Colony NorthStar, Inc. (NYSE:CLNS)
Q4 2016 Results Earnings Conference Call
March 01, 2017 10:00 AM ET
Lasse Glassen - IR, Addo Communications, Inc.
Richard Saltzman - CEO
Darren Tangen - CFO
Jade Rahmani - KBW
Jessica Levi-Ribner - FBR
Mitch Germain - JMP Group
Greetings and welcome to the Colony NorthStar Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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 Lasse Glassen. Please go ahead.
Good morning, everyone, and welcome to Colony NorthStar, Inc.’s fourth quarter 2016 earnings conference call. With us today are 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 the line to answer questions.
Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based 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, March 1, 2017, and Colony NorthStar 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 on both a consolidated and segment basis. The Company’s earnings release, which was issued yesterday afternoon and is available on the Company’s website, presents reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to investors. 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 Richard Saltzman, Chief Executive Officer of Colony NorthStar. Richard?
Thank you, Lasse.
It’s with great enthusiasm that I welcome everyone to our inaugural earnings call as Colony NorthStar. As the merger between Colony Capital, NorthStar Asset Management Group, and NorthStar Realty Finance wasn’t completed until early January, the earnings release issued last night is unique, in that we reported stand alone fourth quarter results for each of the three predecessor companies.
From an SEC disclosure standpoint, the only requirement was to release NorthStar Asset Management’s financial statements, as NSAM is the surviving legal entity. However, we thought it more appropriate to provide an update on all three companies’ year-end financial performance at this time. Although these fourth quarter results are important to understand, in our view, they are not indicative of the future value or earnings potential of Colony NorthStar. With this in mind, my comments today will focus more on some of our recent accomplishments as well as our strategy, vision, and near-term priorities as we look ahead to 2017 and beyond as one unified company. And on a related note, we also introduced a new investor presentation last night, which is available on our website.
First off, I’d like to emphasize that we couldn’t be more excited about our future prospects. Colony NorthStar represents a world-class real estate investment management platform with a unique combination of competitive strengths. We have a colossal opportunity before us, and we are blessed to enjoy significantly enhanced scale and market presence with a common equity capitalization now of more than $8 billion. This places Colony NorthStar in the top quartile of equity REITs within the MSCI U.S. REIT or RMZ Index, to which we were added coincident with the merger closing last month.
Furthermore, our new expanded footprint includes more than 500 people around the globe and 17 cities with a consolidated balance sheet of approximately $24 billion and assets under management of $56 billion. Our attention and top strategic priorities now turn to simplification of the business and cost rationalization, both to be executed as quickly as possible. We have hit the ground running with these efforts, as the integration was well under way at the time of merger closure. Today, we have achieved approximately 75% of the previously announced $115 million of targeted G&A synergies, and we are on track to achieve the full strategy target on a run rate basis by year-end. Furthermore, there is the strong potential for additional synergies above and beyond our initial target as we continue to optimize our organization.
Prior to this merger, Colony and NorthStar shared somewhat similar paths in histories that led to their respective and varied public market positions. Both organizations grew up during the 1990s with an opportunistic and entrepreneurial approach to making money. Ultimately, that led to diverse business strategies and going public. Each company has benefited from a deep bench of talented personnel around the globe. So, we have all the raw ingredients. The challenge is how do we thread the needle of simplifying without abandoning our culture and opportunities to make money, and of course, last but not least, maximize shareholder value in the process.
As we’ve discussed previously, the balance sheet of Colony NorthStar will be organized in a series of from three to five core property verticals that are each easy to understand and valued from a public market’s perspective. The commonality will be very favorable supply-demand fundamentals for the particular real estate asset class, along with an ability to raise third-party outside capital with investment management economics. The latter at an ultimate ratio of at least 2 to 1 outside to inside capital is intended to turbocharge growth and returns, as you see today in single-sector-focused equity REITs with embedded investment management platforms.
