Colony Capital, Inc.
Q4 2014 Earnings Call Transcript

Published: 20 Feb 2015

[Operator:]

Welcome to the Colony Financial Inspirited Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host Mr. Lasse Glassen with Addo Communications. Thank you, you may begin.

[Lasse Glassen:]

Good morning, everyone and welcome to Colony Financial, Inc.'s Fourth Quarter and Full Year 2014 Earnings Conference Call. With us today are the company's Chief Executive Officer Richard Saltzman and Chief Operating Officer and Chief Financial Officer, Darren Tangen. Kevin Traenkle, the company's Chief Investment Officer and Neale Redington, the company's Chief Accounting Officer, are also on hand to answer questions. Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, February 20, 2015, and Colony Financial does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the company's financial information presented in this call represents non-GAAP financial measures. The company's earnings release which was issued 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. And now I would like to turn the call over to Richard Saltzman, Chief Executive Officer of Colony Financial. Richard?

[Richard Saltzman:]

Thank you, Lasse. Welcome everyone to our fourth quarter and full year 2014 earnings call. 2014 was a phenomenal year for Colony Financial with a particularly strong finish in the fourth quarter including making significant progress on the proposed combination transaction with Colony Capital. During 2015 capital deployment totaled $4.5 billion. Investment realizations totaled approximately $600 million generating a weighted average internal rate of return of 16% and our balance sheet grew to approximately $6 billion in size which is more than double our asset base at the end of 2013. For the full year 2014, core earnings were a $146.5 million or a $1.50 per share which fully covered our current annualized dividend of a $1.48 per share. An excellent result given that transaction cost during the year were $0.25 per share approximately 40% of which relate to the pending combination transaction with Colony Capital. Building upon these strong results, 2015 should be a transformative and breakthrough year for Colony Financial. During the fourth quarter we invested and committed to invest $2.8 billion across the United States and Europe. Our most active capital deployment quarter to-date. Approximately 650 million was in 19 loan originations primarily first mortgages and $2.1 billion was in three real estate equity investments. This includes $2 billion of invested and committed capital relating to the cobalt industrial portfolio acquisition which closed in late December and which I will discuss in more detail shortly. Our momentum continues in 2015, since the end of the year we have invested and agreed to invest approximately $364 million in 10 separate transactions comprising both loan originations and real estate equity investments. Our portfolio continues to migrate towards more equity and equity linked investments now representing approximately 50% of our portfolio by asset base. We also continue to see very healthy deal flow coming from Europe. Since September 30, 2014 we have deployed approximately 350 million in five separate European transactions in the form of loan originations and equity investments most of which emanate from some type of distress. European investments now represent approximately 19% of our portfolio up from 9% at the end of 2013 and we expect our European exposure to continue to grow in 2015. In summary the investing environment continues to be extraordinarily robust for us in both the U.S. and Europe. And based upon the current global economic backdrop distress opportunities may surface in other attractive geographies as well. Under written yields continue to look very attractive relative to underwritten risks and we continue to underwrite blended overall gross returns in the mid-teens through a combination of current yield and capital appreciation. Stepping back we’re very proud of what we have accomplished in Colony Financial's relatively brief five year history. We attribute this success to our relationships with Colony Capital, the parent company of our external manager which has established itself as one of the preeminent [ph] global real estate management and private equity firms. Since it's founding 24 years ago, Colony Capital has grown to 13 offices in 10 countries employing over 300 people and has invested more than 60 billion of total capital. Colony Financial's relationship with Colony Capital is critical to it's continued success and as we communicated in our IPO roadshow back in September 2009 it Colony Financial ever reached the sufficient scale to be able to internalize management and absorb the Colony Capital infrastructure we would seriously consider such a transaction and we’re very fortunate to be in that position today. Since our last call we have executed and filed the definitive contribution agreement which was filed in January by the filing of a preliminary proxy in Investor presentation. These materials provide a significant level of detail which we believe should sufficiently inform our shareholders regarding whether to support the proposed combination in the upcoming vote on March 31. To summarize the transaction is modestly accretive to earnings based upon a historical look back pro forma analysis but we expect earnings accretion to become much more significant as AUM increases and Colony Financial's balance sheet is transitioned into more GP co-investment positions where it enjoys both underlying real estate asset returns plus enhanced economics from fees and carried interest. As one guide post for future earnings, it is noteworthy to point out that under the contribution agreement management has a significant financial incentive to achieve a three year cumulative FFO linked earnings target of $6.06 per share or an average of approximately $2 per share per annum. This average $2 per share annual earnings target assumes $4 billion of third party cumulative fund raising over two years and $6.7 billion cumulative fund raising over three years which represents the third party fee producing fund raising performance targets as defined within the contribution agreement. Colony Capital has historically achieved this level of fund raising and is evidenced by the recent cobalt fund raising efforts and the prospect of new fee bearing vehicles and next generation fund series planned for formation beginning this year, we believe this fundraising target is eminently achievable. As a further reference Colony Capital was recently cited by the publication PERE as one of the Top 5 real estate private equity fund raisers since the financial crisis. As the current trajectory of fund raising initiative should be enhanced by access to a larger balance sheet following a combination, we believe that a doubling of our equity under management in the intermediate term is a very achievable goal. To recap some of the financial details of the combination transaction, the aggregate consideration of upto $657.5 million using a reference price of $22.5 per share includes upfront consideration of $547.5 million and contingent consideration of upto a $110 million which would only be paid if the combined company achieves multi-year performance targets including those just discussed. Also it is very important to note that the consideration payable by Colony Financial would be entirely a combination of operating partnership units and or Colony Financial common stock. Further all of the Colony senior executives would become employed by Colony Financial, with Tom Barrack and I entering into five year employment agreements and other key senior executives having three year employment agreements. To emphasize our commitment and alignment with public shareholders, our shares would also be locked up for the length of our employment agreements subject to limited exceptions to tax selling and pro-rating overtime. A lot of care is been taken in structuring the considering of the combination to create mutually beneficially performance based incentive that clearly align management's interest with that of our shareholders. Furthermore following the combination transaction, management insiders will collectively own approximately 20% of the company. The company will hold a special meeting of it's stockholders on March 31 for stockholders of record as of February 18 to vote on the combination. Assuming a yes vote, we expect to close the transaction in April. Upon closing Colony Financial will be renamed Colony Capital, Inc and will become a global real estate and investment management company taking over the entirety of Colony Capital's legacy and ongoing investment management businesses representing approximately $19 billion of assets under management today and over $13 billion of equity under management substantially all of which is real estate related. Following the combination, the new Colony Capital becomes unique and hopefully appealing offering in the public equity REIT universe. Colony Capital at it's core is a real estate investment management company, not a real estate portfolio or development company taken public like the origin of many other REITs. There are few if any publically traded real estate investment management firms in the world that are structured as a REIT and offer exposure to a global portfolio of real estate equity and debt investments within attractive risk return profile that pay a consistent and relatively high dividend. For comparison purposes we believe a composite of several categories of companies is most appropriately to consider. One, sector focused equity REITs with significant investment management businesses. Two, large more diversified asset management firms that have real estate as a meaningful component of their business and three real estate companies that have more of a hub and spoke approach where investment management may be separate from affiliated property owing entities. Colony Capital's private fund management business is currently oriented to institutional and high net worth investors. Investors such as public and private pension funds, university endowments and sovereign wealth funds. By adding this private source of capital to Colony Financial's arsenal of capital raising alternatives, it should allow us to grow our business at a more accelerated rate with reduced reliance on the public equity capital markets. Also important to note, Colony is a private company built it's current book of equity under management with a very constrained GP balance sheet. By combining the two businesses third party capital raising should benefit from making larger GP co-investments perspectival in new funds and vehicles and accelerate the growth of fee bearing equity under management relative to what's been achieved historically. Currently Colony Financial deploys it's capital directly into equity and debt investments and only earns the income from the associated real estate investment. But with the ability to sponsor new funds Colony Financial can effectively leverage it's capital as the general partner where it will not only earn the income from the underlying real estate investments but also fees and potential carried interest from the private funds under management. Referencing an example illustration that is on page 10 of the investor presentation that we filed in late January and can be found on our website. Returns on equity can be boasted some 300 to 600 basis points, assuming a range of underlying asset level returns of 10% to 15% as we have generally experienced in our five year history. This implies total ROEs from 13% to 21% going forward. Following the combination, Colony Financial would be the sole vehicle empowered to sponsor and act as general partner, the new formed funds under the Colony name and would concentrate it's future investment activity in this capacity. The combined company would be internally managed and therefore management fees that have been