Greetings and welcome to Colony NorthStar Incorporated First Quarter 2018 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. At this time, I would like to turn the conference over to your host Lasse Glassen, ADDO Investor Relations. Thank you. You may begin.

Good morning, everyone, and welcome to Colony NorthStar, Inc.’s first quarter 2018 earnings conference call. With us today from the Company is Richard Saltzman, President and Chief Executive Officer; Darren Tangen, Chief Financial Officer; Kevin Traenkle, 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, May 10, 2018 and Colony NorthStar does not intend now undertakes no duty to update future events or circumstances. In addition, certain other 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 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, President and CEO of Colony NorthStar. Richard?

Thank you, Lasse. Good morning, everyone, and thanks for joining us. For sure, we've had a difficult beginning to the year based on headwinds experienced in our Colony NorthStar merger integration. This led to recalibrating expectations, including a reduction in our dividend to an annualized level of $0.44 per share. Nonetheless, we are very pleased with our first quarter results and corresponding strategic progress made year-to-date. First quarter Core FFO was $0.20 per share, and $0.17 per share excluding one-time asset sale gains and losses and income earned from carried interest. This was ahead of budget due to outperformance in most of our property sector verticals, albeit, some of which is likely to be only temporary in nature as well as various non-recurring items that were generally positive this period. In particular, certain likely restructurings in our healthcare portfolio, along with the impact of future monetizations in our Other Equity and Debt segment will somewhat dilute our run rate results over the balance of this year, absent other positive surprises. At the same time, we're making excellent progress on the strategic goals of buying back our securities accretive to offset some of the excess dilutions suffered last year as a function of the merger and growing our Investment Management business, the key to our future success and profitability. As we simplify and streamline, the focus will exclusively be on those areas, which are compelling from a risk reward standpoint and where we can rely on a predominantly third-party investor capital model. At the margin, this will permit us to shrink our balance sheet and become more asset light, while we add to profitability and maximize shareholder value. Various achievements during the first quarter demonstrates significant evidence towards how we plan to accomplish these goals. First of all, we raised approximately…

Thank you, Richard, and good morning, everyone. As a reminder, in addition to the release of our first quarter earnings, we filed a supplemental financial report this morning, and both of these documents are available within the Public Shareholder section of our website. Today, I will review first quarter results, analyze the performance of each of our six reportable business segments and conclude with some comments on capital structure and liquidity. Turning to our financial results, first quarter net loss attributable to common stockholders was $72.7 million or $0.14 per share. As we had anticipated and previewed last quarter, we incurred a significant non-recurring and non-cash GAAP loss this quarter related to the elimination of the management agreements associated with the two credit-oriented non-traded REITs, NS I and NS II, that terminated as a result of the Colony NorthStar Credit Real Estate, or CLNC transaction closing. The former NS I and NS II management agreements represented intangible assets on the Colony NorthStar balance sheet with a carrying value of $139 million and were written off without a corresponding new intangible asset being created for the CLNC management agreement. However, from an economic perspective, we believe the new CLNC management agreement is materially greater in value than the prior agreements with NS I and NS II. The elimination of the two former NS I and NS II management agreements were non-cash charges, and therefore, added back for Core FFO. First quarter Core FFO, was $115.1 per share and $0.20 per share compared with Core FFO of $0.16 per share in the prior quarter. First quarter Core FFO included net gains on sale and carried interest income totaling approximately $16 million or $0.03 per share. Net gains were principally driven by a $10 million step up in basis related to the various…

Thank you. [Operator Instructions] Our first question is from Mitch Germain with JMP Securities. Please proceed with your question.

Good morning, guys.

Good morning Mitch.

Good morning Mitch.

Richard, you mentioned healthcare restructurings but you were kind of seemed to be pretty much on a high level there, so maybe if you can maybe provide some insight on what you refer to as restructurings?

Okay, it’s mainly in the skilled nursing portfolio and these are instances where lease coverage is stressed in terms of what's happening at the operations of the asset that I think we've been transparent about. And in order to be successful in terms of keeping a sound tenant in place that can produce the results that are required, and this is happening throughout the industry in some instances you have to restructure these leases. So it's mainly that.