In our current mix, global healthcare real estate and U.S. industrial are two obvious strategic verticals that demonstrate these characteristics. The evolution of our industrial business, known as Colony Industrial, is a prototype or a poster child for how this segment of our business will evolve. It started with the concurrent acquisition of 30 million square feet of light industrial space around the country, along with its related operating platform for $1.6 billion just over two years ago. Today, it’s grown to more than 38 million square feet and morphed into an institutional open-end fund construct. Along the way, we invested approximately $600 million from the balance sheet, raised another $670 million from outside investors, and the overall gross asset value has grown to approximately $2.4 billion. We have very good visibility on incremental capital raising prospects during 2017 and our return on equity currently exceeds 9% at a 45% leverage level. Hypothetically, if we were to achieve a 4 to 1 outside to inside capital ratio in this vertical, those returns will increase to more than 12%. This is the series of metrics that we intend to replicate across all other verticals, such as global healthcare as an example.
Now, in terms of these other verticals, we have been making substantial progress and now have well thought out plans for another two or three at this juncture, albeit it is still somewhat early to disclose any specifics. The good news is we will generally focus from within, meaning trying to expand upon existing assets and known relationships.
Complementary but separate from our balance sheet heavy verticals is our institutional and retail investment management business. Strategically, it will play two roles. First, it will support the verticals in the manner I just described. Secondly, it will allow us to be in other businesses, which may be less compatible with the maximization of our value as an equity REIT. These include regular way debt, opportunistic more backend residual-oriented investing, and operating sensitive real estate sectors that produce more cyclical and volatile returns. We have expertise and core competency in all of these areas, but it will primarily be expressed through third-party capital vehicles, which are more balance sheet light. In other words, a ratio of outside to inside capital of no less than 10 to 1.
To handicap better our chances of succeeding on this basis, I draw your attention to Colony’s deal and platform creation track record since bringing Colony Financial public in September 2009. From a transaction perspective, we completed 184 deals, aggregating more than $11 billion of capital deployment.
In turn, approximately 30% of that portfolio has been fully realized, generating a weighted average return of approximately 19% on an IRR basis. This is the primary basis for raising more third-party capital and traditional balance sheet light investment management products. As to platforms, we’ve created two, one through acquisition, Colony Industrial as just cited; and a second in the new single family for rent space that was built organically from scratch and is now known as Colony Starwood Homes. Both demonstrate the common characteristic we will look for in all of our verticals, very favorable supply-demand dynamics combined with an ability to raise meaningful third-party capital with a resultant strong win-win for our fiduciary clients and our shareholders. Synthesizing this philosophy and ability to execute into a simple, well-articulated business plan is our number one objective.
Next, I’d like to turn to our expected financial performance in 2017. As you may already appreciate, our general philosophy is not to provide guidance on future performance. However, at the time of the Colony NorthStar merger announcement at the beginning of June last year, we felt compelled to provide such detail. Today, some nine months later, we need to revise such guidance down by just under 10% to an anticipated core FFO earnings range of $1.40 to $1.58 per share. The primary reasons for this modification include, one, approximately $200 million less cash to invest inclusive of the $100 million extra special dividend paid to NSAM shareholders, which was announced back in October; two, approximately $2 billion of reduced capital raised in 2016 versus expected results, leading to a smaller base of fee-paying AUM at the beginning of 2017; three, correspondingly, we have assumed a more conservative level of fundraising for 2017, albeit $1 billion higher than 2016 actuals.
And finally, four, an anticipated acceleration of non-core generally high-yielding assets divestitures that will be redeployed into our core strategic verticals and investment management business at initial core FFO yields that are somewhat lower until such time that we raise additional fee-bearing capital that will ultimately compensate for the difference, and hopefully then some.
In terms of capital raises, we experienced headwinds in 2016 on both the institutional and retail fronts based upon noise around the merger announcement that didn’t get clarified until late December as a function of the respective shareholder votes. Furthermore, retail capital raising in particular was adversely affected by regulatory changes, both enacted and anticipated. So, new incremental fundraising for the year ended up at a disappointing total of around $1 billion. Fortunately, the tide appears to have turned for both institutional and retail placements based upon the momentum we are now experiencing in both markets. In fact, our guidance only assumes $2 billion of new fundraising in 2017. If momentum continues to build, this is an area where we could be very pleasantly surprised. Also related to the revised financial guidance are our assumptions about liquidity, divestitures, and redeployment. Darren will provide more detail shortly, but I’d like to share a couple thoughts.
