Image source: The Motley Fool.
Colony Capital Inc (NYSE: CLNY)
Q1Â 2019 Earnings Call
May. 10, 2019, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Greetings and welcome to the Colony Capital, Inc. First Quarter 2019 Earnings 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, Managing Director of ADDO Investor Relations. Thank you. You may begin.
Lasse Glassen -- Managing Director
Good morning, everyone and welcome to Colony Capital, Inc.'s first quarter 2019 earnings conference call. Speaking on the call today from the Company is Tom Barrack, Chairman and CEO; and Mark Hedstrom, COO and CFO. Darren Tangen, the Company's President 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 upon management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, May 10th, 2019, and the Company 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 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 Tom Barrack, Chairman and CEO of Colony Capital. Tom?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Thank you, Lasse, and good morning, and thank you to all the participants on this morning's earnings call. As we survey the performance of our business lines at the closing of 2018 fiscal year and the first quarter of the 2019 fiscal year, we are pleased with the underlying fundamentals of the assets and operating companies, which drive our cash flows, earnings and consequently our dividend.
First, a personal overview of the macro. We continue to be the beneficiaries of globally low interest rates, driven by concerned and empowered central banks with few arrows left in their quivers. As a result, we're keenly aware of the dramatic supply of liquidity in a very late stage of the real estate cycle, and the corresponding endless appetite for yield by both public and private investors.
As always, the illusion of supply demand balance in most asset classes in most geographies, stimulates lower risk premiums. And if I'll give you of the lessons of the past. While debt and equity remains prolific for high-yielding assets, a clear determination to investors of the differentiation between return of capital and return on capital is epic. (ph) The pressure of increasing wages, physical obsolescence, real depreciation and accelerated capital expenditures are outweighed by the consistency of contractually obligated cash flows derived from rents and profits of slow-growing, but mostly stable real estate assets.
These mostly understandable cash flows managed by experienced professionals are an offset to the current investor fascination and public market stardom of the high-growth companies such as Amazon, Google, Microsoft, Facebook and Apple. The necessity of understanding the brick-and-mortar impact driven by the new requirements of these tenants and their attended employees and customers is the current quest.
Meanwhile confusion on trade agreements and their unknown effects, a dramatic march from globalism to protectionism, volatility in emerging markets from Latin America to Asia, global unsettleness (ph) and brinkmanship, and increasing schism among the haves and have nots, a contest between socialism and capitalism, and geopolitical confusion spanning from Latin America to Asia, were continued to cloud the steady appreciation of many risk assets.
These doubts of confusion will benefit our real estate assets as many investors seek safety and predictability, and there is the still better than all else economy of the USA dominates global investor flows and appetite. Going to where the ball is going while keeping your eye on the ball coming over the plate in front of you will separate winners from losers in the real estate industry. The long lead time of the entitlements, planning, architecture, construction, leasing and maintenance in the midst of a technological revolution makes hard asset adapting on the spot difficult or impossible and necessitates a longer and more patient strategy.
Along the never-ending road of value creation and adaptability is the opportunity for those who are fortunate enough to possess scale to arbitrage and values between varying and different public and private markets, and risk appetites. Real estate income streams are certainly not static and discounted cash flows are confounded by the constant necessity of curating bricks, mortar, tenants, geographies and capital structure. This necessitates great people and great information, not simply financial alchemy.
Pricing today is surgical and investing market is constantly in search of transparency and simplicity at scale. The balance between current yield and total return for passive investors is frustrated by a value added desert of no yield along the Yellow Brick Road to us. Further obstacles along this road are the need for liquidity, transparency and market pricing. The creation of new real estate product and its early stages by nature is lower in yield during development and higher in risk in total return and maturation. Older assets have less risk at the front end, but higher risk and being financially, functionally or physically obsolescent.
And now, an overview of CLNY within the context of this challenging macro environment. Our stated 2019 goal is to simplify our business and balance sheet, monetize assets, which achieve higher private market values and public market values or are not strategic, pone (ph) and build liquidity and deploy it wisely in assets and companies in which we create, buy, build, grow and harvest acceptable current and total returns in the businesses of the future, harvest and carry cash flows from the businesses of the past and investigate consolidation and merger opportunities in those business silos, as they present themselves, as we maintain an increased core FFO, stabilized earnings, extended debt term and lower interest rate expense. Take advantage of market opportunities when appropriate to buyback preferred and common stock, reduced G&A, and maintain our dividend and REIT status.
