DigitalBridge Group Inc (DBRG) 2018 Q4 法說會逐字稿

Ladies and gentlemen, greetings, and welcome to Colony Capital, Inc.

Fourth Quarter and Full Year 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this program is being recorded.

It is now my pleasure to introduce your host, Lasse Glassen, Managing Director of Addo Investor Relations.

Thank you.

You may begin.

Good morning, everyone, and welcome to Colony Capital, Inc.'s Fourth Quarter and Full Year 2018 Earnings Conference Call.

Speaking on the call today from the company is Tom Barrack, Executive Chairman and CEO; and Darren Tangen, President.

Mark Hedstrom, the company's COO and CFO; and Neale Redington, the company's Chief Accounting Officer, will also be available for the question-and-answer session.

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 those 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, March 1, 2019, and Colony Capital does not intend and undertakes no duty to update for future events or circumstances.

In addition, certain of the financial information presented in this call represents non-GAAP financial measures, reported on both a consolidated and segmented basis.

The company's earnings release, which was issued this morning, is available on the company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

In addition, the company has prepared a table that reconciles certain non-GAAP financial measures to the appropriate GAAP measure by reportable segment, and this reconciliation is also available on the company's website.

And now I'd like to turn the call over to the Tom Barrack, Executive Chairman and CEO of Colony Capital.

Tom?

Thank you, Lasse, and good morning, and thank you to all the participants on this morning's earnings call.

Today, as we look around the world, financial markets are priced to perfection across most of the investable universe, which is a testament to the unprecedented intervention of central bankers, which erupted in the wake of a great financial crisis.

A global wave of liquidity, an unquenchable search for yield, historically low interest rates and strong economic and employment environment in the United States and supply-demand balance in most asset classes in most regions has spurred an ebullience in pricing, which has been -- supported the performance of the businesses and assets in which we invest.

Within this economic backdrop lies the unknown effect of trade wars and global unsettledness, which has actually added to the stability and predictability of real estate assets in the regions in which we invest.

First, the old news.

Our post-merger initial strategy of a diversified multi-faceted REIT with an investment management toggle with a new and untried theory, which was further complicated by limited growth due to inherited structural limitations, complex operating partnerships and high leverage levels, primarily in our health care and hospitality segments.

Given these challenges and to better position ourselves for growth, we first had to stabilize those assets and in some cases, the attendant liabilities in each of those operating silos, namely health care, hospitality, industrial, credit and our broad Investment Management business.

The good news is that we primarily accomplished this calling and extending in 2018 and with the remainder scheduled for 2019.

For example, in 2018, we monetized $1.4 billion of gross assets from our other debt and equity segment.

In our hospitality segment, we refinanced our $512 million Courtyard by Marriott portfolio debt, extending the fully extended term from 2019 to 2025 while also placing 19 noncore hotels up for sale.

In our health care segment, we refinanced our $46 million Kensington portfolio debt and the $100 million GAHR floating rate debt, while also internalizing asset management and property accounting for a majority of CLNY's health care portfolio by terminating an external manager and agreement and hiring approximately 20 FTEs, resulting in about a 50% savings.

Additionally, we will thoughtfully allocate excess capital when appropriate to streamline our balance sheet.

In 2018, we redeemed almost 200 million of preferred stock and repurchased about 61.4 million CLNY common shares at an average price of about $5.71, which we think represents a sound discount to intrinsic value.

In 2019, we'll continue to monetize and call.

We'll rotate excess liquidity into foothold positions for new products supporting fee-bearing and promote-bearing third-party capital.

In 2018, we deployed $530 million into GP co-investments, much of which we plan to warehouse and syndicate in the future.

We will be more of exactly the same in 2019.

From a market perspective, increasing allocations to alternatives, real estate and real estate related operating companies, will continue.

Given the strength of Colony's brand around the world and our 26-year history, we have owned, operated and invested more than $110 billion of capital in real estate and real estate-related assets across 20 countries, and we stand to gain tremendously from this trend in our Investment Management business.

We were certainly a beneficiary of this trend in 2018, raising more than $5.5 billion of equity for our Investment Management operation.

In summary, for 2018, while we were disappointed with the performance of our share price, we nonetheless began to lay the foundation for growth in NAV per share.

For example, we raised more than $900 million in coinvestment transactions.

