Greetings and welcome to Colony NorthStar Incorporated Third Quarter 2017 Earnings Conference 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. It is now pleasure to turn the call over to Lasse Glassen, Addo Investor Relations. Thank you. You may begin.

Good morning, everyone, and welcome to Colony NorthStar Inc.’s third 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 upon 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 9, 2017 and Colony NorthStar does not intend now undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures reported on both a consolidated and segmented basis. The company’s earnings release, which was released this morning and is available on the company’s website presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors. In addition, the company has 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 third quarter 2017 earnings conference call. It’s hard to believe that we’ve only completed three quarters since our merger closing back on January 11. So much has been accomplished since then as we simplify our story. This includes significant sales in refinancing, as well as the streamlining of business units to achieve synergies and foster more efficient operating performance. But frankly, although there’s somewhat more to do, that’s our past. What’s most gratifying and exciting today is the identification of those businesses, which embody our future growth. In fact, whether it’s through reorganizing legacy competencies or pursuing new ventures in real estate sectors and geographies that offer the most compelling current risk reward opportunities. Those pieces are now falling into place. In that regard, I’m pleased to report another excellent quarter of strategic accomplishments at Colony NorthStar. During the quarter, for example, we announced a plan to merge our U.S. credit-oriented balance sheet assets with two of our externally managed non-traded REITs, Northstar Real Estate Income Trust or NS I and NorthStar Real Estate Income II or NS II to create Colony NorthStar Credit Real Estate, Inc., CLNC. More recently, we committed $167 million to a digital real estate infrastructure investment in Latin American cell towers through a new partnership with Digital Bridge, all in anticipation of creating a third-party capital model for such investments. Furthermore, this morning, NorthStar Realty Europe reported earnings and announced agreed upon changes to the management agreement with Colony NorthStar to continue the progress that’s been made towards better positioning that company for growth. Last but not least, we also made incremental investments of $50 million and $146 million in our U.S. industrial platform and U.S. multifamily preferred equity portfolio, respectively. These represent the other significant areas…

Thanks Richard, and I echo your sentiments regarding David, thank you David. Good morning everyone, as a reminder, in addition to the release of our third quarter earnings, we filed a supplemental financial report and an updated company investor presentation this morning. All of these documents are available within the public shareholder section of our website. Now I’ll turn to our financial results for the third quarter. Net income attributable to common stockholders was $1.7 million or $0.0 per share and core FFO was $193 million or $0.33 per share compared with core FFO of $0.35 per share in the second quarter. Third quarter core FFO included net gains totaling $36 million or $0.06 per share. The majority of these gains resulted from the sale of a portfolio of sale-leaseback properties located in Switzerland with two other less significant gain contributions from unrelated investments in Europe. Taken together, these gains contributed $58 million which were offset by $22 million of nonrecurring unrealized impairments and mark-to-market adjustments within our CDO securities and secondary real-estate private equity portfolios, resulting in a net gain contribution of $36 million. In addition to the Swiss sale-leaseback portfolio sale, we sold our interest in Colony American Finance and received part payoff from several loans and pruned various other non-core assets within our industrial and healthcare verticals. All told, third quarter asset monetizations and repayments totaled almost $600 million, bringing year-to-date monetizations to $4.3 billion, primarily within our other equity and debt segment. Speaking of non-core assets and businesses, we are under contract to sell the Townsend Group. The Townsend sale is expected to close by year-end, generating approximately $379 million of net proceeds to Colony Northstar after transaction and other expenses. These net proceeds are expected to be redeployed accretively into new investments and stock repurchases,…

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jason Arnold with RBC Capital Markets. Please proceed with your question.

Hi. Yes, good morning, guys. Just a couple of quick questions. I was just wondering on asset under management growth kind of here going into 2018, if you have any kind of ballpark big picture thoughts on where you might be able to hit numbers-wise going into next year?

