Q3 2020 Colony Capital Inc Earnings Call
[music].
Greetings and welcome to colony capital third quarter 2020 earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn the conference over to your host several white. Thank you you may begin.
Good morning, everyone.
And welcome to colony capital third quarter 2020 earnings Conference call speaking on the call today from the company is Mark and see our President and Chief Executive Officer, and Jackie will our Chief Financial Officer before I turn the call over to them I'll quickly cover the safe Harbor some of the statements that we make today regarding our business operates.
And and financial performance, including the effect of the Cold 19 pandemic on those areas maybe considered forward looking such statements involve a number of risks and uncertainties that could cause actual results to differ materially all.
All information discussed on this call is as of today November six 2020 and colony capital does not intend and undertakes no duty to update.
Future events or circumstances for more information. Please refer to the risk factors discussed in our most recent form 10-K filed with the EPS you see in our form 10-Q for the quarter ended September 30.
2020.
With that I'll turn the call over to Marc Ganzi, our president and CEO Mark.
Thanks, Aaron and thank all of you for joining us this morning and.
And taking time to learn more about colony capital and the digital transformation Werent flight on.
In terms of the agenda today I'd like to start with a business update.
To highlight some of our key accomplishments in the quarter.
And then I'm going to turn it over to Jackie Who'll walk you through our Threeq two financial results and some of the progress we've made in our digital revenues and our digital business.
You got a finished today with a case study from our digital playbook.
I want to highlight the progress Weve made a data bank, how we're creating value for our shareholders and where we see that business continuing to grow on the edge.
Look it's been an incredibly busy quarter again, so why do we get right into the materials and I. Please ask you to turn to page five.
Before I detailed the significant progress we've been the quarter I'd like to start by briefly reviewing our strategic plan.
Particularly for investors that are now due to the colony to data story.
We've had a profound transformation underway transitioning from a diversified read managing real estate assets across many verticals.
Singular platform that is focused exclusively on digital infrastructure, which is cell towers, datacenters fiber and small cell infrastructure.
The key rationale for that transition.
Our detailed right in the center of the slide first.
First.
I want to align with powerful secular tailwinds that are driving consumer and enterprise demand for more better and faster digital connectivity.
Second.
I'm, a big believer in simplification.
Business simplification, and a simple or narrative for you our investors.
Three we said this many times over the last couple of quarters, but the key to this entire business plan is predictable digitaloptics.
And this will be the engine that drives our stock forward in the coming years.
Lastly, attractive returns on invested capital.
I've been in the digital infrastructure space for over 26 years.
And what ultimately drives value creation over time and through cycles are attractive risk adjusted returns that this business can reliably generate.
With that context, I'd like you to flip to the next slide and update you on two key highlights from this last quarter that really exemplify our digital transformation and asset rotation.
Over the summer we completed a lot of work to strengthen the colony balance sheet.
Which put us in an amazing position to accelerate our digital transformation that you're seeing now.
This past quarter, we executed on both sides of the great rotation.
This slide is really the story of Q3 in a nutshell first we signed an agreement to sell our hospitality business.
It is a significant step in harvesting our legacy assets.
One we're able to achieve positive equity value for colony shareholders.
Despite the pressures that are facing the lodging sector today.
Second we reduced our consolidated debt by $2.7 billion as most of you know de levering the business is incredibly important to me.
As it positions us for success down the road.
Lastly, we're removing the distraction from a noncore asset.
This simplification of the business is core to our narrative.
On the right side, we have the other side of this rotation, which is investing in digital.
And that's why you're here, we've made some great progress the last quarter, leading data banks acquisition of Z code.
This 1.4 billion dollar deal that transforms data bank into a national scale its data center operator.
With 29 tier one and tier two markets 64 locations trip.
Tripling our footprint across the United States.
It's not just the square footage and the crew, it's really about the cross connects.
30000 cross connects up from 7000.
As I'll explain later this is a big deal when you look at how networks are evolving and how our customers architecture is changing.
The deal was financed with a 145 million of our balance sheet capital, maintaining our 20% ownership stake along with $500 million of new co investment capital that pays us fee in carry in addition to arranging over $600 million in debt financing to support the acquisition.
Finally, this deal is highly accretive to the database platform and that is very critical.
We talked about our ability to acquire high quality digital assets at attractive and accretive levels and this is proof positive which will explore a bit more later in our presentation today.
Next slide please.
Hospitality sales this is really a.
Story in the narrative around our business simplification.
The deal represents a significant milestone for two of my key priorities, one simplifying the business and to de leveraging the balance sheet.
Between the sale of these portfolios and the resolution of our hospitality business, we're shedding $3 billion of debt, that's a 44% reduction.
Our debt to asset ratio declined from 67% to 55%.
An annual cash interest swaps decreased by over 110 million and will generate over $7 million in annual DNA savings.
We also successfully achieved positive equity value for colony shareholders from the sale of this business.
And it's worth noting that the transaction value $2.8 billion was within 1% of our total carrying value on the balance sheet.
I want to give special attention in credit to Dave Schwartz and the entire lodging team at colony forgetting this critical transaction done.
Next page please.
So let's go a little deeper into the story of combining data bank and see Colo.
Our acquisition of the Cold It was really the story of the quarter in terms of building our exposure to high quality digital assets.
The table on the map presented here give you some context for what a transformative deal. This is first three times the number of locations.
Which only increases the opportunity for our customers to work with us on the edge.
Second it gives us a national footprint across 29 tier one and tier two markets.
Third this kind of scale is increasingly relevant as hyperscale technology and content companies locate compute resources and nodes closer to their customers.