So it's lease restructuring. So maybe just kind of think about you've got a pretty significant slug of debt coming to next year. And I think you guys have been pretty clear that you view healthcare to be somewhat non-core to your future. What's the long-term strategy with regards to the healthcare sector?

Well, look I think for this year and arguably next it's to stabilize and internalize management where we can like we talked about in our last call and really once we stabilize improve the go forward operations and cash flow trajectory of what we own. We had indicated that healthcare was going to be down year-over-year this year and a lot of that had to do with some of these lease restructurings that we were anticipating. But I think what we're going to do long-term is still a question mark until we accomplish kind of the interim plan of stabilizing doing better in terms of parts of the portfolio where we're internalizing management for instance we did that with respect to medical office buildings this quarter and where we are already demonstrating better absorption and improvement in how that part of the portfolio is performing. So I think it's blocking and tackling and until we're kind of done with the blocking and tackling and just having a stable and upward trajectory portfolio in terms of its performance, we're hesitant to commit to anything from a long-term nature.

You talked about reducing your OED exposure, but where do you see the monetizations is it some of just the properties or is it really made – I mean you can pretty much get there with the hotel portfolio in general. So what's kind of next 24 month plan there?

Sure, Mitch, it's Darren. I'll maybe take that. I mentioned that some of the gains we realized in the first quarter were from the sale of some CMBS securities. So I think the CMBS securities portfolio and CDO securities portfolio which was one of the primary culprits of our earnings volatility last year is certainly one part of the OED book that we're looking to reduce over the course of this year. Some of that may spill into 2019 as well. I would also highlight the real estate private equity fund secondary interest that was again another area or source of earnings volatility last year and that's another part of the OED book that we're looking to monetize here and in fact we've even put parts of that onto the market here in real time. So hopefully we'll start to see some monetizations in that part of the book here in Q2 or Q3. I think beyond that it's a lot of smaller investments that we may have in legacy debt portfolios. We've been working with our asset management group to accelerate some of the liquidations of the tail interest in those loan portfolios and have put some of those loan portfolios on the market through various brokerage organizations. So it's really I mean those as you know there was about 80 different positions in the non-strategic OED book and so it's just it's again a lot of blocking and tackling, the steal a word from Richard in the case of working through an accelerating sales and monetizations in that part of the portfolio.

Great. Just two more for me. Capital allocation it seems like last quarter there was a lot of emphasis on the buyback it seems like this quarter is a lot more emphasis on de-levering it seems like more people want the buyback as well. So how do you kind of put the different you also co-investments, how do you weigh them all us to what's most important in terms of how you kind of look at your strategy going forward?

Well, I mean look I think to some degree you gave the answer in your question, right. We prioritize buyback first because that's where we thought we would get the biggest bang for the buck if you will, but as part of doing a buyback, you're increasing your leverage, and whereas our longer term goal is to reduce our leverage. And so to the extent that we're close if not almost done with the plan that was authorized and announced last quarter, now we want to move on to making sure that the leverage is kind of kept in check consistent with the number of shares that we did repurchase. So that's kind of the next step. Albeit always balanced by where we can deploy capital in a smart intelligent way for our strategic purpose of growing our Investment Management business. So we always need to be mindful of that in terms of just making sure that we have adequate liquidity for the parts of our business that we do want to grow predominantly with a third-party capital contract as we've described. So that's how we analyzed.

So last one for me is, I mean should we expect the Board to be putting other buyback in place now that this one's been almost fully utilized?

Well, I think we have to deal with the deleveraging first that's the next element here and then I think we'll cross that bridge after we've delevered adequately.

Thank you.

Thank you.

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

Thanks very much. And thinking about strategic alternatives, does M&A in the alternative asset management space make sense?

It could. Certainly for areas where we don't necessarily have a presence today and we think they maybe very compelling on a go forward basis, we might consider something like that for sure.

And what about in the case of selling the Company?

In selling our entire Company you mean?

Yes. Colony NorthStar be acquired by a larger firm.

Well, I mean look we're clearly trying to maximize shareholder value, so we're pretty opportunistic flexible group and always open minded about what might be happening in the market in any given point in time. We're certainly not focused on that in any way shape or from, but if something came across our transom that all of a sudden looked like it was incredibly compelling and synergistic, sure, we would consider it.