Well, first of all, just – Jason, good morning, and thanks for that question. So with the pending sale of Townsend, of course, assets under management are going to first get reduced by virtue of the fact that that is currently a part of our total, approximately $15 billion just under. And then from there, certainly, our expectation is, we’re going to be able to grow at a steady pace based on all of the activity that we’re currently pursuing, whether it’s the industrial fund, whether it’s the new things that we’re doing in the digital real estate infrastructure world, what we’re doing in Europe, hopefully with respect to the new credit REIT that will be formed, we have all of these platforms, if you will, that will be positioned for substantial growth in businesses that we think have the best fundamentals in the market today. So we’re very optimistic about that.

Okay. So probably just it’s as usual dependent upon opportunities and what not. But maybe just specifically on kind of a third-party asset under management side of the equation, do you have any bigger picture thoughts or just kind of same view that, hey, if it comes along and as things kind of move in transition, it will grow?

Well, we have no specific number forecast, if that’s what you are looking for. I mean I think, look, there is lots of capital available in the market today, albeit I would say it’s fairly selective and picky with respect to strategies and managers that the people want to invest with. So, it’s kind of good news bad news if you will. Although I think we fall into the category of a preferred manager and simultaneously I think we’ve done a great job of really selecting what are the appropriate strategies consistent with all the things I reviewed earlier in the call. Some of it, all the things that we’ve been doing in the last 10 years, you know whether in single-family for rent or other spaces and so as a result, notwithstanding that the market is picky and selective, we’re quite confident and optimistic about getting at least our fair share if not more than our fair share of the market.

Excellent, great color there, thank you. And then the second question I would guess just specifically directing towards Europe and just wondering what you can mention in terms of your key kind of strategic vertical areas, where you see the most interesting opportunities in Europe?

Well, look, we have great investments in Europe as we sit here today, whether it’s on the public side through NRE and the high-quality office portfolio that they own as part of their core portfolio or even privately. I mentioned the project Tolka, which was nonperforming loans in Ireland that is primarily again backed by Class A Double and office assets. But we think the pan-European opportunity is really interesting today. Again, Europe is behind the U.S. in terms of its cycle and there really hasn’t been terribly much supply, as I noted, with maybe an exception or two. And so as you look at European countries that are now poised and beginning to start to come out from under and grow their economies, you know we’re pretty sanguine about that opportunity and it’s not just in office, it’s in other asset classes as well which could include hospitality, it could include logistics, it could certainly include residential. We think the sun, the moon, the stars are actually aligned really well for Europe here going forward over the next several years.

Okay, great thanks so much for the color, I appreciate it.

Thank you, Jason.

Our next question is from Jade Rahmani with KBW. Please proceed with your questions.

Thanks very much. It certainly seems like you’re continuing to make a lot of progress. Just wanted to ask your views broadly on the commercial real-estate markets right now, in the U.S., especially in the debt capital markets there seems to be a lot of spread tightening. Just wanted to see if you anticipate stability in 2018 or any potential for cap rate widening that could start to present better acquisition opportunities?

Good morning Jade and thanks for the question. Look, I think to some degree it depends on the pace of interest rate increases and then looking at that against the backdrop of how quickly the economy is improving. And certainly I think in the past we’ve commented that there is going to be an interesting tug-of-war between those two forces. But assuming the economy continues to improve and we are going to see moderate pace of interest rate increases as we’ve already been experiencing. We would think that, yes, cap rates eventually are going to start to move up albeit net operating income is going to continue to improve other than in those places where you’ve got too much supply and I think unlike my commentary in Europe, I think in the U.S. the supply picture is much more mixed, depending on which market we’re focusing on and which sector within that market, so it’s not one-size-fits-all. On the other hand with all of the regulation that’s still out there as it relates to traditional lenders, all the things that we’ll put in place is a function of the financial crisis. We still think for non-regulated non-bank lenders there is really interesting opportunity. In particular I would say in the middle of the capital stack and to the lower end of the capital stack and in terms of the debt stack, maybe even more senior part of the market is experiencing the spread compression that you’re referring to, but as you move down that cap stack, not necessarily the same. So, I think that’s where – assuming things kind of stay the same as they are right now, I think that’s where we’ll be focused.