previously paid to Colony Capital under the management agreement would be eliminated and replaced with directly incurred cost. However Colony Financial will also pick up Colony Capital's in-place fee income from existing private funds under management. The investment management business is highly scalable and enjoys a considerable degree of operating leverage. Said differently, as we grow our assets under management and associated fee income operating margins for the business should increase and as part of this we expect to be able to utilize members of the existing Colony Capital organization to organically build new equity platforms of varying strategies and geographic focus which may include externally managed publically vehicles, private REITs and/or open ended enclosed and combing [ph] of funds. The proposed transaction is a new beginning in terms of the enhanced power and reach of the combined platforms. The business model becomes greatly simplified and unifies all of Colony Financial's and Colony Capital's investment activities in one company, eliminating any perceived conflicts of interest and providing full alignment. It also gives Colony Financial complete access to Colony's global platform from deal sourcing to asset management to financial reporting and risk management. Finally the transaction is seamless from the perspective of Colony's employees. It will be business as usual leading upto and immediately following the closing of the transaction with minimal integration logistics as we already operate together as a team albeit in separate legal areas today. To illustrate and preview our go forward business model I would like to spend a few minutes on the recent Cobalt acquisition. As communicated on previous calls we have maintained the focus on equity platforms as a primary investment strategy particularly in the U.S. where we can combine an attractive real estate investment thesis with the best in class management team and raise third party equity capital around the platform. Like the investment management economic model I just described for Colony Capital the return profile of these equity platform investments generally has a foundation in the value and cash flow of real estate with an opportunity to enhance these returns to managing incremental third part capital for fee and profits interest. We’ve accomplished all of these objectives with the Cobalt acquisition. The purchase price for the transaction was $1.6 billion and the real estate portfolio consist of 256 light industrial assets totaling 298 buildings of approximately 30 million square feet and 16 major U.S. markets with significant concentrations in Atlanta, Dallas and Chicago. The acquisition was financed with a $1.1 billion mortgage loan and is expected to produce an initial annualized return on equity of approximately 10%. Third party limited partners funded and committed to invest $350 million, all fee bearing upon investment and representing a 37% ownership interest. Colony Financial is the general partner of the investment vehicle and currently represents the remaining 63% ownership share. However we expect to further sell down this position by raising additional third party capital in this platform with investment management economics that will only further enhance our return on equity. The aggregate $390 million of unfunded commitments from the company and third party co-investors represent dry powder to fund future light industrial acquisitions and as an example we just went into the contract on the platform's first small take-on [ph] acquisition this week. In addition to the real estate portfolio acquisition, Colony Financial acquired a 100% of the Cobalt operating platform which is led by Lew Friedland, a very well-respected leader in the light industrial property market. He and his team are running the day to day operations of the business including acquisitions, asset and property management and have hit the ground running. Since closing two months ago, the Cobalt team has already executed 35 leases totaling 1.2 million square feet and net effective rents that are well above our underwriting. In addition several large leases are under negotiation that should bring occupancy above 90% in the coming months, again well ahead of our underwriting. It is of course far too early to declare victory but I would like to commend the Cobalt management team for such strong performance so quickly out of the gate. We believe investing in equity platform such as Cobalt as a great example of our go forward investment management centric business model and will define a new period of growth and success for Colony Financial. Across our investment portfolio, we continue to see positive developments and successful realizations. As we have previously mentioned Colony American Homes completed the internalization of it's external manager last quarter and has continued to make great operational strides with portfolio occupancy now upto 88%. CAH has entered a few new markets in it's core ownership business and it has closed over 500 million of loans in it's synergistic lending unit known as Colony American Finance and on the strategic front we’re in active conversations on several alternatives and remain cautiously optimistic that we will be in a position to report our plans in the coming months. In summary, the past five years have been incredibly gratifying, having grown Colony Financial from 300 million at it's IPO to a balance sheet of $6 billion today. However the future is even more exciting. The proposed combination with Colony Capital is a game changer, transforming us overnight to a completely aligned more powerful business model which should turbo charge our performance. I would like to take this opportunity to thank all of our shareholders for your continued support of our company and we look forward to the special meeting at the end of March. Now I will turn the call over to Darren Tangen, our COO and CFO for a more detailed summary of our fourth quarter financial results.