For Colony Capital historically, as many of you know, our fertile portfolio of investments has produced a steady stream of recurring and growing capital gains over our eight-year public history. Although our go-forward model is different and that these types of deals and investments will continue to be pursued through our investment management division with a higher proportion of outside third-party capital and a more balance sheet light approach, for the next two to three years, we will continue to generate a meaningful capital gains from selling profitable legacy positions. Of course, this capital will be redeployed primarily in our strategic verticals. But other uses will include buying back our stock when the opportunity is attractive, as announced last night with a $300 million buyback plan, as well as deleveraging further.
In summary, we are well along in executing upon the enormous opportunity ahead of us. For this year, we will be very inwardly focused achieving synergies, streamlining and simplifying our core verticals and story, and positioning ourselves as the top tier equity REIT with a more flexible and smart approach to the global opportunities before us. And while we’re chopping all this wood, we have a great earnings and dividend profile to underpin our transition. At the end of the day, having everything together all under one roof -- balance sheet, platforms, and investment management with the ability to qualify to be an equity REIT is completely unique and in a good way.
For sure, there are other great amazing organizations out there that we compete with, but none of them enjoy this pure play construct, all available in one combined place for shareholders. Tom Barrack, David Hamamoto and I along with the rest of our team are completely energized, motivated, and aligned with our shareholders and third-party investor compliance to succeed on everyone’s behalf.
And now, I’ll turn the call over to Darren Tangen, our Chief Financial Officer.
Thank you, and good morning, everyone.
As Richard noted, this is a unique report where we are presenting standalone results for each of the three predecessor companies. So, consistent with past practice, we have published a supplemental financial package for each of Colony Capital and NorthStar Realty Finance or NRF, both of which are filed and available on our website.
However, when we report earnings as a combined Company for the first time in May, we will publish a brand-new financial supplement for Colony NorthStar, which will provide investors with more granular data for each of our five reportable segments, healthcare; industrial; hospitality; other equity and debt; and investment management. Also, in a couple of weeks, we will file pro forma financials as of December 31, 2016, for the combined company, similar in format to the pro forma financials as of September 30, 2016, which were included in our proxy at the end of last year.
Now, I will briefly touch on each company’s financial results for the fourth quarter. As a general comment, there was a considerable amount of noise in the fourth quarter results, primarily resulting from the merger transaction and two of the companies completing their final year of operations.
Beginning with NorthStar Asset Management or NSAM. NSAM reported net loss attributable to common stockholders of $11.1 million or negative $0.06 per share and cash available for distribution or CAD of $37.7 million or $0.20 per share. These results included higher compensation expense of $15 million or negative $0.08 per share in CAD relative to compensation expense in the prior quarter. Aside from this, earnings from the retail companies, NorthStar Realty Europe, Townsend and other corporate investments were relatively consistent with earnings in the third quarter of 2016.
Second, Colony Capital, or CLNY, reported net loss attributable to common stockholders of $16.8 million or negative $0.15 per share and core FFO of $49.4 million or $0.47 per share. After-tax net gains during the fourth quarter, primarily from the sale of the Ritz-Carlton Hotel in Maui, were offset by other provisions for loan losses and bad debt expenses. Core FFO also included $4 million or negative $0.03 per share of nonrecurring income tax provisions and other expenses. Excluding these nonrecurring taxes and other items, our normalized fourth quarter core FFO was $0.40 per share, which covered the fourth quarter dividend of the same amount. Furthermore, as reported at the end of January, dividend distributions at CLNY for 2016 were exactly 100% of estimated taxable income, one of CLNY’s previously stated dividend payout guidelines.
Third, NorthStar Realty Finance, or NRF, reported net income attributable to common stockholders of $61.6 million or $0.34 per share and CAD of $48.4 million or $0.26 per share. These results included some expected and significant quarter-over-quarter fluctuations, such as hotel seasonality of negative $19 million or negative $0.11 per share, and foregone operating income due to asset sales in the third and fourth quarters of negative $7 million or negative $0.04 per share, among other variances.