We navigate this Yellow Brick Road with caution and focus. We will continue to grow our investment management business by using our balance sheet as evidenced by our most recent Digital Colony Partners, CIF, CLNC, and Colony Latam initiatives. Our Board of Directors and the special asset review committee are doing a terrific job at helping us focus on the openness to market opportunities for those businesses, which we desire to grow and hold and to better understand and explore consolidation within the marketplace, which we believe will increase in upcoming quarters, i.e. the well-timed and brilliantly engineered Oaktree and Brookfield transaction. We will also evaluate monetization opportunities for those businesses that have reached optimal maturity, if we believe we have a higher and better use for the allocation of their redeployed capital. More to come on this in the next quarter.
Next, a review of our investment management business. Digital Colony. Digital Colony Partners is a major achievement within our Investment Management segment. We successfully raised $4 billion of capital from global institutional investors, united by our $250 million balance sheet commitment, alongside of Marc Ganzi's Digital Bridge expertise and tremendous track record; nearly 50% committed, despite being barely one-year-old. DCP in a partnership with EQT, this week commented the execution of a binding purchase and sale agreement of a landmark $15 billion take private transaction of Zayo, a major provider of bandwidth infrastructure in the USA, Canada and Europe. The transaction required $6.5 billion of sponsored equity and over $8 billion of debt. This is a tribute to the power of great partners such as Digital Bridge and Marc Ganzi, CLNY's institutional investment management model, which when combined, harvested significant investor co-investment appetite. This was done in record time against adverse circumstances dictated by confidentiality and other considerations, a constrained fundraising and we anticipate substantial additional co-investment being raised as the transaction has been announced.
CIF. CIF led by Lew Friedland and our Dallas-based team has been a poster boy example of our buy, build and growth strategy brilliantly executed. We started in this business four years ago with our acquisition of the $1.6 billion Cobalt portfolio of 298 buildings, totaling 30 million square feet. Similar to the thesis behind our hugely successful investments in single-family home rentals and digital infrastructure, we identified a secular shift in demand and behavior in an asset class that was highly fragmented, which we could enter and scale with a SEAL Team 6 management team and well a engineer and funded third-party open-end fund structure of the highest quality global institutional investors. It's one of the few real estate asset classes that look to benefit from technology and its last mile appetite rather than be disrupted by it. So we pursued it with convention. Since our original acquisition, we've doubled the footprint to 58 million square feet and more than tripled our basis to approximately $5 billion.
Same-store NOI is continued to grow year-over-year as our competitive advantage in leasing, marketing and servicing our national tenants gets better and better. All the while, we've called the portfolio shedding lower quality assets to compile a highly desirable portfolio of assets. In the first quarter, we completed the acquisition of a scaled portfolio of 54 industrial buildings, encompassing 12 million square feet for $1.2 billion. Particularly attractive about the portfolio was the value-added upside to its 71% occupancy and geographic overlap with our existing markets and tenants. So we could employ the same playbook, we successfully have with our existing portfolio, having leased it from 89% to 95%.
Colony Latam. Past quarter, we closed the acquisition of the Latin American business of a Abraaj, and it's proven management team led by Miguel Olea. Along with a superb team, we annexed $500 million of assets under management to our investment stable and an active pipeline of proprietary transactions. CDCF, this is a further complement to our public CLNC REIT, and makes a dominant and significant player across the global credit industry, availing ourselves of a mature market and investors who see lower risk and a lower part of the capital stack, and yet acceptable risk based yields.
Shooting institutional third-party capital as well as public shareholders is the formula. These successes clearly demonstrate the ability of Colony through prudent use of its balance sheet, the power of our capital formation teams and attraction of great operating teams such as Digital Bridge and CIF to form impressive amounts of third-party capital by curating distinguished investment product geared toward the future of real estate, here and abroad.
Now, a review of our balance sheet assets and products, hospitality. We continue to call and improve our mostly select service portfolio, as the industry is dominated by seasonality, increasing, but small gains in the top-line and a relatively flat bottom line due to rising wages and capital expenditures required from the brands. We've extended term and lower interest rate costs in several portfolios. Compared to the same period last year, first quarter 2019 hospitality same-store revenue increased seven-tenths of 1%, and NOI before FF&E reserve increased 2.4%. The lowest service quarter and select service positions it more safely to rising wages and costs in its full service breadth. Managing CapEx and the brands is quest in this category.