Okay. That's helpful to hear. If you have an estimate of cumulative net gains or losses on the OED portfolio in entirety?

So Jade, is the question, what is latent that that maybe realized in the future within that segment or are you talking about what was realized in the first quarter?

Well just the entire remaining portfolio if it was liquidated today would there be a net gain or net loss?

So look I think we're probably fairly valued, as I think you know the legacy NorthStar assets that sit within that segment were marked a fair value a year ago when the merger closed. There are – the legacy Colony investments that sit in that segment were carried over at historic cost. So where there are gains they are generally the legacy Colony investments just because of that accounting that took place during the merger. There certainly are some investments that were legacy Colony that we do expect to realize gains on in the future. And I think one that I've highlighted in the past is we remain optimistic that our Albertsons/Safeway investment could be one that could produce a realized gain in the future and there are others such as that. So I'm hesitant to give you a specific number. I think well maybe another comment on this topic is, is the fact that last quarter when we were talking about gains contribution to 2017 earnings, I think I did mention that we do expect gains to continue to be a part of our earnings picture here in 2018, and in fact, they were here in the first quarter as we just mentioned. But certainly, not to the same degree that we saw in 2017 when gains approximately 25% of our earnings. This year, they’re going to be quite a bit less than that in terms of percentage contribution. So there are still latent gains. We are expecting to realize some of those but they're less significant today than obviously, they were a year ago. In term of the CDO portfolio and the secondary PE portfolios, is there hesitancy to sell the entire – the entirety in one shot because of the headwind to earnings that that would create?

No, and in fact in the case of second – the private equity fund secondary interest, we are looking at a potential wholesale liquidation or sale of that part of the book. In the case of the CDO securities, which is a more eclectic mix of CDO securities, it's probably not practical that there would be an appropriate buyer for all of that together. So we're really approaching that more on a case-by-case basis, and trying to maximize value in some securities that are in some cases, rather a liquid or have various complexities around them, which may make a sale in the next one or two quarters difficult. But if it's possible to monetize those at a value or a price that we think is fair, we're going to sell them. And the quicker that we can sell in non-strategic assets in the OED segment, the better. So we’re not holding back because we are worried about losing income. If we get that capital back, as I think Richard mentioned during his remarks, we’re going to just reinvest that into, whether it's common stock, buybacks or preferred equity redemptions. I mean, there ways we can mitigate the loss of income by redeploying that capital and, all the while, we're simplifying the balance sheet.

Okay, that’s good to hear. Neale, $2.4 billion of net book value in the Other Equity and Debt segment, you mentioned $1.3 billion of monetization. What would be the remaining $1.1 billion? Is that the PHL portfolio, or is that something else?

The two big components that would remain there, Jade, are the PHL portfolio, as you say, which is the large hotel portfolio that we stepped into the ownership of last year and we just refinanced at the end of last year, we're now embarking on quite a significant CapEx program that because there's been a fair amount of deferred maintenance that was the case for that portfolio when we took ownership. So the goal there is to spend the CapEx, create some value, stabilize that portfolio and then sell. And that is outside of our two-year window, so that's part of the answer. The Second, as we’ve got about a $350 million investment in a multifamily portfolio, sitting in a preferred equity position today, and that's an investment that we've suggested in the past. We still would like to try to figure out a way to restructure that, so that it could potentially become a new strategic third-party capital vehicles focused on the multifamily sector. So those are the two big areas of OED segment right now, which are not part of our two-year liquidation plan.

Thanks very much. I’ll get back in a queue.

Thanks, Jade

Thanks, Jade.

Our next question is from Jason Arnold with RBC Capital Markets. Please proceed with your question?

Hi, good morning guys. Just a follow-up on that OED category. Just wondering how much of that that's remaining kind of still in the lower or no yielding kind of category there?

