Colony Capital, Inc.
Q4 2015 Earnings Call Transcript

Published: 26 Feb 2016

[Operator:]

Greetings, and welcome to the Colony Capital Fourth Quarter and Full Year 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]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Lasse Glassen from Addo Communications. Thank you. You may begin.

[Lasse Glassen:]

Good morning, everyone, and welcome to Colony Capital Inc.'s fourth quarter and full year 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 turn 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 26, 2016, 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. The company's earnings release, which was released earlier this morning 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. 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 fourth quarter and full year 2015 earnings call. Following strong performance in 2014, 2015 proved to be an even better year for our company in many important respects. First and foremost, we completed the transformative combination transaction in April with Colony Capital, LLC, the parent company of our prior external management. This transaction represented both the internalization of management and the acquisition of Colony Capital’s investment management business. The net result of the combination is a stable, highly productive real estate company with high quality anchor assets producing foundational returns plus investment management, a small part of our business currently but with the potential for more significant turbo-charged growth overall. Second, we had outstanding investment and operating results, which I will address shortly. Third, we arranged the merger of Colony American Homes and Starwood Waypoint Residential Trust or SWAY, which closed last month. The company was renamed Colony Starwood Homes and now trades under the ticker SFR. Finally, we laid the foundation for future growth with substantial accomplishments at CLIP, our Light Industrial Platform, we had the initial closing of our next generation Global Credit Fund and further planted the seeds through several other balance sheet investments for potential future investment management opportunities. So returning to the financial performance, for the full year 2015, core FFO was $2.03 per share, a meaningful increase over the prior year and 34% in excess of our 2015 dividend of $1.52 per share. And from a tax perspective, essentially all of our 2015 dividends were classified as taxable income and gains, not a return to capital consistent with our prior dividend issued. For the fourth quarter, core FFO was $0.57 per share, our highest quarterly result to-date, which underscores both the recurring earnings power of our real estate portfolio and the continuing ability to unlock capital gains from those assets. During 2015, capital deployment totaled $2.2 billion, investment realizations totaled approximately $440 million generating a weighted average internal rate of return of 25% and our quarterly dividend increased by 8% from a year ago. And to cap it off, we ended the year closing on approximately 700 million of total callable capital commitments, including a 20% commitment from the company and our first sponsored fund since the combination transaction. Our record earnings can be attributed to solid performances in each of our business segments. Within the Colony Light Industrial Platform or CLIP, the portfolio was 93% leased as of December 31, 2015 compared to 89% one year prior, while the portfolio increased 15% in size to 35 million square feet at year-end 2015. Further, fourth quarter core FFO was $0.11 per share compared to $0.08 per share in the first quarter of 2015, which was our first full quarter of ownership. We have spoken in prior quarters about the favorable market fundamentals and dynamics to Light Industrial, which remain intact today. Furthermore, our CLIP management team led by Lewis Friedland has done an exceptional job, executing on all facets of the business including acquisitions, dispositions, financings, leasing and asset management. Overall, it was an outstanding first full year for CLIP, and as I will highlight a little later the continued growth of CLIP is a top management priority for 2016. Within Colony American Homes, total portfolio occupancy stood at 95% as of December 31, 2015 compared to 87% the year prior. Colony American Homes completed its third and largest securitization of $640 million in June 2015 resulting in a special dividend of $75 million to the company. The core FFO yield against the book value of our investment in Colony American Homes increased from 2% in the fourth quarter of 2014 to 6% in the fourth quarter of 2015 or $0.05 per share. And Colony American Homes capped the year announcing its merger with Starwood Waypoint Residential Trust, which closed last month to create Colony Starwood Homes, a single-family home rental company with more than 30,000 homes, which we’re confident will be a market leader going forward. Within the other real estate equity segment, we grew the segment from 429 million of net book value at year-end 2014 to 591 million of net book value at year-end 2015 with fourth quarter core FFO of $15.7 million or $0.12 per share, yielding an annualized 10.6% on its ending net book value; all the more impressive since there are various non-yielding assets in this segment such as our Albertson's investment and certain land parts that was acquired opportunistically during the financial crisis. As a reminder, this segment includes our triple net lease investments, real estate owned properties or REO acquired from governmental agencies and financial institutions, loan to own investments, Albertson's and various other real property investments. Within the Real Estate Debt segment, fourth quarter core FFO was $69.4 million or $0.52 per share, yielding an annualized 13.7% on segment ending net book value. This result includes accelerated interest income from the successful resolution of a non-performing loan acquisition investment. Darren will describe this transaction and more detailed information on our debt segment shortly. Lastly, within the investment management segment, we ended 2015 with assets under management of $18.8 billion and fee-earning equity under management of $9.3 billion. During the quarter, reductions in equity under management by virtue of investment realizations in legacy funds were more than offset by the closing of new capital