Data bank is their edge colocation provider of choice.
One of the most exciting aspects of this deal will be to see what Rahul Martin Nick and his team do with these assets.
Which really were not core to zayo given their focus on fiber.
The team in data bank has been laser focused on customers and building the premier as data center company to serve them.
They have the experience in acquiring and integrating acquisitions.
And a consistent track record of posting organic growth year over year as we've demonstrated to you in the past.
As some of you know we also are the controlling shareholders there.
The seller, our digital Connie Partners fund.
Working in concert with the Qt ran the sale process for CECO, though given data banks interest.
It's worth noting this transaction is really a win win for both parties.
Well data bank achieve scale and accretive growth.
They also divested a noncore asset and generates 1.4 billion of additional liquidity that it can used to de lever and fund future growth and their core fiber verticals of wholesale fiber and enterprise fiber.
We telegraphed to many investors when they ask us about do what was the core thesis of investing in sales.
And I always tell them. It was about simplification. It was about returning so to its core routes, which is the leading provider of connectivity services.
Long haul metro fiber and enterprise fiber solutions for customers all across the U.S. in Europe.
There's a lot of great stuff happening as they are right now, including the announcement two weeks ago, but Steve Smith agreeing to become our CEO.
Steve track record at Equifax was impressive.
17 times increase in equity value from 2 billion to 34 billion and an increase in revenues of over 10, X. from 400 million to 4.4 billion.
We're excited to see what Steve is going to do.
He helps it lead it into its next phase of growth I'm honored and privileged to call. Steve Smith My partner and I also want to thank Dan crews, so as our partner as well Dan will continue to be a vital member of our board and its founder of the business. We look forward to his input and helping Steve transition into this great new business.
Look at the end of the day, we couldn't be more thrilled we've got great leaders running all of our businesses well Martin next Steve Smith, Dan Caruso. All of these folks are really the from my perspective, the secret sauce at digital economy today, having great leaders building great businesses.
Next slide please.
So I always like to refresh every quarter. Our promises made promises kept slot a lot of you seem to like that slide so let's get to it and share with you some of the things that have happened inside of the quarter.
First of all progress on de levering many of the key corporate initiatives to strengthen our balance sheet that we announced last quarter were finalized during Q3.
One we paid down the revolver.
Now have $500 million available on that revolver today.
We closed the $400 million strategic Wafra investment.
We issued $300 million of 2025 convertible notes using those proceeds to pay down the bulk of the Jan 2021 convertible notes.
We successfully tendered for $81 million of the remaining Jan 2021 convertible notes, there's $332 million, there's $32 million remaining.
And this yields a significant interest savings for us.
Second we continue to invest in high quality digital assets.
We closed a $190 million vantage stabilized data center portfolio.
Vantage SDC is what we call it.
Vantage FCC completed a watershed transaction in the financing markets about a month ago closing a $1.3 billion securitization at an all in rate of 1.8%.
This lower interest rate drives improved IR ours increased annualized cash flows derived from this investment for the entire portfolio of $22 million a year. So yields goes up returns go up and it's really an impressive example of our execution and high quality digital assets.
Lastly, as I mentioned on the previous pages, we acquired Decolar for 1.4 billion and.
And we've also invested $145 million from our balance sheet to lead this transaction.
While generating 500 million of incremental co invest.
[noise] harvesting legacy assets and streamlining our organization.
We've achieved $46 million in June a savings year to date, and we expect to say 60 million exceeding our original $40 million plant.
$430 million of year to date, Oh, Andy Monetizations against a budget of six to 700 million projected for full year 2020.
Our hospitality sales led that narrative to point to $2.8 billion of hotels sold in the quarter shedding 2.7 of debt and reducing our debt load by 44%.
Last but not least I've talked a lot about organic growth and delivering on core digital growth 2.3 billion of net few m. raised year to date.
33% year to date few m. growth exceeding our 15% guidance, we've more than doubled our promise in terms of our performance on this metric.
One 3 billion in net few M was raised after 630 2020 all of this was co invest capital and enhances our balance sheet economics, like we mentioned advantage FTC and of course in database.
Inside the quarter, we raised an incremental $800 million for vans Europe.
And we have 500 million in pending commitments.
For other coinvestment vehicles as well so it was a great quarter and fund raising.
So at the end of the day it continues to be a story about execution.
Execution from my perspective is the most important thing.
And all of these are about our key people delivering in each of their Silas.
I'm very proud of our progress inside the quarter and with that I'm going to turn it over to Jackie who is going to walk us and to the finance section of our presentation today. Thank you Jackie.
Thank you Mark and good morning, everyone. As a reminder, in addition to the release of our third quarter earnings We filed a supplemental financial report this morning, which is available within the public shareholders section of our website.
Starting with our third quarter results on page 11. The company has continued to make progress in its digital transformation.
Digital assets under management increased to 50% of total eight.
At the end of the third quarter and over 55% of total eight on a pro forma basis, including pending digital transactions and the anticipated sales of the hospitality portfolio.
For the third quarter reported total revenues were $317 million, which represents a 10% increase from second quarter revenue of $287 million. While this is a market improvement from last quarter. It is still a 12% increase from sales period last year, primarily as a result of the impacts of the cobot.
Domestic auto legacy business as well as from legacy asset sales.
GAAP net loss attributable to common stockholders was $206 million or 44 cents per share. The significant sequential improvement is primarily due to our recognition of a $2 billion impairment charge on our legacy assets in the second quarter.
