Colony Capital, Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Greetings, and welcome to the Colony Capital, Inc. First Quarter 2015 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] I would now like to turn the conference over to your host, Lasse Glassen of Addo Communications. Please go ahead. Lasse Glassen Good morning everyone, and welcome to Colony Capital, Inc's First Quarter 2015 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 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, May 7, 2015, and Colony Capital does not intend and 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 both on a consolidated and segmented basis. The company's earnings release, which was released yesterday afternoon and is available on the company's Web site, 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 to reconcile certain non-GAAP financial measures to the appropriate GAAP measure by reportable segment, and this reconciliation is also available on the company's Web site. And now I'd like to turn the call over to Richard Saltzman, Chief Executive Officer of Colony Capital. Richard?

[Richard Saltzman:]

Thank you, Lasse, and welcome everyone to our first quarter 2015 earnings call. I'm pleased to report that we're off to a great start in 2015 based upon our first quarter results, and we are incredibly excited about embarking on a new chapter for Colony Capital. On April 2nd, we completed the combination between Colony Financial and Colony Capital, LLC, including the contribution of substantially all of Colony Capital, LLC's real estate and investment management business and operations, and we subsequently renamed the company, Colony Capital, Inc. The transaction was approved by an overwhelming majority of Colony Financial shareholders, on March 31, and we are extraordinarily grateful for our confidence and support in this regard. As fellow owners of almost 20% of company's equity, the management team is fully aligned with shareholders, and we couldn't be more enthusiastic about our future prospects given the transformative nature of this transaction. With a $9 billion balance sheet today, we can take greater advantage of the Colony brand to build best-in-class real estate investment management businesses that capitalize on Colony's existing global infrastructure, and long successful real estate investment track record. Before discussing our first quarter results, I'd like to highlight some changes in our financial reporting. After this quarter, we will cease reporting core earnings. If you recall, core earnings was a metric developed for new generation mortgage REITs at the time of our IPO, almost six years ago, and among other things was used to compute incentive fees payable to the company's formal external manager. Furthermore, we've never fundamentally viewed ourselves as a mortgage REIT, instead we've always been a total return investor targeting equity returns, even when we buy or originate debt. Today, we are clearly a diversified REIT, with a significant and growing portfolio of equity investments to complement our high-yielding debt investments. Therefore we will now disclose funds from operations, or FFO, and core funds from operations, or Core FFO, which should provide our investors with more relevant and comparable performance metrics. Darren Tangen, our CFO will describe more of the specifics, but we are introducing these new metrics now in the first quarter, in order to help shareholders understand the differences between them as we will no longer report core earnings on a go-forward basis. Furthermore, we are no longer reporting fair value, as it is less germane in our transformed state, and our peers' equity REITs and investment management funds do not report this metric. Turning to financial results, we are off to a solid start in 2015 with first quarter core earnings of $0.45 per share adjusted for an excluding one-time transactions cost primarily related to the combination transaction. Strong first quarter results were partially driven by continued operational improvements at Colony American Homes or CAH. First quarter core earnings contribution from CAH was $0.02 per share. While not material, this evidence is an improving earnings trend over the $0.02 per share that we enjoyed for all of 2014. Portfolio occupancy at CAH has also continued to rise, and is now up to 93%. CAH's occupied portfolio was generating a 9.7% gross revenue yield and 5.9% net unlevered yield at the property level during the first quarter, with core NOI margins in excess of 60%. And now that portfolio occupancy is at a more stabilized level, we are beginning to see more meaningful rental growth of 3.8% on leased renewals in the first quarter, and we expect this trend to continue as single-family rent increases start to catch-up to those experienced by multi-family owners over the last few years. Furthermore, we re-retained 76% of the tenants who had expiring leases; another promising data point that highlights the stickiness of our resident base. The demographics of CAH's resident base are also attractive, with an average household income of $87,000, and average income-to-rent coverage of approximately five times. This compares quite favorably to the demographics of the apartment industry. And finally, the Colony American Finance lending unit is demonstrating