Healthcare. We are far along in refinancing the upcoming guard debt maturity. We anticipate accelerated consolidation in this industry and we're bettering our relationships with proven professionals in the healthcare industry. Our underlying asset portfolios have been performing at budget and stabilizing in a marketplace, which has faced a recent headwinds, but contains significant opportunities for the future as we continue to extend term and call it assets within skilled nursing and medical office buildings. Consolidation in this industry is inevitable.
CLNC. Our mortgage REIT was off to a good start in 2019, highlighted by early success in portfolio rationalization and the expansion of core earnings. We made meaningful progress in recycling capital from non-core assets, highlighted by the sale of 90% of our interest in real estate private equity funds. Restructuring of legacy loans is a key part of our overall portfolio rationalization strategy and this is occurring at pace. We are utilizing our best efforts to ensure that by year-end, we will be able to generate core earnings that will cover our dividend.
Other Equity and Debt. We are on target for monetizations in 2019. As we previously communicated, we will continue to utilize our well-capitalized balance sheet to create engines of value in our investment management businesses, around teams and themes in which we have confidence and trust. We will continue to rigorously execute our large-scale G&A net cost reduction program. We will make capital allocation decisions, which align with our total return investment management driven business model, but which will allow us to support a solid dividend and retain REIT's status. We will continue to stabilize the balance sheet and work to mitigate underlying risk in the operations and portfolios, and in doing so, retain the Fortress position from which we are poised for growth.
As we monetize and save our liquidity, we will prepare for that unforeseen intervening event, which always materializes. We will continue to execute transactions, which elucidate the true divergence between spot price of our shares and our belief in a much higher NAV and establish it to the market that difference in executions. And most importantly, in 2019, we will remain elite and judiciously focus on the production of our $0.44 dividend distribution. Many thanks.
And now, I'd like to turn it over to our CFO and COO, Mark Hedstrom.
Mark M. Hedstrom -- Executive Vice President, Chief Financial Officer & Chief Operating Officer
Thank you, Tom, and good morning, everyone. As a reminder, in addition to the release of our first quarter earnings, we filed the 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 first quarter results, business segment performance and provide an update on our previously announced cost reduction program.
Turning to our financial results for the first quarter. GAAP net loss attributable to common stockholders in the first quarter was $102 million or $0.21 per share, while total core FFO earnings were $48 million or $0.09 per share. Excluding net investment losses of $28 million, core FFO would have been $75 million or $0.15 per share.
Approximately half of our net investment losses related to our share of investment losses realized by fluency during the quarter, which I will discuss in more detail later. The other half primarily related to losses on sales off and loan loss provisions on certain other equity and debt investments, most of which we have planned for as part of our strategic monetization program. If we continue to monetize non-core assets as planned, we anticipate recovering these losses on a net basis over the balance of the year.
During the first quarter, we had solid outperformance across all of our six reportable business segments on a quarter-over-quarter basis and we also achieved significant G&A cost savings, which I will touch on later. Starting with the Healthcare Real Estate segment, same-store portfolio NOI increased 2.7% compared to fourth quarter 2018, primarily due to higher one-time expenses experienced in that fourth quarter.
On the financing front, we have made significant progress on our near-term loan maturities in Healthcare segment. Three such (ph) loans have been refinanced since the beginning of the year with an aggregate consolidated balance of $210 million, fully extended maturity dates to 2024. Additionally, we continue to make significant progress toward addressing the December 2019 maturity of the $1.7 billion consolidated mortgage debt on Griffin US healthcare portfolio. We expect to be in a position to provide a more detailed update on that refinancing during the next quarter.
Moving on to the Industrial Real Estate segment, light industrial same-store portfolio NOI increased at just under 1% compared to fourth quarter 2018, primarily due contractual rent escalations, which were partially offset by slight anticipated decreases in occupancy, together with increased real estate tax and insurance expenses.
On the capital front, the Company raised $141 million of new third-party capital during the first quarter of 2019 in this light industrial open-end for combined $1.7 billion of third-party capital in that strategy. The industrial platform also invested significant capital, including the acquisition of a $1.2 billion value-add national portfolio, a 54 light industrial buildings, representing almost 12 million square feet of warehouse space. 48 buildings in the acquired portfolio are light industrial, which required in the Company's existing light industrial platform for approximately $800 million. The remaining six bulk industrial buildings representing approximately 35% of the total acquired portfolio square footage were acquired for approximately $400 million through a new investment vehicle, which was capitalized by the Company and a third-party fee-paying investor, which contributed $72 million for a 49% interest in the bulk portfolio. The acquisition of these bulk industrial warehouse assets will serve the seed portfolio for a new bulk industrial strategy.