commitments for a net change of approximately $400 million. While fee-earning equity under management did increase during the quarter, fees associated with the new capital contributions generally will not become earned until capital is called from investors to fund new deals, just as a reminder. Our team has done a fabulous job of delivering yet another year of great results and we look forward to improving upon that performance in 2016. Notwithstanding that conviction, markets are very volatile at the moment and there are concerns generally about asset quality, liability management and liquidity. I’d like to address these areas at a very high level before Darren delves into more detail. On the asset side of our balance sheet, substantially most of our exposure is in CLIP, Colony Starwood Homes, triple net lease investments with credit tenants and high yielding debt investments that fit in a less risky position in the capital spend. In addition to the stability inherent in these categories, our portfolio is extremely well diversified by property type and geography across more than 150 different individual investments containing literally thousands of assets. Turning to the liability side of our balance sheet, our pro rata share of debt totals $3.3 billion equating to modest leverage of 48% debt to assets or approximately 1 to 1 debt to equity ratio. We have financed our business with an objective that limit recourse to Colony Capital, Inc., our parent company, while optimizing term, cost and flexibility against the cash flow profile and stability of the assets being financed. We do not have overnight mark-to-market or spread maintenance repo debt facilities and across our 3.3 billion of debt obligations, only 191 million or 6% is due in the next few years, excluding our corporate credit facility, which matures this August but is currently in the process of being refinanced. And while we do have some limited debt [indiscernible] to maturities to provide us with flexibility and lower costs, we generally favor longer-term debt at both the investment and corporate levels. For example, we were one of the first three to issue 10-year convertible notes following the financial crisis when the market standard terms was typically three to seven years. Also, our preferences to finance our business with investment level match term non-recourse debt such as the securitized financings that we have executed for our transitional commercial real estate mortgage origination platform. We have also been actively terming out our mortgage debt within the CLIP platform on a longer term, generally 10-year plus fixed rate basis. Regarding liquidity at year-end, we were well positioned with more than 900 million in cash on hand and revolver availability. We are also optimizing our current investment portfolio by accelerating non-core investment realizations and narrowing on the focus of our future investment funding priorities. All-in-all, we have a safe and conservative balance sheet with significant flexibility in liquidity to take advantage of the attractive opportunities before us. To this end, we remain quite sanguine about our business, despite the ongoing market volatility. Public and private markets for commercial real estate debt and equity are currently out of sync. For sure, part of the volatility in the public markets relates to technical liquidity and regulatory factors but in addition, public markets appear more bearish in the outlook for real estate fundamentals in private markets. This has certainly impacted some aspects of our business such as the cost of financing loans and securitization, and we have had to re-price our loan origination business accordingly. Furthermore, market volatility and macro headwinds for some of our larger shareholder constituencies have led to significant turnover in our shareholder base over the last several quarters. However, from our advantage point, overall commercial real estate fundamentals continue to be quite sound. And while it has been difficult to observe the fall in our share price, along with many others in our space, the market dislocation has resulted in significantly expanded pipeline of opportunities both for the company’s balance sheet as well as our funds under management. We simply need to focus on the aspects of our business, which we can control, preserve our liquidity and safeguard the balance sheet. And in this vein, I’d now like to switch gears and provide a brief overview of our top priorities for 2016. First, we are highly focused on maintaining fund raising momentum for our Global Credit Fund, following its successful initial closing late last year. The Fund targets equity-like returns with debt-like risk and is expected to have significant exposure to Europe. Second, with respect to our investment in Colony Starwood Homes, we expect to close and over time eliminate the significant gap between SFR’s current stock trading price and net asset value by achieving a merger-related cost synergies and expanding its FFO pursuant to management’s presentation in early January. Third, within CLIP, we will work to raise additional third-party repaying capital, possibly in an open-end fund construct while continuing to term out floating rate acquisition financing with long-term fixed rate debt. Fourth, we will seek to transform other wholly owned balance sheet investments into third-party capital formats where we can benefit from both underlying asset level returns and investment management economics. And finally, last but not least, at the corporate level, we will simplify our business, refinance our 800 million corporate revolver at more favorable terms and begin to realize both revenue and expense synergies from the combination transaction. So in conclusion, the transformational transaction with Colony Capital in April coupled with strong investment portfolio and operational performance made for a milestone year of Colony Capital in 2015. As we look ahead, our objective remains the same. Turbo-charged growth and returns combined with the safety and stability of high quality real estate assets that we plan to own for the long term. I believe Colony Capital’s future has never been brighter and I’d like to thank all of our shareholders for your continued support of our company, notwithstanding these turbulent times. Now, I’ll turn the call over to Darren Tangen, our CFO, for a more detailed summary of our operational and financial results.