strong early traction with approximately 600 million in loans close to-date, and a $1 billion plus pipeline of additional potential loan originations. We believe this subsidiary business is an important growth and value differentiator for CAH. I'd like to now turn to our recently acquired Light Industrial platform, which I will herein refer to as the Colony Light Industrial Platform, or C-L-I-P, CLIP. Core earnings contribution for the first quarter was $8.9 million, or $0.08 per share. This represents an annualized core earnings yield of approximately 10%, against our initial equity contribution of $339 million, which is in line with what we communicated at acquisition late last year. As lease-up continues in CLIP's portfolio, from its current 90% level, we expect this yield to increase. We are also continuing to optimize CLIP's portfolio with accretive acquisitions and dispositions. Since the beginning of 2015, CLIP has acquired or is under contract to acquire 18 additional properties, totaling 3.7 million square feet with $215 million, and recently closed on its first disposition of a vacant property. We are also in the process of terming out some of the acquisition financing of CLIP by replacing floating rate mortgage debt with fixed rate debt on sub portfolios that we expect to hold longer term. With the combination transaction complete, I think it's important to articulate how we see Colony Capital evolving over time. As we've stated previously, we expect CLNY's balance sheet to transition from direct real estate equity and debt investments to more sponsorship positions and funds, and platforms. At present, we have five such fund and platform units. Number one, the CDCF distressed credit funds family; two, a U.S. conventional core, core-plus in value-add funds and separate account business, previously known as Colony Reality Partners; three, the Colony Light Industrial Platform; four, Colony American Homes; and five, our Legacy Opportunity Funds. Going forward we will prioritize these funds and vehicles, as well as new ones as the funding source the new investments, and utilize our balance sheet either to help grow these platforms, or to help seed new platforms and funds. A number of initiatives are under high priority focus in this regard, including the next generation fund in our CDCF fund series, U.S. core, core-plus, and value-add funds including customized separate accounts, and the geographically focused vehicle. These initiatives can take various forms; private, open, or closed-end funds, and private separate accounts where Colony would be the general partner, or externally managed public companies, where Colony would be the manager. One of Colony's distinguishing attributes is its existing global infrastructure, and with deal flow accelerating in Europe, and potential new regions of distress surfacing in parts of South America and Asia, we are well positioned to take advantage of these burgeoning opportunities. We are also looking at some interesting real estate investment management M&A opportunities. As a modest example, we are close to acquiring a 50% interest in a German-based real estate fund and asset management firm. We can provide more details once the transaction closes, but needless to say, this will bolster the growth of our equity under management and provide access to even greater deal flow in Europe, particularly in Germany. As I mentioned in our last call, Colony Capital built its current investment management business with the a very constrained GP balance sheet, but under the newly combined company, with a $9 billion balance sheet, CLNY should be able to accelerate the growth of third-party fee-paying equity under management. We have already begun to market this powerful synergy in connection with several of our current fund raising initiatives, the details of which we are not yet at liberty to disclose. Nonetheless, we believe that doubling our current $9 billion of equity under management in the intermediate term is a very achievable goal. I hope that this clarifies some of our current priorities in strategic direction. In summary, we're off to a great start in 2015, and we now have the tremendous opportunity to harness the power and scalability of the combined company in order to create extraordinary value for our share holders. The combination has taken place at a very propitious time, as both fund raising and consolidation opportunities in the real estate investment management space are accelerating with tremendous torque at the moment. We've been recognized as a top five private capital raiser since the advent of the financial crisis. Based upon our track record, relationships, and reputational capital across the globe, and so far this cycle has been different and that the rising tide has not lifted all boats. In fact, to the contrary, it's more a world of haves and have-nots in the real estate investment management industry, and this should play to our advantage, particularly with the power and scale we now enjoy as a public company. I'd like to thank all of you again for your continued support, and we look forward to reporting our progress in the quarters ahead. And with that I'm going to turn the call over to Darren Tangen, our CFO, for a more detailed summary of our first quarter financial results.

[Darren Tangen:]