Total company core funds from operations, excluding gains and losses was $5 billion in the third quarter. This turned positive from a $19 million last last quarter, driven by continued digital growth as well as improved performance on our legacy assets.
Turning to page 12, as we continue to simplify our business further.
The digital transformation, we're also streamlining our financial disclosures, but the legacy business, while emphasizing our growing digital results in order to provide transparency to our investors.
The prior digital segment has now been separated into three segments digital investment management digital operating and digital other we also introduced additional digital disclosure in the supplemental financial package this quarter.
First digital investment management consists of our recurring I am and performance fees generated through the management of our third party equity capital second the digital operating segment consists of our balance sheet investments and data bank and band it stabilized data centers.
We will grow this segment as we continued to deploy capital into Egypt direct balance sheet the baskets.
Art digital other includes the equity method earnings of our inaugural deal quality partners and our digital listed securities investments vehicles. These investments are held at fair value.
On the legacy side of the business, we will continue to have a separate wellness infrastructure segment. So that segment remains unchanged. However.
However, we are combining the other investment management quality credit real estate and other equity and debt segments to a new segment <unk>. Other we will continue to provide similar sub segment disclosures, but this change reflects the digital focus of the business going forward.
Hospitality is no longer a segment and we have moved to discontinued operations given the pending sale transaction that Mark previously discussed.
Moving to page 13 during the third quarter. The company continued to rebound from the impacts of coated generating positive core FFO, excluding gains and losses of approximately $5 million. The core I thought the improvement was driven by continued execution of our corporate strategy.
First we continued to grow our digital assets, which contributed $3 million incremental earnings in the period.
We had also committed to simplifying our business, we realized $2 million of incremental savings as a result, the previously announced DNA reduction plan and $3 million and reduce corporate interest expense due to our efforts to de lever the business line.
Lastly, our legacy business improved quarter over quarter, driven by expense savings and national reopening efforts from the trough with the cobot pandemic.
Turning to page 14, consolidated digital revenues increased to $119 million driven by acquisitions that data bank at the end of last year and banish status stabilized data centers in July of this year.
Looking at the right side of the page consolidated digital fee related earnings and adjusted EBITDA increased to $54 million during the third quarter.
Our digital few related earnings declined slightly due to investment in personnel to support fundraising efforts and recent and future growth and digital the Arctic equity under management. Despite our increased investment in our platform our card market still improved to 46% or by 500 basis points over there.
Prior quarter.
Turning to page 15, we are reiterating our 2023 digital growth guidance.
We continue to target digital you revenues of $150 million to $200 million by 2023, and digital fee related earnings of 80 million to $110 million.
In addition, we continue to expect to.
To achieve 175 million to $225 million of digital operating EBITDA at $150 million to $200 million of digital operating costs wrap up.
Our acquisition advantaged stabilized data centers as well as our recently announced acquisition as Eecol are just two examples of our commitment to achieving those goals.
Turning to page 16, we have made great progress this year towards our digital transformation.
Digital a U.S. has increased $12 billion year to date with digital AG land, increasing from 32% to 55% of total AG lap in fact since the inception of digital called colony capital is located over $45 billion in Asia.
Increasing digital to over 25 billion eight.
While transitioning $20 billion of legacy assets.
Moving to page 17, including our pending and announced transactions. We will have achieved 33% growth in digital fee, earning equity in 2020 again far exceeding our original 15% guidance set forth earlier this year.
To recap, we raised over $700 million of fee, earning equity for the Zale acquisition at the beginning of the year. We also raised over $900 million that you already equity for our vantage data center platform through the third quarter.
Additionally, we expect to raise an additional $500 million of net fee, earning equity in the fourth quarter four pending transactions, which includes the Colo and additional vantage platform fundings.
Including these fourth quarter pending transactions, our digital the Arctic equity under management will be approximately $9.1 billion and we have plenty more to look forward to as our fund raising and M&A pipeline continues to be robust.
Turning to page 18, as we previously discussed our EPS execution of a new revolver facility elimination of our original 2021 convertible notes maturity and our partnership with Wafra has eliminated all liquidity risks and allowed us to accelerate our digital transformation.
And deploy dry powder towards digital acquisitions.
Our current financial position is strong with a 29% reduction in corporate liabilities I am proud to say that we have virtually eliminated all near term debt maturities.
In addition, we now see ending liquidity at $650 million to $750 million by your AD, which is a $25 million increase over the estimate we disclosed last quarter. This improvement is driven by our continued expectation that we will monetize $200 million to $300 million.
Legacy assets in the fourth quarter with over 50% of those monetizations already under contract and.
And I am thrilled that our higher guidance still includes expected digital acquisitions, such as the Colo and our growing M&A pipeline.
With that I'd like to turn it back over to Mark where he will lay out further details on our digital playbook. Thanks.
Thanks Jackie.
In this final section I'd like to discuss how colony is growing at the edge by taking you through a case study on data bank.
I believe this demonstrates the opportunities we're focused on the.
The value, we bring to our portfolio companies and that we ultimately create for you as a common shareholder.
Next slide please.
First I want to give you some context, everyone has been talking about the edge for the better part of the last 18 months.
For us, we really want to break the edge down and really explain what it means and why it's important.
Let me start in the upper left of the slide on page 20.
Well computers continue to grow rapidly over the last 10 years.
What's been under appreciated from my perspective is the exceptional growth in demand there.
It's yet to come.
In just the next five years and beyond as artificial intelligence systems move out of the lab and Internet of things applications are deployed.
Machine to machine communications underpins use cases for AI Aiotv cloud computing.
Which will cause compute demand to skyrocket skyrocket.