[Darren Tangen:]

Thank you, Richard. For the fourth quarter core earnings were $34.5 million or $0.31 per basic share. As expected transaction expenses ran higher in the fourth quarter totaling $0.13 per basic share and we’re primarily comprised of $0.07 per share relating to the proposed combination transaction with Colony Capital and $0.04 per share related to the Cobalt light industrial acquisition. Ex-transaction cost core earnings were $0.44 per basic share for the fourth quarter. For the full year 2014 core earnings were a $146.5 million or a $1.50 per basic share notwithstanding transaction cost during the year of $0.25 per basic share. Ex-transaction cost, core earnings would have been a $1.75 per basic share. We expect that transaction cost will remain elevated through the anticipated closing of the combination transaction currently expected to be sometime early in the second quarter. For the fourth quarter and full year core earnings contribution from Colony American Homes was approximately one penny and $0.02 per share respectively. Although not material in relation to our overall earnings this was a slightly improvement over it's breakeven results in 2013. As of last week, CAH's portfolio had approximately 18,900 homes up from approximately 18,200 as of September 30, 2014. During the fourth quarter CAH averaged approximately 725 renovations and 700 new leases signed per month while acquisitions averaged approximately 200 homes per month. Total portfolio occupancy was 88% last week, a meaningful increase from 83% as of September 30, 2014. As the portfolio moves closer to stabilization and rental markets continue to tighten we are beginning to observe greater landlord pricing power and stronger rental growth across CAH's portfolio. All of these improved operating metrics along with the continued growth of the Colony American Finance lending platform should materialize and improve financial results for CAH in 2015. And as Richard mentioned we’re also working on various strategic initiatives at CAH and expect to be in position to announce our plan with the next few months. With respect to our balance sheet, our total consolidated assets stand at $5.9 billion as of December 31, 2014 which is a significant increase over the 2.6 billion level as of December 31, 2013. The growth is attributable to more than 4.5 billion of capital deployed during 2014. Our balance sheet will grow even further to approximately $9 billion following the operating partnership and stock issuance to complete the Colony Capital combination transaction and the resulting consolidation of some of Colony Financial's currently unconsolidated investment joint ventures. This equity issuance and joint venture consolidation will also be a deleveraging event for the company reducing our year-end balance sheet leverage to approximately 33% on a pro-forma basis. Our book value per share increased from $18.72 as of December 31, 2013 to $18.97 per share as of December 31, 2014. Fair value per share increased from $20.78 as of December 31, 2013 to $22.01 as of December 31, 2014. Also we paid a dividend of $0.37 per share on the fourth quarter which was an increase from $0.36 per share for the third quarter and brought total 2014 dividend distributions to a $1.44 per share. We also are declaring a dividend of $0.37 per share for the first quarter of 2015, the first quarter dividend will be paid on April 15 to stockholders of record on March 31. Current investment activity remains weighted towards equity investments and transitional commercial, real estate lending in the United States and both debt and equity investments in Europe. The largest transaction in the fourth quarter as the Cobalt light industrial acquisition but the most active transaction volume occurred in our transitional CRE lending platform. During 2014 this platform closed $658 million of loans and completed two securitization transactions during the year where our combined retained interest are currently earning approximately LIBOR plus 1300 basis points. With a large volume of loans scheduled to mature over the next three years we continue to commit additional