In terms of assets that are remaining to be sold, can you discuss those if there is any key assets in the portfolio you could identify or any portfolio segment you plan to focus on or would you expect a general pruning at this point such as what we thought in the healthcare segment?

So why don’t I take that Jade, it’s Darren, good morning. So I think you are probably just going to see selective asset sales to what we are referring to is pruning inside of the real-estate verticals, healthcare and possibly hospitality and we’ve been selling a few assets in the industrial vertical as well. So, most of the asset sales that are to occur are going to come out of the other equity and debt segment. U.S. credit oriented investments as you now know are going to be contributed over to the new mortgage REIT that we announced back in August and so it’s really the balance of the assets that are in other equity and debt that – that are the legacy investments from either the Colony side of the ledger or the North Star side the ledger that we’ll be looking to divest. And so there are some – that includes the private equity funds secondary interest, CDO securities here in the U.S., and then there’s quite a few European investments, both equity as well as debt that we’ll be looking to realize or sell off over the next one to two years.

Okay. On the digital infrastructure initiative, keeping in mind that the first investment is targeted in America, I wanted to say, if you could comment on whether you anticipate broadening that beyond Latin America and also if there’s any key execution risk you could identify with respect to that market?

Well, yes, at this point, we can’t say too much. I mean, just given – our intent to raise some private capital here, I think, we have to be limited in our comments, as you would normally suspect in situations like this. But for sure, we believe the emphasis here in this space is going to be more outside the. US than it necessarily going to be within the U.S., it’s not going to be the exclusion in the U.S. We believe there’s still opportunity here in the U.S., too. But for sure, the growth potential of the market since it’s way more underserved outside the U.S., we just think it’s going to be that much more robust. So it wouldn’t necessarily just be in Latin America. We cited Colony having previously put – putting together a data center platform in Europe, as an example, which is doing extraordinarily well, we own through some funds that we manage. So I think, it’s going to be a mix of geographies. Certainly, the opportunity is global, but I think the emphasis will be more outside the U.S.

And in terms of multifamily beyond the preferred, do you expect to make additional investments? And why would now be the right time, given cap rate compression has been most dramatic there and we are seeing some rent deceleration and supply increase?

Yes. Well, look, I mean, as in anything, Jade, great question, you’ve got to be careful. So you’ve got to pick the right markets. You’ve got to pick the right products. And despite some of those factors being certainly acute in particular markets, we think the overall opportunity in residential rental housing continues to be incredibly strong, just based on longer-term demographic trends and you’ve got to be careful in terms of not getting caught short in markets, where it is getting oversupplied against that backdrop. But assuming you can diligence that well and have the right approach risk reward from an underwriting standpoint, we continue to be quite bullish about the opportunity.

Thanks very much for taking the questions.

No, you’re welcome, Jade. Thank you.

[Operator Instructions] Our next question is from Jessica Levi-Ribner with B. Riley. Please proceed with your question.

Good morning. Thanks for taking my question. As you look at your liquidity profile, what’s kind of your priority for capital deployment?

So, Jessica, good morning. It’s Darren.

Hi, Dan.

I’ll start and Richard can add in. I think, our – the first priority is to pursue some of these new investment opportunities that we’ve mentioned on the call today. As I think, we’ve been somewhat underdeployed, having the liquidity that we’ve had over the last couple of quarters, which has for sure hampered our earnings performance. And so getting that capital deployed and starting to generator earnings from that deployment is obviously an important priority for us. But we’ve been – we wanted to be patient and make sure that we find the right opportunities to put that capital to work. We now feel like we’ve got those opportunities in front of us, and so we want to make that happen. But other areas that we’ll be putting the capital to work is, we have been, as you saw, repurchasing more stock pursuant to the plan we announced did not had authorized at the beginning of the year. So that will be – continue to be another place where capital is being allocated to. And then, there may be some other refinance – not so much refinance, but deleveraging that we may want to do elsewhere in the portfolio as well. But I think, new investments are really the top priority for dry powder right now.