Next, we raised more than $3.7 billion of outside capital, along our $250 million GP capital commitment for our inaugural Digital Colony fund.

Additionally, we formed Colony Credit Real Estate, the third largest publicly listed commercial mortgage REIT, on the New York Stock Exchange.

Additionally, we took concrete steps to launch our Latin America private equity platform focused on growth equity investments and middle-market companies throughout the Pacific Alliance, a trade bloc consisting of Mexico, Colombia, Peru and Chile as well as a new energy-focused Investment Management platform in partnership with HB2 and its seasoned management team.

Colony HB2 Energy will sponsor and manage third-party capital across a series of investment solutions, providing investors more efficient forms of exposure to the upstream and midstream oil and gas industry.

It is now the end of my third month in returning as CEO and for 2019, we have a clear mandate: maintain the dividend for 2019, further the monetization of assets while harvesting liquidity.

We will continue to monetize assets from our other debt and equity segment as well as nonstrategic assets, wherever private values exceed public values or where there's little or no growth potential and no ability to form meaningful third-party capital around those assets.

We will utilize our well-capitalized balance sheet to create engines of value in our Investment Management business.

Assets priced to perfection and our macro outlook are driving us to scour the growth for compelling value and find opportunistic transactions, which can be carried with third-party capital, targeting capital gains oriented long-term returns.

Fund raising.

We've done a great job at raising capital from high net worth individuals and sovereign wealth funds.

We will focus our efforts on these constituencies with whom our brand has the most relevance and use our balance sheet to initiate large-scale coinvestment opportunities, which is currently the product of choice amongst these large investing entities.

Further cost reductions, as Darren will elaborate on in more detail.

We'll continue to rigorously execute our large-scale G&A net cost reduction program.

And further to our G&A reduction program, we remain sensitive to the reality that our results are largely dependent on empowering great people and we will have some additions to them as well.

Capital allocation.

Key to Colony success in the future is capital allocation.

We'll make capital allocation decisions which align with our total return Investment Management driven business model while maintaining a solid dividend.

We intend to stabilize the foundation.

We'll continue to mitigate any underlying risk in the operations and portfolios and in doing so, retain the fortress position from which we are poised for growth.

Most importantly, in this current economic environment, as we monetize and savor liquidity, we will prepare for that unforeseen intervening event, which always materializes.

Armed with ample liquidity on our balance sheet, we will await the cracks and fissures which will arise from some unforeseen intervening events and which will present extraordinary opportunity on the buy side.

In 2019, even as we execute on the aforementioned initiatives, emphasizing the fortification of our balance sheet, the growth of our Investment Management business and an increasing focus on total return, we will retain our status as a REIT and will judiciously focus on the continued production of the $0.44 dividend.

In closing, I'd like to welcome the appointment of our 2 new directors, Ray Mikulich and Craig Hatkoff.

Welcome onboard.

Now I'll turn it over to Darren.

Thank you, Tom, and good morning, everyone.

As a reminder, in addition to the release of our fourth quarter and full year 2018 earnings, we filed a corporate overview and supplemental financial report this morning.

Both of these documents are available within the Public Shareholders section of our website.

On the call today, I will provide a review of our financial results and update on our previously announced cost reduction program and touch on some operational achievements in 2018 and corresponding objectives for 2019.

As an administrative matter, this will be the last call where I will address our financial results.

Mark Hedstrom, who became our Chief Financial Officer on January 1 of this year, will take over this responsibility going forward.

Turning to our financial results for the fourth quarter and full year 2018.

Net loss attributable to common stockholders in the fourth quarter was $397.2 million or $0.82 per share, and full year 2018 net loss attributable to common stockholders was $632.7 million or $1.28 per share.

These GAAP net loss results are principally the result of noncash impairments attributable to common stockholders of $258 million for the fourth quarter and $563 million for the full year 2018, primarily related to certain assets within our Healthcare and Hospitality Real Estate portfolios, our 37% ownership stake in CLNC and the write-off of certain intangible assets arising from the closing of the Colony NorthStar merger in January 2017.

Fourth quarter 2018 core FFO was $22.5 million or $0.04 per share, while full year 2018 core FFO was $333.3 million or $0.62 per share.