Thank you, Richard. Core earnings for the first quarter were $34.6 million, or $0.31 per share. Excluding transaction costs, the vast majority of which related to the combination transaction with Colony Capital, LLC, core earnings for the first quarter were $49.2 million, or $0.45 per share. First quarter net income was $3.6 million, or $0.03 per share. The $0.28 per share difference between core earnings of $0.31 per share is composed of approximately $0.22 of depreciation expense resulting from our various equity interests, primarily the CLIP light industrial portfolio, and $0.05 of non-cash stock compensation expense, which is higher in the first quarter than the remaining quarters this year due to the vesting schedule of the prior stock awards. As Richard noted, we will no longer report core earnings after this quarter because incentive fees, which were based on this metric, are no longer payable to an external manager following the combination transaction. But to provide similar metrics that are meaning supplemental measures of operating performance and are also widely accepted by the equity REIT and analysts' communities, we are introducing FFO and Core FFO this quarter. We are providing FFO as defined by May REIT for comparability to other equity REITs, and we will also be providing Core FFO, a company-defined metric. We believe Core FFO will be helpful to investors because it provides additional adjustments to FFO that are non-cash or one-time in nature, and will be the most comparable to core earnings. Specifically, Core FFO will adjust FFO for the following items. One, non-cash stock compensation expense, two, effects of straight line rent revenue, three, amortization of acquired above and below market lease values, four, amortization of differed financing costs and debt premiums and discounts, five, unrealized fair value gains or losses on derivative instruments and on foreign currency re-measurements, and finally six, acquisition related expenses, merger and integration costs. For the first quarter of 2015, the company reported Core FFO of $53.6 million, or $0.49 per share, compared to $28.6 million, or $0.35 per share for the same period last year. FFO was $29.7 million or $0.27 per share, compared to $19.2 million or $0.23 per share for the same period last year. Now that Colony Capital combination transaction is closed, I'd like to recap the final terms of the transaction to help investors understand the aggregate consideration, and the amount of common shares in OP Units now outstanding. Based on the closing share price of $26.19 on April 1, 2015, the aggregate potential consideration was $779 million, of which $659 million were paid upfront. It is important to note that the consideration is comprised entirely in a combination of operating partnership units and CLNY common stock, and that the remaining balance represents contingent consideration that is subject to multi-year performance targets. Under the previously negotiated contribution agreement, and after final closing adjustments, the issuance of OP units in common shares was fixed at 27.9 million with 23.3 million OP units in common shares issued upfront, and $4.6 million to be issued contingent on multi-year performance targets. Based only on the upfront OP unit in share issuance, the company now has a $112 million Class A and B shares outstanding which represents an 84% ownership stake in the underlying operating partnership subsidiary. If a 100% of the operating partnership units were to convert to Class A common stock, as of today, the total shares outstanding will be a 133 million. More details can be found in our 8-K filing upon closing of the transaction, on April 2, 2015. Pro forma for the internalization total assets in our balance sheet will be approximately $9 billion which takes into account the value of Colony Capital, LLC, and consolidation of some of our previously unconsolidated investment joint ventures. Further more, we issued $288 million of Class C preferred stock last month. Both of these events de-leveraged our balance sheet, reducing our March 31, 2015 leverage from 50% to approximately 34% on a pro forma basis. Turning to investment activity, recent deployment has been brisk. Since the beginning of the year, we have invested and committed to invest $710 million. Of this, $362 million or 51% was invested in six equity investments. Once we obtain investment-level, non-recourse financing, we expect to achieve a blended leverage internal rate of return in excess of 15% on these equity investments. The balance of $348 million was invested in 14 loan and preferred equity originations. We expect to either finance or lay off senior interests in the majority of these originations, upon which we expect to achieve blended yields of approximately 12% to 13% on our levered and retained interests. Our investment portfolio remains well-diversified with approximately half of our assets in equity or equity-linked investments, and the balance in debt-oriented investments. Geographically, approximately 82% of our investment portfolio is in North America, and 18% is in Europe on a net book value basis, with a trend towards increased exposure to Europe. Investment performance continues to track very well, and consistent with prior reports, either meeting or exceeding underwriting on average across our portfolio of equity investments, originations, and loan acquisitions. On the capital markets front, subsequent to the end of the quarter, we completed a public offering of 11.5 million shares of a new Series C Preferred stock at an attractive yield of seven and one-eighth percent. The net operating proceeds after deducting underwriting discounts and commissions and offering costs payable by the company were approximately $278 million. We use these proceeds to pay down outstanding amounts on our credit facility, which have been drawn previously for various high yielding investments. To increase liquidity, we're also in the process of potentially upsizing our current $645 million credit facility subject to additional lender commitments. Prior to any upsizing, we currently have in excess of $500 million of available liquidity from cash on hand, and liquidity under our various credit facilities. I would also like to briefly touch on a few important risk management topics that remain a focal point for our management teams. As we enter a period of heightened volatility, in both foreign currency exchange rate and interest rate markets, we would like to reiterate some of our foreign exchange and interest rate hedging strategies. From a foreign exchange hedging perspective, we have consistently applied a policy to hedge our cost basis in non-U.S. dollar denominated investments through local currency financing, and or forwards in costless collars in the derivatives market in order to protect our principle basis from significant swings in foreign exchange rates. As of the end of the first quarter, these hedges had a net fair value of approximately $49 million. Turning to leverage; we continue to remain disciplined in maintaining only modest amounts of leverage, generally 50% debt to assets or less, and largely consistent with other equipment REITs. Where debt has been issued or assumed, we have been careful to match assets and liabilities, appropriately focusing on both interest rate and term structure. For example, we have been undertaking a process of refinancing floating rate debt with longer term fixed rate debt, mortgage debt in our Light Industrial platform for segments of the portfolio that we expect to hold longer term. Whether through our leverage strategies or foreign exchange hedging policies, we will remain prudent and continue to err on the side of conservatism. That concludes our prepared remarks. Operator, can you please open up the call to Q&A?