And what kind of the pace of investment that you see certainly into the fourth quarter, but maybe through 2018?

Well, I – go ahead, Darren.

Okay. I mean, I think as it relates to the dry powder we’re sitting on right now and based on the activity we have in our pipeline, that we would expect the majority of that capital is going to get deployed really through the first-half of 2018. So I think it’s going to happen reasonably quickly.

Okay, great. And then just piggybacking off of Jade’s last question, in the multifamily space, are there MSAs that you are kind of focused on, or is it kind of an asset by asset decision when you’re looking at investment?

Well, I – look – hi, Jessica. I think, consistent with the approach that we took to the single-family for rent business, we want to be in those markets, where the demographics are best. There’s the highest growth as it relates to both population, as well as employment opportunities. But of course, measured against the backdrop, as Jade cautioned, of how much new supply is there.

Okay.

So I think, generally speaking, you therefore are going to be favoring more sunbelt markets, maybe be more heavily invested in the southern part of the country. But there could be exceptions to that for sure. And – but I think, that’s basically how we look at the single-family for rent business, and I think it’s consistent with how we’re looking at the multifamily opportunity.

Okay. And then just a question on the repurchases, what’s kind of the ceiling where you’ll be active in the market buying back your stock?

I mean…

[Multiple Speakers] Yes, go ahead.

Yes, I was going to say, I’m not sure we have the ceiling. I mean, I think, it’s a dynamic of looking at the various opportunities that we have before us for our capital and comparing and contrasting those. So, I don’t think there’s a magic number ceiling, per se. I think, it’s constantly changing just based on the various capital requirements that we have in our business, whether it’s pursuing acquisitions or deleveraging, or alternatively buying back our stock accretively.

Okay, fair enough. Thanks so much for taking my questions.

Well, thank you.

The next question is from Jason Weaver with Wedbush Securities. Please proceed with your question.

Hi, good morning, guys. First of all, I want to say congratulations on the huge amount of progress. It seems like, you’ve made already this thus far this year. I think first, just a brief question on The Townsend sale, what do you expect will be the realized gain or loss from that transaction?

There’s actually going to be a modest loss from a GAAP perspective on it. But from a cash perspective, it really was a break-even transaction relative to what NorthStar paid for the business initially. So we really just sort of think of it as a recovery of capital.

Okay, fair enough. And then I want to talk about the new mortgage REIT. And can you tell me a little bit about how you expect the initial capitalization will look for that, as well as how much initial liquidity you expect to start out with?

Sure. So why don’t I take that, Jason. So initially about $5.5 billion of assets and $3.4 billion of equity. So it actually starts off in a relatively low leverage capital structure position, which I think gives – affords the company the opportunity to possibly take on a little bit more leverage to pursue its investment strategy. So it really, I think starts off in a great place, has a lot of flexibility. We’re probably going to be able to access credit lines in a way that the – certainly, the two non-traded REITs could not put in place on their own. So there are some economies of scale that comes from this tri-party merger taking place. So it’s – we think the company is going to be well-positioned for early growth.

Very good. All right, that’s all I have. Thank you for taking my questions.

Okay. Our pleasure, Jason.

Ladies and gentlemen, we’ve reached the end of the question-and-answer session. At this time, I’d like to turn the call back to Richard Saltzman for closing comments.

Yes. Thanks, everyone, for joining us again today. Just a huge amount of progress. We recognize just given the multitude, I’m sorry, of things that we’re doing. It’s a little messy, a little noisy on the one hand. On the other hand, I think, as I stated earlier, we’re now more than halfway through our transition. In another six to nine months, I think, we’re pretty much be complete. And we now are in a position to share with you what we’re really going to look like, what we’re going to be concentrated on, and we look forward to reporting future results consistent with that. So thanks very much for joining us, and have a great rest of the day.

This concludes today’s conference. You may disconnect your lines at this time, and we thank you for your participation.