Turning back to Colony NorthStar, on the topic of capital structure. Total capitalization excluding minority interest and debt related to the manufactured housing portfolio was $18.5 billion based on debt balances as of December 31, 2016, and our share price as of last night. Of this, total pro rata debt was $8.3 billion, representing a 45% debt to capitalization, which is in line with our previously stated target to keep leverage at or below 50% debt to assets. In addition to deleveraging the balance sheet, we are hard at work to extend and stagger our remaining near-term debt maturities. Real estate debt markets are currently very liquid, and therefore it was an opportune time to refinance our owned real estate portfolios.
Turning to liquidity, we currently have over $1 billion of liquidity between availability under our new $1 billion corporate credit facility, cash on hand, and expected net proceeds of $615 million from the sale of a manufactured housing communities’ portfolio. After this sale closes, it will complete the asset monetization initiatives previously announced by NRF, totaling $6.5 billion of gross assets, resulting in $2.5 billion of net proceeds.
To recap, these monetizations include, but are not limited to, the sale of a subset of medical office buildings for approximately $800 million at a 5.6% cap rate, which after mortgage debt repayment generated approximately $80 million of net proceeds. Two, the sale of a 19% preferred joint venture interest in NRF’s share of the healthcare real estate portfolio to one of China’s leading insurance companies. The transaction resulted in net proceeds of approximately $340 million, representing an implied at-share gross valuation of approximately $5.4 billion, including the aforementioned portfolio of medical office buildings sold and an implied 6.1% cap rate. This joint venture forms a long-term partnership with a top-tier global financial institution and is emblematic of our stated strategy to partner with high-quality investors within our scaled property verticals. We could not be more delighted to enter into this partnership and jointly seek ways to grow the healthcare business together over time. And number three, finally, we expect the sale of the $2 billion manufactured housing communities portfolio to close within the next several weeks and generate $615 million of additional net proceeds.
All in all, we are very pleased with the execution of these asset monetizations, which have been completed or in the case of manufactured housing is expected to close at the pricing levels communicated, last summer. To date, sale proceeds have primarily been applied to deleverage the balance sheet, specifically the payoff of $921 million in term loans at NSAM and NRF. The remainder of the liquidity will help us play both offense, in terms of new balance sheet deployment, including share repurchases, and defense, in terms of further deleveraging.
Now, I’d like to add more color around our revised earnings guidance. Richard explained the primary reasons for the decrease to the new earnings guidance range of $1.40 to $1.58 per share, which really came to light in recent months as we were seeing data and figures come in at the year-end and upon review of 2017 segment business plans.
Furthermore, the prior guidance was based on a combination of two different reporting metrics, core FFO for Colony Capital, and CAD for NSAM and NRF. The new guidance is based on a new core FFO definition, which is very similar to Colony Capital’s historical core FFO definition, except that we will no longer include realized gains or losses for our core property verticals. This exclusion is consistent with how most single sector equity REITs report their FFO and/or AFFO, as they are generally not in the business of trading properties. However, we will continue to include realized gains and losses for the other equity and debt segment during the next few years while this segment winds down because gains are a regular part of this business. Our current expectation is for gains to constitute approximately 15% to 20% of our core FFO for 2017. In addition, the legacy Colony core FFO definition differs from the legacy NorthStar CAD definition in two other primary respects. Number one, core FFO does not add back provisions for loan losses; and two, Colony NorthStar will no longer use fair value accounting for certain legacy NRF assets. That said, I’d like to reiterate that this is a one-time update to the guidance provided last June in connection with the merger announcement. And we do not intend to update our core FFO guidance going forward, consistent with historical practice at Colony Capital.
Finally, our new core FFO guidance more than covers our new annual dividend of $1.08 per share, which represents a quarterly dividend of $0.27 per share. Note that our first quarter 2017 dividend will be prorated to $0.24 per share for the period January 11, 2017 to March 31, 2017, because CLNY and NRF paid stub dividends in January for the period between January 1st and January 10th of the year, while NSAM shareholders were paid a special dividend of $1.16 per share, also in January.
In conclusion, we remain confident and excited about the value proposition of combining these three companies to form Colony NorthStar. We have already achieved over 75% of our originally identified $115 million in synergies, which includes achieving over 65% of our originally identified $80 million in cash synergies, and expect to achieve the balance by year-end on a run rate basis.
