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…

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…

[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.