Fourth quarter 2018 core FFO included a few significant and unusual items, most notably, $0.06 per share of nonrecurring investment losses primarily related to our share of write-downs within CLNC's private equity secondaries portfolio.

Additionally, $0.03 per share can be attributed to seasonality in our hospitality portfolio and certain G&A expenses such as legal, tax, audit and compensation.

Adding back these items, fourth quarter core FFO would have been $0.13 per share and more in line with expectations.

The full year also includes some notable and unusual items, both positive and negative.

And in the aggregate, there were $0.03 per share of net losses for the year.

Excluding all one-time gains and losses, our core FFO would have been $0.65 per share, just slightly exceeded our budget set at the beginning of the year.

In summary, the fourth quarter financial results were noisy as a result of these various noncash impairments taken in the period.

However, we ended the year ahead of budget on a core FFO basis after adjusting for onetime gains and losses.

I won't delve into my customary individual business segment reports this period and instead refer listeners to our various public filings made today.

However, I would like to make a few comments regarding CLNC, which reported full year 2018 core earnings of $0.70 per share yesterday or $1.42 per share, excluding losses from one property sale and the private equity secondaries portfolio that I referenced earlier.

This fell short of our expectations formed at the beginning of 2018 for CLNC's first year of operations.

The lower earnings were generally attributable to unique credit events on certain legacy assets and a more recent strategic decision to divest certain noncore investments on a more accelerated time frame.

By rotating capital out of 0 or low-yielding legacy investments, CLNC can redeploy its capital into higher-yielding new investments, enabling the company to be in a position to cover its dividend by the end of 2019 on a run rate basis.

Next, I will provide an update on the corporate restructuring and reorganization plan announced last quarter.

Since this announcement, the company has achieved over $25 million of run rate cost savings or approximately half of the stated target.

As previously communicated, we expect to meet or exceed the original target of $50 million to $55 million of gross annual compensation and administrative cost savings by early 2020.

Although most of the savings will come from reductions in our workforce and in most cases, involving businesses being divested, we are committed to retaining our best people for those businesses that are long-term strategic, allowing us to be well positioned for growth.

Turning to strategic accomplishments in 2018.

First, we began the year with an objective to simplify and streamline the company.

One of the ways we measure this objective is the reduction in the size of our nonstrategic Other Equity and Debt or OED segment, where much of our asset complexity resides.

We are by in no means done, but nonstrategic OED decreased by approximately 2/3 during 2018 from $3.6 billion to $1.2 billion by net equity value, well ahead of our plan.

This was accomplished by generating over $900 million of liquidity from these asset monetizations, significantly exceeding our initial target of $500 million for the year.

In addition, the formation of CLNC, which occurred in early 2018, represented a $1.2 billion transfer of assets from nonstrategic OED into a new strategic, credit-focused, permanent capital investment management vehicle.

2019 will be another busy year of dispositions as we look to monetize a majority of the remaining investments within our nonstrategic OED segment and reallocate that capital to grow our third-party capital Investment Management business and continue to build liquidity and deleverage.

Now I'll turn to Investment Management and offense.

In 2018, we raised $5.5 billion of third-party capital, our best year of fund raising since the global financial crisis.

Notably, $3.7 billion was raised in Digital Colony Partners, which continues to approach its hard cap fund size of $4 billion, and we will also look to form incremental coinvestment capital as that fund is deployed.

The remaining $1.8 billion was raised primarily through our GP coinvestment program and light industrial platform.

This success was the result of tremendous fund raising efforts by both our investment and capital formation teams.

These teams were also hard at work to set the stage for future capital raising campaigns which include the following new products: first, we formed Colony HB2, an investment management platform focused primarily on creating and managing financial products focused on the upstream and midstream energy sectors; second, and as a complement to an existing $100 million-plus REIT public equity fund under our active management, we developed the Colony Capital fundamental U.S. real estate index, which is a rules-based equity strategy that invest in REITs.

This index can be licensed to various investment channels and the first licensee is DoubleLine Capital, which just launched the DoubleLine Colony Real Estate and Income Fund, a mutual fund the trades under the ticker symbol DBRIX.

Third, we signed a definitive agreement to acquire the Latin American operations of Abraaj, which has AUM of approximately $500 million in aggressive growth plans.

And last but not least, the Colony Industrial team just closed on a $1.2 billion value-add portfolio, of which approximately 1/3 is composed of seed assets for a new bulk industrial strategy.