Moving a little bit over to the right to the upper right here.
Where exactly does this demand from compute come from well our belief is it's increasingly coming from the edge and that's never been more prevalent than it's been in coated.
Its mobile where the consumer enterprise customer interacting with the network in real time this.
This is not a short term trend, it's really important to to focus on that as part of a multi decade cycle that will see compute migrate back to a distributed model at the edge of networks.
Shifting to the lower right that ship to decentralize computing is already focusing its already forcing changes in network architecture.
As these new use cases require lower latency of course faster speeds and greater device efficiency.
These new applications don't have time to send all that data back to headquarters.
The answer has come to bring that data back in real time, which means you need compute resources close to the end user.
This is really the definition of the edge last.
Lastly, lower left which ultimately as you'll see in the lower left graphic will drive strong growth in AD server deployment.
As this chart highlights Cowen estimates over the next eight years edge servers will support 10% of cloud workloads globally.
This is up from around a little over 1% today.
That's over 1.5 million servers sitting in EPS data centers around the world that's.
That's a huge opportunity for data bank.
Our EPS data center portfolio company, and if that opportunity that underpins the transformative acquisition of Z Colo.
That we help realize alongside data banks phenomenal management team.
Next slide please.
I've outlined the transformative nature of this transaction earlier.
But here, let's cover the benefits to you colony shareholders.
Last quarter, we detailed our accretive data bank acquisition strategy well.
Well here it is inaction by the numbers.
The Z code deal will reduce our effective multiple to 15 times on a blended basis.
Well below our public peers and our original entry multiple which was around 22 times.
What's interesting.
Is that the 15 times multiple doesn't even fully capture the true economics to colony shareholders.
On top of the solid core investment economics associated with a $145 million equity investment, we've raised $500 million of fee and carry bearing co investment capital similar to exactly the same playbook. We ran on vantage stabilized data Center go.
Those investment management earnings boost our returns.
Driving our core FFO yield from 8% to 10% they want.
And its core EPS at those stabilizes over the next couple of years, the yield migrates to north of 10%.
This is very difficult to accomplish in today's market were digital infrastructure assets are trading at all time highs.
From my perspective, it's a hybrid model built to benefit our shareholders first hi.
Hi quality balance sheet growth enhanced by asset light investment management earnings.
Next slide please.
So the case study here is all about creating value and we've talked about it before its our digital colony value that playbook.
The acquisition of Z Colo is really just the latest example of how we create alpha.
Our strategy is today.
Since 2016, the digital economy team has helped transform data bank <unk> regional Midwestern data center, operator to a national scale edge data center provider by adding value across three key areas first.
We met we augmented the management team.
I called out my good friend, Mike bouts of 25 years, who is the co founder of digital Realty has been a digital colony advisor since our inception to be chairman of data bank.
One of our key operating partners rail Martinec, who I've known since 1997 became our CEO in 2017.
Polls incredible if you've ever up have you haven't had a chance to meet rail you should absolutely asked to go down to Dallas and have a meeting with him because he is amazing.
This is a CEO that's been there five times now he's very driven.
He focuses on customers driving organic growth and is effectively integrated acquisitions as database has grown rapidly.
We have also helped identify and recruit most of the senior leadership there to support role.
Second.
Strategic development and financing.
The digital colony capital markets team has been integral to the data bank transformation right.
We raised all the equity and co invest capital of over 1.4 billion and Weve arranged 1.5 billion of debt over the past four years, creating the fuel for data bank to grow.
The team's experience and network of relationships is manifesting itself right now as we finalize the Zillow acquisition.
Lastly, M&A.
M&A execution.
Our senior team at digital County is help source and execute five acquisitions.
Inside the data bank platform Zika.
He called me number six.
We brought all of our expertise to bear on this transformative deal Justin Chang the CIO of our digital balance sheet has done an amazing job pulling all the pieces together.
On top of that we also helps fuel data makes investment in etch presence the micro data Center company that we just invested.
These two deals in fact really position data bank.
For the future in edge computing.
Next slide please.
So really this is a story about executing on converged networks.
The strategic investments that colony is enabling today position data bank to be at the forefront of the evolution of next generation converged networks.
From the Zico acquisition that gives us the scale national footprint.
With on ramps to global Internet traffic to the far edge with its presence.
And they're modular data centers located at the base of cell towers. These.
These are really important deals that sync data banks profile with the demand tsunami, we see coming down the road and edge computing.
Look from my perspective, one of the really interesting facets of the edge presents deal is out highlights the benefits of being part of the digital county ecosystem.
Not only is data bank, making a $30 million strategic investment into this business, but edge presence is also partnering with vertical bridge one of our other digital colony portfolio companies to.
To deploy their micro data centers at the base of vertical bridges towers.
We're already in flight at 12 locations.
And vertical bridge has tower locations and over 9000 locations across the United States today. So.
So this is really an equation from my perspective of taking multiple portfolio companies.
Looking to ultimately deploying infrastructure for the benefit most importantly of our customers and providing these integrated solutions is really the future of where digital rights are going.
My conclusion here is simple the breadth power and value.
But the digital county platform is on full display here.
Edge computing is a huge opportunity and we're helping data bank capitalize on it well building value for colony shareholders.
Next page please.
So look I want to finish where we ended the last quarter, which is my commitment to you to continue to deliver on our commitments that is the best thing. This management team can do for you is our shareholders.
This is the slide we're going to keep coming back to you as we did last quarter, where are we how are we following through on our commitments. So first let me summarize for you.
[noise], our t. commitment addressing near term corporate debt maturities and enhancing our liquidity.