[Operator:]

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jade Rahmani from KBW.

[Jade Rahmani:]

Hi, good morning, and thanks for taking my questions. I wanted to ask about your servicer. I think you have a rated special servicer and wanted to see if you could comment on whether the BP supplying [ph] business could be attractive, given the large number of expected CMBS refinancings over the next few years? Do you think you'd be interested in growing this into an active BPs operation and potentially a separate company? A - Richard Saltzman Hi, Jade, good morning. So we have looked at being in the B-pieces business, and to-date have not jumped in. And just mainly given how we saw the risk reward characteristics of what was happening in that space since the advent of the financial crisis. However, there are now pending new rules which may change the landscape in connection with how people actually invest in B-pieces, limitations on being able to set your position and other things which could frankly have some implications for how these pieces get priced, and the risk-reward tradeoff, again. And if it should change in a direction which we think is more favorable to the buyer, I think it's an area that we may be keenly interested in. So, nothing specific right now in terms of plans to jump in, but certainly we've been monitoring this forever, and will continue to, and if the opportunity arises, we're happy to get into that space.

[Jade Rahmani:]

Great, thanks for that. Turning to equity under management, just wanted to confirm, $8.8 billion is the correct number for modeling going forward and if this is the amount of EUM that's currently generating base management fees? A - Richard Saltzman Correct.

[Jade Rahmani:]

Could you give any color on the CDCF IV marketing, how that's going, what the target size of that fund is and how long you expect that process to take place? A - Richard Saltzman We're really just pursuant to how these private placements work. We are really not at liberty to disclose much. I mean, all I can say is that we are still investing our CDCF III distressed credit fund, and of course we are much closer to the end of that investing period. And therefore, we are beginning to start to talk to investors about the next generation, which would be CDCF IV, but that's really all we are at liberty to say today.

[Jade Rahmani:]

Okay. And broadly speaking, how would you characterize competition in the fundraising space? We've seen large funds raised from many of your competitors, some are having very strong success, but I believe it's an extremely competitive process. Can you talk to that? A - Richard Saltzman Yes. Well, it is a very competitive process. And I think the good news is that demand for these types of funds is really picking up rather dramatically right now, just given global liquidity, and a dearth of opportunities in many other areas, so global real estate investing, generally, is viewed as attractive from a relative investment asset standpoint. And so you're seeing a lot of demand from a wide number of constituencies. On the other hand, I think investors are quite selective in terms of who they're willing to invest with. And as I referenced in my comments, you have a little bit of have-have not situation out there today, in that those who are larger and have more -- larger funds, and larger infrastructure, and larger scale are benefiting disproportionately in terms of the recovery. And we are thankful that we're in that category, as I referenced, and hope to have a lot more favorable news to report as it relates to that in ensuing quarters.

[Jade Rahmani:]

Thanks. And just finally regarding the real estate equity investments, what areas in the U.S. do you find still attractive at this point in the cycle? Do you think that you will be focusing primarily on net lease in industrial or switching to other property sectors? A - Richard Saltzman Well, look, we have a lot of equity exposure in both single-family for rent, as well as now in the Light Industrial. And we remain quite enthusiastic about both of those spaces in terms of the fundamental demand from the tenants for what we own. That continues to be the case. We could selectively enter some other spaces too through our more conventional division that basically manages core, core plus value-added products, whether to funds or separate accounts. We're having a couple of things that we're contemplating which would expand that part of our business, and that would be across a diversified set of property types which would include office, and retail, and multi-family, in addition to industrial. So I think you will hear more on that too, again in ensuing quarters. So we think equity in the U.S. right now is actually a pretty attractive proposition, just from a fundamental supply/demand standpoint. What we have to be careful about is pricing.