[Darren Tangen:]

Thank you, Richard. Before my remarks on the fourth quarter and 2015 full year, I’d like to quickly inform our listeners that we filed our supplemental financial package concurrently with our earnings release this morning, which I know many of you are just now digesting, and both of these documents are available for download from our Web site, which can be accessed at www.colonyinc.com. In the particular quarter, you will notice that we expanded our disclosure around the company’s pro rata interest within each of our business segments. We will continue to file a supplemental concurrently with our earnings release going forward, and while it will be an ongoing process to continuously improve upon this report, we hope you find this current addition a more helpful resource. Turning to our results, we capped a tremendous year with record fourth quarter core FFO of $76.7 million or $0.57 per share and FFO of $54.3 million or $0.41 per share. These results contributed to full year 2015 core FFO of $2.03 per share and FFO of $1.87 per share. Fourth quarter results were supported by a net positive contribution of approximately $0.15 per share resulting from the successful resolution of a non-performing loan acquisition and other gains, net of various other loan loss and other provisions. The non-performing loan resolution involved a 400 plus acre Florida land parcel and represents a great case study and Colony’s ability to identify and create value in a real estate investment. While we generally shy away from land-based investments, this opportunity had the requisite attributes and upsides to warrant proceeding. Through due diligence, we were able to assess and quantify the risk associated with the defaulted borrower and the underlying land entitlements knowing that there was tremendous development potential and value in the site to collateralize the loan. Very shortly after closing the loan acquisition, we successfully negotiated a friendly foreclosure with the borrower, collected the land entitlement issues and negotiated a sale to a large corporation that viewed the site as strategic. The sale produced an 80% plus IRR and a 1.9 times equity multiple on our investments, a truly outstanding result. We believe we continue to have other significant latent gains embedded within our existing investment portfolio that we will harvest over the coming years. I’d like to spend a few minutes on the asset quality within our investment portfolio. Richard has already covered the equity investments and the improved performance within CLIP, Colony Starwood Homes and our other real estate equity segments. All of these segments currently enjoy favorable market fundamentals and have talented and experienced teams in place to manage those assets and execute those business plans. The other important component of our investment portfolio that I would like to address is our real estate GAAP segment, which had a net book value of $2 billion as of year-end 2015 and contributed $69.8 million of core FFO in the fourth quarter, including gains. Our book of originations made up three-quarters of this segment. Of this, 26% was composed of first mortgages and 74% was composed of leveraged first mortgages, B-notes, mezzanine loans and other subordinate debt. The total originations book sat between a weighted average first-dollar loan to value of 38% and a weighted average last-dollar loan to value of 72%. The originations book is yielding 11% on a blended basis, which is very attractive for the corresponding risk profile given the amount of equity subordinate to us in the various capital stacks. Credit metrics in the portfolio have been stable consistent with the positive commercial real estate fundamentals that we are observing elsewhere in our business. Loan acquisitions composed the other 25% of our real estate debt segment at year-end. Of this, approximately 64% is represented by loans or loan portfolios that are primarily performing in nature and producing an 11% current yield. The remaining 36% of our loan acquisitions represents our small balance loan portfolios that were acquired with a larger percentage of non-performing loans and typically