We paid down 2021 converts we issued $300 million of new 2025 converts we amended our revolver and we've cleared the road to this digital conversion.
So from my perspective that mission has been completed.
[noise] committing significant capital towards digital infrastructure grows.
We deployed over $530 million between data bank, Zika low and vantage FTC in the last year.
This is really another significant balance sheet investment.
That we made this quarter was the Colo and what I can commit to you is that we will make another significant balance sheet investment over the next six months.
Our pipeline is robust and replant with opportunities and were working hard to bring you more high quality assets that produce investment grade long term predictable earnings for you our shareholders.
Third we will continue to deliver on core digital investment management growth.
We've already executed over 100% in terms of our few m. grow through three quarters. We still have another 90 days left in the year to continue to outperform this number and let me tell you we plan to do that.
Our focus will be to grow the flagship digital equity and emerging credit franchises across our investment management platform.
We have the best digital fund raising team in the World and we will continue to go out and raise new capital supporting all of our great ideas.
And lastly simplification.
Legacy asset Monetizations and cost reductions have been core to my thesis and turning the story around.
We monetize 430 million of legacy assets to date.
The hospitality business is now under contract and we've achieved 46 million in run rate DNA savings year to date.
By the end of the year, we believe we will achieve 600 to 700 million dollar in total legacy asset sales.
We will continue to sharpen our focus on DNA and we pledged to you that we'll hit 60 million at run rate Genies savings by the end of the years.
Look it's been an incredibly busy quarter Youve got another 60 days left in the year to continue to go out and execute and at the end of the day for US the story remains unchanged its a story around execution.
And our pledged to you to build long term value for our shareholders.
I want to thank you for your time today and I want to thank you for those of you that are invested with us. Thank you for your trust.
And lastly, I want to thank all of you for listening to the story that continues to evolve as we change colony into the leading digital infrastructure company in the world. Thank.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad at.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Jade Rahmani Rahmani with KBW. Please proceed with your question.
Thank you very much you talked about the investment pipeline how does it split between what you might call proprietary deal flow deals in which digital bridge may have a legacy investment or some history your interest and de Novo originations and generally speaking where do you think the economics are better from a colony shareholder perspective.
I, considering what you mentioned with respect to elevated valuations in the digital space.
Hey, good morning, Jade its mark how are you.
Good thanks.
So look you know.
Our pipeline has never been busier Jade, we've got about 31 deals in the pipeline today accruing to about a total of about 20 billion in enterprise value.
I would say five of those deals are currently either or in the process of being finalized.
Or had been executed and of those five deals that will fall into the next quarter or all of them are proprietary in other words, there was not a banker involved there was not a broker where we source those transactions through the digital colony proprietary pipeline.
So from my perspective, the best way that we're going to create value for our shareholders. Today is not running too overheated auctions, but really sticking to our knitting, which is focusing on great relationships with Ceos that are in our sector and really making the pitch.
To them that we are the best a partner of choice because of our relationships our experience our access to capital and that's been a narrative thats worked really well for us and I think we can continue to do that.
You know if you look at the progress of fund one and you look at the 10 investments we made in fund one.
Eight out of those 10 transactions Ah Jade were proprietary.
And so as we look at the next five deals were doing all of those being proprietary. This this team has a great history and track record of creating proprietary deal flow look.
Look it's not to suggest that we don't look at auctions. We certainly do we've looked at a lot of the big auctions that got done in this quarter.
We just believe this is a moment in time jade to be price discipline [noise].
And so that's where our focus is going to be big pipeline I focus on proprietary deal flow and to maintain a high degree of discipline right now.
When you think about capital priorities and current liquidity, how much excess capital is available for investment how do you split that between you know new investments and raising third party capital to supplement a that capital base and what are your thoughts around potentially redeeming preferred.
Or finding other ways to reduce leverage versus making new investments.
Thanks, once again, it's almost like a bit of a broken record. So I'm not trying to be to bridge you Jade and we can certainly get into further detail on this later, but you know what I would say is look we always look at the way to deploy capital and all in all different ways right. So first when we first came.
Onto the scene and we're part of this management team alongside of Tom Barrick and Mark Hedstrom, Jackie we win myself, we made it a priority to de lever the balance sheet first and we did that a little bit last year in the fourth quarter and we continued to execute on that in the second quarter and third quarter.
Now at the same time, we've also been clear with you that we've had great success selling assets, we've been very disciplined weve been very careful nothing's been a fire sales we've taken our time, we've found the right buyers and weve rotated cash to the balance sheet and so at the end of the day as Jackie pointed out our presentation today.
We have the great privilege of having access to close to almost $900 million of total liquidity when you factor in our revolver.
So now the question is how do we deploy that cash and what are the best opportunities like what weve evidenced in the last two quarters with vantage stabilized. So the data bank investment Zika low edge presence, we are prepared to deploy our balance sheet in an intelligent way and what I mean by intelligent Jade is if we have a great idea and we have a great.
The opportunity we use the strength of the balance sheet to get it under control. That's once we get it under control and we're going through the process of closing it we optimized for the right mixture of balance sheet capital and third party capital.
And largely if we think the idea is really good for a certain type of Investor for example that likes yield advantage stabilized scope. We go focus on that group of investors and we raised the capital.
If you look at data bank and see color, which is a bit more of a growth oriented asset. There is a certain type of investor that really likes those kind of investments and we were very successful in raising capital for that idea. So I like Jade this mixture of using the balance sheet and using third party capital I don't want to lock you in on a on a formula like Oh, we're going to use 20.
