10% equity stake plus or minus in situations like this, as it relates to a long term hold. So we're going to benefit from a much higher multiple of outside money to inside money as versus how we think about the strategic verticals and these are just a couple of examples of those types of situations. We have others and there's just going to be a constant sequencing of this type of activity that we're going to be doing.

I was just going to add on to what Richard just said there, I think both of those transactions are consistent with what we've talked about in the past in terms of tactical strategies that are more balance sheet light that may not be appropriate to develop into a full-fledged real estate vertical, but where again as Richard just mentioned, maybe 5% to 10% of the activity would come from the balance sheet and the 90% to 95% would come from third party capital.

And just so curious about this one or even many of the others that you plan to do, why not create a comingled fund rather than looking at each one on a situation by situation basis?

Well, Mitch, I mean, it's a great point. I mean, in some cases, it may lead to a commingled fund. It could lead to a series of deals that offer a similar approach and strategy. But I think the ease with which you can raise money for these kind of co-investment situations and opportunities is much greater than starting a new comingled fund, which is kind of more of a blind pool even if you have a little bit of seed investments at the beginning. But it could lead in certain cases where we have a high degree of confidence around that type of capital formation, it could lead to a construct like that.

Got you. Curious about NRE. Obviously, you're at 9% now or just under 9%. Can you go north of 10% in terms of how much stock you can own of that entity?

Well, I mean there is a charter restriction, which doesn't allow anybody to go over 10% unless the board would approve it. So technically, yes, we are restricted today from going over.

[Operator Instructions] Our next question comes from Jade Rahmani of KBW. Please proceed with your question.

This is actually Ryan Tomasello on for Jade. Just starting off, what does management see as the most interesting opportunity ahead and top priority for the company? For example, is it sponsoring this new mortgage REIT, new investments in Europe, growth in industrial or NRE or perhaps something on the residential side?

Well, I mean really difficult question. Because we love all those ideas and opportunities, but I do think just in terms of the transformation that we're very focused on this year and presumably somewhat into next year that the recapitalization of the conventional US debt book along with the credit equity investments that we also have in that space is probably our number one top priority, just because it literally checks all of the boxes of what we're trying to do, including this is legacy core competency of both the Colony and the NorthStar organization. So we want to remain in the business on the one hand, but on the other hand, we don't want to do it in such a balance sheet heavy concentrated fashion, as it's currently configured on our balance sheet today. So we believe it continues to be a great opportunity in the space. We believe there are very interesting ways to raise more capital to do it and we'll still have a significant investment in this space, but we're going to do it in a way which is much more consistent with how philosophically we've been outlining what we want to do with investment management.

Great. And regarding gains, can you provide a range of the one-off gains that you expect in 3Q and perhaps for the balance of the year, including the Colony American Finance sale and the Swiss net lease properties.

Go ahead, Darren.

Thanks, Richard. At the beginning of the year, when we revised our guidance, we did talk about gains being a 15% to 20% contribution to our full year core FFO expectations and I'd say at this juncture, we're likely to be at the high end of that range. So there are some additional gains we're expecting in the third quarter from the sale of the Swiss sale leaseback investments that you just mentioned. So that will be a meaningful game we'll pick up in Q3. Obviously, Q1 and Q2 have the two SFR or Colony Starwood Homes sales that were large gain contributors in those periods. So we are expecting that gains are going to continue into the second half of this year and probably more in that sort of 20% contribution to overall core FFO for the full year.

And then just moving on to investment management, do you expect the institutional AUM balance to continue to decline in the second half driven by fund life cycles and could you potentially provide us with what institutional fee earning equity under management is today?

So there is a supplemental financial report that we filed last night, which does break down all of our third-party assets under management and I don't anticipate any significant movement in institutional AUM between now and the end of the year, but for what we've talked about previously, vis-à-vis Townsend, but outside of that, there really shouldn't be - I wouldn't expect any meaningful change of, there will be some ins and outs, but I think the net effect should be relatively neutral.

And you're earning fees primarily on equity under management rather than assets under management, correct?

That is correct. Certainly, in the institutional investment management business, that's correct.

And do you disclose what the actual equity under management is?

I guess we don't in the supplemental, but maybe a good sort of rough guess would be to assume sort of one to one debt to equity or 50% leverage and that could get you to an estimate of what the equity under management might be. That might be a little high on the leverage side, so there is probably a little more equity than that under management, but at least that gives you a guideline.

And then just on the property verticals, can you give us some expectations for same-store NOI growth for perhaps back half or 2017 and maybe a bit of color on the supply/demand dynamic in your major markets, particularly in the hospitality portfolio and healthcare.

Sure. Well, I think we're expecting the second half to probably track pretty closely to what we've been experiencing here in the first half. So if you go through the three real estate verticals, healthcare obviously there was an idiosyncratic things that happened in the period vis-à-vis our skilled nursing portfolio, but if you look at what was happening in the balance of our healthcare portfolio, top line was growing sort of 2% to 3% and we saw the NOI was also actually increasing, sort of flat to maybe 1% to 2% growth. Again, if you sort of put skilled nursing to the side where there's some different things going on, on the hospitality front, top line has been flat and I think somewhere between flat to 1% to 2% top line growth is what we're expecting in hospitality, but there's definitely been some wage and other expense pressures in that business, which has been leading to EBITDA being down a little bit. So I think we saw that in the second quarter and it's probably fair to assume that we're going to see a similar type performance over the balance of 2017. Industrial has been the bright spot as we've talked about and there year-over-year, we've seen more 3% to 4% same store NOI growth, which I think we would expect to see a continuance of the latter half of this year.

Perfect. That was good color. And then just lastly, you mentioned the near term headwind from the high liquidity position, which I know you said is partially intentional due to your cautious view of the environment. How long should we expect this liquidity overhang to continue and do you have a target timeframe for being more fully deployed?

Let me address that Ryan. Look, we're going to do it as expeditiously as we can, albeit, it's going to be pursuant to being very disciplined around being in those areas that we think are really compelling from a supply demand standpoint combined with third party capital formation consistent with our model. So, there's no panic or urgency on our part, notwithstanding that we might be under earning relative to what our full octane run rate could be based on this further deployment. But it's going to be very opportunistic based on when those opportunities surface and become available in the spaces that we like, we're not going to put our heads in the sand and just buy. Just not going to do that.

Our next question is a follow-up from Mitch Germain of JMP Securities. Please proceed with your question.

Richard, I know you've been cautious to provide any additional detail on this potential vehicle for your loan book, but obviously there's been a number of mortgage REIT IPOs, another one or two that are in the queue as well. So looking at a public sort of vehicle, is there any cautiousness on your side that the market just might be saturated with too much new products?

Well look, I think we feel there are both public and private options here that are permanent capital constructs and it certainly seems to us that when we look at the public side of that, that the public market is still trading reasonably well and people are bullish and confident about the opportunity on a go forward basis, just in terms of how the traditional lending business here in the US has gotten disrupted, based on the financial crisis regulations that are currently in place, capital requirements, et cetera. So, and we continue to believe in that ourselves. So whether it's private or public, we're very optimistic about the future for that business.

There are no further questions. I'd like to turn the call back over to Mr. Richard Saltzman for closing comments.

Okay. Thanks, everyone again for joining us today. We know our story is quite complex and we're doing our best to simplify it as quickly as we can. So bear with us as we continue this progression over the next couple of quarters, but we're getting the job done and creating shareholder value and we look forward to reporting more in those in ensuing quarters. Thank you.

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