require various workout resolution strategies managed through our cap at AMC or Asset Management Company. We continue to experience good performance from our seasoned small balance loan portfolios during the fourth quarter and we expect to fully resolve these loan portfolios within the next 12 to 18 months, so they will become less significant to our overall results. Across both our equity and debt investments, our aggregate portfolio remains highly diversified by property type in geography and weighted 80% towards the U.S. and the balance towards Europe. We also have very limited exposure to energy-sensitive markets. Approximately 3% of our net book value of our overall investment portfolio is located in Houston, primarily through national or multistate portfolios within CLIP, Colony Starwood Homes and a preferred equity investment in an apartment portfolio. And incidentally the performance of these Houston assets has held up very well thus far. And we have another 3% of our net book value invested in the Statoil headquarter office building in Norway. Statoil has an investment grade rating of single A plus, is majority owned by the Norwegian government and is subject to a new 15-year lease. In summary, we believe we possess a diverse, high quality portfolio of real estate investments that are positioned to deliver reliable, steady earnings with additional upside potential from embedded capital gains. Moving to the subject of debt, I’d like to revisit our overall leverage profile and liability management plan. Our pro rata share of consolidated debt stands at $3.3 billion representing modest leverage of 48% debt to assets. Within our share of consolidated debt, 2.2 billion is nonrecourse investment level debt, which includes match term CMBS securitizations and other asset-level financings. The $1.1 billion balance is debt that is recourse to our parent, which represents only 16% of our pro rata assets. And again, we only have approximately 190 million of loan maturities and scheduled principle amortization payments in the next two years, excluding our corporate credit facility, which we are in the process of refinancing on more favorable terms. Other than our corporate credit facility, the other significant mortgage loan maturity inside the next five years is our CLIP acquisition financing facility that has a fully extended maturity date of September 2019. We have reduced leverage within CLIP from approximately 70% at initial investments in December 2014 to approximately 57% today, while further reducing floating interest rate exposure by terming out some of our floating rate acquisition debt at very attractive long-term fixed rates. CLIP has refinanced or is under term sheets that finance approximately $300 million of debt at a blended 11-year term and 3.9% interest rates. As a key priority for 2016, CLIP will be active in terming out additional floating rate debt, which as I mentioned still has almost four years of remaining term. Overall, we are very comfortable with our current leverage profile and ability to manage our near-term loan maturities. From a liquidity standpoint, we also have significant flexibility and runway. At year-end 2015 we had approximately 900 million of cash on-hand and availability under our corporate revolver and warehouse facilities. As Richard mentioned, we completely understand the market’s recent focus on asset quality, leverage and liquidity amidst the current economic climate. But this isn’t new to Colony. We have been focused on these issues since our IPO in 2009 regardless of the market conditions. We have continued to be rigorous in our underwriting of new investments, conservative in our use of leverage and protective of our liquidity. And our results to-date and the quality of our balance sheet proves this out. As significant owners of the business, management has never been more aligned with outside shareholders and we remain ever vigilant to strike an appropriate balance between capital preservation and risk management while generating strong earnings and dividends and long-term value creation for our shareholders. With that, I’d like to turn the call over to the operator to begin Q&A. Operator?