Percent of balance sheet capital and raised 80% third party, that's really not how we think about it.
We think about the opportunity to obviously deploying our own capital side by side with our partners capital.
But always with a keen eye on terms of preserving liquidity.
As you've heard Tom Barrick same previous quarters cash is king right now we haven't we're dealing from a position of strength, which is really great for colony shareholders. We have a lot of cash right. Now we see also a lot of opportunity and so we're going to continue to invest in high quality assets for the balance sheet.
We're going to continue to put cash to work Jade in new GP commitments I think we've telegraphed that to you that our digital equity business, our digital credit business and our digital liquid securities platforms are all growing they're all out raising third party capital right now and we do so by putting up a pledge of our balance sheet capital in our investment management business. So.
I wish I could give you a strict formula but I think it's there's a little more science to this then then art I'm sorry, there's one more arts in their design, but at the end of the day, we are deploying the balance sheet prudently and most importantly, everything we're doing jade.
Make sure you understand this is with the eye towards growing long term predictable digital revenues and this was a great quarter for that if you look at our growth in digital EBITDA you look at our growth in terms of total digital revenues were making enormous progress quarter over quarter in terms of our growth rates.
I don't think you'll find another did treat out there that's grown quarter to quarter as much as we have in our digital revenues and that's the key. This story right now is the fastest growing digital read out there in terms of our revenue growth in our EBITDA growth quarter to quarter and Jade one thing I want to just add is that on page 18, where I do walk over walk the liquidity to our.
Ending liquidity balance of the year or the 650 to submit that the already nets out.
In in process pipeline deals like the Colo that has already been now and that's already netted in there. So we continue to guide the two to 300 million of Monetizations in the fourth quarter. This year and I'll get you to that <unk> billion to 1 billion won a range and then obviously a dot that would be the gross amount of UBS.
Total liquidity of four or more dry powder and deals on that of any minimum cash and then the last piece on the preferred equity a redemption a couple of things. One is we did revolve our oh.
Amend our revolver facility earlier this year and so there is a bit of like a break in terms of redemptions or preferred but obviously add as we continue to do well and and we go look for a new facility at some point in time, we will look to.
Redeem those and we will be disciplined about it in terms of what's the best return as versus digital opportunity.
Okay, well I applaud the EPS Swift actions or the management team has taken definitely refreshing and very good to see the progress I wanted to ask you about a particular, that's Tom Bakke might call. It a rubik's cube, which is sealants see you know there is an overhang in the mortgage REIT space because Pete.
All are looking at commercial real estate and the long cycle to recover and potential impairments loan losses on the credit front. So that's one thing that they have to address secondly, there's no liquidity issues that go into managing that and finally, there is some excess investment capacity, but when you look at stocks like ceiling.
And there's many others tier TX ladder to name a couple trading at 40% to 50% of book value. It seems that investors are also potentially assuming and an eventual dilutive capital raise a ceiling why owns 37% of CNC and to me that that bodes for an opportunity you could have sealant C.
Buyback some of those shares at a premium to where its trading yet it still would be wildly accretive to its book value wildly accretive to its earnings it would reduce the overhang of ceiling, while 37% stake because people do wonder when those shares will be liquidated and that it would provide seemed like why looks fresh capital.
To accelerate the digital transformation, how do you think about that as a potential option for both steel and lie and sealants see to explore.
Well, Jay it's almost like you bumped our investment committee.
So look seriously.
You know first and foremost I want to applaud, Mike Mazzie, Andy with David Powell May for those of you that had the chance to hear that earnings presentation.
It's also another great story of transformation in execution.
When we brought Mike mazzie onboard to run that business unit.
We couldn't have been more clear about what the objectives were first and foremost to make sure that we are shored up our loans that had any issues with them. It repo lines on two loans gravitating to liquidity and mikes done an amazing job stabilizing that portfolio, returning cash to the balance sheet and now that.
Business is poised as you heard yesterday to play offense and be selective and they'll play offense inside of their sandbox and I don't get too involved in what Mike and his team does I think they're doing a great job of executing and as one of their largest shareholders. We couldn't be happier with the progress that's happening at Sealand C.
When you look at its peer group sealants. He got ahead of its issues quickly Mike address those issues you stabilize the story he rotated to cash and now we have an enviable position, where we can play offense.
And we will continue to recover book value.
You saw the shares perform well aftermarket last night, they perform well today, we have a lot of confidence around that management team's capability and in the meantime, we keep our options open Jay no option is off the table for sealing see we've made that clear two quarters ago, we made it clear a quarter ago I'll make it clear today you know.
As we rotate to digital if there's a good opportunity to harvest the hard work that's been done in sealing fee, we have an open year and well listen to whatever proposal comes across the table in the meantime, it's just ruthless execution for making the team and that's what you're going to continue to hear from US There's no fire sale on any of these silos anymore.
We have cash we have patience and we have a good execution happening at all of our business units today.
Thank you very much appreciate your time.
Thanks, Jed Jed.
Our next question is from Randy Binner with B. Riley. Please proceed with your question.
Hey, good morning, Thanks, that's actually a pretty good segue into what I was curious about and that is just a little bit more color on the the legacy assets.
Sales expectation you after the fourth quarter that you gave in the the sources and uses slot.
Oh, My God, the Monetizations column.
Yeah, So look I'll, let Jackie give some of the granular detail. Let me give you the 50000 foot architecture, Randy and good to hear you. This morning, thanks for tuning in.
First and foremost you know as it relates to the you know what I would call. The four legacy silos, obviously lodging is in flight and being sold the Highgate. So obviously that they'll be operating that business and we wish them. The best It obviously had a good recovery in the third quarter and lodging will eventually recover and that'll be a good investment.