As a reminder, we entered the Industrial Real Estate business in November of 2014 and has since raised approximately $1.5 billion of third-party capital, mostly through an open-end fund launched in 2016.

All of these new strategies as well as our existing Investment Management products, including the CDCF opportunistic credit fund series, light industrial and various discrete coinvestment transactions, will be the primary drivers of our future Investment Management growth.

Looking back, we have made tremendous progress in 2018 to simplify our business and focus the business on a more balance sheet light Investment Management business model.

That said, it will still take us at least 1 more year for our efforts to manifest into a cleaner Investment Management business, and we are evaluating multiple ways in which we can accelerate this transformation.

During 2019, we will objectively measure our operational success as follows: one, stabilization and growth in earnings of the 3 real estate verticals, along with the successful refinancing of the $1.7 billion growth in health care loans, which matures at the end of 2019; two, achievement of our stated cost reductions of $50 million to $55 million; three, the growth of third-party capital in our credit, industrial, digital, energy, liquid securities and special situation coinvestment strategies; four, optimization of CLNC to cover its dividend on a run rate basis by the end of 2019; five, monetization of noncore assets to create additional liquidity of at least $500 million; and finally, six, effective allocation of this liquidity into the most compelling opportunities which could include both new investments and repurchases of our own securities but with a bias toward compelling new investments where we have a competitive edge and can employ a third-party capital model.

In summary, we are very pleased with our financial performance and strategic progress in 2018, particularly in the areas of fund raising, asset monetizations and capital deployment.

And I'd like to take the opportunity to thank all of my colleagues for their many contributions towards these excellent operating results during the year.

With that, I'd like to turn the call over to the operator to begin Q&A.

Operator?

(Operator Instructions) Our first question comes from the line of Randy Binner with FBR.

I wanted to start with a question about the Blackwells relationship and if you could provide any background on how that came together and if that is part of kind of a broader look at structural or strategic changes or if it's really more limited to, I think you said, the strategic asset sale review.

Randy, it's Tom.

Both did a good job.

I think Jason is on the phone, bright, articulate, thoughtful, considerate, and raised questions and issues that we've been dealing with already.

It's spurred us along to come up with an extended strategy, adding board members, creating special committee to help us evaluate the repositioning of many of these silos from the REIT.

I know you're getting sick of hearing us say we're going to simplify the business.

If it was simple, it would have been done.

So we're anxious to have shareholder input, we're anxious to have additional expertise helping us as we carve through these complicated asset combinations, which, actually, in this environment, we're happy with at this point.

By 18 months and really just figuring it out, we have our fingers and most of the defensive dikes, and now it's highly maximize the offense.

So we were happy to cooperate with them.

They did a very good job in the way that they approached us.

We now have 2 really great directors the board is very happy to have onboard.

And absolutely, yes, it's part of a rapid process of figuring out how do we maximize value along total return and earnings matrices to take advantage of where we are in the economy and the position where Colony is.

So it was a great relationship and we're very pleased and happy with the result.

Okay, that's helpful.

So that's things like more of a partnership and that, I think, is supportive.

So then kind of following from that, I heard in the opening comments that you are committed to remaining as a REIT and paying the dividend.

So the -- I just want to go back to that though because to me, it seems like between, I think, generally the success in fund raising and the growth overall, the Investment Management business and then this bulk industrial strategy and some of the other syndicated vehicles that you're putting together.

It seems like there's a higher growth investment company within this larger company.

So I'd be curious to just hear thoughts on the pros and cons of keeping this together as a REIT dedicated to that -- covering that dividend then versus potentially kind of realizing more value by separating out some of the much higher multiple pieces of this business.

Yes.

I mean, look, the bottom line is -- the answer is yes, we're looking at all those options.

And it's one foot on the gas and one foot on the brake, right, because as no-go economists have proved, total return is ultimately the quest in whether it's from current yield or residual, eventually, you get to total return.

That's the holy grail.

It's constituencies who are interested -- and dividend yield are different than those who are interested in total return.

So as we go down this path, especially in a surgically priced world, I mean, I think all of you would agree that creating value by going out of paying the highest price for assets at a very mature period in time and historically low interest rate environment is not a brilliant strategy.

So you have to have some value-added position to that asset acquisition base.