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Jade Rahmani from KBW. Please go ahead.

[Jade Rahmani:]

Good morning and thanks for taking the questions. Just on the broader environment, how do you think this plays into Colony’s favor? Are you seeing investment opportunities in the U.S. improve as yet, or are you still focused primarily on Europe? And how has deal flow been tracking?

[Richard Saltzman:]

Good question, Jade. Good morning.

[Jade Rahmani:]

Good morning.

[Richard Saltzman:]

Yes, definitely deal flow activity in the United States is picking up as a result of dislocation in certain parts of the capital markets. So we’re now seeing more coercive divestitures of assets where people have leverage issues. We’re certainly seeing as a result of the backup and loan origination activity more broken deals that we might be able to advantageously finance. Now it’s not quite back to what it was at the beginning of the financial crisis for sure, but we would expect that there may be more rescue capital type new originations, financing opportunities as a result of what’s taking place. So, yes, we’re cautiously optimistic that this is going to be very good for deal flow. And of course the activity in Europe continues to pace in terms of a very plentiful, abundant pipeline of opportunities that we expect to pursue. So, yes, we think it’s actually notwithstanding the pain in terms of the volatility, we think it’s actually a really good business.

[Jade Rahmani:]

And in terms of the CMBS market, which is having its own significant issues and estimates for straight securitization volumes have dropped by at least about 30%, which could actually be conservative. And there’s the wave of debt maturities upon us, is this an area that you think you guys could significant play in as part of rescue capital, as part of recapitalizations?

[Richard Saltzman:]

Yes, for sure, that’s a subset of really what I was trying to identify, so absolutely.

[Jade Rahmani:]

And on Colony Mortgage Capital, which has used sort of the CRE CLO market as a financing tool, has that – that market I assume also spreads and widens significantly and we haven’t seen any CLO issuance this year in the CRE space. So what’s the outlook for Colony Mortgage Capital?

[Richard Saltzman:]

Well, it’s slowed for sure consistent with your comments. We’ve widened out our pricing on new loans consistent with where the liabilities would price and the borrowers for the most part haven’t met us, at least not yet. So, the pace of the originations has slowed down but we’re not going to do anything silly. That’s just one kind of aspect of our business. We’re very comfortable with the exposures that we have. Substantially, most of it is already kind of permanent lease financed. We just have a little bit on our warehouse lines. And the portfolio is in good shape and earning a very healthy rate of return for us right now. So if that part slows down, but other things are growing, that’s okay as far as we’re concerned.

[Jade Rahmani:]

In terms of the total debt portfolio, you mentioned the loan portfolios should be resolved over the next 12 to 18 months. Just on the rest of the portfolio, what’s the remaining duration? And just summing the two together, what’s the aggregate amount of capital you expect to come back?

[Darren Tangen:]

Jade, I’ll take that one. The origination side of the portfolio has a shorter duration between two to three years at this point. The loan acquisitions has a longer duration, it’s probably more four to five years. However, we could ultimately exit some of the loan acquisition portfolios more quickly than that four to five years because certainly in the case where loans are non-performing, you control the exit through resolution strategies. And that’s what I was mentioning on the one part of the loan acquisition book, which has the majority of the NPLs, which are these small balance loan portfolios, we’re going to be looking to exit those over the next 12 to 18 months. It’s a large part of our book overall. The debt segment, when you include both originations and acquisitions, it was 2 billion of net book value at the end of the year. So it certainly could contribute or return a lot of capital to us over the next few years.