For them.
Wellness infrastructure continues to exceed our expectations. It also had a very good quarter rich wells and the team are doing a great job you know that portfolio has proven to be fairly pandemic proof and so we're very pleased with that you know we much like sealant see Randy we have an open air towards different ways to harvest.
That portfolio now that we've got lodging in our rearview mirror sealant C and health care lodging wellness infrastructure coming a sharper focus so both of those business units are doing exactly what they said they were going to do it to actually say both of them have exceeded our expectations for the year and having those two businesses now stable input.
It is for ultimate harvesting is a really good place to be we're playing off our front foot, we're not playing out for back foot.
The last you know quarter core vertical a value is though in d. Once again another business unit that has outperformed our expectations Jonathan Grunts why Garcia. The CIO there has done a great job harvesting and monetizing assets. This year, we've got three to four more monetizations happening right now in the fourth quarter as.
They come do you'll see the you will see the press releases and you'll see the information released.
But we plan to be at the upper end of our guidance for R&D Monetizations. This year and you know, it's just once again, making sure Randy that we under promise and over deliver for our investors and I can say with a lot of conviction that wellness infrastructure, feeling CNO Indy hub, absolutely outperformed our expectations. This.
Sure Yeah. The details Randy is two and $2 million to $300 million in the fourth quarter that will plan a guide as Mark mentioned, we are looking at the higher end of that range. Those three to four deals already give us more than enough coverage for the lower end of that range and obviously as it did in addition to a couple of sales and done.
Well as well well, we should get there. So we feel good about it and Donna <unk> part of the rotation that Mark has outlined.
Yes, no doubt two to 300 million would be a good number and that is.
That's net to steel steel and why correct. So that would be that yes, that's correct and again after you pay down the asset level debt.
That is correct.
So were.
Where.
Does that story go and 21 because.
For our sources and uses to continue to see digital investment.
Similar to those equal a deal.
You kind of funding that with.
Legacy sales right on the margin, which is which is exactly the plan, but we kind of our model wants you to keep doing that so you know these assets you are selling are they can you know are they closer to book value. What's left does it get a lot harder because I think there's still.
Some lodging in energy assets in there that might be a little bit harder to sell it can you just give us a glimpse of what that ongoing OE. The liquidation process will look like.
And yes sure 21, considering how good this fourth quarter result seems to be.
Yes, sure Randy the way I kind of look at I'll start with your last question, which is where we think we can monetize these things well you know under fair market value accounting you know, we kind of look at it based on the last data points from third party bought potential third party buyers. So that definitely is a uh huh.
EBITDA for us to Mark those mark so in our Supplementals, you'll see a total.
Net equity value of about $1.5 billion and not other equity that line. A we do believe that we can get close to that amount and that's the basis of why we mark those thing I would add that amount and in terms of 2021.
I think that we should expect that we should be able to perform a similar to what we did in 2020, you know and ER and ER. We expect by 2023 that we will have fully rotated so.
Even if you take it on a straight line basis, you get you get there and we've clearly shown that we can outperform the sales.
All right that's great I, just had one more and I'll, let someone else hop on but did you all have you disclosed a GAAP book value for the quarter. There's there's a lot of great new disclosure here, but we're just.
Looking for that number still.
No not yet.
Very good thanks a lot.
Thanks Randy.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad one moment, please while we poll for questions.
Our next question is from Colby Synesael with Cowen. Please proceed with your question.
Great. Thank you first time on the an economy car.
I actually have a question is related to digital portfolio construction, a one of the I guess segments of digital infrastructure that you're not really involved in right now is on the residential broadband side I'm.
I'm just curious if that's something you're pursuing and we could expect to see added to the portfolio at some point and then secondly.
I appreciate that there is this focus on.
Bolstering the digital side of the business and in selling off the legacy portions.
In you, obviously want to kind of get there as soon as possible so to sell digital assets would be somewhat counterintuitive, but what are your thoughts on potentially selling off some of the digital assets actually recycling capital you're putting in mark out there to kind of show that these values do in fact have that the value that you perceived to have.
Given where I would guess demand is for these assets and potentially what you build is how the Matt. Thank you.
Yes, Thank you Colby and first time here and I'm I'm optimistic it will not be or last time here. So appreciate you tuning into the story, let's start out with fiber to the home.
We've continued to look at every fiber to the home opportunity for the last five years and we've looked at opportunities in Europe, we've looked at opportunities in the U.S. flat Tam.
And let's break this down there are really two kinds of models Colby today in fiber to the home. One is you can partner with a carrier a telecommunications provider a cable show and you can own their infrastructure and enter into long term agreements with them, where you provide on a whole.
Well basis.
That network infrastructure.
And so we've done that actually we did that with cogeco and are being fueled acquisition and it was done at the right price and it's been a great partnership so we own that fiber there our primary customer and we've now gone on Truebeam field to lease up that fiber to other folks and we continue to build laterals to support them and support other customers.
So that wholesale business, we like quite a bit and effectively we did that deal. It just a little over 130000 or Canadian dollars per route mile, which was about 1.4 above replacement costs now replacement costs in the U.S. is about $65000 per route mile in some.
Always looking at this colby with a sharp angled towards what can you do can you buy it or can you build it in.
And so generally.
Generally speaking, we want to be pretty darn close to replacement cost more buying stuff and you heard me say it earlier, we're going to be price discipline.
And then if you take that forward into other business models, which is more consumer facing.