Jason, thanks for the question. I think on the last call, last quarter, I mentioned that for the OED segment and this is across all of the OED investments both strategic as well as no-strategic that we we’re expect a Core FFO yields of approximately 8% based on what would be a declining balances we were projecting sell some of those assets over the course of the year. But I would say, on average you’re looking at around an 8% sort of yields across this entire segment. Now you're right to point out that there are certain investments in there that currently have no yield and our investment in the Albertsons/Safeway consortium would be an example of that which is producing zero yield. And there are other investments that are producing more than that 8% average, but hopefully that gives you a little bit of a guide line of kind of what's perhaps rolling off as we sell down this part of the book. And then turnaround and need to reinvest that but we think we can reinvest that capital accretively relative to those levels.

Okay. Super thank you. And then obviously a lots been going on over the past several quarters. But I was just curious if you can speak about kind of how we should think about the go forward run rate on the comp and admin expense one ends in particular.

Yes, so we're able to achieve significant G&A cost savings last year, well in excess of the targets that we had set going into the merger and had communicated over the course of the year. I would say from a cash G&A number we had previously I think guided people to a number somewhere around $210 million that's an annual cash G&A number for the company net of the various savings that we've realized to date. So I would say for now that's probably the right number to think about that that we're certainly trying to manage to this year and will sort of see as the year goes on there may be some opportunities for us to continue to find other savings opportunities but. But for now that's the right number.

Okay. Super. And then I guess just one last one for me on the preferred paydown opportunity. Would that be something that you guys would consider like a refi or just a compare paydown and then maybe timeframe bigger picture on how you'd expect to deliver and maybe guide on kind of what sort of leverage target you might be ideally achieving over time?

Sure. So I would say for now preferred redemptions are probably not going to coincide with the new issue we're just going to use asset sale proceeds as we monetize positions in OED and use that capital to redeem the preferred. And I think that's consistent with as we migrate to this different business model of being more balance sheet like. We really frankly don't need the same amount of balance sheet capital that we may have today to pursue and prosecute that business plan. And so I think that's the reason why at least for now we can shrink a little bit. We can sell some of these assets and redeploy those assets into the right side of our balance sheet by buying back common stock or redeeming preferred we do as Richard highlighted want to save some amount of dry powder to play offense with and pursue new investment strategies as well. But I think that's our mode for now. As to how long it's going to take us to accomplish everything we want to accomplish in terms of delivering and resetting the balance sheet. It's really going to coincide with the timeline for exiting all these non-strategic assets and businesses. So I think we'll accomplish a lot over the next two years, but we won't be complete in two years. I mean some of the non-strategic assets that I was mentioning before whether it's the THL portfolio or some of the other things that we may ultimately want to sell that could be on a more like three-year or four-year timeline. So it's going to be a process I think again will accomplish a lot by the end of 2019, but there will be ongoing work beyond that.

Okay. Super. So like I mean, maybe 0.3 debt-to-cap or something would be – maybe be more what you would like to achieve or is it just truly based on, what can we dispose of them and kind of where the opportunities lie?

Yes. I think 0.3 or 0.4 debt-to-equity, debt-to-cap would be, yes what we would ultimately like to get to, correct.

Okay. Super. Thanks so much.

Thanks Jason.

[Operator Instructions] Our next question is from Randy Binner with B. Riley Financial. Please proceed with your question.

Hey, good morning. Thank you. I was hoping we could go – jump back to the Core FFO and get kind of a percent walk, if you will, from the $0.20 reported this quarter to the $0.16 kind of ongoing run rate. I think Darren, in your comment, you indicated that for the rest of the year, we should expect quarterly results more in line with the outlook you provided last quarter. So I mean just kind of trying to isolate how much was gained funding cost, other items that goes back to the $0.16?

Yes. Well, as you know Randy – and thanks for the question and good morning. That we do have some seasonality in our business and I touched on this during my remarks that the hospitality aspect or component of our business does produce some pretty significant seasonality where Q1 and Q4 tend to be lower than Q2 and Q3 in that part of the business. But just focusing on our first quarter results a little bit, the $0.20 Core FFO result when you exclude the net gains and you exclude the carried interest income, we mentioned that was $0.03 a share that brings you down to about $0.17 a share. And then there was some various other non-recurring items that occurred in the quarter which were mostly positive this quarter, which is about another $0.02. So if you adjust for those that would bring the $0.17 down to something closer to $0.15 as it relates to the first quarter. Now trying to compare that back to the fourth quarter which I think was part of your question is a little more challenging just because there was a lot of differences between the results in the fourth quarter versus the result this quarter. Things, including the CLNC transaction which closed mid first quarter or there was various things going on last quarter which are no longer relevant today and in particular in the Investment Management business where Townsend was sold and various management agreements were restructured as I highlighted. So it's probably a longer conversation to go through. The list of everything that change from fourth quarter to first quarter, but at least coming back to what I just mentioned as far as some of the components of the first quarter results, hopefully that gives you some sort of guidance in terms of thinking about the balance of 2018.