resources to this transitional CRE lending platform and expect origination volumes to more than double in 2015. Domestically other notable transactions include the origination of the entire debt stack [ph] for two separate hotel developments with great sponsorship and significant equity being invested subordinate to our financing. These hotels will be flagged and managed by two world class hotel operators with which Colony has a long working relationship. Further the hotels are located in major metropolitan cities with strong hotel operating fundamentals. We expect to participate senior interest in both loans and earn 15% plus IRRs on our retained interest. In the first quarter of 2015 we also originated or committed to originate just over $50 million of mezzanine debt and preferred equity for repeat sponsors with whom we have existing investments. The blended current yield on these two follow-on originations is 13%. In Europe, we have also been active having invested $352 million in five transactions since the end of the third quarter, the largest transaction is the €175 million acquisition of an OREO portfolio through a privately negotiated transaction with an Italian financial institution who provided €79 million of effective seller financing at 0%. The portfolio of a 113 properties primarily located in Northern Italy includes a mix of leased cash flowing assets and value add properties that we under wrote to mid-teen returns on a blended basis. The second largest transaction was a high yielding sale lease back of two leading hospitality management university campuses in Switzerland for a CHF175 million. We received a new 20 year master triple net lease and obtained 15 year mortgage at a 2.7% fixed interest rate which will provide our equity position with 11% cash on cash yield. The other three transactions consisted of another high yielding sale leaseback on an industrial portfolio in Spain and Portugal the recap of an overleveraged property holding company with commercial property assets in France and Spain and the acquisition of an office building in the United Kingdom through a short sale. Europe continues to generate a plenty supply of attractive investment opportunities and we expect this trend to continue for at least several more years. Our investment portfolio is now well diversified with approximately half our assets in equity or equity linked investments and the balance in debt oriented investments. Geographically we remain heavily concentrated in the U.S. market at approximately 81% of our portfolio with the balance in Europe. Investment performance continues to track very well, either meeting or exceeding underwriting on average across our portfolio of equity investments, originations and loan acquisitions. On the capital markets front we completed two securitized financing transactions in the fourth quarter for total gross proceeds of $415 million. In the first securitization we sold 217 million of matched term non-recourse senior bonds against 316 million of unpaid principal balance at a weighted average fixed rate of 2.5% The company's retained interest yield 13% before the amortization of financing cost. The second securitization was executed within our transitional CRE lending platform on 15 floating rate loans totaling 308 million of UPB. We sold $205 million of matched term, non-recourses basis at a weighted average fixed rate of LIBOR plus 2%. The company's retained interest yield LIBOR plus 12% before season expenses. In addition to this, during the quarter we amended our revolving credit facility to increase commitments by $225 million to 645 million total. The amendment also modified the interest rate and covenants to more beneficial terms, we currently in excess of 300 million of available liquidity from cash on hand and liquidity under our various credit facilities. All-in-all it was another terrific quarter and exceptional year for Colony Financial. That concludes our prepared remarks and we would now like to open the call up to Q&A. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from the line of Eric Beardsley with Goldman Sachs. Go ahead with your question, please.