And certainly you can look at for example, a transaction that was done this week, which was down and you know that is a consumer facing business that does not have a long term contract and you face you know a very competitive landscape in those markets, where you're looking at a brand that's an over builder and so typically your eyes.
For the second time or you're the third operator in that market and it's very competitive you face a lot of churn you've got to deal with going into the household and actually connecting and at the end of the day, we looked at that deal and said Hey, you know what it over 400000 per route mile that doesn't make a lot of sense and maybe it makes sense for one type of investor.
Sure, but it really doesn't make sense for us and so and then I look at that and I'd say Gee, we bought Zayo and we paid net of Z. Colo, we paid about you know $12.6 billion and we paid roughly about a little over 100000 per route mile which was about 1.3 times replacement costs.
This is paying 5.34 times replacement cost for something like US down we have no long term contracts and a lot of churn. So the Devil called me you've heard me say this before in towers Datacenters fiber small cells. The devil is in the underwriting.
And you've got to be really careful about how you underwrite. These asset classes you always have to look through to the quality of the infrastructure.
You have to look at the quality of the network you have to look at the cost of the network because today one of the great privilege as we Havent colony capital sales were building.
We're building new towers were building tons of data centers globally. We're building new fiber routes were building new small cells and one of the great advantages. We have at colony capital is our heritage, which is we're operators 26 years of earning customers trust and having the privilege to builder networks and being interested but their networks.
We have a pit we have a toggle that other investment managers don't haven't sometimes even our pure reads don't have which is we can build and we're very good at building. We're very good at permitting we're very good at design. We're very good at construction RF engineering all of these skills are resident at colony today and that gives us a huge advantage the circuit.
Summers and having a three decade resume and reputation with our customers is totally central to our business model the business model at colony going forward. So we look at that as massive comparative advantage.
For us so that's that's my answer on on on fiber to the home and how we look at fiber to the home business models and and also by the way, we're doing a little bit of fiber to the home in Latin America at ATP and at high line, where we enter into long term 15 year or 20, or 25 year contracts with investment grade customers where were bill.
Adding network for them. So for me the best place for colony shareholders to play fiber to the home isn't long term investment grade contracts not short term consumer facing businesses with high churn.
No second part to your question.
About selling legacy assets and you're right. It's a really good time to be a seller.
So we had four investments in the last 16 months Colby that had been realized.
We did a partial recap of vertical bridge last June it was a very successful transaction for our shareholders. We are delighted to partner with case topo and that was a great outcome for vertical bridge shareholders and that Mark was roughly at about a 1.8, Mike and just a little under you know an 18% our for our share.
Voters, we then went out and we had a partial realization of data bank now that was to shareholders or one shareholder fully exiting another shareholder partially exiting and we had an opportunity for our balance sheet to buy a piece of data bank and we did that for the shareholders that exited it resulted in a you know roughly about a 22 23.
Our our and 2.1, Mike So that was a great mark for our investors.
And then this year, we have two other marks to report obviously the sale of the vantage Datacenters that a 5.1 cap rate was a great outcome for the original vantage shareholders you know.
Vantage was an investment we made in 2017 and the shareholders that got liquidity and that resulted in a 32.2% IR for those shareholders and then lastly, exton that we announced a transformative financing for Xtend that a couple of weeks ago, John Hancock and Cal regions, a leading the way we're selling a third.
Vexed in that.
This will result in about a 1.8 wake for investors X and that's been a great investment for US five years in the making and we're excited to welcome. These two new shareholders. So what weve been very cleverly doing Colby is we've held some assets.
But weve also marked assets, we found ways to rotate capital and to create returns for our existing shareholders and to continue to back those platforms with longer term capital to help grow those businesses. I mean, you look at you look at logos like vertical bridge, and vantage and Exenatide and they're all market leaders and.
So whilst for returning capital getting the marks that investors want we're also raising new capital and making sure that we can pilot those investments in steward them to the right outcomes. So I couldn't be more happier with our four marks in the last you know.
Call It a.
Five quarters, and I think our Lps and kind are very happy with our performance on the private investment side and I think our public shareholders are also quite happy with our performance in digital particularly over the last two quarters.
Great. Thank you.
You're welcome.
Thank you we have reached the end of our question and answer session. So I'd like to pass the floor back over to management for any additional closing comments.
Well look thank you.
I couldn't be happier with the quarter.
And this all starts with people at the end of the day.
And you know I think that.
This has been a another great quarter of simple execution and this is what you can expect from this team going forward is to continue to keep our heads down our eye on the prize which is this rotation.
I promised you to continue to get the cost structure correct. Our promise to you to continue to raise capital.
And ultimately our promise to you to deliver long term high quality digital learnings.
None of this happens without the dedicated professionals around the globe a colony capital.
I'm very much in their debt and have enormous gratitude and appreciation for the hard work that's happening.
If you think about what's transpired since we did the digit rich merger last July it's been a profound amount of rotation.
Weve rotated Jackie I believe 45 45 billion in assets in less than a year and a half that would be probably and I don't have the data in front of me, but it's got to be one of the biggest anyway.
Hmm rotations and reach history.
And so this is hard work, but it doesn't get done without our people I want to thank all of our colony employees and partners around the globe. It's you that wake up every day and make it happen.
And I want to thank you our shareholders for having your trust in US and we will continue to deliver for you in due in due course, so look we're going to get back to work, we got a busy fourth quarter or in fact, we got a bunch calls lined up and some new deals. We are doing so let us get back at it which is continuing the rotation and once again have a great weekend, everyone and thank.
Thank you for your time today take care. Thank you.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
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