In addition to achieving or even exceeding the remainder of our synergies target, we have to execute on the balance of our strategic plan, as outlined by Richard. That is, transition the majority of our balance sheet to three to five core property verticals and pair it with fee-bearing long term third-party capital on a 2 to 1 ratio or greater. We are already at a greater than 1 to 1 ratio within the industrial segment; and given the new open-end fund is only five months old, we expect this ratio to now accelerate higher.
With respect to our healthcare segment, we sold the 19% preferred joint venture interest to a long-term strategic partner and are evaluating more strategic transactions with third-party capital for both the healthcare and hospitality segments.
The pace of our balance sheet transition largely depends on the pace of divestitures and resolutions within the other equity and debt category. This segment totals approximately $4 billion of net equity and is composed of higher yielding, shorter duration investments that are relatively liquid and salable.
The goal is to reduce the less consistent earnings profile of these shorter term opportunistic investments and replace them with more transparent, sustainable, and steady earnings characteristic of long-term real estate ownership and then buttress those earnings with sticky annual asset management fees. Upon completion, we believe the Company will be valued at a much higher multiple and lower dividend yield, more in line with other equity REITs. As we have said before, our vision is to transform Colony NorthStar into a must-own, large-cap, diversified equity REIT. And we look forward to reporting on our progress towards this end in the quarters ahead.
With that, I’d like to turn the call over to the operator to begin Q&A. Operator?
Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Thanks very much for taking my questions, and congratulations on completing the merger. Just a big picture question on the strategy. I guess, why the emphasis on joint ventures and having the ratios that you described from -- between balance sheet capital and outside third-party? Is it because of the return profile and the asset management fees generated; is it a risk management tool since effectively it’s a form of financial leverage? Just overarching, what would you say the themes are because I would suspect that equity REIT investors, they will apply a discount since really this would be more of an asset management company in the form of a REIT.
Okay, Jade. That was a long question, and thank you for asking it. Look, I think the strategy is we’re an equity REIT first, okay? And we’re making very substantial bets, if you will. And these three to five very significant areas that are going to be our verticals, on the one hand, where we think the supply/demand dynamics are the most compelling around the globe. Then, on top of that, we’re an investment manager. When you think about both, NorthStar and Colony, historically, we’ve excelled at being in the investment management business and we’re able to overlay that on top of this significant exposure that we have through these verticals in order to turbocharge or generate higher returns, like you were suggesting in your question and hopefully generate better growth than a typical equity REIT in a single sector might be able to produce as a function of those incremental streams and the growth in those streams.
Separate and apart, we have other activities that we’re going to continue to do in the investment manager where we believe that they wouldn’t be as well understood by the public market equity REIT investors, as you were also suggesting in your question. And so, these are the regular debt business, these are more opportunistic investments, these are businesses that might be viewed as more cyclical or more volatile in their streams, and those, we’re going to choose to put in the investment management category, where we will be willing to commit balance sheet and be aligned with the partners who come into those strategies. But it will be at a vastly reduced amount, so that at least from a valuation standpoint, you’re going to look at much less financial risk in that part of the business. And yes, I agree with how you worded the question that we view the investment management as non-financial leverage in terms of the ability to turbocharge our earnings and the resultant return on equity that we’re going to be able to produce.
And from your vantage point today, what would you identify as the core strategic verticals? And also, can you say whether you’re going through a strategic review, an internal research process, to identify where you think investment opportunities are likely to be greatest? You mentioned around the globe, but greatest going forward?
Sure. So, first and foremost we have two that we’re really excited that we already have significant investment exposure in and that will definitely be strategic verticals for us. One is global healthcare and two is industrial. And I took in my comments earlier, I described the history with respect to how we have been building that industrial platform as an example of the way in which we’d like to do this for other verticals in terms of how it could be streamlined and all in one place balance sheet, investors, all aligned together in terms of the go forward opportunity. And we’ve got tremendous legs in terms of the demand characteristics in that industrial business, occupancies and believe it or not, in the high 90s now, I mean at 96%, plus or minus, and arguably the best rental demand characteristics that I’ve seen in close to a 40-year career, doing what we do. And it’s just exceptional and a lot of it is driven by some of the ecommerce trends and the need for close-in places to store merchandise and goods and be able to do same-day or next-day delivery.