Turning to our Hospitality Real Estate segment. Compared to the same period, last year, first quarter 2019 same-store portfolio NOI before FF&E reserves increased 2.4%, primarily due to an increase in ancillary revenues. The Company's hotels typically experienced seasonal variations in occupancy, which may cause quarterly fluctuations in revenues and therefore make sequential quarter-to-quarter revenue and NOI result comparisons less meaningful.
Earlier this week, CLNC reported first quarter core earnings of $12 million or $0.09 per share compared to a core earnings loss of $37 million or $0.29 per share in the fourth quarter of 2018. These core earnings include realized net losses in the first quarter, of which our 36% share was $14 million. These losses resulted from the first quarter foreclosure of a single borrower mezzanine loan collateralized by a diversified portfolio of US properties. As a reminder, this loss was anticipated in the fourth quarter of 2018 when CLNC have recorded a related loan loss provision in their GAAP earnings.
Adjusting for this anticipated foreclosure events and other one-time items, CLNC run rate core earnings were $0.36 per share in the first quarter. And the Company continues to make significant progress toward its stated objective to cover its dividend on a run rate basis by year-end.
Next, we will touch on our Other Equity and Debt or OED business, which is a $2 billion segment that is bifurcated into strategic OED and non-strategic OED. Strategic OED includes our investments alongside third-party capital where we earn investment management economics, and which represents a growth segment for the overall business. During the first quarter, the undepreciated carrying value in strategic OED increased by $40 million or 5% to $812 million. On the other hand, we are actively liquidating non-strategic OED, which includes legacy investments that they're at the end of their investment life and or do not fit under the investment management strategy.
During the first quarter, undepreciated carrying value in non-strategic OED declined by $73 million or 6% from $1.2 billion to $1.1 billion. Including OED, asset monetizations realized subsequent to the end of the quarter, approximately $200 million in net equity proceeds have been realized year-to-date. And we expect to exceed the $500 million plan for the year that Darren mentioned on the last earnings call. We will continue to allocate this liquidity to the most compelling opportunities with a bias toward new strategically aligned investments where we have a unique or competitive edge, and where we can employ a third-party capital model. We expect that strategic OED will soon outweigh non-strategic OED by carrying value, consistent with the plan we have been communicating and executing on the past year.
Our Investment Management business segment continues to increase in its significance as a strategic component of overall revenues and operations of the Company. Colony ended the first quarter with third-party AUM of $28.8 billion and fee earning equity under management of $17.8 billion, representing impressive year-over-year increases from the same period a year ago of 5% and 10%, respectively. During the first quarter of 2019, the Company closed on $310 million of third-party capital commitments, which was well ahead of plan. Additionally, and just subsequent to quarter end, Colony closed its acquisition of Abraaj Group's private equity platform in Latin America, whose operations we are now integrating and which will add more than $500 million to our existing fee earning equity under management.
Turning to our corporate capital structure. We amended the terms of our corporate credit facility agreement, including reduction of aggregate from revolving commitments from $1 billion to $750 million, and the modification of certain terms and financial covenants, including the -- the asset borrowing base formula and easing of a cash flow coverage test. This gives us more flexibility to maneuver as we monetize assets, without sacrificing substantial liquidity reserves.
Finally, I will provide an update on the corporate restructuring and reorganization plan announced during the fourth quarter of 2018. During its first five months in supplementation, the Company has achieved over $30 million of annualized run rate total cost savings of more than 60% of its stated objective. We continue to expect to meet or exceed the original target of $50 million to $55 million of annual run rate compensation and administrative cost savings over the coming six to nine months. Although, most of the savings will come from reductions in our workforce and in some cases involving businesses or assets being divested, we are committed to retaining our best people to support those businesses that are our long-term and strategic in nature, allowing us to be well positioned for continued growth. And as we speak, we are implementing employee retention strategies to do just that. We are also continuing to drive non-compensation related administrative cost savings and efficiencies through expense policy changes, the leveraging of technology and the utilization of offshore resources where possible. You will increasingly see the impact of these G&A savings in our financial statements and core FFO results.
While first quarter 2019 GAAP revenues declined 5% from the same period a year ago, principally related to asset monetizations, first quarter 2019 GAAP G&A cost declined 22% to $58 million during the same period. G&A cost reported on a core FFO basis, which adjust for one-time and non-cash costs declined 12% from the same year-over-year comparison.