[Eric Beardsley:]

Just going from the full year adjusted core earnings of a $1.75 ex-transaction cost and the getting up to that $2 higher level that you’re targeting following the Colony Capital combination, how long do you expect that to take?

[Richard Saltzman:]

That test is an average test, so it's not specific given the year and it's basically measured over a 2 to 3 year period and so look we think right out of the box, we’re going to be in a position to really turbo charge our results as I was describing before mainly based on the transition from direct investments in property whether debt or equity and converting those to sponsor positions like we just did Cobalt where we’re going to benefit from investment management economies in addition to the underlying real estate returns. So as do that and basically change our balance sheet overtime that will continuously add to our earnings performance and then in effect we’re also benefitting from the fact that we have now got this quasi leverage which is through the form of private equity capital that we’re able to raise through these funds and other vehicles where on a go forward basis we therefore need to rely much less on the public equity capital market so that from time to time we will still be issuing equity as we grow our business and platform but clearly our expectation is a lot less than we had to in the past to achieve those results. So I know it's not a precise, it's going to take us x-number of months answer to your question but I think once we’re close to the combination this transition will start to occur immediately and you will start to see those results overtime.

[Eric Beardsley:]

And then just on the Cobalt portfolio, I know you didn’t have it for very long in the quarter but do you off-hand what the core earnings contribution of that was and where we could expect that to go in the first quarter once you’ve a full quarter results?

[Richard Saltzman:]

Let me turn it over to Darren but we did literally close in the middle of December so we only add about two weeks of results that we’re in our fourth quarter and--

[Darren Tangen:]

Yes, Eric let me take that. I mean there was an 8K with some pro forma financials that was filed back in December when we closed the transaction, so if you just look at the nine months of 2014 and were to annualize that you can see that, you know there is a calculation you can do where they would add, I think it's around $0.14, $0.15 a share just again doing a pro forma on the historical financials that we’re filed at that time. As we sort of go forward, as Richard as highlighted in his comments, operating performance at the portfolio has actually been trending positively from where they were last year, so with a little luck we will end up doing a little better than that.

[Eric Beardsley:]

Okay, so if I were to combine that $1.75 ex-transaction cost, for the $0.14, $0.15 and I guess you’re already around 1.90. I guess you don’t need too much to happen from the Colony Capital combination it seems.

[Darren Tangen:]

Well I think going back to your first question, the $6 cumulative earnings target that’s in the contribution agreement it is over a three year period and I think as Richard was mentioning it will take some time for us to reposition our balance sheet and start to pick up some of the accretion from the combination transaction. So I would expect that with a $2 per share average obviously built into that $6 target that it probably does build over that three year period if you’re just sort of looking at it over that three year timeframe.

[Operator:]

Our next question comes from the line of Jade Rahmani with KBW. Go ahead with your question, please.

[Jade Rahmani:]

This was a strong quarter of investment activity, I was wondering if you could characterize the pipeline and then maybe give a sense of the magnitude of opportunities that you’re evaluating and as you look forward do you think that you will increasingly be looking to do larger deals along the lines of Cobalt?

[Richard Saltzman:]

Our pipeline right now is at record levels and that’s in the U.S., in Europe, and as I’ve mentioned in my prepared comments even some other geographies which are starting to become a little bit interesting a function of what's going on in the world right now and so we’re very optimistic about our ability to deploy meaningful amounts of capital. And clearly to the extent that we can do it in scale all things being equal, that’s what we will chose to do. So there are platform investments like Cobalt under consideration throughout the globe but there are also individual transactions and I think in some circumstances we continue to benefit from not necessarily completely focusing on the largest transactions that are available in the market because I think as we have discussed in previous calls there is a lot of capital out there. It's a competitive, very liquid market and some of the largest deals depending on the circumstances have the most competitive landscape whereas for those who don’t necessarily have the same type of infrastructure that we do because some of the investors that we compete against with large amounts of money could be hedge funds and other groups that only have very limited infrastructure. Sometimes focusing on somewhat smaller transactions really gives you a competitive edge and advantage in terms of what the ultimate economies maybe. So it's more work for us but on the other hand everybody, we and our shareholders benefit as a result if you have bad infrastructure and that’s why we’re so excited about kind of where we’re today. So I think it's really a continuation of the same with an ability to do even more pro forma for the combination just based on we will then have a balance sheet that can be used in so many other interesting ways to sponsor new vehicles either programs that we have already been doing historically where it's going to be kind of time to the next series or alternatively even new strategies that are very compelling in the current economic environment where we can raise lots of outside capital and deploy quite effectively in the current environment.

[Jade Rahmani:]

I think a corollary to the question since you’re, the purview of what you’re evaluating has expanded, maybe could you identify any areas whether it's geographic or sector type or maybe how far into the stabilization phase it is, areas that you would not consider interesting or attractive right now due to pricing or something else?