Similarly, we’re really excited about what NorthStar has already built out on the global healthcare side, and I do say global because we have UK exposure. And we anticipate that with some of the partners that have now joined us, we may be able to expand that to other geographies outside the U.S. But obviously, the demographics in terms of global healthcare real estate are incredibly strong. And we hope to continue to take advantage of that, albeit in a way that’s going to be simplified and streamlined in terms of how we reshape that vertical.
Then, on your next question, which is what are the other verticals going to be, I think it’s a little premature on this call for us to specifically identify them. But, we have a pretty good sense now as versus when we announced this transaction back in June as to what they will be. And it’s based on the type of research that you were identifying, combined with really for the most part looking inward at what we already have in the portfolio in terms of assets and strategies that are really working well, combined with teams who we know and who are already our partners or are inside our firm that we also know well and have tremendous confidence in. So, I think we have, based on that research, even though we’re not 100% done yet kind of perfecting what the ultimate other two to three verticals will be, we have a pretty good sense at this point and hopefully within the next couple of quarters it’s going to become a lot clearer as to what those strategies are as we perfect our plans.
On the hospitality side, have your views changed? I think hotel REITSs have been amongst the strongest performing REITs this year. And with a potential improvement in economic growth and the reflation trade, hotel fundamentals do seem to be potentially improving. So, how do you feel about hospitality currently?
Well, we like hospitality and we always have. And I think if you look at again the histories of both Colony and NorthStar, we’ve both been very significant hospitality investors over our lives. And yes, you’re right. Hotels are looking like they’re going to bounce back from some negative perceptions around it being late in the cycle to given what’s now happening in terms of economic policy and potential growth in the economy, maybe another extended few innings to this cycle in a very positive way. And we’re excited about that in terms of the portfolio that we own.
On the other hand, I mean, it is for sure one of these businesses that I was referring to that’s more cyclical and more volatile. So, in terms of how we position it for the long-term, we’re now examining, is this appropriately a vertical as it currently is constituted today or are we may be better off morphing it into something that’s a little bit more balance sheet light over on the investment management side. It’s definitely a business we really like, we want to stay in. It’s just question of is it going to be a vertical or is it going to be more in the investment management division.
And in terms of 4Q performance, you gave some helpful color. Just wondering if you could give any additional comments on the degree to which the merger undertaking impacted some of the business lines, for example, in investment management, the pace of asset sales monetizations, realizations or any other business lines. You did comment on the pace of capital raising; you said there’s positive momentum there, but anything else?
Well, I’m going to turn it over to Darren for some color here. But, look, I think there is for sure some noise in our numbers for all of the companies, at the end of last year, based on the merger deal and what that meant in terms of expenses and the like from a reporting standpoint and really trying to clean up everything as best we could prior to joining the companies together and integrating. I did specifically mention headwinds just in terms of confusion about the deal, was it going to happen, was it not going to happen, and how that impacted capital raising. But I think all of that is contained in those year-end results, which is why on the one hand, they are important for people to look at and see to how we all did. But on the other hand, I would say that’s behind kind of us, and a lot of it was just getting the deal done and putting it behind us. And now, we should really all be focused as partners together, given that we as insiders are very significant shareholders, we own about 7% of the stock collectively, those of us who are the senior executive officers of the Company, and really focus on what we can produce this year and how we can grow from there. So, Darren?
Yes. I mean, Jade, the only thing I would add to that obviously, some of the sectors that are subject to seasonality or annual cyclicality like hospitality, obviously the fourth quarter was not as strong as some of the prior quarters, third quarter in particular. And I think the other comment that I would make, and this started to show up a little bit in the fourth quarter and frankly will be something we’ll be managing through over the course of 2017 is as we’re transitioning out of some of these legacy, more opportunistic type investments, getting that capital back on the balance sheet and then redeploying, there will be a timing lag in some instances where we are not fully deployed and don’t have fully stabilized operations or earnings. And again, I think that was something that showed up in the fourth quarter and again will be something we’ll be managing through over the course of this year.
And, can you say how much of that either AUM runoff or capital return you anticipate this year?
I think as we mentioned in some of our materials last night, when the manufactured housing portfolio closes, the sale closes, we’ll have approximately $1 billion of liquidity. And then, there is actually another $1 billion of capital that we expect to return to the balance sheet over the course of 2017, and that’s from this other equity and debt category. So, that’s $2 billion of liquidity there, not all of which will get redeployed into new investments or stock repurchases; some of that will go towards deleveraging in order for us to maintain our target leverage levels, but obviously that’s still a substantial amount of capital that’s going to turn over.