And the value-added piece of it when you're looking at seed-bearing and carry-bearing third-party capital and repositioning those assets or adding value is critical.

The good news is we have billions and billions of dollars of stabilized assets that we're starting to become very comfortable with.

So as we look at what's the best way to define and categorize those very different businesses, there's lots of options.

But what we decided for 2019 is really what we told you, is the dividend and our capacity and capability to produce that dividend this year, we think, is in our pocket.

What we do with a growing and growing Investment Management business that has different capital allocation characteristics and different multiples for that third-party capital is something that we're pursuing and investigating in a very serious way.

So we think we're going to have some dynastic opportunities in 2019, but we're not taking our eye off of -- the basic ball is every Friday is payday, every Thursday night, we need earnings.

Cash flow is the king.

FFO and core FFO is interesting.

But at the end of the day, really, clean cash flow is the essence of this business for the next year, and we're in good shape.

We've got liquidity.

We have undrawn lines of credit.

The assets are stabilized and the new third-party businesses are what we think is right in the middle of the fairway.

Just one more, if I can.

I think it was mentioned a couple of times in the opening remarks that you specifically mentioned this GAHR portfolio and plans for refinancing it.

Can you -- I think that needs to be done by December of this year.

Can you kind of share any color or plans of how -- what that process might look like?

Sure, Randy.

It's Darren here.

So yes, there's a $1.7 billion mortgage maturity in December of this year relating to one of the larger or the largest portfolio by financing pull in our Healthcare Real Estate portfolio.

And we are going to be hitting the market here very shortly with a refinancing campaign to get that loan refinanced.

So I think I said in my remarks that, that's one of our key strategic operational objectives for 2019.

And it's got the focus of everybody here at the company to get that done.

Our next question comes from the line of Jade Rahmani from KBW.

Turning to the entire OED portfolio, would you consider a bulk sale of the whole thing for -- I mean, it seems that there's not a lot of distress in the market, there's ample capital on the sidelines and plenty of special situations buyers that they really don't have much to do right now.

Why not sell the entire portfolio even if at a discount to carrying value and remove the opportunity cost of allocating management's time and resources to that.

It's Darren here.

I mean, it's really about maximizing recovery value over a reasonable period of time for our shareholders.

And the nature of that nonstrategic OED portfolio is such that it's a lot of disparate and somewhat eclectic investments.

We have investments in that category such as the THL Hotel Portfolio, which was loan-to-own situation.

There's 100 hotels that are going to a significant CapEx program there.

And another example, the Albertsons/Safeway position is in that part of -- I'm not sure, trying to wrap all of that up and sell that to an individual buyer is going to ultimately get us the best value or the best recovery.

So I think, look, we're focused on this clearly, given the amount that we're able to monetize in 2018.

And that too remains a big priority for us to continue to winnow that down in 2019.

In terms of the impairments, can you give any color on some more specifics on what drove the impairments and including the real estate investment management impairment, whether that was RXR or something else?

So let me take that in reverse order.

So the impairment relating to the Investment Management business was not RXR.

It related to a health care related Investment Management interest that we have.

So no, it was not RXR.

As to the other impairments, they mostly resided within the health care portfolio, and there was just some changed hold period assumptions for some of the assets that are within that Healthcare Real Estate portfolio, which required us to take some of those assets down to a fair value, just as the way that the accounting works there.

So really, it was the health care portfolio impairments that represented the biggest number in the period.

I think earlier in the comments, in Tom's comments, he mentioned that the real estate verticals were stabilized.

Is, in your view, the health care portfolio now stabilized in terms of premarket performance issues?

Or do you anticipate other performance drags in 2019?

It's a day-by-day process.

If you take the health care portfolio, it's concave.

Skilled nursing is a Rubik's cube, why?

Because we're so far removed from being able to fix anything.

If you remember, you start out and you think it's a triple net credit transaction and the credit lies in tiny operators in various geographic jurisdictions that are subject to various, say, regulatory control in addition to the process in how you get reimbursed.

So the REIT structure really doesn't lend itself well to fixing this stuff.

So what we've done is slowly roll back all of the layers of that operational difficulty.

And Rich Welch, who was running that sales force, has done a great job with his team.

But the operating intensity is difficult because you have CapEx that's going into these skilled nursing facilities on a constant basis.