[Jade Rahmani:]

Great. Thanks for taking my questions. A - Richard Saltzman Thank you, Jade.

[Operator:]

Thank you. Our next question comes from Eric Beardsley from Goldman Sachs.

[Eric Beardsley:]

Hi, thank you. Just wondering, I guess relative to the proxy that you previously put out, if there's any updates you could share on -- I guess, if there is any changes in the expense base in terms of what's going to Colony incrementally in the second quarter from the acquisition, and then in just terms of the revenue as well?

[Darren Tangen:]

Sure. Well, Eric, so with the transaction closing on April 2nd, so obviously very early in the second quarter, yes, you will see in our second quarter results a pretty material impact from the overlay of the Colony Capital business coming on board. And so you will see two things taking place; you're going to see fee income coming from the various funds that Colony Capital manages today. You're going to see increased overhead expenses, which is mostly compensation-related expenses to the people that are now employed by Colony Capital, Inc. And then of course the other big change going into the second quarter will be the fact that the management fees that were previously paid to the external manager will fall away. So all of those will be big changes -- and actually there is also going to be, in the second quarter -- this will be a one-time thing that happened as of the transaction date, the consolidation of some previously unconsolidated joint ventures, investment joint ventures is also -- there is a fair value step-up, which is going to create a one time gain. So there is -- all of those things you're going to see in the second quarter results, and I think part of your question is what impact is that going to have overall, and all I would say to that at this point is there was some pro forma numbers that we're actually more backwards looking that were picked up on some 2014 numbers for the first nine months that showed -- based on those results that the acquisition was slightly accretive. And so I think that answers the question of what overall impact this may have on the bottom line.

[Eric Beardsley:]

Great. So in terms of the overall run rate, those pro forma numbers for the nine months of '14 are still a pretty good place to look, and there haven't been so many changes to those?

[Darren Tangen:]

Yes. We don't have any other numbers for either the first quarter of 2015 or forward-looking to really share at this time. But I think the right takeaway based on the information that was presented back in January with the proxy is -- the expectation is that it's just going to be a little bit accretive if you're in the near-term, but more material accretion is expected is likely to take a little more time to come to fruition as some of these initiatives that Richard was highlighting come to bear.

[Eric Beardsley:]

Great. And then, how much transaction cost you have remaining relative to the deal?

[Darren Tangen:]

Yes, I mean we accrued for most of the transaction expenses in the first quarter. I don't want to say they're completely behind us. There is a possibility that some could show up in the second quarter, but there certainly should not be anything to the level of materiality that you saw here in the first quarter.

[Eric Beardsley:]

Great. And I guess, are there any updates you could share on the timing or I guess the strategy for the CAH exit?

[Richard Saltzman:]

Well, let me say the following about CAH. I mean we continue to explore all possibilities with respect to how we can eventually create some liquidity for all of the investors who were in CAH, including CLNY. And so as part of that, we've certainly been continuing to consider potential strategic transactions, we've been looking at an IPO. I think it's fair to say on the IPO front, the public markets continue to struggle a little bit with the companies that have already gone public in this space, and part of the issue I think just as been the learning curves and ramp up of what really is a brand new business from an institutional perspective. It's a business that has existed for a long time in terms of mom-and-pop ownership, but in terms of aggregation, institutional management, scale, it's really brand new. And the good news is that I think 2015 -- certainly looking at our own circumstances is likely to be an inflexion point in terms of the results pivoting as we were describing earlier in the call. In that, we are now finally at a stabilized occupancy, and it's hopefully going to even improve some more, where we have some leverage -- operating leverage in terms of being able to now get some real rent increases, and start to play catch-up with respect to the very robust rental increases that the rental market has enjoyed through the multi-family space. So you heard me say we had almost 4% increases in rent in the first quarter, we certainly expect that trend to continue, maybe even be little bit better than that. We also have the CAF machines staring to kick-in in terms of the loans that we're originating in that part of the business. All current cash flowing at a very robust level even before we start to think about how we can turbo charge that result with securitization. So I think all of these things will contribute over the course of the year to a much more robust picture in terms of the bottom line, which could position us well for our -- let's say, just going public through an IPO, but at the same time we will continue to explore all of the different potential strategic possibilities that are out there. And so I don't have anything more specific to report at this point, but I think the trajectory from an operating standpoint looks quite positive, which I think provides a solid backdrop for a lot of different options.