And just lastly, what do you anticipate for recurring or maintenance CapEx in 2017?
So, on the hospitality segment, that historically I think has been running around 4% to 5% is where FF&E reserves have been established. So, I think that equates to somewhere around $35 million on an annual basis. For healthcare, I think that’s been closer to about, probably $0.01 a share a quarter, so $0.04 annualized. Right? So that’s maybe, call it $25 million roughly, $24 million, $25 million. And then on the industrial side of the business, which really doesn’t have a lot of maintenance CapEx per se. There is more TIs and LCs relating to some of the leasing activity that occurs in that portfolio, and I think that on an annual basis is somewhere around $20 million a year. So, those are just some basic guidelines. I know the two guidelines I just provided on hospitality and healthcare have been previously provided by the NorthStar companies. And I think we see a consistent level of CapEx for those businesses going forward. And the industrial again is not a very CapEx intensive business, other than the leasing costs.
Our next question is from the line of Jessica Levi-Ribner with FBR. Please proceed with your questions.
Just to turn back to deleveraging, Darren, you just mentioned with some of the liquidity, what can we expect from deleveraging? Are there preferreds that you can take out or that you’re planning to take out? Can you give us an idea of the magnitude and maybe the cost that’s coming off from any deleveraging you might do?
Yes. I think in terms of what you might see flow to the bottom-line, the preferreds currently are about $1.6 billion in total balance, all of which are priced above market relative to what we could do on a new issue basis. Now, not all $1.6 billion are callable today. I think by the time we get to the end of 2017, approximately half of that $1.6 billion, so $800 million of the $1.6 billion, will be callable. And so, certainly that’s one area where we can look to go in and do some accretive refinancings. But I think otherwise, the rest of the leverage really sits down at the asset level; it’s mortgage debt. And I think that the most important aspect of that -- there will be some deleveraging that we’ll want to do, but I think the other important thing from a liability management standpoint is for us to go in and start to push some of those maturities out. And I think the debt we have in place at the mortgage level is not necessarily below market -- or sorry, above market; in some cases, it may actually be a little bit below market. But as I mentioned in my remarks earlier, the real estate debt markets are quite liquid right now. And I think generally speaking, we can go in and refinance a lot of that mortgage debt at probably negligible difference in terms of cost of capital.
And deleverage simultaneously in some cases.
And as Richard mentioned, deleverage in some cases as well at the margin.
Okay. And as Jade mentioned, are you doing a strategic review there of what you can take off?
I guess, what I’m asking is how quickly we can expect some of that to come off.
I think quite quickly. We are in the market with and we just closed on a mortgage in the industrial business where we were able to put on average 12-year new term debt on a fixed rate of approximately 4%. So that was a case in the industrial business where we’ve been replacing floating-rate debt with long-term fixed-rate debt. But, we’re going to be looking to refinance parts of both the hospitality and the healthcare portfolios, which is where the bulk of the mortgage debt in the Company sits and where maturities currently are generally in the 2019 timeframe. We’re going to be aggressively going to refinance that here in the weeks and months ahead.
The guidance, the revised guidance that you gave us, does it include the synergies that you’ve mentioned, $115 million of synergies?
It does. Yes.
It does. And also, the first part of January when you were separate companies, the earnings there as well?
Yes. No, that’s a full year of guidance.
That’s a full year of guidance. Okay. In terms of just going back to the hospitality portfolio, are you considering sales of properties or are you holding the portfolio until all the renovations are done and kind of see where that all shakes out?
So, we’re actively focused on strategically what we could be doing to reposition the hotel portfolio to either be a vertical in the manner that I was describing, or alternatively to shift it more into the investment management business. Now, as we’re hopefully realizing the fruits of our labors in terms of these various renovation programs, which for the most part are now complete, we’re simultaneously focused on that.
And lastly, the accelerated sales in the debt and equity portfolio, do you already have indications on the street or is that just something that you’re working on right now?