And the amount of CapEx versus what your anticipated return on equity investment in the future is not simple to calculate.

But we've stabilized that base, and health care is kind of the darling of the new investment groups, looking and saying where is their growth, there's growth in health care.

So even on the skilled nursing, which is operationally intensive, if you look at the future of what's going to happen, it's -- outsourced delivery of medical services to homes is going to be a gigantic growth just as strip malls and light industrial become the last-mile delivery for consumer goods.

There's a big movement underway thinking this could happen in skilled nursing, but it takes time.

So solving all those operational issues was a dilemma, the capital structure, as we talked about, with the GAHR debt, needs to be rectified.

And we think we have a good handle on the big misses as to what happens along the way.

Medical office buildings, more or less stabilized, and senior housing, including our U.K. operation, is terrific.

We've all talked about the mismatch in the supply demand on an interim basis, but the demographics are going our way.

So what helped us, of course, is a low interest rate environment.

Our view always subject to dramatic change is that this rate environment is going to stay relatively common low for the foreseeable future and we should be fine.

On this capital allocation strategy, why did you decide to repurchase common stock this quarter?

I would think that the best use of capital right now is coinvestment capital to catalyze the Investment Management business.

And then reducing leverage, you have a significant amount of asset-level leverage, not to -- in addition, there's $600 million of converts, $1.4 billion of preferreds.

So can you just discuss how you'll prioritize capital?

Yes.

So Jade, it's Darren here.

Maybe I'll start and Tom can chime in.

But I mean, we did take advantage.

I mean, clearly, the stock market swooned in the fourth quarter of last year, and our stock in particular got caught up in that.

And we just saw an opportunity to buy back our stock at very attractive levels.

I mean, I think we averaged $4.80 a share for the stock that we bought back in the fourth quarter.

So look, I think we just saw that as an opportunity.

But having said that, I think going forward, and I made this comment in my prepared remarks, that the bias for the redeployment of liquidity in 2019 and beyond is for new investments in compelling opportunities where we can attract third-party capital under our Investment Management business model.

So that is the bias.

And like you're also correct to point out that we need to take opportunity to deleverage both at the asset level and at the corporate level here over the coming couple of years as we free up this liquidity as well.

So we're really focused on both.

(Operator Instructions) Our next question comes from the line of Mitch Germain from JMP Securities.

Dan, I think you talked about looking to accelerate some of the portfolio rationalizations that you guys are undertaking.

And it sounds like you also changed some hold times on health care.

So is that potentially a signal that you could be maybe pursuing a significant amount of sales in that sector.

Well, we're really looking at everything, Mitch.

I mean, as was announced in the settlement agreement with Blackwells, there was an agreement for the creation and formation of a strategic asset review committee.

And as Tom highlighted, this is really undertaking in considerations that have been ongoing for us.

And so look, yes, if there's an opportunity for us to monetize assets or streamline and simplify the business on a more accelerated basis for us to get to the ultimate vision and end state that we're seeking to achieve for the company, we're going to do that.

So really, I mean, we're looking across all the silos, all the businesses right now in terms of how we can achieve the best results.

Got you.

And obviously, you talked about maintaining REIT status.

You've got digital investment -- in traditional real estate, you got digital, you did an energy fund.

I'm just trying to understand, it seems like everything has got this third-party construct attached to it now.

What is Colony expected to be when we look forward 3 to 5 years?

So let me try and give you an answer.

And I think the reality of it is if you look at REIT land in general and you say who have been the darlings of what you all want to invest in, you start at the top with a Public Storage and a Prologis and you say, "Give me a box that has very little CapEx, that has longer-term contractual revenues with little or no debt, Public Storage instance with a lot of deferred and steady growth in earnings with margins that are going to continue to widen so I can drop to the bottom line those kind of earnings." Your guess is as good as mine, looking out 3 to 5 years as to where we are in that cycle, are you going to have that kind of growth?

The supply-demand balance in all of these asset classes seems to be okay, so we're not suffering from what we have suffered for in the past anticipated recessions.

But I think the answer is that you move with the balance sheet through originating and syndicating high-quality, value-added kind of products, where we're contributing -- whatever this team is, whatever the hundreds end up being at the end of the day, whatever the silo expertise ends up being, as you're creating value moving forward, very hard to create value moving forward buying assets at market, levering them at 30% and hoping and praying that, that margins stays to the same effect.