It does. That's perfect. And then just on capital management and potential deleveraging. You all talked about the preferreds and pretty good detail about I think $350 million that's callable in two separate issuances. I guess, I'm curious though, that can be called, but if you didn't want to call it, it would be permanent capital, albeit expensive. Then you have some converts in 2021 and 2023. I think those are your kind of nearest term maturities that you would think about from illiquidity perspective. So if we think out about that long-term, how do you think about the trade-off between retiring higher cost preferreds and preserving liquidity in light of those maturities?

Well we're certainly planning for both. You are correct that there are $600 million of convertible debt outstanding at the Company, $400 million is callable in 2021 and $200 million is callable in 2023. Now we can't pay that off or call that debt at this juncture, so I think we're thinking about delevering holistically and we would like to bring the $1.6 billion preferred equity balance down some, and of course, what we're looking at right now are the two series that are callable that you just mentioned. But as we get closer to 2021 and then ultimately 2023, we need to have a plan in place to address those debt maturities as well. And so there's certainly an area of focus and we'll be managing and planning to accordingly.

All right, thanks. Thanks for the answers.

Thanks Randy.

Thank you.

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

Thanks, I appreciate, taking the follow-up. Just around hospitality, is there a prospect to spin off an externally managed equity REIT?

Well, you could. I mean certainly we've had conversations with groups that would love for us to do that. But we're certainly not thinking that way at the moment. What we are thinking about doing is maybe selectively either selling parts of the portfolio and or creating a third party capital construct round select portions of the portfolio, that's what we're focused on currently.

Okay, yes that seems to make sense. I mean spinning it off when really be more than financial engineering, although you would probably get management fees? And then on the digital infrastructure fund, what are the cap rates are targeting and what are target returns and I think there's been some reports that you've lined up total commitments of $3 million, so just want to confirm that and see if fundraising success to-date has exceeded your expectations.

Well, listen for legal reasons we can only disclose what we have about that at the moment so unfortunately Jade, we're not able to respond to your questions. We did the best that we could with our legal advisers in terms of what we were able to say in today's call. But we really can't go beyond that unfortunately.

Okay, and finally on the industrial business, what are your thoughts around the eventual maturation of the business as well as your ownership of the platform, is this something you could IPO or merged with another player or do you think that the current open-end fund – open fund structure is the best structure for it?

We do, we like the open-end fund structure and there seems to be a lot of interest in that structure. On the institutional side maybe even consensually in terms of some kind of retail sleeve on a go forward basis. So we're pretty sanguine about that and the business is doing great. We're where in an area, which is more fragmented. So we think there's lots of additional ability to grow our platform and consolidate. We're still – even though we're a very large owner. We're still a fraction of what the market has to offer – I mean light industrial generally speaking I think is about 60% or so of the investable industrial space here in the U.S. and of course because we are infill locations that are in close prison proximity to urban centers. We're benefiting disproportionately from some of the e-commerce trends as well as the underlying strength in the economy at the moment. So fundamentals are really great. Capital formation prospects are also excellent and we have the pieces in place to be able to meaningfully grow that business in the current construct that we have and that's what we're going to continue to do for the next couple years at a minimum.

Thanks very much.

Thank you. End of Q&A

Ladies and gentlemen, we have run out of time for the question-and-answer session. At this time, I'd like to turn the call back to Richard Saltzman, President and CEO for closing comments.

Okay. Thanks again everyone for joining us. Following our recalibration, it's really good to have a full quarter behind us, demonstrating both stability and growth. Our mantra is simplify, streamline and grow our Investment Management business and we look forward to reporting more on that progress in ensuing quarters.

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