[Eric Beardsley:]

Okay, great. And then just lastly, I think there's been just a little bit of noise as we look at the average loan yields, whether it's from prepayments or other, but just wondering if you had any data you can share in this, where that period on average today, if we were to look at the first quarter?

[Darren Tangen:]

Yes, if, Eric, you're looking at the loans held for investment, so those are the loans consolidated on our balance sheet, I do think in the fourth quarter last year we did have some relatively material prepayment penalties that came through on some power payoffs. So that was one of the reasons why that yield maybe was a little inflated in the fourth quarter. I think if you look at the yield here in the first quarter of this year, it's about the 9% yield range. And that's probably a better run rate number.

[Eric Beardsley:]

Okay, terrific. Thank you.

[Richard Saltzman:]

Thanks, Eric.

[Operator:]

Thank you. Our next question comes from Dan Altscher from FBR.

[Dan Altscher:]

Thanks, and good morning everyone. Darren, I think if I heard you correctly, you said you had $550 million [ph] kind of liquidity between cash on hand perhaps, so can you guys kind of just give us a little bit of walk through of that? How much of that is cash versus credit facility or if there is a math [ph] a specific financing that you're including in there that needs to get done?

[Darren Tangen:]

No. So it was -- 500 was the number that I said, Dan, and it's probably 50 -- I don't have the exact number in front of me, but somewhere order of magnitude 50 million of cash on hand with the balance available through availability under our various credit facilities. I mean obviously those are little bit fungible, because we do have amounts outstanding on our credit facility. So any cash on hand could be used to pay that down at any point in time or redrawn, but that's why I sort of quote that number in the aggregate, but it's around 500 million of liquidity. There is, on top of that, an ability for us to do some additional financings down at the investment level; in fact there is one material loan origination that we closed on in -- actually closed here in the second quarter that we are expecting to lay off any note, which is going to bring back some proceeds to us, and there are some other financing opportunities and repayments that we are expecting through the balance of this quarter and through the balance of this year, which will also provide some pretty material liquidity to us.

[Dan Altscher:]

Okay, got it. Yes, thanks, that's helpful. And thinking about also the last preferred offering that you completed, can you just give us a sense of the rationale or the thought process as to doing preferred versus maybe just doing straight common at that point?

[Richard Saltzman:]

Sure, and thanks, Dan. So look, the way we looked at it on April 2nd when we closed the merger, we viewed that as a simultaneous issuance of equity to the tune of approximately 25 million common shares in OP units. So a meaningful increase in our gross equity capitalization, and a de-leveraging of it, as Darren actually described in this comments. And so therefore, we thought that doing a preferred, which -- while it has a higher current dividend and coupon that we're basically paying on a current basis doesn't participate in the upside, was a much better corporate financing option in light of the fact that we had already just issued a lot of common equities. And as you've seen us manage the company from a financial point of view since our inception, I mean we have a blend of these different types of financings on our balance sheet. And we've also signaled that on a go-forward basis, given our new construct. We will be a lot less dependent on public equity necessity, if you will, in light of the fact that we are going to be now making most of our investments through funds and vehicles, and benefiting from the private capital that we're raising to produce the same, if not, more turbo charged results. So all of those things were taken into consideration in terms of why we thought it made sense to do the preferred right after the merger closed.

[Dan Altscher:]

Got it, okay. Switching to the CLIP, which I like the name of, Richard, I think you've mentioned that the occupancy there is around 90% and the lease-up continues. So I was wondering if can kind of give us some details or thoughts around what you're all doing to really actively manage that portfolio to get folks in. You know, there are some rent actions being taken or new lease terms that you're doing to improve that occupancy. And then I guess just maybe overall what you guys really like about the industrial side of the equation? I assume beyond the Cobalt deal that was already done, there are some overarching themes that you're trying to play out with that?