[Jade Rahmani:]

Just on the CLIP side, it looks like the lease rollover schedule – there’s quite a significant amount of leasing activity that you need to complete over the 2016 to 2019 timeframe, about 12% to 16% per year. So, I guess can you comment on your confidence level and ability to maintain the occupancy as well as just supply fundamentals in that sector.

[Richard Saltzman:]

Sure. Look, from a fundamental standpoint that business is in great shape. Our occupancy is now ahead of where we thought it was going to be after only ownership of slightly more than one year. And interestingly while technology generally has negatively impacted many real estate sectors in terms of how supply-demand fundamentals work in this particular cycle, in industrial it’s actually been a big benefit vis-à-vis ecommerce and how there’s just a greater need generally for more warehouse space, more big box space, more smaller box space, just as a function of where do you store all of those goods that are now trading to online ecommerce. So there’s been very little new supply in the light industrial space. Where there’s been new supply in industrial is more the larger box stuff and kind of locations where land is more abundant. Typically, the Light Industrial is owned in infill locations where there really is typically very few places to develop anything new. So supply-demand fundamentals are great; leasing activity is quite robust in terms of renewals and absorption of space that was previously vacant. And look, I think it’s just there are shorter duration leases typically in this particular business, so it’s just a constant rollover of some of the portfolio every year. But the leasing activity has been quite sound.

[Jade Rahmani:]

And just on the asset management side, can you just say what the amount of fee earning AUM that’s actually been called is that’s generating fees currently and maybe just discuss the fund raising plans?

[Richard Saltzman:]

Well, I don’t think we’ve disclosed that completely. But the 9.3 billion is either equity under management that’s already earning fees or alternatively it’s going to be called in the short run and will be earning fees. That’s how we’re reporting the space right now is capital commitments that we have total discretion over whether they’re already in place and earning fees for us or adapted. And look, I think from a fund raising standpoint, I tried to really emphasize the priorities, which are the Global Credit Fund with taking CLIP, perhaps converting it to an open-end fund structure where there’s enormous demand and queues in the private market. And we think we could be very successful doing that with our 2 billion very well performing portfolio. And then we have some other ideas, which are more at the early stages just with respect to what we can do with other parts of our balance sheet in terms of creating third-party capital models, which will be consistent with our overall business model. So, lots to focus on this year. I think if we’re able to do all of that, we’re going to have a phenomenal year.

[Jade Rahmani:]

Okay. Thanks for taking my questions.

[Richard Saltzman:]

Thank you, Jade.

[Operator:]

Your next question comes from Eric Beardsley from Goldman Sachs. Please go ahead.

[Eric Beardsley:]

Hi. Thank you. Just a follow up on the fund raising. Could you just remind us where you stand on your targets here I guess relative to other fund raising has been versus your targets? And just a follow up. Have you had to change your focus at all in terms of your fund raising whether it’s because of potentially less investment from sovereign wealth or others just based on the global economy?

[Richard Saltzman:]

Yes. Hi, Eric. Thanks for the question. We’re on target for the targets that we had in connection with the contingent consideration that we structured as part of the combination transaction. So, not issue there. I mean I think as I’ve commented previously, for sure a volatile environment like the one we’re in causes just greater time to get the closings, just because people take a step back, they pause. But the demand at the end of the day is still very strong for the types of things that we’re pursuing. And sovereign wealth funds for the most part aren’t fund investors. There are some that invest in funds but sovereign wealth funds typically are making more direct investments either on their own or through joint ventures or kind of separate account type relationships. So they’re not a big part of the fund market to your point that maybe certain sovereign wealth funds aren’t quite as active today given that there may be oil-based economies and the like. So we’re on target and we just want to be focused on things that are kind of obvious next step generation opportunities of things that we’re already doing and very successful at and/or transforming great assets that we have on our balance sheet, like CLIP, and figuring out the right capital construct and perhaps hopefully a permanent capital construct like an open-end fund.

[Eric Beardsley:]

Got it. And just want to clarify I guess how much did the NPL resolution contribute in the quarter?