In summary, we are very pleased with our strategic progress and operating results for the first quarter and we are on track to meet or exceed the 2019 goals that Tom and Darren communicated on the fourth quarter earnings call.
With that, I'd like to turn the call over to the operator to begin Q&A. Operator?
Questions and Answers:
Operator
Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Randy Binner with B. Riley FBR. Please proceed with your question.
Randy Binner -- B. Riley FBR -- Analyst
Hi. Good morning. Thanks. I have a couple. I guess I'll start on expenses. As you wrapped up the comments there is what we saw in the second quarter with I guess $58 million of G&A. Is that to a level that's run ratable going forward because that was better than we expected or was there kind of one-time items or seasonal spending patterns, that may make that number a little bit higher as we go through the year?
Mark M. Hedstrom -- Executive Vice President, Chief Financial Officer & Chief Operating Officer
Hi, Randy. This is Mark Hedstrom. That number is slightly lower due to some one-time adjustment of accruals for year-end bonuses in 2018, that we estimated but didn't incur. That's $3 million to $4 million after other charges against it. But I think what we're going to see is, ongoing benefits and continued reductions of costs that haven't had there in place and the actions have been taken to realize those costs, but they're not yet being realized. So I think that's going to be an offset to that and we are going to see declining cost, we believe through the remainder of the year.
Randy Binner -- B. Riley FBR -- Analyst
Okay, great. And then with the comments around the GAHR portfolio, I would -- a couple of questions. One, I think you mentioned that there was three refinancings that were healthcare-related. I just wanted to clarify if those were part of that portfolio or outside of it? And then the follow-up questions obviously get to you now is, you said, you're moving forward with that strategy, and I understand that you said, there'll be more comments in the next quarter's call. But is this -- should we expect that you would be putting capital into those refies (ph) and just want to square that with kind of the overall strategy, which I thought was deemphasizing healthcare?
Darren J. Tangen -- President
Hey, Randy, it's Darren here. So there actually was five healthcare loans with maturity dates in 2019. The three that have been refinanced to date are all smaller loans and those have all now been completed per Mark's comments at I think widely higher interest rates on average. But pushing up maturity dates there in 2024, the two loans that remain to be refinanced in the Healthcare segment, one is the Griffin portfolio that you're mentioning, not the larger loans for the US portfolio. And that's what we mentioned, we've made great progress on this quarter and expect by next quarter, we'll have good news to report there. The final healthcare loan involves our United Kingdom senior housing portfolio and that's the refinancing that we've also now began the process on and hopefully we'll be in a position to report on a successful refinancing there on the next earnings call as well.
As to your question regarding equity contribution, I mean there could be some act by additional equity that we're going to need to put into the larger US refinancing, the GAHR refinancing. And we'll report it on where we ended up on that, on the next call.
Randy Binner -- B. Riley FBR -- Analyst
So can I take from that, that we should -- if we're thinking about what Colony is going to look like over the next 12 to 24 months that healthcare will continue to be a part of that mix?
Darren J. Tangen -- President
That's the right assumption, Randy.
Randy Binner -- B. Riley FBR -- Analyst
Yes.
Darren J. Tangen -- President
I think that, that's the right assumption for now, correct.
Randy Binner -- B. Riley FBR -- Analyst
Okay. I just ask one more if you don't mind. On the -- you had some gains relative to -- in reported book value in the OED sales. Can you give a little more dimension to that, that's welcomed? I mean as we look to further OED divestitures, would we expect to kind of continue to have a good result versus where carried book is? Trying to understand that better would be helpful.
Mark M. Hedstrom -- Executive Vice President, Chief Financial Officer & Chief Operating Officer
Sure. Randy, I'll take. This is Mark again and I'll try to address that. I think what we said was during the quarter, we had $28 million in investment -- net investment losses that were related to OED sales. And that's a mix of probably more than 20 transactions netting some gains and some losses. What I do think is important and what my comments addressed was that, based on our plan for the rest of the year and the aggressive monetization of assets we have in that plan, we expect on a net basis to exit those assets add gains that will more than recover the net investment losses we incurred in the first quarter.
Randy Binner -- B. Riley FBR -- Analyst
Okay. That's helpful. Thank you.
Lasse Glassen -- Managing Director
Thank you.
Operator
Thank you. Our next question comes from the line of Jade Rahmani with KBW. Please proceed with your question.