[Richard Saltzman:]

Well look I think, when you go back to our beginnings in terms of what we were doing in the U.S. pretty much exclusively at the start and we were buying NPLs, we were doing a lot of first mortgage originations, that’s all shifted just as a result of the more liquid market that I just described as well as now where we’re in the economic cycle here in the United States and so the Cobalt transaction was a thesis around many things and certainly this investment management model that we’re talking about but it was also a play on where we’re in the cycle to the extent that we’re now at the point where growth is accelerating here in the United States, small business demand which is what that portfolio benefits from most acutely is really picking up on the real estate side as a function of the improving economy. So we have shifted from the top of the cap stack, even though we’re still doing transitional loans very effectively as Darren described to more equity investments here in the United States. On the other hand in Europe as you know we are doing more former style investing that we were doing in the United States because Europe is kind of now first dealing with it's distress. Banks need to recapitalize, they are handicapped in terms of their ability to do new originations and all of that is leading to both product that we can buy as well as new origination opportunities that we can take advantage of because there is a void in the market. And then with commodity prices now imploding you see distress in other parts of the globe that are now beginning to surface in certain emerging markets, Asia, etcetera where we have also deep experience and we have looked at opportunities over the past five years but just haven't invested in them and now we think it's getting pretty interesting again. So I think it's a combination of all of these different things.

[Jade Rahmani:]

On the Cobalt deal, can you just discuss how you think about the taxes exposure in the portfolio and any risk there?

[Richard Saltzman:]

Well certainly it's something that we’re monitoring, in Cobalt about 6% of the portfolio is in Houston. When you look at our exposures generally in Colony Financial today our exposures I think are at about 3% in Houston, but interestingly you haven't really seen the distress of let's say less job growth or perhaps job loss showing up on the real estate side of the market. Notwithstanding that we’re quite cautious about adding exposure and so you clearly want to be more in those areas where the growth in terms of the business cycle is accelerating as opposed to decelerating or perhaps even turning a little bit negative. So we’re keeping that in mind as we expand the portfolio. As an example this tack-on acquisition that we just referenced is actually up in an Minneapolis as an example.

[Jade Rahmani:]

Just in terms of capital availability, investment capacity and also how you would approach capital markets activity, could you share your thoughts on that?

[Darren Tangen:]

Sure, Jade. As I mentioned in my prepared remarks we currently have approximately 300 million of cash on hand and liquidity in our credit facilities at this time and in terms of go forward we have several opportunities within the portfolio to do some additional financings. We’re expecting some capital to be repatriated from some of the investments that we have and otherwise as it relates to capital markets activity, we will see how the year shapes up and investment pipeline shapes up but we’re looking at some different forms of securities as being pretty attractive if we were to go to the capital markets. So I think we will be open minded about that as the year progresses.

[Richard Saltzman:]

The other thing I would Jade, is in and Darren referenced this in his comments before which is that pro forma for the combination we’re going to be adding 600 million to 700 million of new equity to our balance sheet which as Darren said is deleveraging in effect of the current balance sheet and will give us more capacity on a go forward basis in terms of all the various things that we can pursue. But we’re cautiously optimistic that the vote is going to go well and assuming that that’s going to happen here pro forma so that we will benefit as a company from that new equity.

[Jade Rahmani:]

Okay. And is there anything technical that would preclude you from being able to access the capital markets before the closing of Colony Capital deal?

[Richard Saltzman:]

No.

[Operator:]

[Operator Instructions]. Our next question comes from the line of Dan Altscher with FBR. Go ahead with your question please.

[Dan Altscher:]

[Inaudible] on core basis, actually transaction cost looked like a very good result. But with that in mind I think Darren you referenced that there is going to be maybe some continuation of transaction cost in both the first quarter and maybe a little bit into second quarter. Can you maybe just help maybe quantify that a little bit so that everyone kind of has that correctly in their models going forward?

[Darren Tangen:]

Sure. Well I think this was even highlighted in the preliminary proxy that was filed at the end of January but ultimately transaction cost for Colony Financial could be in the order of 20 million, now we have recognized just about half of that through the third and fourth quarters of last year. So you could end up with sort of that level of expenses here in the first and second quarters, really leading up to the anticipate closing date of the combination transaction.