[Richard Saltzman:]

Yes. Well, look, the reality -- first of all, we have a separate team that is 100% dedicated and focused to this; consisting of around 25 people, and headquartered in our Dallas office. And they are doing a great job integrating with the rest of the Colony, and we are really off to a tremendous start in terms of the pick up in demand that we've been seeing from the tenant side. Part of the thesis was that in addition to getting best-in-class team and a critical mass in terms of assets, part of the thesis was this was the right point in the cycle in terms of taking advantage of what was an accelerating demand from small and medium-sized businesses here in the United States for that kind of space. And that's happening. So throughout the portfolio, we are just seeing increased absorption and we're seeing net effective rents that generally are meaningfully higher than what we just underwrote back at the end of last year when we were firing the portfolio. So it's a combination of having a separate team fully dedicated to this, a 100% as well as a pick up in the demand for this type of real estate, which is really a little smaller box as compared to the entire industrial market, generally in great locations in real infill locations, historically the best locations, where it's more dependant on small and medium-sized businesses, Dan.

[Darren Tangen:]

And Dan, if you could just jump in on that as well, I mean the other thing that's very attractive about this space is that you can buy a lot of these properties at meaningful discounts to replacement costs. And why that's important is that the new supply in the development cycle for this particular segment of the industrial space really -- the new supply cycle really hasn't started to pick up in earnest yet, and probably won't until values again cross that threshold of replacement value. Obviously there is more new supply coming in the bulk warehouse segment of industrial, but in this more infill Light Industrial segment, not so much, and that we believe means that there is some pretty good upside to rent here, again, before you're going to maybe start to see some of these fundamentals change and new supply enter the picture.

[Dan Altscher:]

Great. Thanks for that, and one other quick one, on the I guess the fund side of the business, are there any actions you can guys take or things that can be done with some of those LPs, maybe more as well to just slow maybe some of the bleed of some of those existing funds that might be winding down, anything that can kind of retain some of that EUM, maybe for longer than we might think?

[Richard Saltzman:]

Not really, I mean, Dan, we are all years and open to suggestions. What does that might add, I don't think so.

[Dan Altscher:]

Well, I guess if I had an answer for that, I'd be sitting in your chair. I don't actually mean to, of course, but…

[Richard Saltzman:]

Yes, I mean it's steady as you go kind of burn off.

[Dan Altscher:]

Yes.

[Richard Saltzman:]

It's not like it's all happening now or anything like that, and it's a very managed process. We're still enjoying potential additional gains in some of these legacy funds that we're investing. So it's not anything dramatic. And I think we're highly confident that just based on somebody's new initiatives, next generation series of things we're already doing as well as some of the new things that we think are going to get a lot of attraction that the manner of fundraising we're going to be in a position to do is going to more than offset this by very meaningful level.

[Dan Altscher:]

Okay. Thanks, Richard. Thanks, Darren.

[Richard Saltzman:]

Yes, thanks, Dan.

[Darren Tangen:]

Thanks, Dan.

[Operator:]

Thank you. Our next question comes from Jason Weaver from Sterne Agee.

[Jason Weaver:]

Hey, good morning guys. Thanks for taking my question. I had a follow-up to an earlier question that was on board about the shift in loan yields from 4Q to 1Q being due to prepayment -- reduction in prepayment fees or penalties. Can you say with any kind of sight that this quarter you've seen an uptick in prepayment, or is that really is that something that you normally observe in the latter part of this calendar year?

[Richard Saltzman:]

No, Jason, I don't think it's necessarily a seasonal thing. I mean, we definitely have loans in our portfolio that either have the season's payments or prepayment penalties if a borrower wants to pay off early, and we can really control the timing of those things. Again, I don't think it's necessarily more prevalent in the fourth quarter versus the first or the second or the third quarters, but they will continue to happen from time to time, and it will add to any kind of run rate yield that we're otherwise seeing in the loan book.

[Jason Weaver:]

Fair enough. And also I noticed that you didn't disclose a NAV this quarter versus last and I imagined that probably due to all the changes that happened first quarter end the internalization, as well as the preferred offering, but is there any way you could outline how we could be thinking about that now, both those transactions?