So I think what you see everybody doing is slowly limping along to liquidity and monetization, saying the safest thing for capital preservation is to be armed with a reservoir of cash to take advantage of missed pricings or fissures and cracks in markets that you understand in the future.

And what we're doing is softly with a clutch and a gas pedal doing that.

Actually, we're happy with the hospitality portfolio.

It's overlevered.

Select service is always difficult because of that CapEx cycle.

We're one of the biggest stewards of a couple of the biggest brands.

And you get intoxicated from the cash flow aspects of those businesses.

And of course, the quality of the income streams is less because you are really subject to what's happening in a fully employed economy.

But it should be good.

The only problem is what happens in a fully employed economy is rate increases, occupancy increases and so does the underlying wages and costs of operating that entity.

But in the long run, that should be good.

So I think the answer is 3 to 5 years from now, we become a global player.

If you look at -- the alternative asset managers have one set of playbook.

REITs have another set of playbook.

We're -- we've been somewhere in the middle.

And how you rectify the benefits of both of those businesses, do they belong to other, do they belong apart, is one a subsidiary, do you risk your requalification as you build up that third-party capital along the line are all questions that we together are starting to answer.

But the bottom line is, as long as we make money and we take advantage of our brand and we have an offense, which we haven't had, right, we've been struggling with the defense, we got caught for sure.

This merger was much more difficult and complex than anybody envisioned.

And we had to rectify teams, we had to rectify our balance sheet and we've been focusing on defense.

As you can see from this last year, we're focusing on offense.

And along that way, we're going to figure out exactly the format that this should be in a public marketplace.

Is it 1 company, is it 2 companies, does it belong together?

What are we focusing on?

Does the dividend get compromised by total return?

For this year, we have a business plan.

We're sticking to that business plan.

3 years from now, I would hope that we are at a fund raising basis of $10 billion a year and third-party capital and a variety of products in which we have a competitive edge and producing a clean cash flow and earnings distribution that's appropriate to what that total return constituency wants.

It's going to take us another year to figure out what that is.

But we're in good shape now to do what we need to do, which is you need an offense, you need to drive forward, you need some bold action in a very efficient marketplace, right?

When we talk about auctions, the question of having an auction other debt and equity, we've thought about it because auctions create euphoria.

The problem is the complexity of what's in this is other debt and equity pool is going to be discounted by anybody looking at it.

And we're right at the precipice of being able to fix those problems otherwise called the discounted price.

So we're saying what we can do in the next 3 to 6 months is we'll dress it up so that it's easier and more definable to buy.

The monetization of these assets in this marketplace is very tempting.

And you know better than we like you look at buying assets in the open marketplace on a third-party basis at a [4.8] cap at 30% leverage, that's thrilling.

I'm not sure that's a business 3 years from now, but we're going to figure out the right business and we're going to be bold and we're going to have an offense.

And internally, there are teams with a share price -- the other team besides shareholders is suffering.

You have teams inside that need to be incented and we have great athletes all over the world.

So every day, our mantra is look, where we are now is opportunistic.

So the upward swing from our share price is and contributive value, if you figure out how are the economics to get there, rely on an offense with third-party capital, along with our balance sheet, sometimes coinvest, sometimes taking that syndicated risk, sometimes formulating funds.

But at all times, having some competitive edge in the marketplace other than being the highest priced buyer of mature assets, that, we're not going to be.

That's very helpful.

I appreciate all that comment.

Can I ask one more, if you don't mind.

Not very often does a industrial -- $1 billion plus industrial portfolio trade that we hadn't really heard much about it.

Is there anything that you can, a -- one, share about the portfolio?

And then, two, it seems like -- I don't think you've lined up co-investors as the plan to create some sort of third-party construct around that portfolio as well.

Yes, great question.

So the Dermody portfolio -- Dermody is a great industrial developer, up from Washington originally.

And Dermody's value added was really development to core.

So he had pooled funds, building and managing and operating both last-mile logistics and bulk.

And unfortunately, like everything in the marketplace, it was an auction.

It was a little bit of a complicated auction because it was mixed, both bulk and logistics, and it was partially leased.

So as a sign of the times, and all of you are too young to remember, but when I started in this business, if you said that there was an empty 1 million square foot bulk warehouse building, you would go into catatonic shock, right?