[Dan Altscher:]

You know referencing I guess Eric's earlier question, he made a good comment I think that the core earnings power of the company on a run-rate basis is clearly showing some really positive momentum gearing up maybe a $1.90 - $2 or so. Richard, obviously you’re not the one [inaudible] before the horse and you just raised the dividend a little bit in the quarter but versus the current run-rate versus maybe that more normalized run-rate earnings power. Seems like there is maybe some room to do something more on the dividend there, can you just kind of give us thoughts about what you and the board are looking at there?

[Richard Saltzman:]

Sure. Dan, certainly our view is we’re quite confident at the level that we’re paying today, that’s kind of now our new baseline after we raise dividend in last quarter and on a go forward basis I mean we would certainly hope sooner rather than later we’re going to be able to increase the dividend again and certainly that’s based in large part on the accretion that we’re expecting as a function of the combination as well as just general improvement in our results based on the portfolio that we have. So there is no specific plan or target yet with respect to how that will work, historically as I think you know we have tried to make sure that whatever our dividend is it's recurring and kind of a minimum baseline from a go forward standpoint and also remindful of the fact that as a REIT we have to pay out a lot of our earnings and cash flow and we try to keep in mind retaining as much of that as we can so that we don’t have to come back to the equity markets as frequently as we might otherwise have to. So it's all kind of a balancing act but for sure we are biased towards improving performance included that will be increasing dividends.

[Dan Altscher:]

I think there is an often an important comment that was made before just as you bring on Colony Capital. I think we have view this term before of increasing business leverage or business operating leverage, however you want to think about and as the business gets bigger and the opportunities potentially get bigger and the balance sheet gets bigger, more flexibility, are there talks about maybe trying to obtain some sort of corporate credit rating to kind of enhance the financial flexibility there?

[Richard Saltzman:]

Well that’s certainly something that we talked previously and we will continue to review. At the moment we have been doing pretty much all of our financings with the exception of our credit line and also the convertible notes that we did on more of an asset limited basis, basically non-recourse to the corporate credit of the company and we certainly think from a financial risk management standpoint that’s a prudent thing to do. It does put more limitations on your ability to do corporate financings, corporate financings of course end up being recourse and so I think it's something that we understand the benefits of in terms of potential scale that we’re getting to and maybe some efficiencies and costs on the one hand but we have to balance it with the financial risk management that I just described and I think we will continue to report on that as we go forward.

[Dan Altscher:]

And then just one other quick follow-up, I know it's still obviously very early on in terms of the transaction with Colony Capital and clearly I guess on the outset, don’t have any sort of TRS limitations but do you think almost a point where the TRS structure may not work as -- there is more fee earnings power that maybe is generated by that where maybe the REIT structure won't be appropriately anymore?

[Richard Saltzman:]

This is possible on a go forward basis but I think given our scale and given the fact that our plan is basically to reposition the existing investments and assets into GP positions where we’re still going to have very substantial exposures to the assets. We have a lot of capacity and visibility on being able to remain a REIT for the foreseeable future. Not to say that there aren't certain scenarios under which if we were growing more in that fee income or activities that didn’t necessarily fit the REIT box that we wouldn’t have to come to some fork in the road where we might have to make some decisions about the status and kind of what we do. But I think in our opinion if that were to happen it would probably still be a good problem in the sense that we would be growing our business in a way where we’re bumping up against that kind of constraint and we could always manage this in a way where we’re acquiring more real estate assets to kind of offset whatever the growth is in the things that might give rise or not be able to maintain REIT status if we wanted to. That’s always kind of available to us as a way to cure this but we’re not sure. We’re going to see how it plays and take advantage of the optionality.

[Operator:]

I would now like to turn the floor back over to management for closing comments.

[Richard Saltzman:]

Okay, thanks everyone again for joining us this morning. It was a great year last year, our future as we said should only get better and we’re looking forward to the special meeting and hopefully thereafter reporting on a combined basis with Colony Capital and changing our name to Colony Capital, Inc. Thanks so much again.

[Operator:]

Thank you. This will conclude our teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.