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
Thank you very much. And I appreciate the clarity that you scripted about top priorities and going through the major businesses. In terms of consolidation opportunities, what areas would you identify as presenting the best outcome for potential value creation to shareholders? Is it on the investment management side, a combination with like sized players to create greater scale or would it be within each of the investment silos? For example, would you consider taking the industrial platform public as a REIT, would you consider combining the healthcare operating businesses with the non-traded REIT? Is there synergistic value there? What would you say has the most potential opportunity?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Hey, Jade, it's Tom. And my answer is yes to all of the above. But let me give you some specificity. As you know, we've been undergoing kind of an intense examination, and $50,000 (ph) fee with special asset we view I think, which has really been fruitful. And what's clear is kind of an acres of diamonds plus that even the businesses that we would look at and say, eventually are we healthcare experts, do we want to singularly be in the healthcare business, probably not. I mean, a clear opportunity for consolidation with someone else. Who is that someone else? How does it play? Do you dissect businesses from skilled nursing, medical office buildings and senior housing, and consolidate them with other assets of like kind. Are those better in a private structure? Are they better in the public structure? And we're undertaking all those analysis.
And I think the bottom line even in healthcare as you look at the pieces and the fragments, as we start extending term reducing interest costs, stabilize those portfolios, the opportunities are prolific because the only way that any of us can grow sizeably at the moment is consolidation. Surgically buying individual assets in any of these silos is very difficult, very competitive and your competitive advantage is just being the lowest cost of capital that can leverage ratios we're talking off. Hospitality the same thing.
So if you look at the select service portfolios and you look at public and private companies and portfolios, we all have same opportunities and we all have the same determinants is a stabilized line with less operating costs than full service in an environment in which you don't have gigantic inflationary pressure on rates or occupancy. But at the same time if you look at just what's happening in the supply chain, building new hotels, costs have increased so substantially. And in the midst of these trade tariffs, which theoretically you look at and say, well, what does that have to do with our businesses and have a substantial effect on our business. Because the importation of all of the stuff that goes into that is 15% to 20% more expensive and 30% longer to get it.
So we've benefited of credit cycle, which is really went in and very good in hospitality. We need to manage the brands, better, right, and select service, more scale helps you're better negotiating power with the big brands, with Marriott and Hilton who are constantly trying to get owners just pay more money and capital expenditures for less return on equity because it's better for their brand, not certainly better for the asset.
As you move across to industrial, industrial is the darling. (ph) We've got a great team. Lew Friedland has done superb job. The assets are easily understandable as concrete tilt-up construction with panelized roof systems. And we're all in this flurry of last mile euphoria. That again at scale the Dermody portfolio, which we just acquired was the second tier of an investment from a great development to core builder, Dermody. And what we did is, finished the leasing cycle at a time where that fulfill Dermody's objectives of getting finished with that fund, so they could raise another quarter development fund. But none of us can grow by single asset acquisitions. So everybody in the marketplace whether stock is lingering and our investor base is primarily dividend based, right, all of us, all of you want the same things. We want the highest dividend we can get with the lowest risk with moderate leverage and give us a pop of total return some place else.
So the only way we're going to get there in an environment, which is so surgically priced at an individual basis is really consolidation. So at every sphere that we have, including in investment management, so our investment management toggles if you look at the CLNC environment. We have a very significant mortgage REIT. We knew that we had to redigest and recycle some of the equity assets we took on the balance sheet at the beginning, and 55% mortgages -- you need to move 55% mortgages to 65% mortgages. But as you do that, it's a commodity. So as you're originating senior loans and you move up the risk curve, the ability to originate the service to maintain at reasonable loan-to-value ratios on a risk adjusted basis of scale.
So as we've stabilized, the team has done a great job and hopefully we're delivering to you more transparency in each of these silos. Some of them you look long-term and say, I get it. I want to be there forever, digital. It's the industrial and infrastructure of the future. It's competitively more difficult to answer. But it's the same exact clients and customers, as the clients and customers at industries. And actually the people who are servicing both industrial digital are staying in the hotels. Hospitality is something else, right, senior housing, skilled nursing. And looking at consolidation might be the outsourcing of medical services. It's the last mile opportunity in the healthcare business. But somebody has to do that. We as a REIT don't have that chops. We don't have any arrows in our quiver to (inaudible) But somebody is going to do. So we're just now getting to the point of being able to think through those things. And I think what you're going to see is us looking at those major opportunities in each of our silos to grow, to blend some of our assets with better assets, to call what we're good at and what we are not so good at, and the focus on the investment management business and lower our balance sheet exposure in some of the great businesses by saying, we don't need to be there. We don't need to have $1 billion of around capital (inaudible) third-party marketers have ratios. And as we've proven up in the last year our co-investment ability, the ability to harvest third-party capital on good assets just better and better all the time.