[Darren Tangen:]

I don’t know if I’ve got that specific, but it would have been a pretty small percentage, Eric. As I mentioned, loan acquisitions are a quarter of our debt segment and the NPL portfolios were about 30% of that quarter as it relates to net book value. So it wouldn’t have been a large earnings contribution from NPL.

[Eric Beardsley:]

Okay, got it. And just the resolution that you have on the property in Florida, what was that number?

[Darren Tangen:]

Yes, so the number that I provided was $0.15 that was largely that Florida NPL resolution although there was some other gains and loan loss provisions that were included in that. So that’s sort of a net number, but it’s mostly that Florida NPL resolution.

[Eric Beardsley:]

Got it, okay, that’s helpful. And then just lastly, I guess how should we think about the transaction cost moving forward? Is there any way to equate those to the activity whether it’s in the third-party investing or other areas?

[Darren Tangen:]

So there was a large transaction expense in the fourth quarter and it actually related to a large REO portfolio, the portfolio of industrial, office and retail assets that we acquired in the UK. And this was a deal that was funded by our next generation global credit fund. So 20% of the capital came from the balance sheet, 80% came from the fund. And when you buy real estate in the UK, there’s quite a large stamp duty as there are in a lot of European countries when you buy real estate. And you have to expense that all upfront. So the bulk of the transaction expense they got recorded in the fourth quarter related to this one transaction. It’s a little difficult to predict how many more transactions of that variety we’re going to have here in 2016. There could be more that trigger these kind of transaction expenses. I would say to the extent they do occur, they’re likely to happen through funds under our management and where the balance sheet may have a 20% interest coming through this Global Credit Fund. But it’s hard to give you sort of a run rate number on that.

[Eric Beardsley:]

Okay, great. Thank you.

[Richard Saltzman:]

Thanks, Eric.

[Operator:]

[Operator Instructions]. Our next question comes from Dan Altscher from FBR. Please go ahead.

[Dan Altscher:]

Hi. Thanks and good morning, everybody. Richard, I guess the stock price probably isn’t where you want to be. It sounds like there is lost liquidity and some other options that are interesting, but maybe talk about the potential for a buyback or something else to maybe tender for something else that might be helpful, whether it is depressed or something else in kind of the capital markets.

[Richard Saltzman:]

Yes. Just on the buyback question, we’ve certainly taken advantage of that before in our history and continued to look at it as a possibility. What we’re very mindful of at the moment of course is just making sure that when managing our liquidity prudently from the standpoint of not overleveraging and not creating any tension in terms of executing our business plan. So we have quite a good balance right now in terms of our sources and uses of liquidity as we look out over the next two or three years. And we’re just a little hesitant since we haven’t announced the buyback to tilt that in a direction where we might put pressure on our business plan. So, maybe we’re being overly cautious or conservative on one hand but we just think that’s been the prudent course to-date, although we do have some ideas that you may hear from us on shortly with respect to how to opportunistically maybe take advantage of what’s happening in the market.

[Dan Altscher:]

Well, since you kind of led us there, can you give us a little more of what that means --?

[Richard Saltzman:]

Not yet, but hopefully more to come soon on that.

[Dan Altscher:]

Okay. I just want to make sure also I heard maybe the comments correctly about some potential for some non-core asset sales. If I did hear that correctly, can you just maybe give us a little bit of flavor as to what that might mean; types of assets, sizing, anything of that color?

[Richard Saltzman:]

Yes, I’m hesitant to be too granular there but for sure as we simplify our business, we want to focus in those spaces where we’re very comfortable with the asset quality and where we want to have significant exposure, and have it coupled with the third-party capital model. And so in places where we may be invested in assets that are a little bit more random relative to that business paradigm, you’re going to see us accelerate the pace of divestitures.

[Dan Altscher:]

Okay, so I guess we’ll be on the lookout for those to come.