[Richard Saltzman:]

Yes. Look, I think what we said at the outset in the call today is that we're not going to be reporting that metric any longer because really in our new construct as an equity REIT with an investment management focus, it's just really not a domain metric that people look to. And we want people to focus really on the earnings generating capability of the company, and how we're going to be able to grow that earnings; more consistent with, again, how the companies that we view is some kind of peer group. I don't think if there's any one company out there that we're thinking about, but an amalgamation of bunch of different companies. None of them report an NAV or share value metric. And so we think on a go-forward basis it's no longer an appropriate thing that we should be disclosing.

[Jason Weaver:]

Okay, thank you. And finally, in your 10-Q filing that will probably come out shortly, do you plan on reporting or restating historical figures for past periods for core FFO and FFO?

[Neale Redington:]

So Jason, Neale Redington here; I mean, for prior comparison periods, I think we have to -- we will show FFO and Core FFO, but I don't know what prior periods you were talking about restating. Right till like for instance I mean…

[Jason Weaver:]

Not restating, just reporting into the prior period. I assume, it will be very close to your core earnings, but with the change in asset mix, obviously it would be different?

[Neale Redington:]

Yes, so there is a reconciliation that was in the earnings release that went out last night, and so there is both our reconciliation of how FFO and Core FFO are calculated, and of course that was done for the first quarter of 2015. It was then compared to the first quarter of 2014. So you will see those period-over-period comparisons over the coming quarters these metrics get reported.

[Jason Weaver:]

Very good. Okay, thank you for taking my questions.

[Richard Saltzman:]

Okay.

[Operator:]

Thank you. [Operator Instruction] And our next question comes from Jason Arnold from RBC Capital Markets.

[Jason Arnold:]

Hey, good morning guys. Richard, are you mentioned the double of the 9 billion in equity under management is an achievable goal over the intermediate term, just curious if you can offer any added color on timing context, is that three years or five years, and then I imagine it's probably a lumpy trend on upward over that time period, but maybe any additional kind of color you could provide that would be helpful.

[Richard Saltzman:]

Yes. No, no, no. Look, I think that's the right timeframe when I said intermediate term, that really means somewhere between three and five years. And part of our confidence around that relates to just the ability for us to put substantially more capital in these GP sponsor positions. And what that really means to the market in addition to the fact that the market demand generally is picking up. As we look back and look at the size of the funds that we sponsored historically when Colony Capital was a private firm, we just think it's going to be a meaningful difference to certain limited partners; some of whom only want to invest with managers that put a substantial amount of Colony investment capital alongside of them. And then in other cases where limited partners might feel more comfortable committing a lesser amount when you're only putting $10 million in a fund like we used to do privately and now we're putting $100 million or more in the fund or maybe multiples of that depending on the particular product, that's going to make a real difference in terms of how much capital they're willing to invest alongside of this. So it's really a combination of all of these different things that leads to the confidence that we have availed that being a very achievable goal.

[Jason Arnold:]

Super. Thanks. And then I guess the other one is, I think you've mentioned South America and Asia is having some kind of merging investment opportunities, I'm just wondering if you can kind of hit us high level on what you're seeing over there.

[Richard Saltzman:]

Yes, look this is more related to just the volatility that you had seen in commodity prices, oil in particular, other natural resources, the slowdown in China, what that's in turn meant to the underlying real estate market in China. And these are markets -- some of these markets we've had historical experience in. We haven't been active lately. But we're certainly looking at them today as possible other potential areas of stress or interesting investment activity just based on where they are in their own economic cycle. I mean there was a lot -- I think in yesterday's Wall Street Journal focused on what was happening in Brazil as another example. And so these are just –- I don't think I'm saying anything that's not well-known by the broad market on the one hand, but on the other hand, again, we're a global firm with a lot of infrastructure outside the United States where we feel just based on our history and our resources, we have the ability to take advantage of some of these opportunities.

[Jason Arnold:]

Terrific. Okay, thanks a bunch for the color.

[Richard Saltzman:]

Yes. Thanks, Jason.

[Darren Tangen:]

Thanks, Jason.

[Operator:]

Thank you. At this time, we have no further questions. I'll turn the call back over to management for concluding remarks. Richard Saltzman Thank you, operator, and thanks everyone for joining us today. Of course, this the last time we're really reporting from a financial standpoint pre the merger, and the name changed to Colony Capital, but we look forward to reporting our results in Q2 where you'll see the fully-merged company. And thanks everyone again for all your support.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.