So long-winded answer but, yes, we're looking at all of it.
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
Within the healthcare portfolio, I think is -- Ventas has a position in the junior mezz. I believe, is there an opportunity to expand the relationship with them to partner or sell them some assets with the portfolio?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
I mean, yes. I think Ventas is certainly if not the best, one of the best in the business and (inaudible) and our team, are skilled, experienced, focused prophetic. And any opportunity for us to align ourselves with that kind of expertise would be valued.
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
The hotel foreclosure, the -- I think it's New York Nomad Hotel, was that within CLNY or was it on CLNC's balance sheet?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
I'ts on CLNC's balance sheet.
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
Was that the asset that is cost collateralized with lots of other properties or that was something else?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
No. It's an individual loan investment, Jade.
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
Okay. In terms of the outlook for industrial, it seems that the growth was somewhat muted. What would you attribute that to?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
The growth for NOI?
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
As per NOI growth.
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Yes. So it's -- as you recite to remember, the arena that we're in industrial, the small last mile delivery is is pretty labor intensive and marketing, servicing, recycling, tenant mix. So I think just the cycle that where we were and trying to say same-store sales and moving up and moving out is longer than a 12 month cycle. So I think our teams feel that the upward pressure on rents is significant. There's not too much CapEx, but the recycling of the tenant mix, the lease mix and in fact, our team was so immersed in the last quarter of closing Dermody that, that was really the intense focus.
So I think our feeling is that, industrial rents in general are going to continue to increase and the bottom line will also continue to increase because the operating expenses that are applicable at top-line are really minimal. So it's why everybody is fascinated with industrial, right. It's simple. The CapEx is simple. The tenant base or the big five, primarily. And it's easier to understand. We're still very bullish. Although prices are surgical, the best door market is so keen because the yield is identifiable and the futures is pretty stable. So these assets trading at below 5 cap are pricing.
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
In terms of the strategic investments, is the RXR stake, is that a long-term stake? Is that an area of potential monetization to create equity to redeploy elsewhere?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
We think it's a great partner. Scott Rechler is one of the best in the business. We annexed with him and kind of our find, buy, build, and grow philosophy. And we will align ourselves with what's best for he in that theme and it maybe a monetization. Depending on what he wants to do and where he wants to go, the next step for him, may be a strategic partner that differs from us. So I think in the next six months that will clarify itself.
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
Okay. And then lastly, on NRE, could you give an update?
Darren J. Tangen -- President
Sure, Jade. It's Darren here. And I mean that is an ongoing process, so we really -- because of that can't say anything more at this time. But as soon as there is news to report, we'll make sure -- well, and the company itself NRE will be disclosing an update once there's something to report on.
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
Thanks for taking the questions. Appreciate it.
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Thanks, Jade.
Operator
Thank you. Our next question comes from the line of Mitch Germain with JMP Securities. Please proceed with your questions.
Mitch Germain -- JMP Securities. -- Analyst
Thank you. So was all the capital raise this quarter targeted to industrial?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Most of it was, yes, Mitch.
Mark M. Hedstrom -- Executive Vice President, Chief Financial Officer & Chief Operating Officer
Not all.
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
But not all. There was a little bit in digital too.
Mitch Germain -- JMP Securities. -- Analyst
Got you. You referenced a bulk strategy that seems to be -- obviously you're carving out that segment of industrial now, maybe if you can provide some detail there would be great.
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Sure. Well, about one third by purchase price and square footage in the Dermody acquisition was bulk distribution warehouse as opposed to light industrial, which is the first foray into that sub segment of the industrial sector. And the objective or the initiative there is to ultimately expand that strategy and add more bulk industrial acquisitions to that portfolio over time. So more to come on that, but that's really what was mentioned there.