[Richard Saltzman:]

Yes.

[Dan Altscher:]

Okay, that’s fine. I guess also you talked about maybe trying to convert CLIP into some sort of an open-ended fund structure and I think maybe we’ve talked about that before in the past. But maybe just remind us all what that could look like or what the impact would be or how that might turn into more of a, like it seems like a permanent life vehicle?

[Richard Saltzman:]

Sure. An open-end fund in the private real estate equity markets is a very well received institutional product where there’s a lot of good history. For the most part, it’s in what are classified as Odyssey funds, which tend to be diversified in the four core food groups meaning office, industrial, retail and multifamily. But more recently there’s been several sector funds that have also been done quite successfully in the open-end fund market both in the industrial space as well as in the multifamily space. And in these funds today, there are actually fairly large queues to get it, because some of these managers just don’t have the capacity to be able to invest the flows that are coming primarily from pension funds and some non-U.S. investors. So there’s quite a good robust dynamic in terms of the supply-demand balance for increased interest in these funds. And the way they work is that there’s a quarterly NAV redemption feature, so you can either get into the fund based on NAV on a quarterly basis or you can get out of the fund on a quarterly basis. That’s the liquidity provision that allows the fund to be infinite life. So it’s the institutional private market version of an infinite life permanent capital construct and where there’s currently a lot of unmet demand from the capital side. And the big issue for people who are trying to create new funds is typically just the Catch-22 that there’s very little, if any, interest in kind of a blind pool in this space. So having a significant portfolio like we do with critical mass, a couple of billion dollars, 300 assets across the country that are performing very well, we think is all of the necessary ingredients to kind of be successful in that kind of restructure.

[Dan Altscher:]

Okay, great. That’s really helpful color. Maybe just one more for me. I guess broadly, you looked across everything that you own and I’m sure you love a lot of your assets and like some others. So for those that maybe you like, or maybe you don’t think maybe are quite as good as the others, I guess ultimately the question is as you kind of scan through the portfolio, what do you see that worries you the most? As you review everything and you kind of pick out a couple here and there, is there anything that stands out as to what seems a little bit less good right now?

[Richard Saltzman:]

Well, I’m not sure there’s anything in particular that we’re very worried about. We’ve been doing a lot of analysis of the type that you’re describing and our big exposures are in the industrial, they’re in single-family for rent space both of which are doing extraordinarily well from a fundamental demand standpoint in terms of tenant interest. Then we have the credit net leases, which we think are very solid just based on who the tenants are, what their credits are. So we’re pretty comfortable. But on the other hand, I think as I just mentioned, we’re going to now streamline the types of spaces that we’re going to emphasize and focus on as we simplify our business model. And so anything that is kind of not core to what we think we want to own for the longest term and where we can have a third-party capital model in addition to whatever our very significant interest is in those particular assets, we’re going to look at for divestiture purposes and kind of clean up what is probably more spaces than we otherwise want to be in at the moment.

[Dan Altscher:]

Okay. Thanks, Richard. I appreciate it.

[Richard Saltzman:]

Yes. No, thank you. I appreciate it, Dan.

[Operator:]

Thank you. With no other questions right now, I’d like to turn the floor back over to Mr. Saltzman for any closing remarks.

[Richard Saltzman:]

Okay. Thank you, everyone, again for participating in this call today. I just want to repeat a couple of things, which is that one, we’re very much on target with respect to all of the things that we’ve been planning over the last year in connection with how the combination transactions work and how it should position us on a go-forward basis. The trajectory in terms of all of these different businesses continues to be very positive. And our balance sheet and portfolio are in great shape. So we’re quite optimistic about 2016 and we think the volatility in the market currently only is going to create more opportunity for us. So, again, thanks so much for being supportive of us as shareholders and we look forward to reporting 2016 results to you over the next few quarters.

[Operator:]

Thank you. This concludes today’s conference. You may disconnect your lines and have a wonderful day.