Jessica, is your question the pace of divestitures and resolutions in the other…
Okay. So, no, we are in the process already of starting to liquidate parts of that portfolio. Now, a good portion of that portfolio are debt investments where there is a natural sort of payoff mechanism vis-à-vis those types of instruments and a lot of that is shorter term in duration, as I mentioned earlier. But as it relates to some of the more equity-oriented positions, that’s where we will be undertaking sort of an active divestiture program that in some cases for some of the positions has already begun and others we’ll be looking to execute over the course of this year and next.
[Operator Instructions] The next question is from the line of Mitch Germain with JMP Group. Please go ahead with your question.
Good morning. Just on that question about debt refis, what about some of the corporate level debt? I know you’ve got some notes and converts.
Yes, we do. We do have some convertible debt. That’s probably the most noteworthy of the other corporate level debt that we have. I am not sure that refinancing that right now, Mitch, is going to reap a lot of reward from a bottom-line perspective. So, that’s probably not where we’re going to be initially focused. I think the preferreds are definitely a bigger opportunity for us at the corporate level.
Great. And with regards to the NorthStar Healthcare joint venture, obviously I think it’s around give or take around 19%. Is there an option for your partner to take a greater stake in that existing portfolio or is the opportunity really growing that through selling additional stakes to new partners?
There is no option per se. But, there for sure is the potential to bring in additional capital, whether from that partner or from other partners. So, I think we have a fair amount of optionality there. But, there’s no option for them to literally take down more capital in that if they want. That would be a negotiation.
Got you. And with regard to the capital raising, I think you said $2 billion versus $1 billion last year. Is there a breakdown of retail versus institutional in terms of how that $2 billion is comprised?
Well, we haven’t been transparent about that. So, yes, there is a mix of institutional and retail. I’m probably not going to comment on it per se at this point. But I think, consistent with my comments earlier, I think we are pretty sanguine and cautiously optimistic about how we’re likely to do better in terms of capital raising this year. We were very disappointed with where we ended up last year for the reasons that I mentioned. But, I think now that we’re stabilized, the merger is behind us, the environment is as positive as it is, and we have all of these interesting opportunities in terms of both the existing balance sheet as well as what we’re doing on the investment management side, I’d be very surprised if we don’t exceed that for this year.
Okay. What type of vehicles would you consider with -- I think you talked about some of the more riskier, volatile type of investments, debt and other equity that you would consider in the future. What type of vehicles would you be thinking about establishing to? I think you mentioned about a 10% stake, give or take. Is that some sort of closed or open-end funds, and if you can just maybe talk about what your ideas are regarding that?
Sure. Look, historically, it’s been primarily closed-end funds on the institutional side, less open-end funds. I mean, really, the industrial is the first open-end fund that we’ve ever done. And I think it’s a template for other things that we could be doing in some other spaces. So, I don’t want to diminish the potential there, but closed-end funds, historically has been the more traditional vehicle, at least in the institutional market. Then, of course you have the retail side with both non-traded REITs as well as some of the new products that are now being developed, interval funds and the like, which are also experiencing better demand and have good momentum and could be conducive to organize around some of these strategies. So, I think it’s a mix; not one-size fits all.
Understood. And then, last one for me. I know some big portfolios out there, healthcare in particular, maybe some other sectors, industrial as well. I mean, what’s your appetite for utilizing some of your contacts in the institutional side to maybe consider M&A or is that really on hold as you work through the integration?
Look, it’s for sure not on hold. We’re always interested in interesting deals and we have the wherewithal, given our scale now to pursue most things. So, we keep our eye out on all of these types of opportunities. But, I would say we are more inwardly focused at the moment. So, I think the bar for something significant is high, other than deploying some of the capital that we already have in terms of liquidity in these different investment vehicles that we formed where for sure we’re doing our normal risk reward analysis. I think to do something significant from an M&A perspective, the bar is going to be high.
Thank you. At this time, I’ll turn the floor back to management for closing remarks.
Okay. Thanks everyone again for joining us today. We very much look forward to reporting on our progress in future quarters in terms of the various things that we discussed, simplification; further expense reductions that we’re going to be able to make; and growing our businesses in the manner that we described. So, I appreciate it again. Have a great rest of the day.
This concludes today’s conference. Thank you for your participation. You may now disconnect your lines at this time.
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