Mitch Germain -- JMP Securities. -- Analyst
And is that a value add? I mean obviously, those are under leased assets, so is that going to be a value add focus?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Yes. You have a -- if you think of value-added, value-added is the ability to give your customer something that they can't buy in the retail market. So our bulk strategy is really just an extension of our last mile strategy is, we're dealing with those tenants every day, so we know by delivery of the inventory that they're putting in our small industrial buildings that are coming from some place else. And as we all know, very soon delivery of everything in a store is going to be looking four to five samples and will be delivered to you that afternoon. So to be delivered in the afternoon, the supply chain comes from aux some place to last mile delivery someplace else to your house in that afternoon. So we will consider the most valuable thing we have is it really the bricks and mortar. It's the consistent relationship between our Company and our teams and the customers. And what the customers need is more bulk.
The bulk business used to be, you would never even think of building a 1 million square foot building unless you had a pre-leased five years ahead of time. Today, we expect 1 million square foot buildings are flying off the shelf as soon as they're completed because that is the marketplace. But the marketplace is based on reputational character and integrity of the bulk owners. And we need to be there to service the customers and clients that we have across the spectrum, which is tremendously diverse in our portfolio of small industrial. We need to be in the bulk business. We have an impediment and that we can't be development core and structure that we got. But servicing that tenant is key and that value-added component will continue to be a part of our continued go forward focus. We have a joint venture with (inaudible) That portfolio who is very experienced in that, I'm sure, he also as an investor. So yes, it'll be continued focus for us.
Mitch Germain -- JMP Securities. -- Analyst
Got you. I'm trying to understand the structure of the big acquisition you made in the digital sector. Obviously your partners with Digital Bridge in a venture and now you're partnering with EQT, I believe to buy the Zayo. So is there a -- is that going to be a fee stream for you, how is that working, and is there any sort of payment that you guys are making or is that all being funded just through the venture that you've got already?
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Yes. So let me tell you, the part that we can talk about because everybody still in their own a proxy and disclosure silo. So there was one of the largest owners fiber distribution in the US, Canada and Europe. As you know, we started a fund with Marc Ganzi and Digital Bridge, called DCP was a $250 million GP commitment from ourselves. The EQT partnership is essentially EQT is tremendously confident in this arena, well capitalized incredible professionals and of course a $15 billion transaction was batting way above our weight as a fund. So the EQT partnership as strategics is straight up. But the amazing thing about this transaction and a tremendous complement to Marc Ganzi and EQT, and to the Colony brand was the ability to raise substantial third-party co-investment, very quickly. So we're talking about $8 billion or so of equity, a portion of that from us, a portion of that from EQT, and a portion of that equity being third-party fee bearing capital to us, on top of our allocable $50 million or so specific commitment on this transaction on DCP front.
The -- in addition, to all the characteristics that we talked about and kind of our buy, build, grow with great operating partner strategy, I think what's interesting about this is the voracious appetite of third-party fee bearing capital around concepts and strategies that require a value-added component is intense. So this transaction will take several months to close. It's a component of the digital strategy coming out of this particular fund, which we think has tremendous legs. And we're looking at all this and our partnership with Digital Bridge as being the engine for what the future infrastructure business is going forward. But instead of delivering high single-digit returns over a 10-year period, we think this is significant double-digit returns over a 5-year period. So it has all the characteristics of investment management that we wanted and we proved it up by the co-investing hard commitments, really in a 30-day period.
EQT is a great strategic partner straight up with us, so we have another set of very smart brands with a global distribution capability. And the idea here is that the consolidation of these various fiber optic networks is similar to what (inaudible) consolidations were a 100 years ago. And the question is how do you sell the dark fiber, right? That's always been the question in the industry. It's like selling empty floors in an office building. Somebody went through all of the agony in building a first-class downtown office building that has 30 floors left to lease, who do you lease them to, what's the rate and what CapEx is left to lease it up. And Digital Bridge and EQT together I think will be a great combination.
Mitch Germain -- JMP Securities. -- Analyst
Thank you.
Operator
Thank you. Ladies and gentlemen, we have come to the end of our time allowed for questions. I'll turn the floor back to management for any final comments.
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
It's Tom. Thank you all for being on the line. We're happy and pleased by the success that we're having in baby steps week-by-week and month-by-month. And we wish you all a great weekend. Thanks for being with us.
Operator
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Duration: 57 minutes
Call participants:
Lasse Glassen -- Managing Director
Thomas J. Barrack -- Executive Chairman & Chief Executive Officer
Mark M. Hedstrom -- Executive Vice President, Chief Financial Officer & Chief Operating Officer
Darren J. Tangen -- President
Randy Binner -- B. Riley FBR -- Analyst
Jade Rahmani -- Keefe, Bruyette & Woods, Inc. -- Analyst
Mitch Germain -- JMP Securities. -- Analyst