The worst experience in real estate would be owning an empty 1 million square foot building.

And the marketplace today is building 1 million spec buildings like Tootsie Rolls and leasing them up to the big 5 that you would imagine.

So part of this portfolio was bulk, part of it was unleased, part of it was logistics which fit perfectly in the -- Lew Friedland who runs our industrial open-end funding, his team do a sensational job, and it fits perfectly into that portfolio, so we were very competitive.

And in that entity, we're very low levered.

So we are in the bottom 30s in leverage.

Our goal had always been into the 40s.

And these financing markets were ebullient, and the team executed a great execution, both bulk and the logistics, which fit perfectly into the open-end fund.

And we did it with an existing investor who stayed as a co-investor.

The idea being that now we have bulk, which is an aligned business, which is more than institutional business, a domestically and internationally acclaimed business, and we have the same competitive edge.

We know how to buy, we understand the industrial cycle.

Our tenants and leases are exactly the same for last mile as they are for bulk.

And we anticipated -- and the team did a great job of anticipating a quick lease-up, which has actually happened even in the executory period of this acquisition.

So now we'll have 2 businesses.

We have a logistical business, which is inside the open-end fund.

We have a co-investment business of bulk, which is really at the border of that open-end fund.

And we'll build a new bulk business with the same team in a different category.

So -- and again, it's a complicated business, but the [revocable] competitive edge is those clients, those tenants, those customers are really the same.

And our goal is we have to supply Amazon, Microsoft, Apple, all of the users of that space with the product that they want, and they have a voracious appetite.

So while Dermody was in the development core business, we're in the core to lease up the rest of the business, it worked.

So we think it was a great buy, it was great trade for Dermody.

He'll go out and raise another fund.

It positions us in the bulk business to do exactly what you have indicated.

We'll go out and create a different set of co-investors in an acquisitive environment on bulk.

And it tops up our logistical base as we call that portfolio by selling off the bottom side of quality and extending it with better quality logistics.

So it's obviously one of the darlings of our portfolios, and the team that is running that is superb.

Our next question is a follow-up from the line of Jade Rahmani with KBW.

Just wanted to ask if you could quantify run rate cash G&A and also give a target that you expect to reach by year-end 2019?

Specifically, I want to know how much severance was included in the quarter.

Jade, this is Mark Hedstrom.

Starting at the end of your question, severance during the quarter was roughly $15 million.

That was incurred from what were a number of higher paid individuals, so severance is unusually high, I think, as it relates to the savings that we have achieved.

But I think that going forward, for the year, we expect to have run rate savings in place for '19 that are going to allow us to realize a significant portion of the $50 million to $55 million in cost savings during 2019.

Not all of those costs will be available as reduction in '19, but the actions to produce those run rate savings will.

Cost reductions will occur throughout the year as business units and assets are exited as well as other reductions.

So it's a plan through the year that's going to get us a lot of the way through the $50 million to $55 million realized in the year but all in place by the end of the year, we believe.

Okay.

So what do you anticipate cash G&A to be for 2019?

We think somewhere between $180 million and $190 million.

Okay.

Secondly, I was wondering if you can give an update on NRE, just the status of asset sales, whether in entirety or individually.

And over what time frame do you expect to achieve that?

Jade, it's Darren here.

So as we announced last quarter, we did reach an agreement with the special committee of that board involving our management agreement, which entails the termination payment of $70 million of -- were to be terminated as the manager in conjunction with the sale and the company.

Back last quarter, also announced that it was pursuing strategic alternatives.

So we're really -- given that, that process is in progress right now, we're really not at liberty to say anything until that process concludes.

But suffice it to say, it's ongoing.

And assuming there's something that we're able to report, we will.

Ladies and gentlemen, we have no further questions in queue.

I'd like to turn the floor back over to management for closing.

Thanks, everybody, for participating on the call.

I'm sorry that the share price this last year doesn't reflect the great job that these teams have done.

It's a work in progress.

It's baby steps.

And at the end of the line, we'll claim victory.

So thanks for hanging in there with us, and thanks for being on the call.

Thank you.

Ladies and gentlemen, this does conclude the telephone conference for today.

You may now disconnect your line at this time.

Thank you for your participation, and have a wonderful day.